Glendale Budget – Inter-Fund Loan Balance Disappears

The Glendale City Council approved the upcoming budget with a 5-2 vote. It’s a “balanced budget”, soon to be flashed around like a badge of honor in upcoming re-election bids by at least two of the people that voted for it.

The major component of the current budget strategy involved removing, from the liability side, $39M of loans made from enterprise funds to pay the NHL. Remove does NOT mean repay.

Enterprise funds are largely financed by fees paid by Glendale citizens for water, sanitation, and the like. Money was borrowed from these funds because of a deficient general fund at the time the NHL payment was due.

The result of this change is that the funds will potentially be misused to rescue the general fund balance. If the health of those fee based funds suffers, the possibility of fee hikes to Glendale citizens is real.

Accounting Is An Art

Tom Duensing

Tom Duensing

During the March 17 Budget Workshop, Glendale Director of Finance and Technology, Tom Duensing, recommended a nifty accounting trick to immediately jack up the sagging bottom line of the Glendale budget and “eliminate” $39M of “crushing sports debt” bond rating agencies love to point out.

The trick involved eliminating the repayment process of money that had been “borrowed” from unrelated City funds to pay the NHL. The same repayment process used to reassure Glendale citizens, some of whom objected to ANY expenditure that was “hockey related”, that all was well.

At 2:04:30 in the workshop video, Councilmember Tolmachoff asks Duensing for clarification:

Mr. Duensing, now the way I understand it is basically this would remove the obligation because it’s no longer classified as a loan therefore no longer an obligation, it can’t be recorded anywhere that it’s an obligation or debt of the City.

Duensing replies in the affirmative and CM Tolmachoff continues:

So, basically in order for the money to be paid back to the enterprise fund you would need, because it’s a 22 year amortization remaining on the loan, you would need a commitment every year for 22 years from a council that far into the future in order for the enterprise fund to be made whole?

Duensing replies in the affirmative.

Loan Millions To Your Kids

At 2:06:43 in the workshop video, Mayor Weiers works with Duensing to clarify exactly what this $39M transaction means:

What you’re proposing would be, in essence, sort of like a kid going to their parents and saying ‘I want to borrow some money’ and the parents saying ‘Okay you gotta pay me back, but pay me back when you can pay me back.’ Is that sort of what you’re saying?

Duensing replies in the affirmative.

What About Record Keeping?

At 2:07:33 in the workshop video, CM Sherwood asks Duensing to clarify:

So, where do we keep track, then, on the books that balance owed to the fund balance, I’m sorry, to the enterprise fund?

Duensing answers “What this transaction does is completely takes it off (the books).”

The discussion goes back and forth a bit, it’s worth watching, with the end statement from Duensing being (as far as when to stop repaying) “We would never know.”

Payments Optional

There’s an interesting exchange at the end around 2:16:44 in the workshop video, where the mayor and CM Tolmachoff have a fun chat.

Mayor:

With your (Duensing) proposal, the money is still being paid back, it’s just being listed differently. That’s the only difference.

Duensing answers in the affirmative “That’s correct.” In fact, that’s absolutely NOT correct, Mr. Duensing had already made it perfectly clear repayment was completely optional.

CM Tolmachoff, laughingly:

I’ve made loans to people who I told to pay me when you can and those are the ones that don’t usually pay me back

That’s right, over thirty nine million dollars advanced from enterprise funds to pay the NHL simply disappear into a cloud of budget pencil eraser dust.

How did the City end up in a $39M now invisible hole? What were the original plans for repayment that were dismissed with the new budget?

The First $25 Million

In 2010, The National Hockey League (NHL) owned the Phoenix Coyotes. In May, 2010, they requested a $25 million pledge from the City of Glendale to manage the City owned arena with the Coyotes as the anchor tenant.

The Glendale City Council unanimously approved “Resolution Number 4377 New Series” during the May 11, 2010 meeting.

City Manager Ed Beasley stated the money:

…was not to pay operating losses for the NHL. This is a fee to operate the arena and maintain the team in the unlikely event that a satisfactory ownership structure is not completed by the end of the summer.

The minutes of that meeting contain:

Councilmember Clark asked for clarification and assurance that no tax payer dollars will be used for this particular financial mechanism. Mr. Lynch stated that from the beginning of the process, they have tried to utilize different financing mechanisms simply because they have independent revenue sources that will not affect the tax payer.

Mr. Lynch had worked for Glendale from 1989 to October 2009. He retired as the Glendale’s Chief Financial Officer and returned to work for Glendale the next day as a consultant.

Community Facilities District

The statement about independent revenue sources were related to the establishment of a community facilities district (CFD) tied to the geographical area surrounding the city owned arena. The implication was that revenue from the district most affected by the success of the arena would cover the potential $25M expenditure.

MAGICMONEYMAKERDiscussion of establishing a CFD began when Jerry Reinsdorf was negotiating with the City and it looked like Glendale was going to have to come up with $65M to help fund that deal. A proposal for a special funding district near the arena began, one in which commercial landowners would charge parking fees and finance bonds.

On a voluntary basis.

Under the Reinsdorf proposal, Glendale would also be responsible for depositing $25M (a now familiar number) in a reserve fund to protect the Reinsdorf group if the club remained unprofitable after five years (another familiar number) at which time Reinsdorf could sell the team. Glendale would, of course, have the right of first refusal if they could find a buyer for the Coyotes at that time.

Discussion of the importance of the proposed CFD to an eventual Coyotes deal is within the minutes of the April 13, 2010 City Council meeting. In that meeting, Deputy City Manager Jim Colson:

The CFD will collect revenues from new user driven sources and are directly generated by activities at the arena and the surrounding district. He noted that under this proposal the CFD is obligated to fund $65 million to the NHL over the period of three years and a $25 million operating reserve account with a cap of $100 million and 7 years.

Unfortunately, the CFD to fund those activities was never established.

Thinking logically, one might question the reasoning of the Council’s decision based on hope that the surrounding community would voluntarily decide paying some of their money into a fund would be a great idea.

City Council Approves Deal With NHL

The Council, none of whom remain as elected officials in Glendale, unanimously approved the plan to pay the NHL $25M.

On May 20, 2010, the city executed an agreement with the NHL/Coyotes Newco that allowed Coyotes Newco to manage and operate the Jobing.com arena for the 2010-11 season. Under that agreement, the fee to be paid by the city to Coyotes Newco for operating and maintaining the arena was “actual cash losses” not to exceed $25 million.

Because there was no CFD established, the money to pay the NHL had to come from somewhere else.

Raid The Enterprise Funds

A June 12, 2012 AZ Central story gives a good synopsis of the history of this debt and the expectations for the “utility funds” to be repaid on a regular schedule. Rather than repeat all the detail from that story:

  • The first $25M payment to the NHL was funded from landfill and sanitation funds
  • The second $25M payment ($5M is still unpaid) was funded from three separate funds:
    • $15M from the water and sewer enterprise fund
    • $5M from the technology and vehicle replacement general fund
    • $5M come from the general fund
Charlie Brown (Charles Schultz)

Charlie Brown (Charles Schultz)

Despite a still non-existent CFD, on May 10, 2011, the Council (none of whom remain as elected officials in Glendale) decided to give the NHL another $25M payment, this time knowing full well that taxpayer money had already been used to fund the first payment.

Interestingly, it was a records request from Cave Creek designed to determine the status of the payment to the NHL that triggered the interest of Mayor Scruggs in the source of the funds for the first payment.

The vote this time was 5-2 instead of unanimous.

Despite the prior $25M coming from enterprise funds, the Council somehow believed that the second $25M would come from the general fund, a more normal way of financing such an arrangement. It will be different THIS time!

It wasn’t… once again the enterprise funds were raided for the cash to pay the NHL.

There’s still $5M outstanding, it’s actually sitting on the budget including the interest it earned while sitting in escrow.

So What?

The people that voted for the budget also voted to rescind the arena management agreement. Most of the people that voted for the budget are staunchly anti-Coyotes, although they contend otherwise.

Transparency is a big buzzword in Glendale lately with overt and veiled accusations of back room machinations running the City.

That begs the question… If transparency is actually important to the Glendale City Council, why would they support a move that makes THEM look good (balanced budget) while removing any hope of transparency for a fiduciary responsibility of the City to repay their loan to their fee based enterprise funds?

Breaking promises to businesses and, now, taxpayers is becoming a “thing” for the City Council.

If the Council was actually trying to benefit their City with some reduction of the payments due to the enterprise funds, why not simply restructure the loans to require little or no payment for a couple years rather than using an accounting trick to make the liability disappear?

Look at the people coming up for re-election and try to decide which of them will be more than happy to point to a budget with a miraculous $39M windfall, one that NOBODY will remember where it came from.

Trackbacks

  1. […] interesting sidebar to this upgrade process relates to the inter-fund loan balance that was dismissed in the version of the budget being […]