Council takes first step to bail out DDA bonds

By: Terry Oparka | Troy Times | Published June 26, 2013

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The Troy City Council authorized publication of the city’s intent to issue bonds to avoid default on existing Troy Downtown Development Authority bonds.

Under the plan that Troy City Manager Brian Kischnick rolled out to the Troy City Council at a June 17 meeting, the city would reissue $14 million in bonds and would allow up to a 2-mill tax levy on property in the DDA district as a last resort. The district is along Big Beaver, approximately half a mile west of Coolidge and just east of Rochester Road. 

“Default cannot be an option,” Kischnick said. “It’s a workable plan that solves the problem to pay debt incurred in the district. It utilizes tax increment financing to debt incurred in the district. We’re asking the council to back the bonds because the DDA can’t borrow the money.”

The improvements were funded by three series of bonds in 2001, 2002 and 2003, and include $24 million in roadway and streetscape improvements to Big Beaver and a portion of the parking garage at Somerset Collection North, as well as $13.7 million to finance a portion of the Troy Community Center.

The council voted 5-1 to publish the intent to issue the bonds. Mayor Pro Tem Wade Fleming was absent from the meeting, and Councilman Doug Tietz opposed the plan.

Tietz thanked the city manager for “having the guts to put forward a plan like this.”

“The premise of the plan is that folks in the future will spend money wisely. Looking at past history, I didn’t see that,” he said, noting that in the past, the DDA board spent money from the reserve fund. “I’m voting no,” Tietz said. “A wise spending history doesn’t bear out.”

The initial property value of the district in 1993 was more than $429 million, which peaked at just less than $700 million, with tax increment revenue of $271 million. However, the projected property value for 2013-14 is $422 million, with tax capture of $12 million.

The bailout plan calls for the city to issue $14 million in bonds backed by the city, extend the Troy DDA and tax capture to 2033, and exclude Kmart Headquarters, Bank of America and other designated properties from the tax increment finance plan, since they are valued at less than they were in 1993, which would change the formula for capturing tax increment values.

Also, the plan includes what Kischnick described as a safety net for the city that could provide up to a 2-mill tax levy, approved by the City Council, across the DDA district until all bonds were retired. No residential properties would be included.

The city of Troy has no financial obligation to service the current bonds, of which more than $17 million is currently owed. The bonds are currently rated junk bond status, making refinancing impossible. Tax increment values for 2014 are estimated to be $12.8 million and are expected to zero out in 2015.

Mayor Dane Slater, who by city charter is a member of the DDA board, said there would be no new projects in the district.

“We’re just interested in paying the debt,” Slater said.

Robert Bendzinski, municipal financial advisor, told the council that backing the bonds would not likely affect the city’s AAA credit rating.

When asked about the ability to sell $14 million worth of bonds, he said, “With a AAA rating, there’s an almost 100 percent confidence level unless something happens in the municipal bond market that’s unforeseen or unpredictable. We don’t see this as an issue.”

“The bonds would be backed by the city’s full faith and credit,” he said.

He added that the bond insurer would likely come after the city to recoup the funds if they defaulted. “There would be litigation. … I believe, personally, the insurance company would come after the DDA, possibly the city. It’s not going to be good.”

“None of us wants to see default,” Councilman Dave Henderson said. “It doesn’t look as perfect as could be, but it certainly addressed the situation.”

The DDA board unanimously approved the plan at the June 19 meeting. A public hearing is set for the July 8 City Council meeting. The council will consider the plan for approval at the Aug. 12 meeting.

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