Platte County, Missouri, bears no legal obligation to repay tax revenue shortfalls on a $32 million appropriation-backed industrial bond issue, a Missouri appellate court panel concluded in an opinion upholding a lower court decision.
Platte County leaders
The county said bond trustee UMB Bank NA’s demand that the shortfall be covered and its threat of litigation prompted its decision in November 2018 to
While appropriation pledges are subject to an annual decision by the sponsoring government, the trustee argued the financing agreement supporting the bond issue represented a legally enforceable promise to pay.
Platte County Circuit Court Judge James Van Amburg in a May 2019
The two sides laid out their positions in recent briefs and the Missouri Court of Appeals for the Western District heard arguments earlier this month.
“We find that the plain language of the Financing Agreement does not contain a promise by the County to pay for the shortfalls for the Zona Rosa Bonds. We affirm,” reads the opinion authored by Judge W. Douglas Thomson. The panel also included Judge Karen King Mitchell and Judge Anthony Rex Gabbert.
The commission never approved making a payment because it was not required to, and doing so would deplete the county’s reserve fund and require either a material reduction in core governmental services or a raise in taxes, county attorneys Todd Graves and Dane Martin of Graves Garrett LLC said in a statement after the Aug. 25 opinion was distributed.
“Since day one, the commission has kept every word of its promise regarding the Zona Rosa bonds,” Graves said. “The court was correct to reject the trustee’s attempts to impose a bondholder bailout on taxpayers by seeking to alter the terms of the agreement.”
Partial or full debt service payments have continued to be paid based on collections of the 1% sales tax dedicated to the bonds. A debt service payment of $724,750 in interest was paid in full June 1. No principal was due. The payment was made up of funds received from the district, but also a draw of $171,189.10 from the debt service reserve, the trustee reported in a June 5 notice.
The bonds traded last month at 48 cents on the dollar, according to data on the Municipal Securities Rulemaking Board’s EMMA site.
UMB
The trustee’s lawyers had argued in appellate court filings the lower court erred by ruling the financing agreement imposed only a moral obligation and argued the finance agreement pledge was legally enforceable after a review of county finances.
The county’s lawyers countered, “moral obligation financing is the creation of the municipal finance industry, not the legal system. The phrase moral obligation itself is a misnomer, because the arrangement does not impose any actual payment ‘obligation’ on the county.”
“The plain and ordinary meaning of the language used in these provisions supports the trial court’s judgment that the financing agreement does not contain a promise by the county to pay on the Zona Rosa Bonds,” reads the appellate opinion, noting the agreement “plainly provides that each year the County intends to budget for the appropriation amount which will be subject to the County Commission’s approval, which the County Commission may or may not provide.”
“There is no promise to pay expressed in any of these provisions. In fact, the provisions repeatedly state that the decision whether to pay or not is entirely up to the County Commission and provides directives to take in the event the County Commission does not approve the proposed appropriation,” reads the opinion.
The financing agreement with the special taxing districts in which the 1% tax is imposed includes a promise to pay but that does not extend to the county.
Moody’s Investors Service cut the county’s rating — then at Aa2 — to junk in September 2018 after learning of the commissioners’ comments and after the May ruling. Moody’s warned in a special report lease appropriation ratings could be at risk if the market saw a contagion effect. Moody’s rates the county Ba3 with a negative outlook.
The financing agreement that outlined repayment of the bonds issued in 2007 to refund 2003 debt sold to finance parking facilities at the Zona Rosa retail complex required the county to submit in its annual budget a debt service appropriation. The county warned it could not afford the expense that could reach $40 million to make good on the bonds that mature in 2032.
S&P Global Ratings stripped the Zona Rosa bonds of their investment-grade rating in September 2018 after county commissioners discussed at a public meeting their opposition to making up future shortfalls absent a long-term solution.
The situation has cast a pall over Missouri appropriation pledges, a popular structure in a state that imposes strict voter approval rules on GO borrowing. While market participants thought the financing agreement requirement argument a longshot, the pall is the result of the county’s willingness to renege on the pledge given the consequence that it lost its investment grade.
The bonds are not secured by a deed or mortgage and remedies in the event of a default are heavily influenced by judicial actions should a restructuring or bankruptcy be sought, according to the offering statement.
