BANs on the Consent Agenda

"The citizens of East Lansing have a right for Council to debate in public session with public input..."

So much for hoping things would be any different under the new City Manager. According to the January 31 Council work session agenda, the plan is to put a resolution for refinancing the BANs on the Consent Agenda for next week. No public input. No debate. Just the same old rubberstamp. Forbidding misuse of the Consent Agenda is high on the list of reforms to restore democracy to East Lansing after the Staton regime.

We all understand why City Hall wants to avoid public discussion. They issued $5.45 million to buy properties worth about a third that for a boondoggle with a developer who even at the time was an appalling risk. They don’t want to talk about that. They don’t want to talk about the money already wasted and the added cost for refinancing. They don’t want to talk about the developer or that there is no realistic prospect for development in the next three years.

They don’t want to be forced to admit that the pretext this is all paid for by the DDA is a lie, because the DDA is obligated to repatriate any diverted tax revenues it cannot put to good use, so money squandered by the DDA is no different than money squandered by the general fund. Anyway, the DDA does not have enough money to pay for principal plus interest, so a pledge to pay for bonds backed by full faith and credit of taxpayers is just “words, words, words.”

I suppose they don’t want to debate different refunding options, because the financial illiterates on Council will show how illiterate they are. Sorry, this is a democracy. Baird does not make decisions for this city. Our elected Council does.

I have no problem with Baird making a recommendation, as long as it provides different options for our elected Council to debate. Baird wants a short term refunding BAN. But its reason is based on the assumption something will happen soon with City Center II or that the properties will be sold. Does Baird understand these properties had an assessed market value for 2011 of $1,535,400, and it is likely to be even lower for 2012?

There is no realistic scenario in which a redevelopment at the City Center II site can generate sufficient TIF and parking revenues for debt service on the BANs. Baird’s secret $28.5 million bond issue/debt service plan proved that. With the fanciful CC II built and successful, it ran a deficit of $8-$10 million during the first decade. Waving a magic wand to make the numbers add up over 28 years is irrelevant. More modest, less risky, future redevelopment options would all require TIF reimbursement to a developer that would leave little or nothing leftover for the BANs. Of course, actually building a parking structure would require more debt service than any net parking revenues, like all the other parking structures.

Baird estimates a long-term bond at 3.75% interest (I can buy that). It has dismissed this option because it wants to build in call provisions that would lead to a much higher rate. With muni-bond yields at historic lows, there is no need for call provisions, and bond investors won’t care what happens to the properties, because the bonds are backed by the full faith and credit of the city. The intent to bond resolution just said debt service by DDA TIF not project specific TIF, which it should have but didn’t. So the DDA can use its diverted taxes plus subsidies from the general fund for the shortfall, all perfectly legal, if disgusting.

A simple calculation of $5.75 million at 3.75% for 25 years comes to about $350,000 per year or $8,750,000 over 25 years. (Current interest-only on the BANs is about $200,000.) My suggestion of delaying principal for five years until the University Place bonds are paid off, assuming 4% interest on $5.75 million, comes to $230,000 for the first five years then $420,000 for 20 years, a total over 25 years of $9,090,000.

A 3-year refunding BAN at 2% interest and no principal on $5.75 million would be $115,000 for three years. But if interest rates on $6 million refunding in three years were at 5% that would be $420,000 for 25 years, a total over 28 years of $10,845,000. Of course, we don’t know what interest rates will be in three years, but we know they are currently at historic lows and that the city has a AAA Fitch rating that is unlikely be sustained, so there is a very real risk that 5% interest in three years is a highly optimistic assumption. Whatever legal issues may need to be fudged for a long term bond with no City Center II will be the same in three years as now.

The option of refinancing the BANs with a DDA revenue bond, not backed by full faith and credit of the city, also needs to be considered. If the city had chosen the DDA revenue bond route in the first place for such an extreme real estate speculation, we would not be in this mess, but of course the bond market would have refused to fund them, which is why LTGO bonds were substituted. I do not believe refinancing with DDA revenue bonds is a realistic option, but there are citizens who think it may be, so it needs be thoughtfully discussed and the argument against it fully explained.

If Council wishes to go along with Baird’s recommendation after an open public debate with full information about different options, that is within its right. My calculation is that a long-term bond, with interest-only until the University Place bonds are complete, is the best possibility. My assumption is based on accepting that the city was sold a lemon and has no choice but to cut its losses instead of hoping something will come along to get exonerate those who are to blame.

The citizens of East Lansing have a right for Council to debate in public session with public input the assumptions and the options for significant financial decisions. The citizens of East Lansing also have a right to know which members of Council can intelligently discuss assumptions and options for significant financial decisions and which cannot.