Paradise Valley bond program emerges to offset Five Star financial obligations

Municipal expenditure limitation restricts usage of available cash

Posted 3/17/20

Paradise Valley finds itself in a unique financial situation as officials have unanimously approved the authorization of utilizing excise tax revenue even though the town has plenty of money in the …

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Paradise Valley bond program emerges to offset Five Star financial obligations

Municipal expenditure limitation restricts usage of available cash

Posted

Paradise Valley finds itself in a unique financial situation as officials have unanimously approved the authorization of utilizing excise tax revenue even though the town has plenty of money in the bank.

Due to the town’s annual expenditure limitation compounded with requirements stemming from a development agreement, the Town of Paradise Valley could be at the brink of its annual spending limit, should revenue not materialize as it should.

According to Chief Financial Officer Douglas Allen, a potential risk to the town involves its obligations under the Five Star development agreement, which requires the town to pay monthly for all costs associated with the construction of the perimeter roads and then invoice the private company for its portion of the costs.

While the town has sufficient cash in reserve, there is not sufficient capacity under the Annual Expenditure Limitation to complete all of its activities in a single year, and rely upon Five Star Development to pay the town back for roadwork.

In the event some of the costs are disputed or reimbursement is delayed, the town’s payment would be counted under the AEL, therefore potentially restricting other anticipated expenditures.

On March 12, the Paradise Valley Town Council adopted a resolution authorizing a private placement of excise tax revenue obligations for about $8.5 million.

Town officials negotiated a $8,469,754 private placement with up to a 7-year maturity, callable after 4-years at 1.58% “all in costs.”

“The plan of this, by issuing tax obligations we would use those proceeds to offset what we currently have slotted to go against the expenditure limitation,” Mr. Allen said.

Town expenditures are either “subject to” or “exempt to” the limitation. Expenditures that are “exempt from” the AEL include federal grants, investment earnings, contributions and donations from private organization --- and, the use of bond proceeds and the repayment of bonded debt.

“By issuing the bonds we are putting these projects in the category of being exempt from the limitation, as well as the private organization,” Mr. Allen said.

“At the same time we will be able to fully pay off the PSPRS liability as we move that project up for full repayment.”

Mr. Allen says the bond will: ensure the town is complaint with the required expenditure limitation in honoring the development agreement obligations, as well as allow flexibility for town financial decisions.

The 2020 budget and 2019 audit identify adequate revenues and cash for the town to:

  • Pay the entire PSPRS unfunded liability;
  • Fund the capital improvement plan;
  • Continue status quo town operations; and
  • Maintain sufficient reserves per the town’s policy.

A bond in good economic times

Paradise Valley Town Council members, while grateful a solution has been sought by their CFO, expressed displeasure at being in the given situation.

“One of the primary reasons we’re obtaining these bonds is because of the development agreement with Five Star and the Ritz,” Vice Mayor Julie Pace said.

Mr. Allen said as the municipality goes through the fiscal year and meets its goals with the CIP and PSPRS, if reimbursements from Five Star are late or unreceived, the town will pull proceeds from the bond to make it under the expenditure limitation.

“If we were doing this all over again with the development agreement, would you advise against issuing and including development agreements where the town is actually fronting money for a developer on a construction project?” Ms. Pace asked Mr. Allen.

The CFO said this is the first time he has experienced an agreement such as this.

“So when we look back in history, it’s a lesson learned. This was done long before this council, mostly, except for one. I think Councilmember Stanton was the only one on at the time that voted for this development agreement, but, it’s a lesson for all of us to learn for the future. The only reason we’re having to do this whole bond is to protect ourselves from a development agreement where the town is fronting money for Five Star and the Ritz,” Ms. Pace said.

“I want to be clear, the reason we’re getting a bond in good economic times is because of that development agreement provision.”

Councilwoman Ellen Andeen, who is in the financial sector by trade, says she doesn’t take this bond issuance lightly.

“I know this is not a cash flow issue, this is an expenditure limitation issue because we are trying to comply with the development agreement with Five Star to front the cost of the construction there,” she said. “Our debt service coverage ratio is exceptional. I think when we retire the 2016 bond offering, our debt service coverage ratio goes to 19 times.”

Councilman Paul Dembow called-out Mr. Stanton for putting the council in this position, stating as the responsible party, Mr. Stanton should make the motion for the resolution.

“I am certainly happy that at least most everyone is looking out for the best interest of the residents,” Mr. Dembow said.

“This is the first time in our town’s history since our inception that the Town of Paradise Valley has gone into the banking business. Now we have to go into debt to have an investor build in our town. I warned long ago with several of my colleagues when the Five Star Development proposal was approved four years ago we were giving away too much, and this is how we got where we are today.

“Mark Stanton is the sole person remaining on council that supports putting the town into debt for purposes of a private development project. This is the first kind, ever, for a deal like this in the town’s history and it’s just plain bad.”

Councilwoman Anna Thomasson made the motion to adopt the resolution, with Mr. Stanton seconding, before it was approved 7-0.

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