A motion to spend roughly $4,000 to $5,000 to obtain a “second opinion” regarding tax consequences if bond-like certificates issued by the city of Crestwood to fund construction of a new police building were retired early recently was defeated by the Board of Aldermen.
In November 2002, the city issued $9.83 million in certificates of participation — or COPs — to fund the construction of the new police building and repairs to City Hall.
Crestwood’s bond counsel, Mark Boatman of Armstrong Teasdale, told aldermen April 13 that not proceeding with construction of a new police building could have grave consequences for the city. In particular, Boatman stated in an April 5 memorandum that if the board decided not to construct the police building and retire the certificates with the unused proceeds when the certificates become callable in 2007, the certificates of participation “could become taxable under the Internal Revenue Code.”
Under the terms of the trust indenture that secures the COPs, the city is obligated to use the certificate proceeds to construct a police building by Nov. 1, 2005.
Crestwood voters in August 2002 approved Proposition S, the extension of a half-cent sales tax to fund construction of the new police building, provide revenue for repairs at City Hall and allow the continuation of the city’s street repair and replacement program. The half-cent, capital-improvements sales tax had been scheduled to end in 2008, but voter approval of Proposition S extended the sales tax until 2023.
During the April 27 Board of Aldermen meeting, newly elected Ward 3 Alderman Jerry Miguel, who was sworn in that night, asked that in light of comments made by some residents whether it would be “prudent for this board to consider getting a second opinion on the, on this tax, IRS tax issue with the COPs certificates?”
Board members agreed to have City Attorney Rob Golterman gather information about the cost of obtaining that second opinion, which he presented to the Board of Aldermen last week. Such a legal opinion would cost roughly $2,000. The city attorney also suggested that additional information would need to obtained from an actuarial accountant, which could cost another $2,000 to $3,000.
Ward 2 Alderman Tim Trueblood made a motion to spend the money to seek the second opinion and his motion was seconded by Ward 1 Alderman Richard LaBore. The board voted 5-2 to defeat the motion with LaBore and Miguel voting in favor of it. Opposed were Trueblood, Acting Mayor Richard Breeding of Ward 1, Ward 2 Alderman Jim Kelleher, Ward 4 Alderman Tom Fagan and Ward 4 Alderman Pat Duwe. Ward 3 Alderman Don Maddox was absent.
At the May 25 board meeting, Golterman said, “… I was asked a couple meetings ago to report on what it would cost to obtain a legal opinion as to whether the certificates of participation would lose their tax-exempt status if they were called or defeased … in November 2007 and if the city did not proceed with the construction of the police building and other improvements.
“I received an estimate of approximately $2,000 to prepare such a legal opinion and my recommendation if the board were to proceed in that manner would be that the legal opinion be obtained by someone other than my firm given the fact that my firm represented the city as the issuer’s counsel in issuing the certificates. So I think it would be better to have an independent firm …,” he said, adding he would recommend a particular firm. “In addition to that, just for the board’s consideration, based on my discussions with lawyers at this particular firm, it is my belief that a process could be put in place such that the bonds would not lose their tax-exempt status if they were called in November of 2007, but that to do that would cost the city a considerable amount of money. An exact dollar figure would be impossible to know without hiring accountants and moving forward in that process …”
In response to a question from Fagan asking for a range regarding the “considerable amount of money it would cost the city,” Golterman said, “… The process essentially is that in order to call these notes in November of 2007, the city would have to put into an escrow fund, governmental securities in an amount sufficient to pay off the certificates in November of 2007. One of the items that would cost the city additional sums is that these governmental securities can only earn a certain amount of interest and it is a lower amount than the yield rates in the certificates.
“So that difference of interest would have to be made up and those additional sums would have to be expended on marketable governmental securities in order to make that escrow fund sufficient. The lawyer that I spoke to who did look at our documents, and again was not giving a legal opinion, but his estimate given the yields and the interest rates was somewhere between $300,000 and $400,000. And there may be additional sums on top of that, depending on how much has been spent to date, which obviously we can’t recover …”
Fagan interjected, “In terms of like design fees.”
Golterman continued, “Correct. But again, I would hate to say that that’s the number or that it’s higher or that it’s lower. But I think the whole process to get some accountants to come and look at it, my guess would be at least a similar amount in the $2,000 to $3,000 range …”
Fagan interjected, “It would seem to me that the professional fees that we would have to expend to get this opinion — $2,000 for the outside firm, $2,000, $5,000, whatever it is for a CPA firm, that’s a minor amount of money. However, when you’re talking about $300,000 to $400,000 that this attorney gave you as an off-the-cuff number, plus the design fees, plus additional costs, it seems to me you’re talking about over a million dollars, at least.
“To me, it makes absolutely no sense to do that and I will not vote — if the information I’m getting is that we’re going to a lose a million bucks on this deal by doing that, I can’t in good conscience think that it’s anything but unwise to do and unless somebody can point out to me and present some logical and cogent arguments why we should essentially give up a million dollars when we have a terrible time with our finances at this time, I’m hard pressed to believe that, especially because based on what information we’ve been told, we can do the police building … There is a need for the police building. The voters knew that when this was passed two years ago with the extension of the capital improvements sales tax. We’re not talking about something in terms of the police building that is, maybe some people characterize it as a luxury, I certainly don’t …
“To me, all this is a just a red herring that people want to throw out there for whatever reason and I’m not accusing anybody of any bad intent and I think it’s wise that we need to ask the questions, but after you sit down and logically analyze it, it seems to me that you can’t come to any conclusion other than we would be throwing away and I’m going to pick a number — a million dollars — and that makes absolutely no financial sense …,” Fagan said, adding he would like City Administrator Don Greer to correct him if he “misspoke.”
Greer said, “No, I don’t believe so.”
Greer also questioned where the city would obtain the money to put in escrow and Golterman noted that the escrow account would have to be established now.
Miguel later quoted from the minutes of the board’s June 11, 2002, meeting, noting that former Ward 3 Alderman “Bernie” Alexander had indicated that for people new to the board and people who have not been closely involved with the city, the building of a police facility is a relatively new concept and the education process had not really begun. At that meeting, Alexander stated that she would support changing the election date to November.
“As we know, the election occurred in August. These are the minutes of June 11, less than two months prior to the election,” Miguel said. “I really question the amount of education, the amount of knowledge that was conveyed to the citizens in the sense that they were voting for a police facility. I believe people were voting for the extension of a sales tax and given a choice between a police facility and streets, I think the overwhelming majority of the people will vote for streets.”
Miguel continued, “Alderman Fagan pointed out that a million (dollars), $1.1 million has already been spent on various items. Payments to the COPS with the November payment will have paid back principal of $750,000, which is roughly $300,000 less than what has been spent. So the amount that has been spent is not a great deal more than what has already been repaid. As far ongoing expenses, the expense to the city in terms of repayment vastly exceeds any other sums we’re talking about. The purpose of a second opinion, as far as I’m concerned, is to remove the doubt that it can be accomplished and I think what we’re hearing tonight is that the city could go through a defeasance process without incurring the wrath of the IRS.
“To me, that’s the point of getting a second opinion because my take is that this board feels it is locked into going forward with the building regardless of cost, regardless of any other considerations. What comes through to me is that this board feels it must go ahead and put up this police facility. And I think the note that needs to result from this discussion is that defeasance is an option if the city wishes to pursue it. Yes, there is a cost. What that cost is has yet to be determined and I don’t think it’s proper for us to be speculating that it’s going to be hundreds of thousands or millions of dollars because none of us really know,” Miguel said
Fagan said, “No. 1, I’m going to have to respectfully disagree with these comments. No. 1, to say that our citizens didn’t understand that, is really an insult to the people of Crestwood and frankly I take exception with that. With respect to what Alderman Alexander said at that time, that was two months before an election, I’m sure our informed electorate and constituents can certainly appreciate the nuances of what was going on, although the financial picture certainly has changed since that time.
“No. 2 with respect to the comment that this board is going to go forward or we feel we’re locked in because of cost, I don’t think that’s the case. I think the chief/city administrator has pointed out that we’re looking at some things in terms of possibly retrofitting the (existing City Hall) building. Secondly, he’s keeping the number or the bid is going to come in at — I’m going to use less than $6 million — I know it’s $5.9 (million), $5.85 (million) or whatever it is — less than $6 million. So the fact that this board has somehow sent the signal that we’re going to move forward regardless of cost is absolutely erroneous …,” Fagan contended.
After Breeding called for the question, Greer asked from what fund the money would come to pay for the second opinion.
Greer said, “… It has to be the capital improvement fund or the general fund and the general fund doesn’t have any money in it.”
Breeding said, “The money will come from capital improvement.”
Board members then defeated the motion with a 5-2 vote.
