While Dave Sanchez, director of the Securities and Exchange Commission’s Office of Municipal Securities has repeatedly expressed concern regarding joint powers authorities, there is no certainty of following enforcement action although that risk always can be heightened in situations where bond issuers are not thoroughly supervised.
“I don’t think it necessarily means that enforcement action is imminent,” said Ed Fierro, who prior to becoming a partner at law firm Bracewell served as senior counsel to a previous director of the SEC’s Office of Municipal Securities.
While Sanchez’s remarks, given to issuer officials attending Government Finance Officers Association events in recent months, suggest he’s concerned there’s a risk of potential violations of federal securities laws, “his remarks are not the commission’s,” Fierro said, adding that past experience has shown that not every issue highlighted by a director of that office has led to enforcement action.
While the OMS provides technical assistance relating to enforcement actions, the SEC’s Division of Enforcement decides which actions to bring, he said.
“I don’t think it’s likely that we’re going to see a bunch of cases come out focused on JPAs, but you know, I could be wrong,” Fierro said.
JPAs, which are most numerous in California, are formed when two or more public agencies form a new entity to exercise common powers, including participating in the municipal market.
In comments during a debt committee meeting held in January that was part of the GFOAs 2025 Winter Meeting in Washington, D.C., Sanchez expressed concern regarding state and local governments that form JPAs and then fail to exercise sufficient oversight.
Such situations can be problematic because when entities accessing the capital markets aren’t well-managed or supervised, there is the potential for material information to fail to make its way to the investing public as required.
When the process of oversight regarding JPAs isn’t maintained, that’s why “disclosure violations happen,” Sanchez said during the GFOA event, adding that default rates of such entities can be “very highly elevated.”
“And so, you know, we’re going to always be looking at where the defaults are,” the SEC official said, adding that the potential exists “for people to be found to be lacking in their oversight of these entities that they’ve created.”
While Sanchez emphasized that government agencies that create JPAs shouldn’t allow them to “run wild,” Larkspur, California, whose city council voted to join a JPA called the California Community Housing Agency (CalCHA) as a non-charter additional member in 2019, is finding that bringing a JPA to heel can be difficult.
CalCHA was created in 2019 by the County of Kings and the Housing Authority of Kings County, CalCHA Chair Doug Verboon said in an email Wednesday. It was created to provide an affordable housing solution for middle-income earners in high-rent areas who would otherwise be forced to commute long distances to work in the communities where they serve in roles such as teachers and police officers, Verboon said.
“One of the things we’ve learned through this process is that the CalCHA board seems very much separated from the operation of the agency,” Larkspur City Manager Dan Schwarz said in a recent interview.
CalCHA’s board “is essentially a county board for a county in a rural part of our state, but all of CalCHA’s operations – all of these buildings – are in very different communities,” Schwarz said. “And there seems to be a disconnect right there on a governance level.”
In California, it’s common for cities to belong to numerous JPAs, Schwarz said. While Larkspur is a member of “quite a few” JPAs, its experience with CalCHA “is the first time we’ve had this much challenge engaging the governance structure and getting responsiveness,”
In addition, Larkspur isn’t seeing “a high level of engagement by the CalCHA board in the individual projects and their success,” he said.
Larkspur’s city council decided to join CalCHA as a means to provide middle-income housing, according to an October 31, 2024, letter sent to CalCHA’s board of directors by former Larkspur Mayor Scot Candell on behalf of Larkspur’s city council.
However, as Larkspur has learned with CalCHA’s Serenity at Larkspur project, what appeared to be a promising solution, can become a project that fails to meet its middle-income housing goals, costs the city property tax revenue and generates big fees for private entities, city documents show.
“CalCHA’s operation at Serenity is in severe financial distress,” Larkspur’s former mayor said in the letter. “It is publicly documented on the Electronic Municipal Market Access (EMMA) website that Serenity is in default with respect to the debt service coverage ratio required for its bonds.”
Housing projects acquired by CalCHA receive property tax exemptions in return for providing a public benefit, an ad hoc committee’s November 2024 report said. At its 2019 inception, CalCHA was the first JPA of its type in California. CalCHA’s Serenity apartments purchase was the first such project in Larkspur and CalCHA’s third acquisition in the state, the report said.
In the months preceding Larkspur City Council’s decision to join CalCHA, council members and staff were briefed mainly by representatives of Catalyst Housing Group, which facilitated Larkspur’s joining of CalCHA, the letter said.
In 2020, CalCHA acquired Serenity at Larkspur via the issuance of $219.8 million principal value of Series 2020A essential housing revenue bonds, the ad hoc committee report said. It simultaneously issued $6.7 million in Series 2020B subordinate bonds.
“CalCHA issued $6.7 million in subordinate bonds bearing 10% interest per annum to Catalyst,” the report said, adding that “Catalyst did not contribute any money toward the project in exchange for the subordinate bonds.”
In its October 2024 letter, Larkspur’s former mayor said the ad hoc committee had “learned that the continuing provision of middle-income housing to new residents at Serenity might be in jeopardy.” According to the ad hoc committee’s report, CalCHA and Catalyst had proposed a recapitalization plan for Serenity, a critical component of which involved potentially waiving the provision of rent discounts to middle-income tenants in order to increase Serenity cash flows.
“The Larkspur City Council opposes any proposal that allows the program administrator to pursue market-rate occupants,” the letter said.
In a Nov. 21, 2024, email, which identified him both as program administrator for CalCHA and an employee of GPM Municipal Advisors, which serves as the municipal advisor to CalCHA, Scott Carper attached a letter signed by CalCHA Chair Verboon in response to Larkspur’s letter.
“As you may know, the Serenity project is not CalCHA’s only project – we have sponsored 13 other essential workforce housing projects throughout the State,” Verboon said in the November 2024 letter. “Our role in all of the projects is quite simple: CalCHA issues governmental purpose bonds to finance the acquisition and refurbishing effort at its properties, thus lowering the cost of capital and allowing funds to be dedicated to the acquisition and upgrade effort.”
Verboon added, however, that CalCHA isn’t a property management expert, “nor is it designed to be.”
“We engage qualified administrators with experience in large-scale residential housing projects – this case, Catalyst Housing Group – that share our desire to provide housing for middle income families,” Verboon’s letter said.
CalCHA hasn’t agreed to any recapitalization plan, nor had bondholders committed to one, Verboon said in the Nov. 21, 2024 letter, adding that the regulatory agreement that imposes certain tenant qualifications on Serenity residents was still in place. Should it become time to discuss potential amendments to the agreement, the city would be consulted, the letter said.
“Until that time, we respectfully ask the City to withhold any final action as it relates to the City’s participation in CalCHA,” Verboon’s letter said.
Larkspur City Council’s ad hoc committee on Serenity “continues to engage with stakeholders, which includes representatives of CalCHA, the bondholders, and local government entities,” Schwarz said.
“No decision has been made at this time about Larkspur’s membership in the JPA,” the Larkspur city manager said.
Serenity hasn’t been able to generate sufficient cash flows to cover its debt service since 2020, the ad hoc committee’s report said. In addition, “the property has consistently underperformed its annual budgets and pro forma projections,” the report said.
“Despite the significant financial underperformance at Serenity and the property’s struggle to cover senior debt interest expense, Catalyst, CalCHA and CalCHA’s designated agent GPM Advisors continue to receive a total of $375,000 in fees annually,” the report said. “In addition, Catalyst’s Series B Subordinate Bonds continue to accrue 10% interest of $667,500 annually.”
In his email Wednesday, CalCHA Chair Verboon noted that Serenity at Larkspur was an asset that CalCHA acquired in February 2020, “one month before the entire world was shut down due to the COVID pandemic.” In addition, the project has encountered “unforeseen maintenance issues as a result of historic winter rains not seen in the area for nearly a decade,” Verboon said.
COVID-related tenant protections enacted by the state, competitive pressures as well as unexpected maintenance issues “have put a strain on the financial feasibility of the asset,” the CalCHA chair said.
“Recognizing these challenges and wanting to help with cashflow at the project, CalCHA and GPM have both waived their annual administrative fees as a way to support the project’s recovery,” Verboon said.
CalCHA isn’t the only JPA provider of middle-income housing in the state, Verboon said, adding that a check of EMMA would show that some others have faced similar challenges with various projects they operate.
“The issue is not CalCHA or any other JPA – to make such an attribution is irresponsible and ignores the market realities each of the projects was forced to confront,” he said.