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Insurance judgment best spent clearing away city’s massive debt

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Posted: Thursday, September 27, 2012 1:55 pm

Suppose you had a long-running disagreement with your insurance company. You paid premiums dutifully back in the 1990s. Then something terrible happened and you wanted the company to pay up. The company balked and you took it to arbitration, in keeping with the terms of your contract.

And four years after your complaint, the arbiter rules in your favor. You get a check roughly equivalent to your annual salary. What do you do with that money? Do you pay off debt related to the original complaint? Or do you buy something new?

That, in a nutshell, is the debate around Half Moon Bay after the city learned it had won a $10 million interim award from retired California Supreme Court Justice Edward A. Panelli in an ongoing case against the Insurance Company of the West. The arbiter ruled the company was on the hook for part of the expense due to a bungled municipal drainage project that resulted in the $18 million Beachwood settlement.

It looks like city officials, who for years have been cutting services, laying off employees and generally pleading poverty, will be suddenly flush with cash. Now what?

An election-year debate has erupted over how to spend the money. So let’s prioritize.

Pay down the debt. This is the obvious answer and to do otherwise with the lion’s share of the money would be grossly irresponsible. This is likely the only chance city leaders will ever have to avoid millions in interest charges and to get out from under a crushing debt that is currently scheduled to cost Half Moon Bay taxpayers $1.12 million a year for another 27 years.

Prepare and market Beachwood. The city might be wise to use a small portion of the money in preparation for selling the 24-acre Beachwood property to private developers. At the time of the 2008 judgment, the city essentially bought the land. That felt like a hollow thing back then, but, as the housing market turns, it may prove very valuable indeed. Proceeds from that ultimate sale should then be used to pay off the bonds.

Consider necessary infrastructure. Prior to the arbiter’s ruling, the city claimed it had no money for capital improvements after the current fiscal year. Some things, like fixing the crumbling Main Street Bridge, can’t wait forever. It would be a bad idea to defer crucial maintenance; it only gets more expensive. It is prudent to consider using some of the newfound money for long-identified projects that are necessary for basic quality of life in the city.

There may be temptation to spend the money on things we would all like. Improvements at Smith Field, a new library … who knows what else? But the city didn’t win the lottery. It won a hard-fought insurance settlement and it has a lot of bills resulting from that case. Cities, like the rest of us, should pay their bills first.

— Clay Lambert

Welcome to the discussion.

12 comments:

  • John Charles Ullom posted at 4:24 pm on Tue, Oct 2, 2012.

    John Charles Ullom Posts: 1079

    Here is an interesting document concerning the advice that we paid for, that almost bankrupted the city, and we almost sued for malpractice because the advice was so bad, but our City Council refuses waive their attorney client privilege.

    http://startthinkinghmb.org/Redacted.pdf

    What could be so bad that our hired gun informs an IRS agent the evidence they have been given is attorney client privileged and is not to be disclosed to anybody, including us?

    I asked for that info. They won't provide it to me, or you. Even though they work for us and we paid for the advice, they don't respect you enough to tell you the truth.

     
  • J C Cervantes posted at 3:43 pm on Tue, Oct 2, 2012.

    J C Cervantes Posts: 179

    What an interesting conversation. There is no penalty for early redemption of the BAB bonds because of the "Extraordinary Event". There is no question the events that resulted in the reduction of the funding immediately made the bonds callable.

    John Ullom should be complimented for digging out this information.

     
  • John Charles Ullom posted at 3:07 pm on Tue, Oct 2, 2012.

    John Charles Ullom Posts: 1079

    How are you so certain that that is the case in this situation?

    I am not certain. Like I said, the way I read it we can activate the Calamity Clause.

    "An “Extraordinary Event” will have occurred if the City determines........ or there is any guidance published by the Internal Revenue Service or the United States Treasury.... ......... pursuant to which the City’s 35% cash subsidy payment from the United States Treasury is reduced or eliminated."

    Per the IRS, the cash subsidy payment has gone from 35% down to 29%.

    Maybe you unaware of the negotiations that could have resulted in our city being bankrupted but instead ended with a very sweet slap on our wrist August West?

    Even if we are subject to a penalty, we would have to ask ourselves if it was worth it due to the effective 6+% interest rate we are paying and the fact that we pay interest only for the first 15 years of the bond.

    Have you found out differently August West? I still have not located the section pertaining to prepayment penalties but I assume there is one.

     
  • August West posted at 2:36 pm on Tue, Oct 2, 2012.

    August West Posts: 340

    I read it.

    You seem certain that an "Extraordinary Event" has occurred (which is the only way they can be paid off early).

    That would mean that either " a material adverse change has occurred to Section 54AA or 6431 of the Code..." or "...there is any guidance published by the Internal Revenue Service or the United States Treasury with respect to such Sections or any other determination by the Internal Revenue Service or the United States Treasury, which determination is not the result of an act or omission by the City to satisfy the requirements to receive the 35% cash subsidy payment from the United States Treasury, pursuant to which the City’s 35% cash subsidy payment from the United States Treasury is reduced or eliminated."

    How are you so certain that that is the case in this situation?

     
  • John Charles Ullom posted at 1:11 pm on Tue, Oct 2, 2012.

    John Charles Ullom Posts: 1079

    Well, you appear to be reading "it" incorrectly. Care to explain why you think that is the case?

    Sure. You will find what Piper Jaffray referred to as a calamity clause on page 9 of the document I linked previously. (You did read that, right?). Per letters PJ wrote to the City Council, that clause cost us extra.

    Here is the relevant part:

    Extraordinary Optional Redemption. The Series 2009B Bonds also will be subject to extraordinary optional redemption prior to their stated maturities, at the option of the City, upon the occurrence of an Extraordinary Event from any source of available funds, as a whole or in part on any date, at the “Extraordinary Redemption Price.” The Extraordinary Redemption Price is equal to the greater of:
    (1) the issue price of the Series 2009B Bonds set forth on the inside cover page hereof (but not less than 100%) of the principal amount of the Series 2009B Bonds to be redeemed;

    or

    (2) the sum of the present value of the remaining scheduled payments of principal and interest on the Series 2009B Bonds to be redeemed to the maturity date of such Series 2009B Bonds, not including any portion of those payments of interest accrued and unpaid as of the date on which the Series 2009B Bonds are to be redeemed, discounted to the date on which the Series 2009B Bonds are to be redeemed on a semi-annual basis, assuming a 360-day year containing twelve 30-day months, at the Treasury Rate plus 100 basis points, plus in each case accrued interest on the Series 2009B Bonds to be redeemed to the redemption date.

    An “Extraordinary Event” will have occurred if the City determines that a material adverse change has occurred to Section 54AA or 6431 of the Code (as such Sections were added by Section 1531 of the Recovery Act, pertaining to Build America Bonds) or there is any guidance published by the Internal Revenue Service or the United States Treasury with respect to such Sections or any other determination by the Internal Revenue Service or the United States Treasury, which determination is not the result of an act or omission by the City to satisfy the
    requirements to receive the 35% cash subsidy payment from the United States Treasury, pursuant to which the City’s 35% cash subsidy payment from the United States Treasury is reduced or eliminated.

    And there you have it folks. The way I read it, we can pay off the Build America Bonds portion of the debt due to the fact somebody recognized that using BABs to buy a swamp sounded sketchy and inserted a bail out option in the prospectus.

    And we should bail out folks. We are paying an effective interest rate of over 6% on those bonds and won't be paying down the principal for 13 more years.

    Got that folks? Every kid at Hatch will have graduated before we pay off one thin dime of the principal.

    Here you go August West: -- http://www.royceprinting.com/jobs/FOSarchive/2009FOS/07_14_09_HMB.pdf

    Read the prospectus before you call me reckless August West. If you had, you would know you accusation sounds rather ignorant per the facts. If you need links to the letters Piper Jaffray sent us or the documents exchanged between the IRS and the City Council, or the letter from Condotti to the IRS forbidding them to disclose the advice Orrick gave the City Council, just ask.

    The one who is "incredibly reckless" is Mr. Ullom and his grasp of facts (or lack thereof).

    Per your reading and investigations, what are the facts August West?

     
  • August West posted at 11:13 am on Tue, Oct 2, 2012.

    August West Posts: 340

    "The good news is, per the way I read it, that we can pay off the Build America Bonds with out a prepayment penalty."

    Well, you appear to be reading "it" incorrectly. Care to explain why you think that is the case?

    The one who is "incredibly reckless" is Mr. Ullom and his grasp of facts (or lack thereof). Guess it never stopped him from repeatedly trying to put forth his version here.

     
  • John Charles Ullom posted at 12:51 pm on Mon, Oct 1, 2012.

    John Charles Ullom Posts: 1079

    Thank you J C for pointing this out. The Main Street Bridge rebuild is fully funded.

    The best hope for doing the right thing with the 10 + million is the citizens of Half Moon Bay. We forced the City Council, even though we were jerked around and insulted, to save millions by contracting with the Sheriff for Police and San Carlos for Rec. We forced the City Council to back down over the installation of metered parking downtown.

    Our current City Council sees few options other than acquiring more revenue to spend. Now we are being told the City Council needs the Chump Change tax even thought they have 10 + million dollars to play with.

    And they will play with that 10 + million. We will be told that the bridge is crumbling. We will be told that the Library is precarious. We will be reminded that we have hardly any employees.

    At the same time our City Council will be boasting on their guts per doing what we gave them no choice but to do. They will declare bogus fiscal emergency's,amazing fiscal turn arounds, gut wrenching fiscal instability, and wise fiscal stewardship. They will hire more 'Chiefs' and then brag on being able to do so.

    The current City Council ignored their own data, staff, and the law at Kehoe. The City Council put all of us at the mercy of the IRS when they signed off on using Build America Bonds instead of Judgment Obligation Bonds to pay off a judgment obligation. The city Council did that knowing there was a risk and knowing that we would pay a significantly higher interest rat. The City Council chose to take this incredibly reckless risk knowing that we would pay 150,000 dollars more in upfront costs.

    Not one penny has been applied to principal as of today and not one penny will be applied for another 13 years, give or take.

    We have 10 million. We are going to get a another 2 or 3 in interest. We have 750,000 grand tied up in a reserve account meant to backup the Build America Bonds. We have around 10.9 million in debts attached to those Build America Bonds.

    Our current City Council ignored Ms Snideman and Mayor Alifano when it wasted 400,000 dollars and counting of your money on a backup emergency center and a phantom fiber optic cable.

    In spite of claims by current City Council Members, that their collective wisdom saved us millions per what we forced them to do, there is no reason to think our City Council's ability to make sound decisions has improved when it comes to the spending other peoples money.

    We have to give them no choice or else the Current City Council will happily allow the children up at Hatch the opportunity to spend 15 years paying off the principal on OURdebt.

    We can't let that happen.

     
  • J C Cervantes posted at 10:46 am on Mon, Oct 1, 2012.

    J C Cervantes Posts: 179

    I investigated the "red herring" Jim Larimer tossed into the discussion regarding funding for the Main Street Bridge. According to the 2012-2013 Half Moon Bay budget the funding for that bridge is already in place. The estimated total cost of the bridge is 7.5 million dollars. The funding comes from San Mateo County Measure A for 500,000 dollars and 6.7 million dollars from a Highway Bridge Grant. The 327,000 dollars the City will pay will come from current reserves.

    Please don't waste this opportunity to reduce our debt.

     
  • John Charles Ullom posted at 10:33 am on Mon, Oct 1, 2012.

    John Charles Ullom Posts: 1079

    If the money is used to retire bonds early the savings in interest minus the early payment penalties may be wasted if an emergency repair to the Main Street bridge requires future borrowing at higher rates.

    We are paying more than 8% on 10,000,000 dollars financed with Build America Bonds. Worse, we aren't paying a penny on principal the first 16 years.

    Here is a link to the prospectus concerning Beachwood Bonds.

    http://www.royceprinting.com/jobs/FOSarchive/2009FOS/07_14_09_HMB.pdf

    The bad news is that we paid 3.5 times more in discount fees and a significantly higher interest rate, even after factoring in the federal subsidy.

    The good news is, per the way I read it, that we can pay off the Build America Bonds with out a prepayment penalty.

    Anybody see the fence?

     
  • J C Cervantes posted at 10:03 am on Mon, Oct 1, 2012.

    J C Cervantes Posts: 179

    It appears the previous poster knows something that is not public knowledge about there being a "prepayment penalty". Perhaps the writer (Jim Larimer) could eplain where he got this knowledge.

    The cheap interest Jim Larimer refers to cost the taxpayers a net of $700,000 each and every year until 2026 when we begin to make principal payments on the nearly 11 million dollars worth of Build America Bonds. By paying off those bonds now will save the citizens of Half Moon Bay $17,000,000.00 over the term of those bonds.

     
  • Jim Larimer posted at 7:54 am on Mon, Oct 1, 2012.

    Jim Larimer Posts: 42

    Despite the headline on this editorial, the content was an almost complete listing of the options available for putting this insurance money to work for the community. The one exception to this otherwise thorough list was the cost of borrowing in the future.

    Today interest rates are at historic lows.

    If the money is used to retire bonds early the savings in interest minus the early payment penalties may be wasted if an emergency repair to the Main Street bridge requires future borrowing at higher rates. Paying down debt is not always the best option although it is clearly a good one. The option to spend this money on other community infrastructure needs should not be dismissed as if reducing debt is always the best option - that is far from certain.

     
  • John Charles Ullom posted at 11:16 pm on Thu, Sep 27, 2012.

    John Charles Ullom Posts: 1079

    Pay off the debt that would otherwise be paid for by the kids attending Hatch.

    Debt is our biggest problem. Fix it first. Pay off the debt.

     

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