Boeing Bonds to Cost Taxpayers $362 Million

April 21, 2010

Investigative Reports

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The NerveSouth Carolina taxpayers will cover nearly $362 million in bond costs over the next 15 years for Boeing’s aircraft assembly plant under construction in North Charleston, according to bond sale records reviewed by The Nerve.

The state did not accept the lowest bids for premiums charged for most of the bonds, which will cost taxpayers at least $1.6 million more over the repayment period. In addition, the winning bidders collectively will have to pay $1.7 million in charges not included in the principal, all of which will be reimbursed by taxpayers.

And the Chicago-based aerospace giant could receive the full $270 million in bond principal as quickly as the end of August.

Besides repaying the principal, state taxpayers will be on the hook for more than $90 million in net interest and another $1.7 million in premiums, or additional charges paid by the winning bidders, according to bond sale documents filed with the S.C. Secretary of State’s Office.

The total interest and premium costs represent a 34 percent surcharge on the principal of the bonds, which are scheduled to be paid off by April 1, 2025, records show. Based on a promised initial 3,800 new jobs with the project, the total taxpayer-funded bond cost works out to about $95,000 per worker.

The bonds were sold late last month in three separate bundles to different New York investment firms.

The state accepted the second-lowest bids on premiums for two of the bundles, which collectively represent $220 million, or 81 percent, of the bonds sold, records show. The interest rates on the winning bids ranged mainly from 2 to 5 percent.

Rejecting the lowest bids on the premiums will cost taxpayers an additional $1,656,451 over the 15-year repayment period.

Gov. Mark Sanford and S.C. Treasurer Converse Chellis accepted the winning bond sale bids on March 25, according to signed certificates included with the bond documents.

There were a total of 20 bidders, mostly New York investment firms; all of the final bids were received on March 23 or 24, according to records.

It’s unclear why the lowest bids on the premiums were not accepted for most of the bonds, or how the $1.7 million in premiums will be spent. Sanford spokesman Ben Fox on Monday said he was still researching The Nerve’s questions.

As for charging premiums to bond bidders, S.C. Attorney General Henry McMaster in a 2009 written opinion concerning a school district bond issue said although “forcing a bond premium” did not violate state law in that case, it “appears as if the school district is manipulating the market in order to increase proceeds without increasing the amount of principal debt.”

Rick Harmon, senior assistant state treasurer, said Tuesday his agency would respond to The Nerve’squestions when it formally replies to an April 7 written request by The Nerve under the S.C. Freedom of Information Act for documents related to the bond sales.

Harmon gave no timetable for his agency’s response, though state law requires an initial formal reply within 15 business days of the request.

(After this story was posted, Harmon in a written response to The Nerve said all of the winning bids were the lowest bids based on net interest, and that taxpayers will not be responsible for repaying the $1.7 million in premiums. But on every bid form reviewed by The Nerve, the premium costs were included in a category labeled “Total Interest Cost.” Also, premium costs typically are recovered through higher interest rates charged by bond bidders, an S.C. bond attorney not connected with the Boeing deal told The Nerve.)

The law firm handling the Boeing bond sale for the state was Haynsworth Sinkler Boyd, whose main office is located across from the State House in a high-rise office building also occupied by the S.C. Department of Commerce.

Harmon would not tell The Nerve how much the firm was paid to handle the bond sales, referring questions to the S.C. Budget and Control Board, which didn’t respond Tuesday to a request by The Nerve.Maxie Haltiwanger, spokeswoman for Haynsworth Sinkler Boyd, referred The Nerve’s questions to Harmon.

Following is a breakdown of the winning bids, according to bond sale documents filed with the S.C. Secretary of State’s Office:

Banc of America Merrill Lynch

Principal: $170 million

Premium costs: $1,588,147.61

Net Interest: $56,937,577.39

Total cost: $228,525,725

Citgroup Global Markets Inc.

Principal: $50 million

Premium costs: $118,961.55

Net Interest: $19,632,838.45

Total cost: $69,751,800

Barclays Capital Inc.

Principal: $50 million

Premium costs: $6,960.40

Net Interest: $13,555,389.60

Total cost: $63,562,350

The total taxpayer cost of the project, including various corporate income and sales tax credits and property tax breaks, is projected to be at least $500 million, an earlier investigation by The Nerve found.

Next to tax incentives given to BMW in the Upstate over the years, the Boeing project likely would be the most expensive taxpayer gift to a company in state history, according to state Department of Commerce documents.

The Department of Commerce had estimated that with interest, the Boeing bonds would cost taxpayers nearly $400 million over 15 years.

All of the bonds are general obligation bonds; under the S.C. Constitution, if there are not enough general fund revenues to cover the bond payments, the money would be recouped through a statewide property tax.

State lawmakers and agency officials had been secretive for months about details of the taxpayer cost of the Boeing project, dubbed “Project Gemini,” despite repeated written requests by The Nerve for information.

The General Assembly in a special session on Oct. 28 approved the first $170 million in bonds, a day after it was first discussed publicly in a Senate Finance Committee hearing.

Those bonds were approved under a section of the S.C. Constitution that doesn’t impose any debt limits on the bonds.

To receive those bonds, Boeing has to create at least 3,800 jobs and invest $750 million over the next seven years, though there are plenty of loopholes in an incentives agreement with the state, The Nervefound in its earlier investigation.

At a Jan. 12 special hearing – the first day of the legislative session – the Joint Bond Review Committee, headed by Senate Finance Committee Chairman Hugh Leatherman, R-Florence, one of the key players in the Boeing deal, approved, without prior public discussion, the sale of another $100 million in bonds for Boeing.

The next day, the five-member S.C. Budget and Control Board, which includes Sanford, quickly signed off on the entire $270 million bond sale.

Of the total amount, $50 million was authorized under the “Air Carrier Hub Terminal Facilities Act,” which was amended in 2005 to allow bond sales for approved air carriers that have at two “specially equipped” planes that are used for the “transportation of specialized cargo.”

That provision was sponsored by House Speaker Bobby Harrell, R-Charleston, another key player in the Boeing deal.

But although Boeing added two large cargo planes that fly assembled 787 Dreamliner sections from its two existing plants at the site to its main plant near Seattle, it didn’t initially ask for bonds under the 2005 amendment. Leatherman at the Jan. 12 special hearing noted that those bonds had “been unobligated.”

Department of Commerce spokeswoman Kara Borie told The Nerve last week that those bonds “will be expended in accordance with state law and the opinion of state bond counsel.” State law allows the bonds for an economic development project that is “functionally related to certain air carrier hub terminal facilities.”

According to Commerce documents reviewed by The Nerve, the $270 million in bonds will be spent as follows:

  • Building construction: $206.1 million
  • Site preparation: $53.9 million
  • Road improvements: $10 million

Under a tentative schedule by the Department of Commerce, Boeing would receive nearly $132 million of the $270 million by the end of this month, and the remainder by the end of August.

Reach Brundrett at (803) 779-5022, ext. 106, or rick@scpolicycouncil.com.