During public comment at a City Council meeting in mid-February, Senior Center Vice President Joan Treacy noted that in the City’s councilmanic bond issue last fall, the Council included $250,000 to begin work on an expansion of the Senior Center. Nearly a half-year later, the Senior Center has not seen any of the proceeds. “Where is our money?” she asked.
It was a question heard ’round the island, at least among serious City watchers who worry about the City’s solvency, given its borrowings from the water utility, staff layoffs and the budget cuts still necessary to weather the financial downturn.
As the City’s financial crisis has deepened, many of our most cherished plans and programs have been trimmed or eliminated. We can argue whether a new Senior Center should be started now, and whether it should become a higher priority than other projects still waiting in the wings. But when the City borrowed money by issuing bonds for the express purpose of putting money toward the project, the decision was made, and the City has no choice but to spend the money for the Senior Center, as promised in the bond contracts and offering documents (or pay it back).
On February 19, I made a formal request under the state Public Records Act for documents that verify the specific use of proceeds of the bond. I wanted to know what happened to the bond proceeds that have not yet been disbursed, particularly the Senior Center money.
The request that seemed so simple to me—show me the money—was answered with various budgets and spread sheets showing that yes, $250,000 of bond proceeds was intended and budgeted to be disbursed to the Senior Center project. But budgets and intent are not at all the same thing as cash and current ability to pay, so those documents were not a complete response.
In the ensuing eight weeks of emails and phone calls with the City’s finance and legal personnel, I was unable to pry from them any documents showing the existence of $250,000 in any bank or investment account that was earmarked and held aside for that purpose.
Two weeks ago, Council Finance Committee Chair Barry Peters threw gasoline on speculation that the cash-short City had spent the Senior Center money for operating expenses, by sending around an email that contained this assertion:
“I vaguely recall that a city has three years to spend bond proceeds for the bond’s stated purposes. Is it necessary and timely for the city to be spending the $250k for the Senior Center now — just 7 months after the bond issue? Council’s concern about cash conservation suggests not.” (Read his email here: Peters email excerpted from email thread.)
It thus appears that Peters believes bond proceeds are simply another source of cash, to be spent or saved for any purpose the City sees fit, at least for the three-year period of time to which he refers.
As a former securities lawyer, I get nervous about undisclosed uses of offering proceeds. Both the Preliminary Official Statement, which is the legal document pursuant to which the bonds are offered to investors, and the Council-adopted bond ordinance, said that proceeds would be used to fund or reimburse the City for a portion of the cost of various capital projects included in the City’s 2008 capital facilities plan and identified in a schedule included in the documents. The Senior Center was among those projects.
The documents didn’t disclose that proceeds could be used for general City expenditures until they’re needed for the intended capital projects. But the Peters email indicated that the City treated the proceeds exactly that way. That raised questions not only about financial propriety and appropriate disclosure under the securities laws, but concerns about compliance with the complex tax laws that apply to tax-exempt municipal bonds.
For answers to my questions, I met yesterday with Finance Director Elray Konkel, Accounting Manager Karl Shaw and City Attorney Paul McMurray.
Konkel told me that all of the City’s cash—-tax revenue, utility revenue, bond proceeds and all other cash in the door—–is commingled. The City keeps cash for immediate needs in its account at American Marine Bank, and the rest in the state and county investment pools. The proceeds of the bond issue were deposited into American Marine Bank and then promptly transferred into the investment pools. The bond money can no longer be specifically identified.
Of course, on the City’s books, money is accounted for separately, and identified by fund. But if the question is where is the $250,000 due the Senior Center, the answer is it’s in that pile of money. Konkel laughingly agreed when I joked that it’s as if he’s sitting at the entrance of the vault, reaching behind him for a stack of cash when someone asks for it.
He told me that commingling of cash is commonly done in municipal finance. Indeed, I found an IRS technical advice memorandum discussing the same practice in another city. In that case, the city ran into financial difficulties and used bond money designated for capital projects for general operating expenses (sound familiar?) That city ran afoul of highly technical arbitrage rules on municipal bonds and was assessed a penalty, but the practice of commingling funds was not the reason for the penalty.
City watchers have raised other concerns about the legality of using bond proceeds for other purposes, including the City’s debt policy (requiring that the City use councilmanic bonds only for capital projects, with limited exceptions such as “catastrophic or emergency conditions”) and state law that provides, “Moneys received from the sale of bonds or warrants shall be used for no other purpose than that for which they were issued.”
But Konkel assured me he’s guided by competent outside legal and accounting advice in order to comply with these laws.
As for the Senior Center’s money, Joan Treacy says the City has told her that as soon as her organization presents a contract for expansion design work to the City for the $250,000, the City will release the money. That contract is now in the works, and she expects to present it to the City in the near future. Konkel confirms that the City stands ready to release the money when the proper paperwork is in.
We’ll have to take him at his word that when he reaches into the vault, the cash will be there.