Community Development Authorities: A Further Exploration of Institutional Corruption in Bond Finance

Abstract

While many investors consider municipal bonds to be “safe investments,” today’s municipal bond market encompasses far more than the simple general obligation bonds of state and local governments. The tax-exempt bonds issued by Community Development Authorities (CDAs) through the municipal bond market are typically unrated; they are, in effect, junk bonds with a history of great success, dismal failure, multiple bondholder lawsuits, and occasional federal investigations. This paper considers the variable history of CDAs in California and Colorado during the late eighties and early nineties and their replication in Virginia a decade later. Using a detailed examination of the Virginia experience, this paper argues that that the model of institutional corruption devised by the Edmond J. Safra Center for Ethics helps explain why CDAs often fail to achieve their institutional purposes, and why Virginia officials often failed to learn from the examples of Colorado and California. The examination highlights significant instances of cronyism and conflicts of interest within the economy of influence surrounding CDA creation and management, and suggests that the loss of public trust when a CDA fails to achieve its institutional purpose extends beyond the district’s boundaries to impact public trust in the municipal bond market as a whole.

Keywords: Institutional corruption, Community development authorities, Special development districts, Municipal bonds, Dirt bonds, Virginia, Real estate development, Public infrastructure