An unpredictable economic picture is a challenge for government officials even under the best of circumstances. But the question of shortfalls on bonds issued by a third party can make that issue even more daunting as localities try to balance budgets.
Platte County was faced with such a circumstance regarding development at the Zona Rosa shopping district in north Kansas City, where parking garages had been financed by a series of bonds payable from a 1 percent sales tax in the district.
When sales tax revenue fell short of expectations, UMB Bank, which serves as the trustee for the bonds, argued that the county was responsible for making up the shortfall. County officials, facing long-term liability of millions, turned to Graves Garrett partners Todd Graves and Dane Martin for help.
“Even before this pandemic, retail operations were struggling because a lot of sales were shifting to the online marketplace. So were a lot of these shopping districts that were put in place,” Martin said. “They did projections based on retail growth that did not come true. It is questionable whether they would have come true anyway, but they certainly didn’t after things like Amazon started growing in prominence.”
The matter wound up before the Platte County Circuit Court and later the Missouri Court of Appeals Western District to determine who needed to make up the cash.
“This has significant implications for cities and counties and other political subdivisions across the state of Missouri,” said Graves. “It depends on the language in the documents, but generally speaking, if they do not want to back up those bonds, they are not legally obligated to.”
The courts agreed that the Platte County had no legal obligation under the bond agreement to make up the shortfall — a significant decision that likely saved citizens from a tax increase or a significant cut in services, the attorneys said.
“It was going to be up to $40 million in obligations for Platte County,” Graves said.
Martin said the two sides litigated issues related to language regarding the county’s role in the bonds.
“The one thing that we struggled with and that was a challenge in the case was that there is not a lot of clear case law that governs that issue,” he said. “Most entities feel like they have to pay because it affects their credit rating, so most just do it as a matter of course. In many ways, we were able to take language that exists in many similar arrangements, litigate that and get clarity at the trial court.”
Graves said he believes that, in the wake of economic upheaval brought on by the COVID-19 pandemic, this type of issue will become even more salient.
“This was before COVID that this litigation began,” he said. “I suspect with COVID that there are many other political subdivisions that are facing an even steeper hill than Platte County was, and they may want to follow the lead of Platte County.”
Added Martin: “A lot of times, it is a situation where people don’t know that they have a decision to make. They feel like they just have to pay it. One thing that this litigation clarified is that that’s not always the case.”
The municipal bond finance bar is a tight-knit group, Graves said.
“Many times, no one wants to step outside that,” he said. “We came in this as litigators, not as members of the municipal finance bar, so we’re willing to challenge the hierarchy. And in the past, I would say that the trustees and bondholders have bullied many municipalities and political subdivisions into paying when they weren’t required to. We’ve sort of broken that chokehold.”