Jul 28, 2014

Weston's Town Debt SNAFU

The law suit the Weston selectmen filed against Harvard University this past March obscures the Town’s eight years of squandering taxpayers’ money on the failed purchase of the 62.5 acre Case Estates property, which had been approved by unanimous vote at the November 2006 Special Town Meeting.

Shortly thereafter, the Town issued $6 million of long term bonds for the Community Preservation Act (CPA) fund.  Then in 2010, the Town issued another $5.3 million of long term bonds for its general fund.  These bonds were intended to fund separate closings on different parcels of the Case Estates property.  Each closing was cancelled following the discovery of soil contamination but both sets of bonds remain outstanding as the Town’s debt obligations.

The bonds’ debt service (principal and interest payments) plus IRS and state penalties for illegal arbitrage activity, has now accumulated to over $4.8 million, even after deducting the modest amount of interest earned on those idle balances.  Because the debt service on these bonds was voted to be exempt from the spending limits imposed by Proposition 2½ or otherwise not subject to those limits, the Town’s borrowing-and-spending appetite has not been diminished one whit to offset this hit to taxpayers’ wallets.

For the $6 million Case Estate bonds languishing in the Town’s Community Preservation Act (CPA) fund, debt service is paid for the most part out of the “CPA” surcharges on Weston residents’ property tax bills, and will amount to almost $444,000 as the largest line item expenditure from the CPA fund in Fiscal Year 2015.  The exempt debt service for the $5.3 million Case Estate bonds sitting in the Town’s general fund will cost over $507,000 in Fiscal Year 2015 as part of our regular property taxes.

Whether or not the Town’s law suit against Harvard prevails, Weston taxpayers will pay about $10 million in future debt service if the bonds are allowed to run full term, which will not be until February 2025 for the general fund bonds and December 2026 for the CPA fund bonds.  In the event the Town’s law suit fails and the Town then tries to minimize this future expense by paying off the bonds at the earliest “call” dates the bonds’ terms stipulate, the Town would still be obligated to pay debt service on the CPA fund bonds until the end of this year and on the general fund bonds until February 2019.

There appears to be an unsettled question whether the CPA fund bonds can legally be paid off at all because of the requirements of the state’s Community Preservation Act.  Thus the Town of Weston finds itself on a dubious cutting edge of Massachusetts municipal law—financing a restricted fund for a purpose that very well may have been extinguished, leaving no other legal use for the money.  That puzzle may be compounded by the Town’s law suit against Harvard, which seems likely to stall any disposition of the bonds for years, except maybe to pay legal fees.            

The law suit at least acknowledges this wastefulness by accusing Harvard of “causing the Town to sustain damages, including but not limited to carrying costs on the substantial borrowing which was necessitated so that the Town would have sufficient funds available to cover the purchase price. . .”  However Selectman Michael Harrity has not even admitted what the law suit claims.  He absurdly describes the debt service on the bonds as a “prepayment.”

So what is it—damages as charged in the law suit or prepayments as Harrity spins to Weston residents?  For the debt service to be anything remotely like a prepayment, the Town will need to prevail totally with its law suit to force the purchase on its terms.  The Town’s legal counsel, Kopelman & Paige, asserts that the Town has a strong case.  That firm seems to have a fine reputation as a specialist in municipal law with only a handful of known unhappy town clients but litigation expertise may well be another matter, particularly when the target is Harvard University.  Did Selectman Harrity bother to get a second opinion as Selectman-candidate Isabella Jancourtz, an attorney, has suggested?

What should be particularly puzzling to Weston taxpayers, however, is why the Town issued the bonds at all.  Both in 2006 and 2010, the bonds were issued just days in advance of the results of soil contamination tests becoming available.  In both cases, the findings of contamination caused the closings to be cancelled.  If it was deemed prudent to order the tests in the first place, what sort of mindless due diligence would skip waiting for the results to be revealed before committing the Town to long term debt obligations?

Could the Town have avoided this self-inflicted expense with short-term bridge financing until the results were delivered?  And why was this mistake made twice—in 2006 and then again in 2010?  These are questions Harvard may well ask if this law suit ever gets to a discussion of who, Harvard or the Town, is really to blame for these damages.

Aggressive use of so-called “excluded debt” has no doubt helped Weston reach the top spot as the Massachusetts town with the highest average tax bill.  The Town’s debt is in plain sight, laid out in the operating budget as well as in the debt schedules listed in Appendix 1 of the warrant book mailed to every household in advance of town meeting.  In Fiscal Year 2015, total exempt debt service (net of state reimbursement) of $7.2 million is projected to increase the Town’s budgeted spending by 10.4% over the total operating appropriations permitted by Proposition 2½.

However, because total exempt debt service is the creeping year-by-year accumulation of a debt service exclusion here and another debt service exclusion there, such piecemeal approvals seem rather more affordable and benign when they appear on the town election ballot.  Would we instead approve its financial equivalent, an annual budget override of Proposition 2½ of $7.2 million?

In its report in this year’s warrant book, the Finance Committee has included for the first time a bar chart showing the Town’s total debt year-by-year from Fiscal Year 1999 to Fiscal Year 2032.  After projecting fully bonded projects for the new Field School and Police Station, the Town’s total debt is shown peaking in Fiscal Year 2017 at around $94 million.

It is important to recognize that the forecasted decline on the far side of this mountain of debt will come from principal and interest payments financed by our property taxes.  It is also important to recognize that other expensive projects just over the horizon are not included in this graph, such as later phases of the Greater Case Campus Plan, which may push this peak to ever higher altitudes in later years.    

Underlying the justification for this mountain of debt are investment banker ratios offered by the selectmen to demonstrate the capacity of Weston residents to afford such high levels of borrowing and spending.  These ratios, however, eventually come to rest on residential real estate valuations.  Whether or not these valuations in Weston are in a bubble, there can be no denying that such valuations are high compared with other towns.

The practical question that should be discussed publicly is whether our town government is borrowing and spending too much relative to household income and not just property valuations.  That discussion should be initiated and led by our selectmen.

Bill Sandalls

Wood Ridge Circle               

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