PhillyDeals: Hard times test municipal-finance pros

Vice President Biden spoke to volunteers at Girard College on the Martin Luther King Day of Service. Teachers have lacked a contract for years, and enrollment is dropping.
Vice President Biden spoke to volunteers at Girard College on the Martin Luther King Day of Service. Teachers have lacked a contract for years, and enrollment is dropping.
Posted: January 17, 2012

John Bonow says he drove across the country from his home on Bainbridge Island, Wash., to his new office as head of Public Financial Management Inc. in Philadelphia "in under three days" this month. (Why not fly? "My dog.")

He passed a lot of clients on the way. PFM is the largest of the specialized firms that advise states and towns on public-finance deals, according to Thompson Reuters, raising nearly $40 billion for bridges, schools, and other public projects in more than 750 bond sales last year.

The firm was founded by ex-Philadelphia finance officer (and future Obama aide) G. Edward DeSeve in 1975. He was joined in PFM's early years by, among others, John White (who retired as PFM boss last year), Sam Katz (Republican mayoral candidate-turned-documentary filmmaker), Marty Margolis (ex-aide to Gov. Milton Shapp), Milt Lopus (a well-known Harrisburg dealmaker, now retired), and later John Spagnola (the ex-Philadelphia Eagle). It has gone national (34 offices, nearly 500 employees) by raising private capital and buying regional rivals.

No rest, even for No. 1

With tax collections down and the public in no mood for higher tax rates, towns have been borrowing less - even with interest rates at 40-year lows. And after "pay-to-play" muni-finance scandals in New York and other states, the Securities and Exchange Commission is writing new rules for advisers that will likely add to the cost of doing business, whether they lead to better advice or not.

PFM is hedging the bond market by also offering investment advice on whether borrowing, boosting revenue, or selling assets makes the most sense. The firm also sells short-term investments for governments to park cash for long-term projects.

Citing the Harrisburg City Council report that asked for federal and state investigation of bankers, lawyers, and advisers who approved that city's risky incinerator-finance projects that later defaulted, I asked Bonow if it's ever the adviser's job to refuse or discourage a deal. "It's our job to say no" when a deal puts the client's finances in danger, he said. Any project, funded with borrowed money, "has to be sustainable."

Under that standard, the bond pros' work is being tested in towns across America.

Legacy in decline

Girard College, the 43-acre free boarding school in Philadelphia, Monday hosted Vice President Biden, who addressed volunteers helping with the Martin Luther King Day of Service, and also protesters, who said the city-run school is short-changing staff and students as it shrinks.

Teachers have been working without a contract since 2009, according to a leaflet passed at the gate by supporters of the Pennsylvania affiliate of the American Federation of Teachers. The staff has been cut from about 270 five years ago to below 200. The student body, once nearly 2,000 and still north of 750 last decade, is under 500 now. President Autumn Graves is awaiting a new strategic plan this summer.

The teachers blamed "poor financial stewardship." The Board of City Trusts, which administers old Stephen Girard's legacy, acknowledges that its ability to fund the school has suffered, not just from weak investment values in general, but also from the old Girard Block it owns in Center City.

Office rentals from the block used to bring in $5.5 million a year, more than a quarter of the school's yearly budget. To diversify, the board sold a long-term lease for $88 million a couple of years ago to SSH Real Estate Management of Philadelphia, but weak investment markets have left the board unable to use all that cash to replace the rental income so far, Board of City Trusts executive director Joseph Martz said.

That doesn't mean the SSH deal was a mistake, Martz said. Two of the block's tenants, the city court system and the Board of Revision of Taxes, plan to leave; their lost rents could have cut Girard's bottom line even more without the SSH deal, he said.

Meanwhile, the board is trying to refinance or sell the Aramark headquarters building and other properties it owns, to reduce the debt left from earlier attempts to boost Girard's assets.

Contact Joseph N. DiStefano at 215-854-5194,, @PhillyJoeD

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