BRADENTON, Fla. – For a decade, a four-lane highway built by a Mississippi economic development district failed to entice new development.
Eventually, there will be property owners to pay the special assessments backing bonds that built the road, an attorney for Madison County, which created the Parkway East Public Improvement District, told an appellate court earlier this month.
But the county’s obligation was to backstop bond payments for the failed project for only two years, its attorney Robert P. Thompson, told the Fifth Circuit Court of Appeals during oral arguments in a case brought by the bonds' insurer.
“Two years means two years in my book,” Thompson said, laying out the county's fundamental position in its four-year-old dispute with Assured Guaranty Corp.
Madison County only agreed to make up debt service shortfalls as long as the Parkway East PID reimbursed the county within two years, argued Thompson, of Copeland, Cook, Taylor & Bush.
Last year, however, a lower court disagreed with the county’s interpretation of the contribution agreement it approved when the PID issued $27.7 million of limited obligation special assessment bonds in 2005, and $3 million of completion bonds in 2008.
The lower court should be reversed, Thompson told the Fifth Circuit jurists.
“Nowhere in the contribution agreement does it say the county is going to assume this full debt; it would not be logical,” Thompson said. “Why pay $257,000 for bond insurance? It defies logic.”
But U.S. District Court Judge Carlton W. Reeves ruled that the county’s obligation is to continue paying the district’s debt as long as the bonds remain outstanding.
Reeves granted summary judgment in favor of Assured Guaranty, which assumed the contract dispute case as successor in interest to Radian Asset Assurance Inc.
Justices hearing the appeal seemed intrigued by the case as attorneys for both sides argued their positions.
Some judges questioned why the debt would be Madison County’s obligation when the county did not issue the bonds, while others questioned the nature of the contract’s two-year provision, according to a recording of the proceedings.
The county provided the “essential contribution obligation” that enhanced the district’s credit because the new PID had no assets to back up debt payments in the event that property owners decided not to pay property assessments, argued attorney John C. Speer for Assured Guaranty.
Property owners in the district failed to pay assessments in 2007 and 2008, said Speer, with Bass Berry & Sims PLC.
The contribution agreement contemplated that the county would step in and pay debt service.
“If the county doesn’t have reserve funds or willingness to do so, the insurer comes in,” Speer told the appellate court, adding, “and we did so."
Since Parkway East was created in 2002 by Madison County, nothing but a four-lane divided highway has been developed in the 1,050-acre district, which is about 20 miles from the state capital in Jackson.
Parkway East was a victim of the 2008 recession when landowners could not pay the high assessments that were supposed to support bond payments, county officials have argued.
The county made four contributions to the debt service shortfall between October 2011 and September 2013, then stopped payments when the PID failed to reimburse the county two years after the first payment was made.
No reimbursement payments from the district have ever been made.
Radian, later acquired by Assured Guaranty Corp., filed the original suit in 2013 alleging that local political resistance interfered with the potential success of the district, as did decisions made by Madison County on how it complied with its own agreement to contribute funding if there was a shortfall in the PID’s bond payments.
For much of the case, legal arguments have parsed sentences in the contribution agreement and whether it limits or forever obligates the county to make bond payments.
“For all the ways Assured Guaranty Corporation wants this case to seem complex, it is actually simple: an insurance company does not want to pay what it admits is a covered claim,” Madison County said in an appellate brief last October.
When Parkway East became unable to make its bond payments, the county said Assured tried to “avoid the promises it made” when it sold the policy.
“To do so, Assured twists the context and plain meaning of the contribution agreement between Madison County, Mississippi and Parkway East,” the brief said.
Assured, in its appellate brief, said that in its most basic form the contribution agreement provides that the county will make bond payments if Parkway East is unable to.
According to Assured, at the time the contribution agreement was approved neither bond insurance nor any ratings were requested.
The county’s agreement “served as the sole basis” for S&P Global Ratings to assign an A underlying rating to the bonds, enabling “Parkway East to borrow money at an attractive interest rate,” Assured’s brief said.
The agreement also made the bonds eligible for bond insurance, which allowed “S&P to provide an enhanced credit rating of AA and allowed for an even lower interest rate,” the brief said.
S&P lowered its underlying rating to D from CC on the Parkway East PID special assessment bonds in May 2015, where it remains today.
S&P said its lowest junk rating reflected its view “that a shortfall of pledged revenues, combined with the county's lack of willingness to replenish the debt service reserve, led the bond trustee to make a claim” on the bond insurance policy.
Moody's Investors Service, which rates the county’s general obligation bonds Aa2 but does not rate the district’s debt, said the litigation with Parkway East Public Improvement District creditors poses a challenge for the county.
The county's debt burden is moderate at 1.3% on a direct basis and 1.8% on an overall basis, Moody’s said, adding that it includes the $29.4 million of Parkway PID bonds due to the county's contribution agreement to assist in deficiency debt service payments.
The county paid approximately $2 million in debt service shortfall payments before halting its contributions.
Moody’s said a ruling requiring the county to cover Parkway East debt service on an ongoing basis could stress the county's budget, although the county balanced operations while making deficiency debt service payments from 2011 to 2013.
Thompson told appellate court judges that the district will make money over time.
“Hopefully, it will take off and when it does property owners will pay the assessments,” he said, adding that will be the time to talk about carving out sentences in Madison County’s contribution agreement.
The Fifth Circuit Court of Appeals has no deadline to render a decision in the bond insurance contract dispute.
Assured said that it could not comment on the litigation.
Calls and emails to Madison County attorney, Katie Bryant Snell, and Trey Baxter, president of the Madison County Board of Supervisors seeking comment were not returned.