The Financial Flimflam of Lease Revenue Bonds
Several of us have been researching the Lease Revenue Bonds that the city of Encinitas used to finance the purchase the Robert Hall property. We knew at the very beginning that this borrowing method was used to get around the requirements of Proposition 13 that necessitate a vote for any tax increase. What about the other details of this financing technique? No one seemed to know anything, and the city was extremely unhelpful in supplying any insight.
In 2001 the city of Encinitas and the San Dieguito Water District (SDWD) drafted a “Joint Exercise of Power Agreement” and created the Encinitas Public Financing Authority (EPFA) for the sole purpose of issuing Lease Revenue Bonds for financing the purchase of the Hall property. The Chief Executive Officer who runs this Authority is City Manager Kerry Miller. This authority is supposed to be an independent agency operating apart from the city. The city of Encinitas through its Public Works Department owns, controls, and administers the “Operating Facilities” of the SDWD. The city then transferred the operating facilities of the SDWD to the EPFA and declared the EPFA the sole owner of these operating facilities. It is very important to note here that no money, not a penny, changed hands. This was purely paper shuffling.
It gets more complicated. The EPFA then leased the operating facilities of the SDWD back to the City, and through the City back to the SDWD. Thus the City became both the “lessor” and the “lessee” of its own water district. An Operating Lease Agreement between the EPFA and SDWD/CITY formalizes this relationship. This explains the name Lease Revenue Bonds. The SDWD Financial Statements, June 30, 2001 and subsequent statements from the district explain it this way under Note 8b, Operating Lease Commitment:
“The District is a participating member of the Encinitas Public Financing Authority (the Authority), which owns the operating facilities occupied by the district and other agencies. Those agencies are committed to the Authority under operating leases at rates and terms sufficient to cover the debt service requirements of the related Certificates of Participation.”
And now comes the zinger from the 2001 Lease Revenue Bond Prospectus:
“The bonds are not a debt, obligation or liability of the City, the State of California or any of its subdivisions (other than the Authority) nor do they constitute a pledge of the faith and credit or the taxing power of any of the foregoing (including the Authority) and the City.” At this point you are probably thinking that this is the kind of creative accounting done at ENRON.
It is clear the City is not responsible for repaying the money it is borrowing. Then, who is? Well, the Authority. And who is the Authority? Well, the City and the water district. Thus it is the water district that has repayment responsibility. The repayment money through lease payments normally comes from the general fund. What happens when there isn’t enough money in the general fund to cover the repayments? The water district is responsible and must come up with the money. This ultimately has to come from the water users in the district through the rates and fees they pay if the City is not to default on the bonds. If money is needed, rates and fees are simply raised. No vote of water users is required to do this.
If you live in the San Dieguito Water District you should be getting very nervous at this point. Water rates and fees can be increased to make bond repayment on borrowings that have no relationship to the normal activities of a water district. The SDWD bond obligation for its share of the Badger Filtration Plant is a legitimate debt repayment. Other bond obligations are very questionable, even if disguised as lease payments. Lease Revenue Bonds are issued to construct “facilities “ that are then used to produce a revenue stream to make the lease payments. The purchase of the Hall property has generated no income. Therefore the money to make the lease payments can only come from water users. If you live in the Olivenhain Water District (OWD), you are in fat city. You have no repayment responsibility. But the City has two water districts within its boundaries and does not control the OWD. This fact opens the possibility that water users in the SDWD will pay more for citywide obligations than water users in the OWD. When the City took over the SDWD it agreed not to mix monies. Can we be sure this is being respected?
All of this would be a waste of time researching and worrying about, if the City were not considering more borrowing in the same manner. The purchase of the Hall property with Lease Revenue Bonds is a done deal. The new borrowing is not. It was very significant that the budget workshop on Wednesday, May 10 was a joint meeting of the City and the SDWD. This makes it perfectly clear what the City is contemplating—more Lease Revenue Bonds. At the workshop Jay Lembach of the Finance Department fumbled and evaded an answer when asked by Mayor Guerin about ultimate repayment responsibility. He didn’t want to say water users in the SDWD, if money were unavailable elsewhere. But money seems unavailable elsewhere. Otherwise why is a huge bond issue being considered?
The State of California through its Department of General Services has the State Administrative Manual on line at http:/sam.dgs.ca.gov/TOC/6000/6872.htm.
I will close with the first line from this page on Lease Revenue Bonds: “Definition: Revenue bonds (or enterprise revenue bonds) are a form of long-term borrowing in which the debt obligation is secured by a revenue stream produced by the project.” I think we have the right to ask the city about the whereabouts of the revenue stream that will secure the debt obligation of any new borrowing.
Gerald Sodomka
*bloggers note--Is "flim flam" one word or two?
Yes, Jerry, thank you so much. Prop. 218, which became part of our State Constitution, as an amendment in 1996, specifically makes an exception for water fees and sewer fees, whereas all other increased fees, related to property use, are to be voted upon and passed by 2/3 of the general public or a majority of the "affected property owners." General obligation bonds are to be voted on by the general public, as well.
ReplyDeleteBy wrongly tying this to a paper "Authority," EPFA, which is really the City, in disguise, it clearly seems as though the City has been allowed to subvert the intent of the law. The Lease Revenue Bonds will ultimately fall upon us to repay, by raising our fees. We sincerely hope that this will be challenged when it happens. Already there are plans to substantially raise our water fees.
This will begin with an increase of how much per year? Was it 8%? Also, we will start getting monthly bills instead of a water bill every other month.
It was wrong for our increased storm drain fees to be placed on our trash bills. It is also wrong for the City to covertly put service debt onto our water bills for developing a park, which purchase and capital improvement are unrelated to providing water services.
I believe there is ample precedent to show that mixing it up in this manner would be considered an abuse of the City's authority. The City Attorney, again, should have told Council this from the get go.
We do not want more debt, unrelated to our water service, to be added on to our fees and monthly charges. We are crying foul.
The City is asking for another lawsuit. We don't like having to go to the court, but when Council oversteps its authority and subverts the intention of the law put into place by the general electorate, as part of the State Constitution, then this becomes our only recourse.
Flim-Flam is two words. You can substitute Guerin-Dalager and the meanings are the same. Where is the grand jury when you need them?
ReplyDeleteIf there is a lawsuit, our City Attorney, Glenn Sabine, could make a lot of money. His contract states that he gets paid $155.00 per hour for the first 50 hours and $145.00 for each hour over the 50 hour retainer. This deal was recommended to the City council by Kerry Miller in a memo to the City Council last year. The Council unanimously approved it on Dec. 14,2005( Jim Bond was not present). It is good until Oct. of 2006.With every lawsuit he and his colleage, Morrison, make more money, so why not go for the litigation. It's a pretty sweet deal. Where is the motive to actually tell the City Council members what is and is not legal. He makes more money playing ignorent or making light of the litigation. This actually happened with the Hall Property. If it had not gone to appeal the City would have won. Good work if you can live with yourself.
ReplyDeleteOh Glenn Sabine and Kerry Miller seem to have no trouble living with themselves. The City Attorney makes more money, the more mistakes the City makes. Money really soothes the nerves of some public officials, until they get called on their wrongdoing.
ReplyDeleteAsk Randy Duke Cunningham. A City Attorney, whether appointed, or hired, by contract, on a year to year basis, is still in a position of trust. Many in this City feel Kerry Miller, Glenn Sabine, and Miller's ex assistant, Jennifer Smith, new, unqualified finance director, through their negligence, which doesn't have to include actual malice, are betraying the trust of the citizens of this City. They can only do this through the twisted values and short sightedness of our Mayor Christy Guerin, and her cohort, Dan Dalager. We need a fresh start come November, with an outside, independent, and complete audit, as called for by James Bond, and the Encinitas Taxpayers association, including Bob Bonde, one of our founders.
If we could afford well over $100,000 for consultants for the misguided ballot defeat of Prop. C, we can afford the money for an audit, with reasonable cost projections.
Every year these projections are off by millions. The rate of discrepancy is increasing. When James Bond questioned this, Christy Guerin told him, "You are so far out of touch with reality; I can't begin to tell you."
We think Bossypants Guerin and the Dalager are the ones out of touch with reality. They are currently in denial. Dan is more honest than Christy. He has been misguided by his development campaign financing. He'll probably get it again for the coming election.
And why was the agendized Council Meeting for this Wed. suddenly canceled?
So clearly "dr lorri" works for the California minimum wage ($6.75 per hour)and therefore can live with herself. And thank god she's not an attorney. She says "If it had not gone to appeal the City would have won."
ReplyDeleteHuh? What? That is such illogical nonesense it hurts my head!
In fact the posts on this issue in general seem to be annoyingly banal.
What about the points made in the letter? Why the constant misdirection of personal attacks?
ReplyDeleteI think she meant, because it went to appeal, the amount that the City had to eventually pay included the costs of Everett Delano's initially defending the appeal (re issue of attorney fees), and Quality of Life's counter appealing to include those fees which Delano had not yet been paid.
ReplyDeleteIf it hurts your head to think about it, if you think this is banal, or if you think a psychologist should make minimum wage, then please go start your own blog, wage rage.
I am quite certain Dr. Lorri is not paid for much of the service work she does. It probably does work out to about minimum wage if you average in all her volunteer, unpaid hours.
Get a life wage rage. Might does not make right. City Council was dead wrong to increase City Manager Kerry Miller's pay and benefit package, and to increase "City Attorney" Glen Sabine's contracted hourly fees, and "car and software allowance," too, we believe. Both of them got two raises in 2005, one in January, and one in December, for Sabine, retroactive to October. This is not right.
You, wage rage, are trying to redirect the conversation to anger and fear, rather than discuss the original post, re the financial flim-flam going on at City Hall by City Council raising fees in sneaky, illegal ways.
Storm drain fees should not have been on the trash bill. The court agreed in a stipulated judgment. We want our money back! The Hall property revenue bonds should not have been financed through the San Dieguito Water District. This is inconsistent, and unfair. We hope a Grand Jury does investigate, so private citizens will not again be forced to petition the courts for relief.
Please stop spinning the facts and trying to divert with character assasination, wage rage. Get real.
The person with the most information on the flim-flam water district/bond issue, should send a letter to the Grand Jury. That is the only way the Grand Jury can get involved and investigate.
ReplyDeleteSpeaking of our refund for the illegal taxes the City took from us, has anyone received one? I know I haven't.Sure could use it, after the government took so much on April 15."WHEN WILL IT EVER END"?
ReplyDeleteTo wage rage:
ReplyDeleteIf you are such a fan of Mr. Sabine, perhaps you enlighten us as to why he has lost so many lawsuits that have been filed against the City? I have copies of them, and I have to admit, I don't know how he could have given whatever advice he did to the City. But perhaps you have more accurate information than I do, and can share it with us. I know that I am certainly open to any new information.Thay is one of the reasons I read this blog.
Then there is the litigation against the City of La Mesa, because Mr. Sabine wrote a letter to a citizen stating that he had to apologize to the mayor. First Amendment rights do not seem to be his strong suit. Outside of that, he is probably a pretty nice guy. As the Wizard of Oz said, "I am not a bad man, just a bad wizard."
Glen Sabine's tears cure cancer, too bad he has never cried.
ReplyDeleteTHIS IS SOME DISTURBING SHIT.
ReplyDeleteNow a little more educated, I can discuss Lease Revenue Bonds. No, I not an expert, if you are,join in.
ReplyDeleteThe Joint Exercise of Power Agreement creating the EPFA and shuffling of ownership of the the operating facilities was purely paper shuffling. This is the same sort of shuffling your average family does when it sets up a living trust. No money, not a penny changes hands in either transaction.
And No, this is not like the Enron creative accounting where there was nothing of value, just smoke.
The repayment money for these bonds comes from the city general fund. You should only be getting nervous if you believe that the revenue stream pouring into the gereral fund is going to be less than that required to service the debt. ONLY under that situation would there be a problem.
In a worse case scenero, the city would default on the bonds and the bondholders would seek relief. In theroy they could take whatever is securing the bonds and use that security for the remaining length of the bond period. Bondholders are not in the "take possession business" and would petition the courts and ask that the courts demand the city to pay. The city would in all liklihood be forced to cut staff and services to the point where the bonds could be serviced. The chance of the rate payers in the water district having their rates jumped to service the debt is about as likely as hitting the superlotto two weeks in a row. As to money being unavailable elsewhere, it is not the debt service money that the city does not have available but the tremendous chunks that would be required to complete the capital improvement projects currently contemplated by the city.
Currently the city's revenue stream is about 49 million yearly.
The current debt service for existing bonds is roughly 6.09% of operating revenue. If the city were to float another bond to start the Hall property, build the fire stations, and the public works facility; in year 2007 this debt service would amount to 8.94% of available operating revenue. Drawing this out to the year 2016 with projected operating revenue increasing to 69 million dollars this would equate to debt service costs of approximately 5.48% of operating revenue.
If the service on your on your home was between 5.48 and 8.94% it seems this would be pretty good value. Unlike your home where if you default you loose the house and it is transferred to someone else forever, these bonds are backed by use of the property only for the remaining length of the life of the bond, then it reverts to the original owner. This is how I interrupt the issues surrounding city lease revenue bonds. If I am incorrect please direct me to your sources so that I can become better educated.
Originally, the JPA, the Encinitas Public Financing Authority, consisted of 5 entities: the city of Encinitas, the Cardiff Sanitation District, the Encinitas Sanitary District, the Encinitas Fire Protection District, and the San Dieguito Water District. Those five promised to be responsible for the debt incurred. The city dissolved two of the districts before the 1997 refinancing of the 1991 Series A bonds. From what little paper work that is available on the JPA, the council at that time didn't make an amendment to the JPA papers showing the deletion of two of the members. State law requires a filing of the change with the Secretary of State before bonds are sold. That filing may not have happened. The Hall property bonds were sold in a similar fashion. There is now only two entities responsible for the bond debt: the city of Encinitas and the San Dieguito Water District. The city could defauit on the bonds and leave a terrible mess for the SDWD. There is also something called the master lease agreement (1991) between the Encinitas Public Financing Authority and the city of Encinitas. There is also an increased cost allocation that will begin FY2006-07. Departments, divisions, assessed areas, and the SDWD must pay additional money to the general fund.
ReplyDeleteThe city has a large unfunded pension liability. Hypothetically, The extra $6 million dollars that was tacked onto the proposed $17 million of last month could cover some of the unfunded liability. The money could be shifted around and no one would know of the shift unless there was an outside audit.
The "last" city bond refinancing was 2002. You can find the staff report and the other legal papers on the city website in the documents archive.
ReplyDeleteThe date is May 22, 2002. The title is Bond SDWD. The agenda item 104 pages.
My two dictionaries say that flimflam is one word and that it means “trick or deception, especially a swindle; a piece of nonsense; twaddle. At the May 10 budget workshop I spoke and described these lease revenue bonds in the famous words of George Bush Sr. as “voodoo economics” with city manager Kerry Miller as the witch doctor. The original post was made the following weekend. Interestingly at the May 24 budget workshop the city had a representative of Northcross/Hill/Ach, the bond consultants, make a presentation. I am convinced this was done to answer what I said and wrote. I stand by everything I said and wrote. Inadvertently the representative only confirmed what I wrote. He contradicted nothing.
ReplyDeleteHe did, however, add two sentences that only deepened my suspicions. From the handout available at the meeting: “City’s general fund may be reimbursed from non-general fund revenues if the asset being financed benefits an enterprise (e.g. water or sewer).” This sentence was not written to be easily understandable. Why the word “reimbursed?” Pay back for what? The “asset” is the Hall property and the “enterprise” can only be the San Dieguito Water District, but may also be the Cardiff Sanitation District, since water and sewer are mentioned. Only the SDWD is part of the COP (Certificate of Participation). Sewer fees on property tax bills in the district have risen up to 400 % over the last 5 years. This suggests that large amounts of money have been moved out of the CSD and into the general fund to make lease payments for bond repayment. What is the benefit here to SDWD and CSD? None that I can see. Also from the handout: “City’s general fund is obligated to make lease payments from legally available funds, subject to the asset being financed being available for use.” Again the language is designed to not be clear. How is the “asset” (the Hall property) available for use? Presently it is unusable.
I think this explains why the city is so angry at the Cardiff group that sued and won, forcing to city to do a complete environmental impact report. The EIR is still not completed. Why the delay? Only the city knows. But the city insists that the group only sued to prevent the cleanup of the property, when, in truth, they sued to force compliance with California environmental law. The deep anger of the city council is now explainable. The Hall property is unusable and produces no revenue flow. This puts the city out of compliance with the bond issue and state regulations.
With all due respect to Gil Foerster, does he really think the city would cut staff and services if necessary? A little financial sleight of hand would solve the problem nicely. The phrase I used was “rates and fees.” A quick check of one’s water bill and property tax bill will show how high these fees have been raised. The water meter charge is now $24 each billing, even if I use no water. My meter was installed 51 years ago and replaced once about 20 years ago. I had to pay for the new shutoff valve. My sewer fees have skyrocketed, and as far as I know the bonds to build the treatment plant are paid off. I think Gil knows that the city is spending the money as fast as it comes in. There have been generous raises and increases in pension benefits. But the heyday of rapidly escalating property tax revenues seems to be coming to an end. And even Mayor Guerin admits that Encinitas is getting built out.
The comparison I made to ENRON was in the complexity of the creative bookkeeping, not in any value of any assets, real or invented. I have never argued that the city is incapable of repaying borrowings or that it has a poor credit rating. I am arguing that lease revenue bonds are a tricky way to do this. If the city wants to borrow money, I think the city should float general obligation bonds, and let the citizens of Encinitas decide. That is democracy in action. I know Kerry Miller hates the restrictions of Proposition 13 and does everything he can to circumvent it. But our city government has an insatiable appetite for money. Only the citizens can restrain this to the level they are willing to pay and the level of services they are willing to accept. Gil seems to have missed the comment of the bond consultant that it only takes a majority of the council to approve the issuance of lease revenue bonds. I don’t think this is the best way to make such an important decision.
Thanks for your clarifying, truthful comments, Jerry.
ReplyDeleteI can't understand how any city can get around the requirements of Prop 218, which is now a state constitutional amendment. I do not want a simple majority to vote on this. More importantly, I think the Citizens should get to vote, or the affected property owners for bonds, period. Calling the bonds something else does not make them something else. A rose by any other name. In this case, a thorn by any other name, is still a thorn.
Unfortunetly Gerald's clarifying statements under the Blog "Financial Flimflam" are just not factual. I have to assume the, "several of us," and "Us" he uses refers to are the mice he has in his pocket. If he is going to stand by everything he wrote he is on very unstable footing.
ReplyDeleteNo one is going to loan you money on open park land unless they are sure you are going to default and they can put something else in there with instant marketable value. The city therefore formed the Joint Powers Authority and EPFA so that something of value could be used to woe the mutual funds who buy the vast majority of COPs. The name says it all. Certificates of Participation, The bond holders (Mutual Funds) see value in your community and are willing to participate in it's construction, growth and development. They want to know the bonds are going to be repaid so there has to be an income stream to service the debt. The other alternative is a public vote and a general obligation bond, where you the property owners are on the hook if there is a question of repayment, in which case your taxes will be raised. We have only to look at school bonds to see just how difficult it is to pass a bond where property owners are on the hook. The consolidation of the SDWD and the City - Joint Powers Authority - created an entity that had a guarenteed income stream in addition to the regular stream that comes in to the General Fund from many different sources. This then allowed the formation of the EPFA and the sale of COPs. The bondholders(Mutual Funds) now have two sources of income stream upon which to depend for payment. One and primary is the city's General Fund, the other, should the City declare bankruptcy, is the income stream coming from the SDWD. Sooo, the asset is not the Hall property as Gerald incorrectly stated but the SDWD and everything that includes. Now you should only be very nervous if you think the city is going to position itself so that it has no choice but to decale bankruptcy. How likely is that? Really, not very. Cardiff sewer fees have risen because everyone is adding new additions and the distance to the treatment plant is far, the existing system is one of the oldest and most neglected in our combined communities.It has absolutely NOTHING to do with the bond issues.
The benefit is to the Joint Authority which is the SDWD and YOUR CITY. As for the language "being available for use", this is to protect the SDWD, and the city if the SDWD facilities become unusuable for some catastrophic reason, like a terrorist attack on the facilities. Under those conditions the bondholders would not be paid in the event of bankruptcy and would have no recourse. Soooo, you see, the fact that the Hall property is unusable at this point or any point in time means squat.
The city is not out of compliance with anything to do with the bonds.
Again, the lawsuit concerning the premature clean-up of the Hall property had little to do with an environmental impact report being done on the property, a full EIR was always in the works. It did have to do with starting the clean-up prior to completion of the EIR. Again, I was on the Darth Vader side of this issue. I felt that the greenhouse remains were a safety concern, from fires started by vagrants using the property, and from rodents breeding unfettered, with the abandonment of the property. I thought that the city was correct to move to immediately clean up the property but that they should have gotten an emergency exemption before proceeding.
Does Gil Foerster really believe the city would cut staff and services if necessary to service the bonds? YES HE DOES!!
The $24. dollars you pay for the meter whether you use any water or not is because the presence of the meter requires the district to be prepared if you do use water. It is $24. on my ag land in Fallbrook, it is $24. on the two parcels in Joshua Tree, one commercial and one residential. The commercial one has never supplied one drop of water but I put the meter in so that I am never in the position of some parcel owners in some areas of the state where you must buy an existing meter if you want service.
The city is spending the revenue as it becomes available, perhaps you would have then invest it in some instrument that pays 1-1/2% like the two CD's that I keep available for emergencies.
As for putting this to a vote of the city, no I don't think this is the best way. The vote tallies on both Prop. A & C certainly point this out. Sorry Jerry but your statements were not clarifying and not factual. You need to bring in new mice to help you do the research.
Folks, I am not going to coddle people who put incorrect or misleading information up on this blogsite. I have too much respect for this site and for the citizens of Encinitas.
If JP feels that I am too wordy or doing the site an injustice, he has my email address and only has to ask that I stop posting for me to stop!!
Read the May 22, 2002 agenda item on the bond for city and the SDWD. It can be found under document archives on the city website.
ReplyDeleteThe point of a COP is that there is no collateral needed. Unless the Hall property was specifically listed as collateral for the loan, how can it be taken by the bondholders?
I'm afraid Gil is sounding very much like an advocate for the city. He is the one being very careless with facts. He says that "no one is going to loan you money on open park land...." The loan (Lease Revenue Bonds) was to purchase the property. Banks do this everyday. The value of the property itself secures the loan. The city could have easily borrowed money through general obligation bonds. The city has the credit rating and revenue flow to do this, as Gil himself stated. The catch, of course, is that these bonds need voter approval. Gil should read more carefully through the Northcross/Hill/Ach handout, which clearly says the "asset" is the facility being financed, in this case, the purchase of the Hall property.
ReplyDeleteAnd Gil is simply wrong on the history of the cleanup of the Hall property and subsequent lawsuit. The city did a cursory site assessment and attempted to do a negative declaration. The lawsuit stopped this. CEQA is very clear. An EIR must be done for the complete project at the beginning, not piecemeal. The court agreed. The city did an appeal and then abandoned it. The matter is settled.
I hope I'm sounding like an advocate for Encinitas, the city, because that's what I am. At the time the City moved forward on the Hall property the other interested party was Costco. Am I glad that the City Bob Hall and the City found common ground and quickly closed the deal sans a public vote? Absolutely, otherwise I'd be looking at a Costco on what is now city property. The total cost for the property was a steal and I don't care whether you look at the sale price or the fully amortized price of the Lease Revenue Bonds. Now, ten years from now, whenever, you will have a hard time convincing me this was not a good deal for the community. I have read carefully and I listened carefully. I was especially attentive when Northcross emphasized the need to formalize the Reimbursement Resolution. Better go back and listen to the tape of the meeting so you know what happening Gerald. I am going in Tuesday to talk with Jay Lembach to make sure I am on stable ground both on this issue and on the issue of potential problems with our responsibility on the PERS funding and it's influence on our bond obligations. Got all that Gerald? I'm doing my homework without any help or mice in my pocket. Blog freely for the next few days and I'll try to catch up by Friday.
ReplyDeleteCity pension plan -
ReplyDeleteThe actuarial valuation-June 30, 2004 report - Under the miscellaneous plan, valuation date of June 30, 2004, the city is only 71.8% funded. The unfunded liabilities as a % of payroll is 75.7%.
Compare that with the city of San Diego.