The Missouri constitution doesn’t permit Platte County to honor trustee repayment demands on $32 million of defaulted industrial development bonds, its lawyers argue in a new filing seeking a quick resolution to litigation that has cast a pall over a pledge favored by Missouri local governments.
The Transportation Refunding and Improvement Revenue Bonds issued by the county’s Industrial Development Authority to refinance debt sold to support the Zona Rosa shopping center development fell into default after trustee UMB NA withheld a Dec. 1 principal payment.
The trustee dipped into reserves for interest after Platte County Circuit Court Judge James Van Amburg refused to order the county to cover a shortfall in pledged revenues. The trustee contends the county is on the hook under terms of a financing agreement.
UMB's demands that the county make good on the guaranty pledge for the bonds by executing a binding declaration to support a $765,000 2018 debt service shortfall and future payments that could total up to $40 million is “contrary to Missouri law and can be resolved as a matter of law,” attorneys for the county say
“Under the financing agreement, the Zona Rosa bonds are payable from the 1% sales tax in Zona Rosa, not the general tax revenues of Platte County taxpayers,” says the summary judgment request filed by the county's attorneys at Graves Garrett LLC in its Platte County Circuit Court case against the trustee and the county authority that served as issuer.
“If the Court were to accept the bond trustee’s construction of the financing agreement and impose a payment obligation on Platte County, it would convert its terms into a general obligation that violates the Missouri Constitution,” the filing says. “UMB Bank’s arguments to the contrary would render the financing agreement unconstitutional.”
Some market participants have questioned the need for a lawsuit given that a moral obligation pledge is not viewed as a contractual obligation to make good on bond payments, but rather an incentive to pay given the negative market and rating consequences of default. They are watching closely, however, as court rulings could damage the value and repayment strengths of similar credits in the state.
Platte County had previously said it filed the litigation under threat that the trustee would sue.
Under the financing agreement, the county agreed, subject to annual appropriation, to transfer funds to the trustee in an amount sufficient for the payment of the bonds should pledged sales tax and developer payments fall short. It’s an arrangement viewed in the municipal bond market as a contractual appropriation pledge.
The bonds are special obligations of the authority payable solely from a portion of the Transportation Development District revenues appropriated by the district and amounts appropriated in each fiscal year by Platte County from legally available funds.
The filing portrays the moral obligation pledge as “a common method used by financiers to obtain the support of counties and other political bodies that, under the Missouri Constitution, cannot become indebted without voter approval” under the state’s strict debt rules.
“Ultimately, under the financing agreement, the only promises made by Platte County were to take certain administrative steps that would allow its governing body to decide each year whether to make a voluntary payment to cover any shortfall for the Zona Rosa Bonds. Platte County never agreed to incur a general obligation nor a revenue obligation,” says the filing.
The county also has also argued it can’t afford the subsidy. From a financial standpoint, the trustee’s demands would require Platte County to make substantial draws on its reserve fund — a fund that exists for emergencies or other unforeseen circumstances — which would quickly be depleted and result in tax hikes, the lawsuit says.
“The County Commission has declined to spend taxpayer funds to prevent investor losses in third-party debt. Platte County will continue to take action to meet the debts and obligations it has issued,” the county said in a statement announcing the summary judgment filing.
The summary judgment request is the latest development in the troubled facility’s history that caught the market’s attention for the preemptive rating strikes taken by S&P Global Ratings and Moody’s Investors Service. The bonds have recently traded at about 55 cents on the dollar, according to trade data on the Municipal Securities Rulemaking Board’s EMMA website.
S&P stripped the Zona Rosa bonds of their investment grade rating last summer after county commissioners discussed at a public meeting their opposition to making up future shortfalls absent a long-term solution. Moody’s Investors Service quickly followed by cutting the county’s rating to junk. Moody’s rates the county's bonds, but not the authority’s, while S&P rates the authority's bonds, but not the county's.
The 2007 bond issue refunded debt sold by the authority to pay for parking facilities to aid in the development of the suburban Kansas City complex. The project has struggled with high vacancy rates for several years. The developer then defaulted on its contributions that go to cover debt service. New owners have since taken over the complex.
The county then filed its lawsuit in early November against UMB and the development authority asking the court to find that any legal obligation for Platte County to make payments violates state law.
The December default triggered an S&P downgrade to D on the authority's bonds. The bonds were originally rated AA-minus and previously cut to A. As the county’s commitment came into question over the summer, S&P cut the rating to B-minus and then CC after the lawsuit was filed.
Moody’s had stripped the county of its high-grade Aa2 issuer rating after the summer discussion about the county’s legal obligation to honor the appropriation pledge. After the default, Moody’s cut the county’s issuer rating two notches to Ba3 from Ba1 and dropped its neighborhood improvement district bonds to B2 from B1 and its lease appropriation rating to Caa1 from B1. The outlook remains negative.
The county's lack of willingness to pay an obligation in the capital markets calls into question its willingness to pay other obligations, according to Moody's.
“The negative outlook reflects the uncertainty surrounding future payments and the disposition of litigation filed to absolve the county of its obligation to appropriate and transfer certain moneys to the trustee for application to the payment of the bonds,” the rating agency wrote in December.
Lawyers from the trustee have several weeks before their response is due. The trustee is represented by Spencer Fane LLP. The trustee’s last bondholder notice was posted in December summarizing an investor call.
A trial date was previously set for May but a ruling on the summary judgment request is expected before that.
The original 2003 debt financed the construction of an 802-space multilevel parking garage. The bonds mature on Dec. 1, 2032 with an escalating debt service schedule.
Sales tax collection in the development district averages about $1.5 million a year and the county has estimated that by fiscal 2026 it will need to appropriate $1.5 million in legally available funds, up from $634,000 in fiscal 2018, if tax collections don’t grow. The 421-square-mile county has an estimated population of 94,970.
The county is asking voters on the April ballot to impose a countywide sales tax at the rate of one-half of 1% for the next six years for capital improvements.
