A House panel late Tuesday narrowly passed a bill that aims to prevent metro district developers from working both sides of a financing arrangement in which they initially approve the sale of government construction bonds on a project and then purchase them for themselves.

Following several hours of testimony on House Bill 22-1363 that lasted into the night, members of the  House Transportation & Local Government voted, 7-6, to send the measure to the full body for consideration. The lone Democrat to join Republicans against the bill was Rep. Donald Valdez of La Jara.

Despite testimony from developers, lawyers and metro district operators that any changes to current law could have a drastic impact on how projects get done, lawmakers largely sided with metro district residents and advocates for changes, with some calling the one-sided bond deal “egregious.”

Co-sponsor Rep. Mike Weissman, D-Aurora, described the measure as giving metro district residents more of a stake in their community. The bill was pared down considerably to deal only with the issue of developer-purchased bonds.

“To have some say over their debt, to have some say over their taxes, that is what we want,” Weissman said of metro district residents who frequently are left paying off the bonds for decades.

Co-sponsor Rep. Andrew Boesenecker, D-Fort Collins, said the deals deserve exposure.

“The little piece of paper that allows you to schedule debt out and to make a cool million,” Boesenecker said, “needs to be transparent and there needs to be clarity in all of this.”

But the two met with nearly immediate resistance from some committee members, who believe the bill would affect housing costs.

“We have an affordable housing problem and what you will do is cripple affordable housing and undermine it,” said Rep. Andres Pico, R-Colorado Springs. “Cities and counties don’t build roads anymore and development pays its own way and you’re constraining that.”

House Bill 22-1363 primarily aims to stop metro district developers from purchasing government construction bonds that they approved for sale while acting as board members of the district. It also declares that proof of the conduct is a breach of the public trust and a board member’s fiduciary duty to district residents.

“I’ve seen developers sign the bonds as the board member and the investor,” developer Tim Leonard said. “The interest rates are not what’s afforded in the open market if they had to bid on them.”

By essentially loaning money to themselves, the transaction allows the developers to not only collect on the expenses they have in building a metro district’s infrastructure – sewers, streets and sidewalks among them – but to collect the tax-free interest on the bond payments district landowners pay over the next several decades.

Here’s how it works: A developer creates the metro district with the approval of a municipal or county government. As the only landowners in the district – and therefore its only registered voters –  the developer frequently votes themselves, family members and business associates onto the district’s board of directors.

Associates who don’t actually own any land are, by law, able to qualify as a voter and a board member by signing a contract to purchase a piece of land from the developer – a sliver that’s often known as a developer’s parcel and is usually little more than the size of a parking spot – without ever closing the deal.

The developer-controlled metro district board of directors then approves the sale of construction bonds, typically for millions of dollars and usually to the public in order to fund the cost of infrastructure. However, there is often a second smaller sale of bonds that is done privately and for a much higher interest rate than the first. Those bonds, known as secondary or subordinate bonds, are to be repaid only after the first ones and frequently are purchased by the developer.

All of the bonds are to be repaid over the next 30 or 40 years through the property taxes of the homeowners, who eventually move into the metro district. The primary bonds are often purchased by pension funds or other groups that use them as a long-term investments.

The money from the bonds reimburses the developer for their actual expenses, so when a portion of the project is completed, the developer submits the receipts to the board of directors for approval. In nearly all cases, the metro district board is composed mostly of the developer and associates, and basically approves reimbursing themselves.

When a developer purchases a district’s secondary bonds, they are essentially giving a loan to themselves – for the reimbursement of their own infrastructure expenses. Then, as the district residents repay those bonds, the developer is also collecting the tax-free interest on that initial loan. Because the bonds are not paid for several years, interest on them compounds, frequently leaving an enormous payday for the bondholders.

Opponents to the bill didn’t say why a developer should be allowed to purchase their own bonds, but did say any impact to how bonds are issued could be detrimental to a project.

“This bill will eliminate bond financing and make it impossible to project what you’re borrowing money for or how to pay it back,” said Kevin Walker, a Colorado Springs metro district manager who handles about 30 communities.

Bob Cope, the economic development manager for the City of Colorado Springs, said developer-purchased bonds “are necessary to bridge the gap in public financing.” And bond expert Zach Bishop testified that eliminating developer-owned debt would not guarantee a builder would recoup their costs on a project, a chilling effect on new housing projects.

Metro districts are virtually the exclusive method of meeting Colorado’s burgeoning housing demand, with more than 2,000 of them across the state.

HB 22-1363 initially would also have required metro district board meetings to be held on or near the development, ending a practice that allows them to be conducted within a 20-mile radius of a project. Residents have frequently complained of board meetings that occur at a developer’s office far from their homes.

“Money, power and economic growth isn’t everything if we lose our fundamental freedoms by allowing developers to contract away residents fundamental right to govern,” attorney Brian Matise told the committee.

The bill is the second of the legislative session to take on metro district reform. Senate Bill 22-136 was killed in committee on March 2 after developers, bankers, finance experts and lawyers that work or control metro districts testified how any changes to current law would affect future home building in a state thirsty for it.

A bill passed by the legislature last year made some changes to how metro districts operated, mostly by requiring developers to better disclose to consumers the financial impact of buying a home in a metro district.