The Cheshire Cat Bonds

‘I wish you wouldn’t keep appearing and vanishing so suddenly: you make one quite giddy.’

`All right,’ said the Cat; and this time it vanished quite slowly, beginning with the end of the tail, and ending with the grin, which remained some time after the rest of it had gone.

—  Alice in Wonderland

 

All you can see of the city’s famous $74 million bond issue is the tax Ashevillians are paying on it.

 

In the spring of 2016 the City of Asheville presented its citizens with a super-ambitious three-pronged plan for improving their quality of life.

It proposed spending $32 million on improvements to city transportation and infrastructure, $25 million on the creation of affordable housing, and $17 million to enhance its parks and recreational facilities.  The city provided a list of the tasks each bond was intended to pay for.  Then it put the $74 million three-bond package — the largest such in Asheville’s history — up for a referendum in that November’s general election.

Voters passed the referendum by a lopsided margin.  The following summer, council approved a 3.5-cent city property tax increase to cover the bonds’ cost.  The legality of the tax, as well as of the bonds themselves, was challenged in court, but the suit was dismissed in April of 2018 (see below).  After that …

Crickets.

In fact, according to the city’s financial department, the bonds will not begin to be issued until 2020, by which time property owners will have been paying the tax on them for two years.  But not to worry: the city is taking stopgap measures to cover the cost of going forward with certain bond-related projects while, presumably, waiting for the bonds to ripen like tomatoes on the kitchen windowsills of Asheville’s economy.

 

BANishing concern

Specifically, in June of 2018 the city quietly began issuing a series of Bond Anticipation Notes (BANs).  These are two- to five-year interest-bearing securities that are marketed in advance of a larger bond issue.  One city staffer described them as “essentially an IOU which will be repaid by proceeds from another bond.”  The BANs do not involve a further tax levy.

“The 3.5-cents [bond tax already in place] covers all of the debt related to the GO Bonds, including the BANs,” Asheville Chief Financial Officer Barbara Whitehorn told Enquiring Minds this week. “We have a financial model that factors in construction financing (the BANs) as well as the cost of the long-term debt so that we can be sure that the tax increase Council approved is adequate to cover the needs,” she said.

City documents show that the BANs covered $6,872,033 worth of odd jobs in 2018 and are expected to pay for another $15,370,834 this year.

Asheville CFO Barbara Whitehorn’s hand-drawn schematic diagram of city project financing from November 2016, when the $74 million bond package was approved, through 2020, when the first bonds are expected to be issued. Proceeds from the BANs are to “repay city coffers” for out-of-pocket costs from January 2017 to June 2018; actual bond sales, beginning in 2020, will then be used to pay off the BANs.

 

So to summarize:  (1) Not a penny of revenue has been realized from the $74 million bond package; and (2) the city is selling short-term notes to pay itself back the city taxpayer money it has spent on city projects since 2017,  as well as to bridge the cash flow gap from last summer until next year, when the actual bonds are expected to start generating actual money.   To those who haven’t been keeping up, this begs the question, “How the hell did that happen?”.

Well, once upon a time …

 

Down the Rabbit Hole  

The city’s announcement that it was considering holding a referendum on issuing $74 million worth of bonds immediately divided Asheville into two camps.  The larger (or at least more vocal and visible),  pointing to the shopping list of infrastructure improvements and affordable housing initiatives for which the bonds were supposed to pay,  praised council’s farsightedness; the smaller, more conservative faction cast a jaundiced eye at what it considered to be an ill-advised overreach by a financially feckless city government.

The entire edifice of Asheville progressivism, including the Chamber of Commerce, the United Way, the Asheville Downtown Association, Mountain True, and Mountain Housing Opportunities, aligned itself behind the bonds, supported energetically by the local mainstream media.  Against the public relations juggernaut thus created, there stood only a skirmish line of former council members and city government staffers, a few outspoken conservative business owners (a rarity in Asheville), and one or two maverick pundits, all deeply suspicious of the city’s motives in light of a growing municipal debt.  The smaller group tried gamely to keep up with, and call attention to, the larger group’s often contradictory narrative of the bond issues’ per capita tax impact, as well as the capital liability involved and the adequacy of the city’s reserves.  But these dissidents were ignored, except when they were being vilified as selfish, stupid obstructionists.

The outcome was never in doubt.  Come November, nearly 70 per cent of voters approved issuing the bonds.

 

Not so fast.

But then two flies appeared in the ointment.  They were former Vice Mayor Chris Peterson and retired attorney Sidney Bach, who called public attention to a vital one-word discrepancy between the published bond description and the language of the ballot.

City documents published before the referendum, including the bond resolution itself, said the city “shall” raise taxes to cover the bond issue, whereas the language of the ballot itself said the city “may” do so.  There was a world of difference, Bach and Peterson contended, between “shall”,  a flat statement of intent, and “may”,  a noncommittal verb they said was misleading in light of the earlier language.  A do-over, the plaintiffs said, was in order; without specific language to frame them, Bach said, the bonds would provide “a gigantic slush fund” that the city could use for any purpose, especially to plug budget holes and shore up the city’s ever-increasing deficit.  (Peterson, at a council budget meeting, calling the bonds “a ponzi scheme” and was removed from the chamber under police escort.)

At the end of the year, Bach and Peterson made good on their threats to take action against the bonds by suing the city over the wording difference. And on January 3, 2017, Bach and Peterson filed an amendment to the lawsuit alleging that the city had acted improperly and illegally by levying an immediate-effect tax on bonds it had already said it would not be issuing for at least another two years.

“Off with their heads!”

Well, that set the cat amongst the pigeons.  City Attorney Robin Currin, enraged, fired off a letter threatening the plaintiffs’ attorney, Albert Sneed, with sanctions.  Moreover, Sneed is a law partner of Mayor Esther Manheimer, so Manheimer had to recuse herself because of possible conflict of interest.  It was a dyspeptic few months at City Hall, particularly since efforts to quash the suit were thwarted when the court denied the city’s motion to dismiss.

Ultimately, though, the city prevailed:  On October 20, 2017, Judge William Coward ruled in its favor, saying the bonds were valid and could be issued.  Bach and Peterson began an appeal but abandoned it on April 6, 2018. “Since then,” Bach says, “the silence has been deafening.”

 

The Sound of Nothing Happening

For example: Back in December of 2016, a month after the bonds were approved by referendum, Vice Mayor Gwen Wisler told Asheville’s Council of Independent Business Owners the city had not made “any definite plans” to spend $15 million in bond sale proceeds for the repurposing and redevelopment of South Charlotte Street.  Her comment raised eyebrows because the redoing of that corridor had been the much-touted flagship project of the $25 million affordable housing bond.  “What we are hoping is that the $15 million would go towards some aspect of affordable housing,” Wisler told CIBO at the time.

Wisler’s hedging underscored Bach’s and Peterson’s contention that the city is in no way bound to spend the bond moneys on any of the specific projects listed in the bond resolution;  that so long as a given project can be made to “fit” into one of the three broad bond categories, money from that category may be used to fund it.

And two years further on, not a shovelful of dirt has been moved on South Charlotte Street and no specific plans to do so have yet been advanced.

 

The Old Shell Game?

A tax will [may] be levied to pay the principal of and interest on the bonds if they are issued.”  — North Carolina General Statutes 159 – 56 (emphasis added).

“It [the 3.5-cent bond tax Ashevillians are now paying] is an illegal tax, improperly levied,” Bach told Enquiring Minds last week.

Bach repeated his allegation that the city will likely use the bond structures to shuffle funds internally, as well as to shore up the city’s sagging finances.

“A true forensic analysis of the city’s financial status would probably reveal that it is carrying around an actual deficit of between twenty and thirty million dollars,” Bach said.

“They [the city] have been relying on windfall revenues from the new taxes that will accrue from Mission Hospital, now that Mission is on the tax rolls,” Bach said.  “Well, Mission is in the process of challenging its assessment value.  While that reassessment process is going on, all obligation for Mission to pay taxes is suspended, so there’s not going to be any windfall for quite some time, maybe as long as three to five years.  If the city’s not going to issue the bonds until 2020, it has to raise as much money as it can, however it can.  Hence a tax on bonds that haven’t even been issued yet.  It’s a question of what you can get away with.”

“We’re all quite mad here. You’ll fit right in.”

 


 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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