VBT Board needs to come up with Plan B to pay the Visteon bonds

On April 2, the Van Buren Township Board of Trustees met with four attorneys, a CPA, and about ten residents in the audience for a work/study session on the refinancing of one of the Visteon bonds that now is callable.
Earlier the board had unanimously voted to pledge the township’s full faith and credit to help refinance the $17 million in bonds, which could save from $1.8 million to $2 million in interest payments for the township.
The township is expected to come up short on money for Visteon bond payments in 2018.
After much discussion, the board learned from the attorneys that the bonds will be harder to refinance unless the board puts down some cash — about $4 million was suggested — and comes up with Plan B, a way to pay the bonds if the TI (tax increment) money isn’t enough – such as a millage.
John Delaney said from the audience that the board will have to come up with a Plan C because voters are not going to approve a big millage for these bonds.
It is estimated by a township resident following the issue that the millage approved by voters to pay the bonds would have to be 5 or 6 mills.
Kaveh Kashef of Clark Hill law firm, the attorney who has been meeting with the board behind closed doors on the option of filing suit against Visteon on the bond issue, said the refinancing savings depends on the township’s bond rating, the interest rate, and whether the township contributes cash it has up front to push the potential deficiency to repay the bonds down the road.
“The board has to decide whether to move forward with the refinancing and whether it will be making a contribution,” Kashef explained.
Attorney Jim Crowley of Clark Hill said, “The township would be on the hook if the TI revenue is not sufficient.” He said the rating would be based on the township rating of A+ in June 2014.
“First the TI, then the township,” Crowley said of the entities responsible for the bond payments.
He said if the township contributed $4 million that would only save them $150,000 over the life of the bond to the final year 2032.
He said there are several hurdles between now and a successful bond sale. A disclosure was added in the official statement going through the township’s previous disclosures on the 2006 bonds and the LDFA bonds. The landfill revenue would have to be discussed, he said, along with the operating mill for the township and the public safety department that far exceeds its millage revenues.
Later, when the attorneys were asked what unseen things might adversely affect the bond refinancing, they were told if Wayne County goes into bankruptcy that would be bad for the bond sales.
Louis Orcutt of Fifth Third Securities said in the last four to five years there has been a heighted level of scrutiny by investors. The shortfall of revenues based on the lower amount of property tax coming from the former Visteon property could impact VBT’s rating.
“Refunding (refinancing) will help, but it won’t solve the problem,” Orcutt said. “We need to have answers to investors’ questions … some investors don’t care … some will want to talk to township officials to get more information.”
He said in the worse case the township rating could fall to a BBB.
Nathaniel Watson of The PFM Group said the savings would drop to $1.36 million if the rating went from A+ to BBB.
Orcutt said the 2006 Local Development Finance Authority (LDFA) bonds are callable April 1 and are now within the 90-day call limit. Then, these bonds are not callable for 10 years.
He said interest rates are very low, but the Fed could do anything to have those rates go up in the Third Quarter.
“You’re taking an interest rate risk if you wait,” said Watson. “Pay down at refunding or wait 10 years.”
Clerk Leon Wright said in 2010 the rates were upgraded to AA- and then downgraded in 2014 because the tax collection went down on the Visteon property.
Treasurer Sharry Budd said at first the board was told there would be $2.2 to $2.3 million in savings for refunding and now it’s lower.
“What’s going on?” Budd asked.
“Interest rates fluctuate every day,” Orcutt said. He said in October 2014 there was an all-time low interest rate for a day or two. “The savings have decreased now. There is no guarantee on savings.”
“It was $2 million at first and now it’s $1.8 million,” said Trustee Jeff Jahr.
“And it could go to $1.2 million to zero,” Watson said.
Trustee Jahr said there have been insinuations that there has been a delay by the board, “But there hasn’t been any delay because we couldn’t sell until yesterday.”
“Interest rates grew,” Watson said.
“We don’t want to give the impression that somebody didn’t move in time,” Jahr said.
“We based the full faith and credit of the township to save $2.2 million or $1.9 million and now there are additional contributions,” Jahr said. “By not adding money we’re jeopardizing refunding of the bond?”
“I don’t know,” Watson said.
Orcutt said, “By putting in a contribution now you’re telling investors you’re making a move … Investors feel it shows the township makes the hard decisions now … But we can refund without that… It shows investors a pro-active township … This is going to help the problem not solve the problem.”
Trustee Reggie Miller asked how they would get the story out to possible investors.
“This is a better story to tell the investors,” Orcutt said. “We put together a preliminary official statement and explain why there are shortfalls … then send it out to a broad base of investors.”
He said they had already discussed it internally and it would take a week to 10 days and the preliminary official statement goes out. A pricing date goes out to those they’ve solicited with a suggested interest rate. Then they raise or lower the interest rate. He said the pricing date can last two, three or four days … “You really don’t know.”
Trustee Miller asked Treasurer Budd if there is going to be a cash shortage if they take the $4 million out for the bonds.
“Supervisor Combs didn’t converse with the board about this,” Budd said. “I won’t answer that question.”
“Is $6 million better than $4 million?” Jahr asked. “What’s the level of the contribution? Where did the $4 million come from?”
“I just came up with that number,” Watson said.
“Out of thin air?” asked Jahr.
Jahr said the picture, as far as he sees it is: “The amount of revenue collected by the LDFA is not enough to pay the bonds in 2018. Four million dollars can kick the problem out to 2020. We have to address the serious nature of the shortfall … If we kept the money and paid the bonds we could kick it to 2020 or 2021 … There’s clearly a cost by not making that payment out front … Whatever money we can scrape together we can use … It’s like refunding a house mortgage. Take the kid’s college fund and plunk it down and the wife will have a fit … Saves a few dollars now, but in the overall scope…?”
“It’ll help in marketing the bonds,” Orcutt said.
“Plan B is not going to be pleasant,” Jahr said. “How are we going to pay?”
“Investors will ask that,” Watson said.
Orcutt said Plan B could be an additional levy or more cuts.
“It takes two or three or four years to do Plan B,” Orcutt said. “You should have Plan B in place.”
“We won’t be pushed to an emergency manager in 2020 or 2021,” Jahr said.
“If the board can come together on Plan B in six months, the rates will be up, but we can still call,” Jahr said.
Watson said, “The Plan should be in place before implementing [the refinancing], in my opinion.”
“I am little disappointed we’re here on April 2 discussing this,” Jahr said. “I’ve been trying to push this board to come up with a plan of action.”
“I disagree,” said Miller. “This board has been pushing.”
Jahr agreed other board members have been pushing.
“If when we were told in order to save $1.9 million to $2 million – last October – we needed a Plan B, we would have started planning,” Jahr said.
“I feel we have a false sense of security,” said Miller, asking Plante Moran representative Dave Helisek to talk about the township’s finances.
He said his firm is in the middle of the 2014 VBT audit, but he has the 2013 figures. He said there is an $8.7 million fund balance. But, with long-term debt and other past-employment benefits, that number drops to $390,000.
He said an $8 million liability is the actuarial amount required for the past-employment benefits, but the actual number is a lot larger.
He said most communities have a pretty large liability there and are not required by law to have that covered.
He said unfunded pensions and other post-employment benefits are going to be in next year’s audit and it’s going up because of pending retirements.
“It’s OK to pay as you go?” Miller asked. “With more retirements, then what?”
Helisek said the township is being able to pay as we go.
Treasurer Budd said the township just took it out of the general fund. She said there is $3.5 million designated for debt on the fire station and money designated for computers, sidewalks, and other projects.
“We can’t say we have $8 million,” Budd said, noting retirement costs are defined contributions. “They walk out the door and we’re done,” with MERS taking care of it.
Helisek said there is an unfunded liability of $17 million in the report the Deputy Treasurer wrote.
Trustee Phil Hart asked if insurance is required on the bonds and Orcutt said it wasn’t, but it would increase the rating to AA. He added under state law the savings have to exceed the cost of the insurance.
“If we change our health plan we can save money?” Clerk Wright asked, and he was told that was so.
“If the township puts in $4 million, is there a likelihood the township couldn’t pay its bills?” asked Supervisor Combs.
“I don’t know,” Helisek replied, adding, “If the landfill is paying the debt millage out to 2022-23…”
“Most of the money in investments would lose interest,” Budd said. “And, shortly we would have a cash shortage.”
Hart said he and Miller spoke to Orcutt at a conference and, “$4 million is a huge decision.”
“It’s up to the board,” Orcutt said. “We’re trying to find ways to help the situation for you.”
“Refinancing is a no-brainer,” Jahr said. “This board voted to refinance… Just recently we’ve been asked about Plan B.”
“How the township is going to deal with the deficit when it comes – Plan B,” said Orcutt, adding the township probably is not earning that much on its investments.
Clerk Wright said his concern is, “with disclosure there is no Plan B” there is a problem. The township could be in better situation with a Plan B.
“We just got into this six weeks ago,” Orcutt said. “Some of these difficulties have surfaced … as we start looking at this … the scab’s that much bigger right now.”
“I don’t want any surprises,” said Supervisor Combs.
“The only thing is, the township’s in Wayne County,” Orcutt pointed out. “If the county gets an emergency manager that will affect you.”
“You could pay a penalty for being in Wayne County,” Hart said.
“You’re dealing with institutional buyers and all of Southeast Michigan is Detroit to them,” Orcutt said. He said when Detroit announced bankruptcy his company had a bond sale in Saginaw County and they had to stop everything for three to four months.
“To spend $4 million to earn $100,000,” Budd said. “I don’t see this as being efficient.”
“That’s a possibility,” Watson said, correcting the number to $150,000. He said if the township kept the money and paid the bonds as they come up, the buyers will think the township might spend that money on something else that they need, not debt service.
“We set it aside,” Budd insisted.
“The only catastrophe to them is the non-payment of their bond,” said Wagner. “If they can get the money, to know it’s there, they’re happy.”
Members of the audience then asked questions, with Diane Madigan asking about the law suit proposed against Visteon.
“There have been plenty of closed sessions with LDFA and Kashef. You said it would be open,” Madigan said of information concerning the agreements.
“Visteon is not responding to us,” Combs said.
Delaney addressed Jahr about Visteon’s bankruptcy.
“We’re not discussing that today,” Combs stated.
Madigan said Combs had announced it would be discussed at this meeting. Madigan asked if there was no communication with Visteon and Combs said, “We are not discussing Visteon. I’m not saying anything about that.”
When she was pressed, Combs said, “I thought an announcement would be forthcoming.”