BRADENTON, Fla. – A small Virginia city lost low-cost financing opportunities because of its decision to reject a moral obligation pledge on a failed economic development project, state records show.
That project was an 18-hole golf course that Buena Vista decided to stop supporting after the recession in 2010, as city officials focused on funding core services rather than making payments on bonds that financed Vista Links.
The default triggered negotiations with bond insurer, ACA Financial Guaranty Corp., and led to a forbearance agreement that the city defaulted on five years later.
Amid those developments, state agencies refused to allow Buena Vista to participate in low-cost pool borrowings out of concern that it would tarnish triple-A-rated Virginia and its local government financing programs, according to documents obtained by The Bond Buyer.
In the most recent example, the Virginia Resources Authority refused to allow the city to participate in the Virginia Pooled Financing Program to refinance $9.25 million of water and sewer obligations to lower debt service costs.
“Inclusion of debt by a borrower with a past history of loan default could negatively impact VPFP pricing, specifically as a result of disclosures regarding Buena Vista’s prior loan default that would need to be included in the related VPFP offering documents,” according to minutes of comments made by program management director, Peter D’Alema, at the VRA’s Portfolio Risk Management Committee meeting on March 24, 2014.
The committee, which also discussed how rating agencies would perceive the VRA’s underwriting of a loan for a locality with a default, decided that the pool program was not an option for Buena Vista.
Some VRA pooled infrastructure bonds, backed by the state’s moral obligation pledge, are rated double-A by S&P Global Ratings and Moody's Investors Service, according to a review of some bonds on the Municipal Securities Rulemaking Board’s EMMA filing system.
Buena Vista, a city of 6,400 residents living in the foothills of the scenic Blue Ridge Mountains, first defaulted on its golf course debt in 2010 when the council refused to appropriate general fund revenue for Vista Links’ debt payments.
At the time, the city said it couldn't afford to continue subsidizing the golf course’s $9.2 million of lease-revenue bonds issued in 2005 by the city’s Public Recreational Facilities Authority.
Built with the hope of stimulating economic development that never materialized, the golf course failed to pay for itself and required general fund subsidies for operating costs since opening in 2004, according to city finance reports.
On the rebound from the Great Recession, the city in 2010 entered a five-year forbearance agreement with bond insurer ACA Financial Guaranty Corp. that allowed the city to make 50% of the annual bond payments for five years.
The city defaulted again when the council voted not to include in its 2015 budget money to resume full bond payments.
ACA and bond trustee, UMB Bank NA, filed a lawsuit in state court in 2016 in an attempt to enforce the city’s obligation.
The complaint was moved to the U.S. District Court for Western Virginia in February of this year, after the city contended that the golf course deal is void because only four of the city’s seven council members voted on the bond resolution and related agreements that included selling the city’s interest in its “public places.”
Virginia’s constitution, the city has argued in court papers, required all seven council members to be present to vote on the golf course deal because it granted a deed of trust lien in city hall, police and court facilities that served as collateral for the bonds.
On March 22, Buena Vista filed a motion to dismiss the federal suit for failure to state a claim, among other charges.
U.S. District Judge Norman K. Moon held a hearing on the city’s motion July 21.
City officials declined to comment because a ruling has not been issued.
Buena Vista argued in its most recent court filing that the golf course’s lease-revenue debt is not a general obligation, and it has a right to stop paying its obligation.
“The city seeks to enforce the express terms of the bonds, under which the city’s obligation to pay rent is subject to annual appropriations by the City Council, and ceases upon a failure of appropriations,” the city said in preparation for the July 21 hearing.
In addition to asserting that the bonds are not a debt of the city, Buena Vista claims that the deed of trust lien for the collateral backing the bonds is void.
In its response, ACA said the city’s motion to dismiss the complaint is an improper attempt to litigate the merits of the suit at the pleading stage, before discovery is taken.
“Worse, the city wants this court to rule that the city only has a ‘moral obligation’ to pay its debts, and that [ACA’s] only remedy upon default is to foreclose on a fraction of the collateral pledged by the city and the Public Recreational Facilities Authority of the city of Buena Vista,” ACA said in an April filing.
“The ramifications from such a ruling would be frightening,” ACA’s attorneys wrote. “If adopted, this court will be sending a message to the market that no lender should ever finance public projects in Virginia because municipalities: (a) have unbridled discretion to not repay loans; and (b) can limit the collateral that can be foreclosed upon.”
In a statement Tuesday, ACA said, “It’s unfortunate that Buena Vista’s elected officials have forced ACA into court after recklessly choosing to have the city default on $9.2 million in debt even though the city has ample funds to make the payments that are owed.”
“This is particularly troubling because ACA spent years negotiating in good faith after the city claimed financial hardship, and even provided a generous forbearance agreement that reduced payments by 50% starting in 2011,” ACA’s statement said. “After the city defaulted on that deal in 2014, it offered ACA only pennies on the dollar while seeking to be absolved of all future burdens of this financing. Left with no reasonable alternative, we must look to the court for an equitable and fair outcome.”
ACA, which has been in run-off since 2008, has paid claims on Buena Vista’s debt.
In the meantime, the city’s default has affected its ability to borrow from state financing programs, and a state official said she believed there could be implications for other local governments and potentially the state of Virginia.
In a 2011 letter to two state legislators concerned about Buena Vista’s default, VRA Executive Director Stephanie Hamlett said municipal debt had entered a “period of heightened scrutiny” making it more challenging for local governments - especially those that are small and fiscally distressed - to access the bond market,.
“In an effort to make it clear that the Commonwealth expects localities to work out their debt obligations,” Hamlett wrote, “we cannot permit a defaulting locality to participate state financing programs such as the VRA.”
That same year, the city’s school system was denied $550,000 for middle school improvements from the Virginia Public School Authority’s qualified school construction bond program.
Given challenges in the credit markets at the time, the ability of state-supported local pool financing programs to access the public market is more important than ever, state Finance Secretary Ric Brown said in a letter to Buena Vista’s then-Mayor Mike Clements.
“This ability cannot be jeopardized or put at risk by permitting a defaulting locality to participate in a state pool financing program such as the VPSA,” Brown wrote. “The Commonwealth certainly expects localities to do what is necessary to meet their debt obligations and to protect Virginia localities’ reputation for fiscal discipline.”