Annual appropriation note ‘similar’ to a bond, financial adviser says

Ramey states Crestwood proposal not ‘run-of-the-mill transaction’


While Crestwood officials said last week that a proposal to refinance the city’s debt and line of credit is not a bond, the city’s financial adviser agreed, but also said the refinancing is “similar” to a bond or certificate of participation.

Carl Ramey of Stifel, Nicolaus & Co. Inc., who was hired by the city to help draft a request for proposals, or RFP, for the refinancing, told the Call that the proposed $2.86 million annual-appropriation note has “some concepts that are similar” to bonds and certificates of participation.

“It’s really comparable to any form of an annual-appropriation issuance,” Ramey said. “So it just carries the name ‘note’ with it to acknowledge that it’s in the form of a note as opposed to something else like a bond or something like that. It’s an obligation that the city will carry.

“It’s an annual-appropriation obligation. One could argue that that’s what a COP (certificate of participation) is or a variety of other kinds of leasehold instruments. In the case of a COP, it’s a leasehold instrument. So there is a difference there.”

Mayor Roy Robinson publicly in the past has opposed the use of bonds to retire the city’s debt and reiterated that opposition at the Board of Aldermen’s Oct. 10 meeting.

Ramey said the city has submitted the RFP to 10 banks and that he could recommend a proposal to city officials by the end of this week. The Board of Aldermen is scheduled to consider final approval of the plan Tuesday night.

The RFP seeks a $2.86 million annual-appropriation note that would be repaid over the next seven years with funds generated from Proposition S — a tax-rate increase of 20 cents per $100 of assessed valuation that was approved in April by 62 percent of Crestwood voters. The 20-cent tax-rate increase has a seven-year sunset provision after which the city no longer will collect the additional 20 cents.

“All monies from Prop S will flow to pay off the note so that as monies in excess of what is required annually become available, the debt will be paid down,” Ramey said. “So it’s conceivable that it will pay off quicker based upon that structure.”

The note also would be tax exempt, and the repayment of funds would be appropriated by the Board of Aldermen on a year-to-year basis. Interest rates for the agreement are estimated at 4 percent to 4.5 percent.

The Board of Aldermen voted last fall to adopt an ordinance borrowing up to $3.5 million from Southwest Bank. The $3.5 million includes a $1.5 million line of credit and a $2 million promissory note that will expire Oct. 31. As collateral for the $3.5 million from Southwest Bank, the titles to City Hall and the city garage on Pardee Lane were pledged.

City officials and Ramey both believe that the proposed seven-year, annual-appropriation note will not require any collateral from the city, but have not ruled it out as a possibility.

As for the nature of the annual-appropriation note itself, Ramey said he can understand why its definition appears complicated and that it is the first financing mechanism of its kind that he has helped any city to structure.

“Typically, in terms of retiring promissory notes and things of that nature on lines of credits, this is different,” Ramey said. “This is not your run-of-the-mill transaction. It is a multi-year obligation that is based upon an annual appropriation of the city and it is using its Prop S money to pay the obligation off. Bond counsel has indicated publicly that they are comfortable that it is legal under Missouri statutes and the Constitution and that it is tax exempt.”

During the Board of Aldermen’s Oct. 10 meeting, former Ward 2 Alderman Tim Trueblood, who left office last spring because of term limits, questioned the need and the definition for the annual-appropriation note to the board. He also asked city officials to explain the difference between the annual-appropriation note and other financing mechanisms like bonds.

“What’s the difference between a note and a bond?” Trueblood said.

“It’s a note,” Robinson said. “It’s not a bond. We’re not selling bonds. We’re asking …”

“There’s got to be a difference,” Trueblood interjected. “So what is it?”

“You know, unfortunately, our legal counsel’s not here that structured this,” City Administrator Frank Myers replied. “When we moved forward through this process, we had to meet certain requirements — to meet Missouri law and then federal law for the tax-exempt status. And this structure is designed to meet those requirements, which you’ve got. And to do that, we have an annual-appropriation note.”

“Can we get an answer to know what the difference is maybe by next meeting so we can understand where you’re putting the debt of the city?” Trueblood said. “What if no bank buys the note? What happens then?”

“We have been assured that’s not going to be the case,” Myers said.

Ramey also told the Call that he can understand the perception that the proposed note is a bond because it is a multi-year obligation, but also said that perception is false and the proposal is not seeking a bond.

“If you think about it, what is a bond?” Ramey said. “A bond is a multi-year obligation. A certificate of participation is a multi-year obligation. A note is a multi-year obligation. And so I’m not going to say that it’s a bond because it’s not a bond. It’s an annual-appropriation note. It’s structured that way. It’s legal. It’s been interpreted by bond counsel as being not only legal, but also tax exempt.”

At the Oct. 10 meeting, Robinson said the city would not attempt to enter into a bond obligation and reminded Trueblood that he was aware of that fact when he was an alderman.

“We didn’t go out for a bond,” Robinson said. “We went out for a tax (Proposition S).”

“What if it (a bond interest rate) is less?” Trueblood said. “What if a bond’s less? Would you have not been wise to have also looked at that?”

“As you well know when we sat in at those meetings structuring this every year, we don’t have the time to determine,” Robinson said. “We determined we didn’t want a bond. And that’s the reason we went for a tax increase. And we got it.”

“OK, so now we’re turning around and buying something when we don’t know the difference between a note and a bond?” Trueblood said.

“We know exactly what it is,” Robinson said.

“What is it, sir?” Trueblood said.

“It’s a note,” Robinson said. “It’s like you mortgaging your house.”

“I’m sorry,” Trueblood said. “I don’t understand.”

“It’s the same thing that they’re giving us the money and we’re promising to pay them within a designed frame of time,” Robinson said.

Trueblood also questioned whether the board is violating the intended use of funds generated from Prop S by using them to fund the proposed note.

“Where in Prop S or in Resolution 519 dated 3/28/06 does the sale of the debt from proceeds, I should say the proceeds of Prop S, the revenue, does it explain that it would be sold by notes?” he said. “I don’t remember that in the language of the ballot or in the resolution this board passed on that date. I’m a little bit concerned on that because it seems to me the point that Prop S was presented to the voters, as I recollected, was a seven-year program, $500,000 a year approximately, increased tax rate, after which time, the debt would be retired and it would go straight to the bank. In fact, Resolution 519 states those exact words, to Southwest Bank. It’s a resolution. I understand that it doesn’t have the force of law. But is there a moral issue there or an obligation possibly that may have been overlooked?”

“Let me tell you why we did this,” Robinson said. “We could have just gone and did the same thing we did last year and we could not have used bond counsel. What we wanted to do was allow every bank in the city of Crestwood the opportunity to bid on this and that hopefully we would get the lowest bid in the benefit of our citizens. I don’t know whether the price we’ve been paying is really good for the citizens or we could have gotten it lower. But we are putting it out on bid so that more people have opportunities. And other banks have called and said: ‘We’d like to have an opportunity.’ It seems like in the past it’s always gone to one bank and they always have the inside track.”

Robinson also said that last year, city representatives “lied” to Crestwood’s bond counsel, Gilmore & Bell, to obtain a legal opinion of the pact with Southwest Bank.

“I commented that I wouldn’t go back, but I want people to know that we were misinformed again last year when we were told about that note,” he said. “It was all done internally. It was all set up and it was thrown at us as a last-minute proposition. And when the bank or the bond counsel told us that they were told that in order for them to give that letter (of approval), the city had to guarantee them that we could pay them off within that year — that everything we owed we could pay off in that year. There was no way we could do so. So the people who represented us lied to the bond counsel in order to get that through last year. It wasn’t going to happen again this year. People complain about this thing. This money was here, was spent before our administration came and now we have to clean up the mess. And the people who were responsible now want to give us a hard time on how we’re going to try to pay off their debt. We’re doing the best we can for this city and we’re trying to get it done in a legal, appropriate way. And that’s what we have done.”

In response to Robinson’s claim of a lie and City Attorney Robert Golterman’s statement that this year’s RFP is legal, resident Karen Trueblood — Tim Trueblood’s wife — voiced concern that Golterman said last year that the agreement with Southwest Bank was also legal.

“With all due respect, that’s the same thing you said to me one year ago today,” she said to Golterman. “And your mayor has just admitted it was a lie on someone’s part to the bond counsel, which I very much, very much appreciate (Robinson’s) willingness to admit that by admitting to it tonight because I knew that was a lie. And I begged the board many times publicly to address that fact and realize that they needed to find financing according to the Missouri Constitution. And I was excoriated publicly for that.

“There were people in the audience. Some of those people who made fun of me for making that assertion are now on the board and have spoken in favor of this financing deal, which I find very interesting.”

She also noted that Robinson and board President Jerry Miguel of Ward 3 said in December 2005 that they doubted voters would approve any bond or tax measure.

“One pertinent issue to that GO bond issue (Proposition 1) was that it was 2 to 3 percent interest at that time (April 2005),” she said. “And this community was torn apart by people that ran for office — several people, not just you, Mr. Mayor — against that … 2 to 3 percent was too much debt. Last year, Mayor Robinson in the Dec. 13, 2005, minutes, Mayor Robinson stated he did not think 57 percent of the voters would approve a general-obligation bond issue.

“Alderman Miguel stated the public would have to be educated and that it would be a challenge to get even a simple property-tax rate increase approved and pointed out that a property-tax issue has a lower approval requirement than a bond issue does. I would submit to you that there was a very deliberate effort to put a tax increase onto the ballot that did not reflect long-term debt, which is what the community represented GO bonds to be.

“And I think this whole debt-restructuring issue is much more than simply a finance question or something that you’ll hear every year in the fall. I think it’s an issue of trust with the voters. It’s been very interesting this evening to see when questions are asked, which I feel like they’ve been asked in a very respectful manner, the defensiveness and the immediate need to quash all dissension on the part of the citizenry. I spoke to a friend of mine who lives in Crestwood today, and he told me at least one alderman has told him: ‘I’m not here to represent what you want. I’m here to use my judgment.’ And I think the fact that you did your strategic planning from the board to us, telling us what our priorities are going to be, again, is another indication that there’s a certain elitism that the board and city administration has adopted that I think is very problematic. I did beg the board last year to look at the Constitution and give us an opportunity to vote on long-term debt.

“Now this annual-appropriation note, I know that’s a prominent word — annual — that kind of allows you to skirt around the Constitution and say: ‘Well, annually, we’re appropriating this. So it’s not debt that goes over one calendar year or fiscal year.’ I would simply submit to you that in this community, you have seen that our charter has a mechanism where five citizens can stop any ordinance of this board. And I would submit to you that my right to vote is very precious to me and I will be watching your action on this ordinance,” she said.