A Missouri judge agreed with Platte County that it’s not on the hook to repay $32 million of defaulted industrial development bonds despite the county's pledge to annually appropriate the funds needed to cover debt repayment.
While the junk-rated county prevailed in the legal case, several market participants said it’s not likely to restore the county’s credibility with rating agencies and investors because they give considerable weight to a moral or appropriation pledge and issuers that renege face steep penalties.
As some observers noted, an appropriation pledge is a contractual pledge to annually appropriate the needed funds, not a legal guarantee to make the payment if pledged revenues fall short.
“Under the Financing Agreement, Platte County agreed that, each year, its Auditor would propose an appropriation for consideration by the County Commission. The Agreement expressly stated that the Commission may make a ‘decision to appropriate or not to appropriate under this Agreement,’” the county’s attorneys said in a statement. “The Court found that Platte County never pledged to make any appropriations or make any payments on the bonds. Because the Platte County Auditor submitted its proposals each year, Platte County has fulfilled the terms of its agreement.”
The decision still casts a pall over Missouri appropriation pledges and potentially could have a broader ripple effectelsewhere.
The financing agreement that outlines repayment of the bonds issued in 2007 to refund 2003 debt sold to finance parking facilities at the Zona Rosa retail complex in suburban Kansas City requires the county submit in its annual budget a debt service appropriation.
“There is no promise or requirement in the financing agreement that the county commission must accept the auditor’s proposed budget and appropriate for a potential payment,” Platte County Circuit Court Judge James Van Amburg
The finance agreement “recognizes that the county commission may decide each year whether to appropriate or not to appropriate for a potential payment on the Zona Rosa bonds,” according to the judgment, which was issued Thursday but not distributed until Friday. “Under the terms of financing agreement, Platte County is not liable on the bonds issued by the Development Authority.”
The county sued UMB last year after receiving a demand to make up a $765,000 2018 shortfall in pledged tax revenues, saying it believed the trustee appeared to be moving to take legal action. The county warned it could not afford the expense that could reach $40 million. The bonds mature in 2032.
UMB said Friday it was considering its options.
“The trustee will post further information notices on EMMA, continue to work with counsel to explore options, and keep working in the best interest of bondholders,” UMB spokeswoman Kaele Palmer said in a statement that referenced material event notice filings on the Municipal Securities Rulemaking Board’s EMMA site.
The county’s lawyers trumpeted the ruling.
“The commission’s lawsuit has saved Platte County taxpayers tens of millions of dollars,” Todd Graves, an attorney with Graves Garrett LLC who represented the county along with Jennifer Donnelli, said in a statement. “The court was correct to reject the trustee’s effort to impose a bondholder bailout on taxpayers.”
The Zona Rosa bonds will continue to be paid using the dedicated 1% sales tax in Zona Rosa, Graves said. That revenue doesn't cover debt service. The annual appropriation will continue to be submitted in the budget but in the near term the county is not expected to cover shortfalls.
The first default on the bonds occurred on Dec. 1.
UMB attorneys from Spencer Fane LLP argued that any judgment should fall in its favor based on the contractual language in the financing agreement.
“Platte County attempts to run from its prior admissions as to the requirements of the financing agreement,” citing county financial documents that acknowledge it “has agreed to appropriate the annual debt service payment.”
In filings submitted to the court, the county’s attorneys argued “there is no promise in the financing agreement that Platte County ‘shall’ or ‘will’ pay any funds that are appropriated” and they accused the trustee of trying to “rewrite the financing agreement to require Platte County to appropriate and pay any shortfall each year.”
The county said such an obligation would raise the bonds to the level of a general obligation pledge and that requires voter approval under the state constitution. The county had told the judge that a ruling in its favor would mark “the first step to restoring its credit rating.”
Moody’s Investors Service cut the county’s rating to junk last year after commissioners indicated they wouldn't honor the Zona Rosa pledge.
“I don’t know that that outcome was in doubt. It’s not going to get the county’s GO rating back, however,” Matt Fabian and Lisa Washburn of Municipal Market Analytics said in an email responding to questions. “This lawsuit shows how appropriate the GO downgrade was. No investment grade credit would file litigation of this type, or disregard bond market expectations so flagrantly. It’s a county government that cannot be trusted, and so it deserves a non-investment grade rating.”
While the ruling doesn’t remove all the value of an appropriation pledge in Missouri, it does hurt the value. Platte County is the ninth local Missouri appropriation bond to become impaired or default in the last decade.
“It’s hard to see rating agencies and investors placing much faith in a community tapping its tax base in the future to pay for a failed project when they have a legal out no matter what they say at the time of issuance,” Fabian and Washburn said.
The decision also could cast a wider net by calling into the value of an appropriation pledge more broadly, but MMA sees a “difference when the pledge is for an essential government project vs a private economic development project.”
MMA also suggested the state could take action. “For the protection of state investors, the state should ban cities and counties from using an appropriation security pledge to make it seem like a bond is backed by something more than project revenues. Misrepresenting effective security is not a good practice,” Fabian and Washburn said.
One buyside source said he too was not surprised by the ruling but given the county’s unwillingness to pay when it has the ability to do so will leave bond investors scratching their heads. “I, for one, will pass on most issues out of Missouri,” the source said.
Under the financing agreement, the Zona Rosa bonds are payable from the 1% sales tax in Zona Rosa. 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.
S&P stripped the Zona Rosa bonds of their investment grade rating last September after county commissioners discussed at a public meeting their opposition to making up future shortfalls absent a long-term solution.
Moody’s Investors Service followed later in the month by cutting the county’s then Aa2 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 county's lack of willingness to honor its intentions under the financing agreement with the Industrial Development Authority represents a lack of willingness to pay on an obligation that supported debt issued in the capital markets,” Moody’s said in its report.
The bonds traded in mid-May at about 54 to 55 cents on the dollar, according to EMMA data. No trades were observed Friday. About $29 million remains outstanding.
