CHICAGO — The St. Paul Port Authority and lawyers for a group of investors who hold a portion of its 876 Fund economic development revenue bonds will return to court later this month as litigation proceeds over the fate of $51 million of defaulted debt.
The Port Authority wants the courts to allow it to distribute about $22 million of revenue from pledged assets in a manner they consider equitable to all bondholders. Under the current maturity structure, holders of longer maturing bonds will see little return on their investment.
“We are still looking at what we deem a fair and equitable distribution” based on the available revenues pledged to bondholders under the 876 resolution, authority president Louis Jambois said in an interview Thursday. “They are asking us to pay them money we don’t have.”
The bondholders’ attorney believes the authority would have more money to divvy up if it had not diverted some funds he argues should have gone to bondholders.
“We want to have all of the pledged revenues put into the fund and money that was wrongfully taken out and diverted to be restored to the fund,” Keith Broady, of Lommen, Abdo, Cole, King & Stageberg, said Thursday.
Both sides will present arguments on disputed issues at a hearing June 29 before Ramsey County Circuit Court Judge Robert Awsumb.
The objecting bondholders hold about $20 million of bonds issued for projects under the 876 Common Revenue Bond Fund, a long-struggling economic development fund established in 1974. Last June they filed a complaint alleging the authority has misused assets pledged to bondholders.
The agency filed a counterclaim in July asking the court to free up the $22 million it holds in escrow to allow it to get caught up on interest payments and then proceed with a tender offer that would provide the remaining 2,700 bondholders with a discounted payout. Officials believe it’s the most fair plan for all bondholders.
Awsumb has issued a series of mixed rulings. In April, he rejected the bondholders’ request for a receiver to be appointed and rejected a request to bar the authority from using various fleeting and tonnage fees to cover riverfront maintenance expenses or administrative and legal expenses.
He ruled in the bondholder group’s favor by allowing it to represent the interests of all bondholders. Last year he issued a temporary injunction that requires the authority to hold in escrow proceeds from the sale of any of its properties or facilities, although no sales were pending.
The Port Authority issued $428.8 million of revenue bonds between 1974 and 1991 under the fund. Many of the projects failed and pledged project revenues have failed to cover debt service since 1991. The fund’s reserves were drained in 2004 and principal payments were halted in 2006 while partial interest payments have continued. The authority had revenues to pay bondholders $700,000 on June 1, about 28% of the interest payment then due, according to authority chief financial officer Laurie Hansen.
The bonds mature in 2022 and the agency officials believe investors with $35 million of later-maturing bonds will never receive any principal repayment if no action is taken. They worry that efforts to achieve a resolution could drag on for some time.
Jambois, the president, said the issue threatens the authority’s financial position and is a distraction to its mission to promote economic development. “We want to get this behind us,” he said.
Officials thought they had devised an equitable solution in its 2006 plan to liquidate the fund and distribute proceeds. It won district court approval in 2007, but the group of bondholders behind the current litigation appealed.
The appellate court upheld the lower court’s decision but the Minnesota Supreme Court last year voided the lower court rulings on a technical jurisdictional issue without ruling on the merits of the plan and sent it back to the lower courts.
The bondholder group argues it is entitled to property sale proceeds and other revenue. While the original 876 Bond Fund Resolution is clear that revenues generated by non-876 Fund properties are pledged to bondholders, it’s less clear regarding issuance proceeds.
The agency’s former chief financial officer said proceeds of sales before 1991 went into the 876 Fund as stipulated under a 1986 letter from the authority’s bond counsel. The agency has presented a 1978 letter from the same bond counsel saying it’s free to use the profits from the sale of non-876 properties as it wishes.
The St. Paul Port Authority’s former chief financial officer also previously testified that before 1996 the agency covered various maintenance fees from general operating funds and that tonnage and fleeting fees flowed directly into the 876 Fund.
In 1996, the authority amended its 876 leases to create a separate fund for maintenance and diverted some fleeting and tonnage fees to cover the costs, a move it claims does not violate the original bond resolution.