20 Aug 2014
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Patch Instagram photo by toriesfitness_ct
Patch Instagram photo by toriesfitness_ct

South Windsor Town Council Split on 63-20 Corporations

Most councilors see value in the financing mechanisms, while several believe 63-20s are not in the best interests of the community.

South Windsor Town Council Split on 63-20 Corporations

While no decision was made at the special work session on Monday, the consensus was that the members of the Town Council, as well as residents in attendance, walked away with a greater understanding of 63-20 corporations.

The entities had come under increasing scrutiny in town after a 63-20 corporation was proposed to finance the construction of a $10.5 million recreation complex/ice skating rink back in October.

That project had come under fire for several reasons, including that it appeared that the town would construct and operate a skating rink that would be in competition with an existing business in the South Windsor Arena.

Even though that proposed project was taken off the table for discussion in January, as the projections did not seem viable, several town councilors still wanted to hear more about how 63-20 corporations work in the event that the town had other projects that would be better suited for the entities.

The town’s bond counsel, David Panico of Robinson & Cole, first provided an overview via a Powerpoint presentation of 63-20 corporations, which are non-profit corporations “that are organized under state law.”

The entities are used to finance the construction of buildings, including hospitals, courthouses and schools. Such entities are traditionally used to avoid statutory debt limitations and other restrictions, as well as take advantage of private-public partnerships.

For example, a town could create a 63-20 corporation to construct a firehouse. In that scenario, the 63-20 corporation would issue tax-exempt bonds to finance the project, while the town would lease the firehouse, typically for the duration of how long the bonds were outstanding.

Once the lease is up, the property - in this case the theoretical firehouse - would revert back to the town.

Though there are myriad factors to consider, the bonds would typically have an interest rate that is a notch below the town’s bond rating. So, in South Windsor’s case, because the town has a AA2 rating, the 63-20’s interest rate would be a AA3 rating, according to Panico. (Though other things like the duration of the lease and type of project could also factor into the interest rate.)

“Under the 63-20 model, the property financed is owned by the non-profit corporation while the bonds are outstanding, which may qualify it for other benefits not available to a municipally owned project,” Panico said during the presentation.

Both Panico and Town Attorney Dwight Johnson offered the opinion that, because the building would be used by the town, prevailing wage would likely apply in the construction of a 63-20 project.

In that case, prevailing wage could add up to 30 percent to the labor costs.

Johnson also offered the opinion that a state statute superseded a town ordinance requiring a referendum in the transfer of town property of over $25,000. Therefore, the town could enter into an arrangement with a 63-20 corporation without having to go to a referendum. All that would be required is a majority of the Town Council.

Later in the 3.5 hour meeting, consultant Dan Marsh said that the failure rate for 63-20 corporations is quite low, with most problems taking place during construction, if, for example, costs run higher than anticipated.

“But that could happen with or without a 63-20 corporation,” Marsh said.

Also a town could theoretically walk away from a lease - though that could affect the town’s bond rating by stopping payment on an existing obligation.

The town could exert control over how the 63-20 corporation is run through the articles of incorporation and bylaws, Panico said.

Most of the councilors, including Deputy Mayor Gary Bazzano, Kevin McCann, Jan Snyder, Keith Yagaloff and Cindy Beaulieu, said that they appreciated the presentation and that it provided additional insight into the financing mechanisms.

They did not, however, endorse any particular project for which a 63-20 corporation would be used.

Bazzano compared a 63-20 corporation to what the town currently does concerning fire trucks, which are leased at hundreds of thousands of dollars.

“I like the idea of 63-20s and I’m glad you came tonight,” Bazzano said.

Yagaloff was slightly more measured, saying that he supported the use of a 63-20 corporation provided that the timing and the project were right.

But two councilors - Dr. Saud Anwar and Ed Havens - were both critical of 63-20 corporations and questioned whether they had a place in the financing of South Windsor projects.

Anwar said that the people involved in the presentation - Johnson, Panico and consultant Dan Marsh - stood to gain if the town decided to ever use a 63-20 corporation.

But Town Manager Matthew Galligan said that Panico was not charging South Windsor for the presentation, Johnson is under retainer and Marsh was being compensated through a flat-fee grant that does not take into consideration how often the town utilizes his services.

Still, Anwar said that the public should be aware that just because a 63-20 corporation is a not-for-profit entity, that does not mean that people do not stand to substantially gain financially.

Anwar pressed Panico, asking what could go wrong with a 63-20 arrangement.

“The people have a right to know,” Anwar said.

Panico said that any concerns - such as requiring making 63-20 corporation’s meeting public - could be put in the articles of incorporation and bylaws by the town.

Havens said that the mechanisms were tainted by their association with the proposed recreation complex.

“It was a bad proposal. … The timing was terrible,” Havens said. “That killed 63-20s for some time.”

Mayor Tom Delnicki said that he was concerned that the Town Council could approve a multi-million dollar project without approving a referendum.

Several councilors dismissed that notion, however. Beaulieu said that town councilors were entrusted to put together a $96 million budget annually, as well as make frequent decisions concerning hundreds of thousands of dollars. None of which requires going to referendum.

The public, Beaulieu said, had an opportunity to voice its opinion when they voted for members of the town council, who were entrusted to lead the town. While she said she is in favor of referendums, Beaulieu said that they should not be used for every expenditure the town makes.

But Havens countered that if the projects are so good, then people will vote in favor of them at a referendum.

“We should never do anything unless the citizens do vote,” Havens said. “I haven’t heard one good thing about this kind of financing.”

Clarification: This article was modified to clarify what Town Councilor Cindy Beaulieu said concerning referendums.

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