When a Local Government is ‘Unwilling’ to Cover Debt Costs

With a payment deadline looming at the end of the week, there’s little question Platte County, Missouri has the cash to help cover debt service costs for bonds linked to a struggling retail shopping center.

But commissioners there have voiced opposition to doing so—at least until there is a new plan in place for how the debt will be paid going forward. The county is also taking action in court, seeking a ruling that confirms it has no legal obligation to assist in paying off the bonds.

Credit ratings agencies have taken notice of the situation, and characterize it as a "willingness to pay" issue. They’ve responded by whacking the bonds and the county with ratings downgrades and have warned a default could be on the horizon for the bonds.

With about 101,000 residents, Platte County encompasses an area that sprawls north from Kansas City, along Missouri’s border with Kansas.

Census Bureau data show that the county is more affluent than the city itself, with a median household income between 2012 and 2016 of $70,879, compared to $47,489 in the city, and a poverty rate estimated to be just 6.1 percent, versus Kansas City’s 18.3 percent.

Todd Graves, an attorney for the county, said by phone last Tuesday that the three-member board of commissioners hasn't decided how to handle its possible share of the debt payment associated with the local shopping center development, known as Zona Rosa.

By making the payment, the county would help to offset sales tax revenue shortfalls in a pair of special taxing districts.

“They haven't told me what their decision is,” Graves said, “and I don’t know when they’ll make that decision.”

“The nature of the lawsuit,” he added, is to get a court ruling “so the county can make its decision with a clearer understanding of the law.”

There’s been at least a dozen or so instances dating back to the early 2000s where similar debt deals have turned sour, but the problem is not of epidemic proportions, said Al Medioli, a senior vice president with the credit ratings agency Moody’s Investors Service.

One example is an arrangement in Buena Vista, Virginia where the city ended up in court, and at risk of losing its city hall, after a default on bonds issued in 2005 for a golf course.

Another occurred in Moberly, Missouri and involved debt issued for an artificial sweetener plant project, which failed, with the former CEO of the company, Mamtek, US, Inc., sentenced to prison for theft and fraud.

“We're seeing a number of instances in recent years where communities have issued this kind of debt for projects that they thought would be self-sufficient and then when they weren't self sufficient, they were like, ‘oh, we don’t want to pay,’” Medioli said.

“Some of these have been very wealthy suburban districts, or suburban cities, that clearly have the ability to pay,” he added, noting that “there’s always a story to these things.”

‘You Legally Do Not Have To Pay’

Platte County’s lawsuit names both UMB Bank, which is the trustee overseeing the enforcement of the bond financing agreement, and the local government entity that issued the bonds, Platte County Industrial Development Authority, as defendants.

The bonds fall within a class of debt sometimes referred to as “lease appropriation” debt, which requires governments to make regular budget appropriations to cover debt service. This is in contrast to debt like general obligation bonds, which bind governments into using their resources, including taxing power, to foot repayment expenses.

In Missouri, it’s possible to issue appropriations-backed debt without falling under a provision in the state constitution that requires voter approval for local government borrowing.

“The implicit agreement with the market is that, ‘yes, we’re going to continue to appropriate,’” Medioli said. “But actually,” he added, “if you don’t appropriate, you legally do not have to pay.”

For a government that chooses to take the non-payment route, there are some potential negative consequences, like being seen as a riskier borrower and as a result paying higher interest rates, or even losing access to capital markets or loans.

In Platte County, the industrial development authority issued $32.2 million of bonds in 2007. Close to $19 million of that sum was to “refund” outstanding debt—an action local governments often take to refinance or restructure bonds. Much of the rest of the bond issue was to construct a roughly 800-space parking facility for Zona Rosa.

Money to pay off the bonds was supposed to flow from a sales tax levied within a pair of special districts in the Zona Rosa area. Over the years, however, the tax has failed to generate enough money to cover the costs and the project’s private developer stepped in to fill the gap.

But the developer faced financial difficulties, and during the past year the property ended up changing hands. Meanwhile, UMB Bank, the trustee, has turned its attention to a provision in the financing deal that calls for the county to make up for the debt service shortfalls.

The county’s budget this year includes about $634,000 for that cost, S&P Global noted in a Nov. 14 report. But the board of commissioners would have to vote to authorize that payment, which is due by Dec. 1.

At an August meeting, the commissioners discussed how they would not be inclined to make payments on the bonds unless a long-term "sustainable" solution emerged for paying the debt.

The bonds now have a principal balance of around $29 million, and mature in 2032.

Graves, the lawyer for the county, said estimates show if the county does pay the debt service shortfalls in the years ahead the cost could range from $17 million to $40 million. Total general fund revenues in the county’s fiscal 2018 budget were slated to be about $22 million.

Ratings Downgrades

Moody’s downgraded Platte County’s “general obligation limited tax” rating in September from Aa2 to Ba1—a rating that signals to investors a government’s debts are speculative and subject to substantial risk.

S&P has slashed their rating on the Zona Rosa bonds themselves to a dismal CC, a red flag that, in the ratings agency’s view, nonpayment is increasingly likely. Analysts there say a default on the bonds is a “near certainty” within the next 18 months and could happen by December.

“We don't have many transitions to double C in the local government sector,” said Caroline West, a senior director with S&P.

“We believe they have the ability to pay,” she added of Platte County. “It is a willingness issue.”

In their report from earlier this month, S&P said that the developer’s debt service payments to make up for lagging sales tax revenues from the special districts averaged around $500,000 in recent years, but that this year the shortfall increased to over $1 million.

Zona Rosa Development, LLC, was the developer of the project. After defaulting on its mortgage, the developer did not make its usual payment to backfill the debt expenses before Dec. 1 of last year, S&P explained. In turn, the bond trustee drew from a $500,000 letter of credit the developer had maintained. After that, the developer failed to secure a new letter of credit the trustee had demanded.

A group led by TPG Sixth Street Partners took over ownership of Zona Rosa in September and installed Trademark Property Company, a national mixed-use developer, to manage and improve Zona Rosa. A public-relations representative for Trademark replied to an email last week, but did not provide comment on the situation with the bonds.

The county’s court filing says the new property owners have asserted they have no obligation to cover the debt service shortfalls. It also says a Sept. 24 letter UMB sent to Platte County claims the county wasn’t meeting its contractual obligations under the financing agreement.

There’s about $3 million in a reserve fund to pay the debt service on the bonds, but it’s unclear when the trustee will tap the account, particularly given the outstanding litigation, West said.

The county’s lawsuit suggests that if the court does find the county legally obligated to pay the debt service costs, then the financing arrangement should be declared illegal under the Missouri constitution because it was entered into without voter approval.

Reached by phone last week, two of the three commissioners for the county, presiding commissioner Ron Schieber and First District Commissioner Dagmar Wood, said they couldn’t comment on matters involving the bonds because of the pending court proceedings.

Scott Goldstein, a lawyer for UMB, declined to comment on the case. He did offer to forward an emailed request for comment to the bank, but nobody replied to that email.

None of the county commissioners in office when the deal was entered into are serving currently.

The controversy over the bonds is taking place in an era when the retail landscape is changing with the rise of online sales. Some of Zona Rosa’s key tenants include department store Dillard’s, Old Navy and Dick’s Sporting Goods, according to Trademark's website.

S&P points out that Zona Rosa has for years had a high vacancy rate, which stood at 41 percent in January, and that sales tax revenues from the special districts, projected to be nearly $2.9 million for fiscal 2017, instead checked in at less than $1.6 million.

There’s a February court date set for the lawsuit the county has filed. But Graves said that date is just a placeholder and that the county was pushing UMB to agree to an expedited hearing.