CHICAGO -The Summit County Port Authority in Ohio is scrambling to deal with a township's recent decision to stop making lease payments on a bond-funded loan because a new administration is unhappy with the three-year-old town hall project financed with the authority's bond proceeds.

One of 12 borrowers in the port authority's bond fund, Twinsburg Township, "defaulted" on its February loan payment of roughly $37,500, according to the Port Authority. No further monthly payments are expected at this time as the township's three-member trustee board voted in early January not to renew its $475,000 annual appropriation for lease payments to the port authority.

Though the payment is a small one in terms of the fund, officials are worried over the precedent it would set if the town doesn't resume payments.

"This is the first time a political subdivision has defaulted on an annual appropriations lease payment when it had the resources to fund it," said Tim Long, a managing director at Robert W. Baird & Co., the underwriter for the authority. "We're concerned about the impact on the marketplace if they actually walk away - it would be one of the few times it's happened."

A township lawyer, Andy Duff, argued with the characterization of the missed payment as a "default," saying instead that because the township did not make the annual appropriation the lease agreement is simply terminated.

The Port Authority in 2005 issued about $6.1 million in fixed-rate bonds, loaning the proceeds to Twinsburg to allow it to purchase and renovate a building into its town hall. The agency negotiated a 20-year lease with the township. The bonds are secured by the township's annual appropriation to make the lease payment, which itself is backed by a first mortgage lien and security interest on the 70,000-square-foot building in an area of town that one trustee described as rapidly developing.

"We have the money in the bank, and we can afford the building," said Tom Schmidt, the only one of three trustees who voted to continue making payments. "The other two trustees felt that the building was larger and more expensive than what we needed."

Twinsburg's trustees voted to withdraw its annual appropriations at a Jan. 2, 2008 meeting, said Schmidt, who was one of the original trustees who negotiated the 2005 transaction. The other two trustees have taken office within the last two years.

"Quite honestly, when I entered into the agreement, and was one of the three trustees that unanimously agreed with it, I personally never envisioned a situation coming up where the township wouldn't continue with the agreement," Schmidt said.

Under the annual appropriation lease payment structure, the township is not legally required to make the payments if it does not appropriate the funds. "If they don't appropriate, they can walk away," said Long. "It's really a moral obligation."

The Port Authority has sufficient funds in a reserve account to make the township's payments for the year, said port president Christopher Burnham. "We'll continue to make the payments from our reserves," said Burnham. "But as it's been explained to me, a moral obligation on the part of a government entity carries some ramifications in the event you don't meet your financial commitment."

For example, Burnham said the township wants to build a new town hall - a project that would be funded through tax-exempt bonds - and that such borrowing could be "problematic" if Twinsburg defaults permanently on the port authority's contract. The town could face a difficult time negotiating with another conduit or accessing the market on its own.

"This is something I never anticipated," said Burnham, who has headed up the authority since its inception in 2000. "It's a pretty strange situation."

In voting to withdraw appropriation, Twinsburg's trustees consulted with the Summit County prosecutor's office and has since hired an attorney to negotiate with the authority, said Schmidt.

If the township continues to miss payments, Burnham said he expects to evict the township's administrative offices, as well as the Summit County sheriff's office, which rents space in the building.

Fitch Ratings this week affirmed its BBB-plus rating on the bond fund program with a stable outlook as the port authority prepares to enter the market in March with a $6.8 million new-money issue. "The bond fund's reserves remain adequate to absorb any permanent losses that may be incurred as a result of Twinsburg," said Fitch analyst Adrienne M. Booker.

"While Twinsburg did not make a February payment, the authority has used their own funds," said Booker in an interview yesterday. "Those monies are not pledged to bondholders, they are a restricted amount set aside by the authority's board to supplement the bond fund."

Emphasizing that February's missed payment was not a bond default, Booker said her analysis of the authority is based on the ability of the bond fund to withstand borrower defaults without defaulting on the bonds.

Booker added that the township had conveyed its concern over the use of the word "default," and that the ratings agency was reviewing its recent report.

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