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Council sees no "slam dunk" on spending $10 million

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Posted: Thursday, October 4, 2012 5:39 pm | Updated: 3:56 pm, Fri Oct 5, 2012.

Buoyed by a successful insurance case, the Half Moon Bay City Council and its prospective candidates on Tuesday endorsed finding ways to use the expected $10 million judgment to pay off the city’s bond debts early.

But figuring out the best way to do this was a complicated question, warned City Manager Laura Snideman, who suggested the city’s financial team would need months to study the options before they could recommend a course of action.

Half Moon Bay is on track to pay more than $32 million through the year 2040 as part of a series of bonds issued in 2009 to fulfill a legal settlement in the Beachwood land-use lawsuit. However, city officials also have the option during certain pre-scheduled years to pay off the bonds early without a penalty, which would dramatically reduce the interest and lower the city’s total debt.

Throwing out a disclaimer that the city was working with “big estimates”, Snideman suggested the city could save as much as $25 million if they could make the most out of the early opportunity windows to pay off the bonds.

“That’s the biggest bang for your buck, but it requires more than the $10 million we’ve been promised to receive,” she said. “That’s the maximum opportunity we have as of now.”

A city spokesman later indicated the $25 million figure was actually a typo. The total possible savings is actually $15.4 million.

But even with that goal in mind, city staff warned council members they would still face a Gordian knot of legal and financial uncertainties going forward. The city issued two separate bond packages in 2009, including $5.7 million in judgment obligation bonds, and $10.9 million in federally subsidized “Build America Bonds”. Each bond program has its own unique payment structure, interest and payback windows.

Other factors could also throw a curveball at the future bond picture, Snideman said. Federal lawmakers were signaling they could pull back the government subsidy on the Build America Bonds program, possibly leaving the city on the hook for as much as $6.6 million more in debts.

The city was awarded $10 million last month as part of a successful liability claim taken to arbitration against the Insurance Company of the West. City attorneys say they intend to press the case further to seek more damages, but they have no clear timeline for when the city would receive any of the money.

Two candidates running for the City Council on Tuesday both urged the sitting members to make paying off the Beachwood debt the top priority for the insurance money.

“The only intelligent use of this, I think windfall, is to pay off the bond as soon as possible in any way that makes sense,” council candidate Harvey Rarback said. “I don’t think we should take this money and use it for anything else but reducing our debt.”

Fellow candidate John Ullom agreed, suggesting the city may be able to pay back the principal early by using an “extraordinary event” clause added in the bond language. Snideman responded that the city’s attorneys had investigated this idea, but they did not think they could make a viable case for it.

Council members encouraged staff to continue studying the bond structure and come back with recommendations. Half Moon Bay had no "slam dunk" options, said Mayor Allan Alifano, explaining the insurance money did not change the city’s need for the Measure J sales tax increase.

“We have significant capital needs over the next few years,” he said. “I don’t think this should change our capital needs and why we put Measure J on the ballot.”

Correction: Half Moon Bay officials indicated on Friday they made an error by noting the city could save $25 million by paying off bonds early. The actual total possible savings is $15.4 million.

Welcome to the discussion.

4 comments:

  • John Charles Ullom posted at 2:26 pm on Fri, Oct 5, 2012.

    John Charles Ullom Posts: 1034

    I don't have a law degree but I can read and think for myself August West. The Extraordinary Optional Redemption clause is straight forward. If the subsidy is reduced, (it was from 35% to 29%), or guidance is issued regarding their use that makes it clear that we can't use them, (that happened too), we can call the bonds.

    The only unclear part is the acts and omissions aspect of the EOR clause.

    I assume that means that we aren't covered if we acted in bad faith or lied. Our City Council must not have done that because all that happened was a reduction in the subsidy. Otherwise, we could have had the subsidy completely withdrawn. That would have resulted in another 330,000 dollars in payments. Mayor Alifano was quoted saying that the City Council's shameful abuse of funds meant to create jobs could have bankrupted our city. He was right.

    Now we are faced with the subsidy being lost on January 1st, 2013 unless the Republicans and Democrats back down. That won't happen before the election. That means that a lame duck Congress will have eight weeks to negotiate a deal.

    And even if they pull off that unlikely feat, we could still lose the whole subsidy as part of some back room deal in exchange for who knows what.

    You might need a Lawyer and a City Manager to tell you what is what August West. Most of us don't. It took me less than five minuets to Google up a dozen Bond Prospectus's that Orrick composed that included that exact same Extraordinary Optional Redemption clause. Not just close, not nearly identical. Except for the names, the exact same boiler plate language.

    Everybody knew these Build America Bonds were sketchy. Nobody was clear on how the rules would be interpreted. The Piper Jaffrays of the world pumped them big time in spite of the fact Piper Jaffray felt compelled to charge 3.5 times the discount rate on them vs Judgement Obligations Bonds. Throw in a subsidized 6+% interest rate vs the going 4% rate for Judgment Obligation Bonds. Sure we got to set things up so that we had to pay interest only for the first 15 years but that is not a good thing in my book. Dumping the majority of the debt on the folks who will living here 15 years from now is not cool.

    But Orrick, Harrington, and Sutcliff, Nature's God bless 'em, covered our ass. Unless 535 politicos acquire some stones, our ass will be hanging out there to the tune of 330,000 a year for 27 more year. If a minor miracle occurs, we can hang our collective ass out there for 27 more years to the tune an extra 15 million dollars of interest payments.

    Yet our City Council twiddles their thumbs quibbling over how to divvy up 10.9 million while not addressing this looming crisis / opportunity. Do you trust them to get it right?

     
  • August West posted at 11:38 am on Fri, Oct 5, 2012.

    August West Posts: 325

    "That event is all that was needed to trigger the Extraordinary Optional Redemption clause."

    John - could you tell us when you got your law degree? Thanks in advance.

     
  • John Charles Ullom posted at 11:06 am on Fri, Oct 5, 2012.

    John Charles Ullom Posts: 1034

    Zachary is right. That is why we were investigated by the IRS and could have been bankrupted. Instead the subsidy we are being paid on Build America Bond interest has been reduced from 35% to 29%. That event is all that was needed to trigger the Extraordinary Optional Redemption clause.

    Here is a link to the page of the bond prospectus that contains the Extraordinary Optional Redemption clause: --- http://startthinkinghmb.org/CalamityClause.pdf

    You may have heard of the impending budget crises in Washington. Unless the Democrats and Republicans agree to a huge and politically painful deal, deep cuts in Government spending are automatically going to happen. If that happens, the 29% subsidy interest paid to us for the Build America Bonds, goes away: -- http://www.reuters.com/article/2012/09/17/municipals-babs-sequestration-idUSL1E8KHECK20120917

    That means the effective interest of those Build America Bonds soars from 6+% to 8+%. This would result in an extra 330,000 dollars per year in payments for 30 years!!!

    This is the biggest issue facing our City. No matter what Snideman says, if this event happens it is a slam dunk that we can trigger the Extraordinary Optional Redemption clause.

    We have to make sure that the City Council knows we know this. We cannot count on Muller, Fraser, or the rest to do the research to understand the grave risk these Build America Bonds pose to our City.

    Ask yourself, if not for the news of a possible insurance settlement, would any of us been told by any City Council Member or Ms Snideman about the Extraordinary Optional Redemption clause? How many people would know that we are paying interest only for the first 15 years of those bonds? How many would know that we are paying over 6% on those bonds and will be paying over 8% if Washington doesn't get it's act together?

    If the City Council and Condotti and Snideman are doing their jobs, then they have known for sometime that the impending automatic budget cuts in Washington could seriously damage our City's fiances because of the bogus decision to use Build America Bonds instead of Judgment Obligation Bonds. Why have they not told us of this impending disaster?

    Every single choice that our current City Council, (except for Mayor Alifano, he wasn't part of it), has made regarding Beachwood has cost us more money and some have almost bankrupted us.

    It is time for us to make them do the right thing. Start with explaining why we can't use the Extraordinary Optional Redemption clause now and what the City Council is doing to prepare for the all too real scenario that we are going to get hammered with another 330,000 dollar per year hit to our finances.

     
  • Zack B posted at 7:02 am on Fri, Oct 5, 2012.

    Zack B Posts: 153

    Build America Bonds: The capital projects these bonds fund are intended for work on public buildings, courthouses, schools, transportation infrastructure, government hospitals, public safety facilities and equipment, water and sewer projects, environmental projects, energy projects, government housing projects and public utilities.

    These bonds were not intended to be used by the city to bail themselves out of a mess of their own making.

     

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