Excess-cash issue puts Crestwood aldermen in difficult situation, board president says

Board votes 5-2 to have Myers draft bill to convert city’s debt into taxable note


“You’re damned if you do and you’re damned if you don’t.”

Crestwood Board of Aldermen Gregg Roby last week offered this assessment of a decision that he and fellow aldermen must make later this month:

Should the Board of Aldermen reduce the city’s tax rate in 2012 by paying $522,094 in excess of a federal balance limit tacked onto the city’s $2.87 million annual-appropriation note with Royal Banks of Missouri?

Or should the board protect that cash in case the city’s recent trend of declining sales-tax revenues continues by converting $2.08 million in debt remaining on that tax-exempt note into a taxable note?

Aldermen tentatively are set by the board’s March 25 meeting to decide what to do with an excess cash reserve of $522,094 in the city’s general fund that is above what the city is legally allowed to carry as part of its refinanced debt.

The city’s $2.87 million annual-appropriation note approved in October 2006 with Royal Banks of Missouri to refinance and pay off remaining debt through the property-tax increase Proposition S — approved in April 2006 by Crestwood voters — contains an Internal Revenue Service provision that limits the city’s general-fund balance to no more than 5 percent of the highest expenditure month during the previous calendar year.

Any amount in excess of that 5 percent must be prepaid to the note by April 10. Aldermen already have transferred $532,696 out of the city’s general fund to bring the fund’s balance closer to that 5-percent cap, but are still left with $522,094 above that limit.

And because the note was issued in denominations of $5,000, the amount to be refunded or prepaid must be rounded up to the nearest $5,000, which would be $525,000.

City Administrator Frank Myers told aldermen last week that the board essentially has two options:

• Use the entire excess to prepay principal on the note by April 10 and retain the note’s tax-exempt status. This option would also pay off the note in March 2012 rather than its current schedule of March 2013. This would also mean that the Proposition S tax-rate increase of 20 cents per $100 of assessed valuation, which generates more than $520,000 per year, would be retired a year early. But if the note is kept tax-exempt, auditor Mark Graves of Schmersahl Treloar & Co. estimates that the city also will end 2008 in the same excess-cash predicament with roughly $540,000 in general-fund cash above that 5-percent limit.

• Convert the remaining $2.08 million on the original $2.87 million note to a taxable note. This option would eliminate the 5-percent balance limit, but also require the city to pay an additional $17,500 in professional fees to convert the note from tax-exempt to taxable. A taxable note also would mean that the interest rate on the note would rise from its current level of 5.44 percent to roughly 6.75 percent, which would mean paying an additional $204,544 in interest fees over the next five years until the note is paid off in March 2013 as the city would pay $419,175 in interest until March 2013 instead of $214,631 in interest under a tax-exempt note until March 2012.

The board voted 5-2 last week to direct Myers to prepare legislation to convert the city’s $2.08 million in remaining debt into a taxable note. Ward 1 Alderman Mac McGee and Ward 3 Alderman Jerry Miguel voted “no.”

Ward 4 Alderman Steve Nieder was absent Feb. 26.

Miguel told aldermen last week that based on his study of city cash balances since Prop S was approved in 2006, he believes the city has borrowed roughly $500,000 more than needed.

To rectify that situation and because he believes the city could address losses in revenue through an additional bank loan, Miguel is in favor of prepaying $525,000 to the tax-exempt note to end Prop S one year earlier.

“When Prop S was taken out, the city did not have a firm handle on the amount that was needed,” Miguel said. “… As it turned out, if you look at the bank balances since Prop S was taken out, the lowest end-month balance was something in the area of $750,000 … So one could easily look at Prop S and say that the city really borrowed a half a million dollars or so more than it really needed to based on the balances in the general fund since Prop S was borrowed. So one could really look at this as returning to the banking system the money that the city borrowed but really did not need at that time.

“So what we’re really saying here is let’s borrow the money now because we may not be able to borrow it further down the line … And for the privilege of doing that, we will pay interest on this $522,000 at the rate of 6.75 (percent) for X number of years … To me, that is not a valid proposition because the city has assets that could far easily cover this amount of $525,000 … If we need the money to borrow, I think the city will be fully capable of borrowing the money tomorrow.”

But Mayor Roy Robinson said that if the city were to prepay $525,000 to the note, it only would accelerate the need to consider a new bank loan or another tax increase, which the mayor has repeatedly opposed in recent months.

“What we’re trying to do is prevent needing to go to the bank at a later time for cash,” Robinson said. “… Like I told you when you and I were here together, Alderman Miguel, is that we’ve done what we promised on Proposition S. We never promised them we’d pay it back a year or two in advance … And those who are willing to take the chance of going out there and finding money later on, I don’t want to be the one responsible for it. I will certainly be on your doorstep if we pay this money back and we run into a problem. We’ll have to see how good you are up there being able to round up the money for us.”

Ward 2 Alderman Steve Knarr said with revenues declining each year, he believes it is wise to keep the excess cash by converting to a taxable note.

“I think it’s pretty obvious in the next three years we’re going to have probably the worst downturn in revenues that we’ve ever had …,” Knarr said. “To me, it’s wiser to hang onto the cash right now. I think it’s very shortsighted to try to pay additional debt off when we’re running out of money. It’s as simple as that. Yeah, it’ll look good in the newspapers. But it’ll just get us that much closer to a line of credit to keep the city operating probably the end of this fiscal year.”

Civil Service Board member Martha Duchild told aldermen last week that she sympathizes with them for being forced to make this decision because of inattention to the 5-percent limit.

“I really sympathize with all the board members,” she said. “I feel that you’ve been put in a position where you essentially have to gamble with city taxpayer money … I just wanted to make the point that it wasn’t the nontaxable loan that put the board members in this position and it wasn’t the conditions on the loan. It was the fact that somebody did not pay attention to the condition on the loan and took their eye off the ball and was not paying attention to cash reserves and let them get beyond the 5-percent limit. That was the reason that this board was put in this position.”

McGee said he would prefer that officials not convert the remaining balance into a taxable note because of the additional costs involved.

“By putting that money into a taxable account, that’s going to cost us a lot of money,” he said. “… If we need the money in 2009, then we borrow it. And we certainly won’t have any problem borrowing money with the collateral we’ve got.”

But Ward 2 Alderman Chris Pickel views the $522,094 excess cash as a chance for the city to hold onto an “insurance” policy in case sales-tax revenues further decline or redevelopment of the Crestwood mall takes longer than expected.

“What I keep coming back to is comparing this to something like insurance,” Pickel said. “Insurance is never a pleasant way to spend money until you need it … I think with some of the cuts the city has already made, we’ve cut just about to the bone. And I think any additional cuts are going to be significant and drastic …

“I think it’s also a little clouded to look backwards and figure out really the intent of the board when they constructed Proposition S. If you go back three years, things weren’t as dire as they are right now. Certainly, the decline of the mall has accelerated in the last couple years … To me, it gets back to the issue of insurance. Do we want to be in the position that we can face that likelihood?”