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Council Approves Loan From EMU

Bridge Loan During Community Center Construction

May 6, 2014
by Jane Whitmore , Emmetsburg News

New Business -- Emmetsburg City Council, April 28:

Resolution 14-11 A Resolution Authorizing and Approving a Loan Agreement and Providing the Issuance of a $850,000 Community Center Pledge Revenue Note

At the public hearing on the Community Center Pledge Revenue Loan Agreement, citizens as part of the Committee for Responsible Government requested that the bridge loan agreement be put before a vote of the public. A petition for a public vote was presented to the City Clerk at the April 28 meeting.

Emmetsburg City Attorney Brian Thul informed the group that the proposal for the revenue loan agreement is exempt from referendum. Resolution 14-11 passed with all City Council members voting aye.

Public Hearing

Dave Nixon opened comments at the Public Hearing, speaking on behalf of Pete Hamilton, chair of the Committee for Responsible Government.

"The purpose of our appearance here tonight is the request from the Committee for Responsible Government (CRG) to bring the bridge loan agreement to the public a vote by the public via a special election," Nixon said.

CRG members, he said, voted unanimously to request that a special election be scheduled "for the purpose of asking the registered voters, the taxpayers of the City of Emmetsburg, to approve the loan."

Nixon stated that under the Iowa Code, citizens may petition the City Clerk to call a special election on that question

"The reasons we think a vote is in order are as follows:

"A large amount of public money has already been spent on the project in question without a vote of the citizens.

"The second reason is, the has increased significantly from the estimate that was provided in the business plan.

"Furthermore, in the fundraising brochure it was stated, 'all funding will be raised before construction begins.' Construction has begun and it is apparent the funding is not secure.

"The last item is, a loan made in the past by ECDC and guaranteed by the city and EMU is now costing the taxpayers of Emmetsburg $618,000 of principle, plus interest. No one was allowed to vote on that issue at the time. The CRG chair Hamilton and other members are present at the public hearing to present that request in person along with the petitions that bear more names of the city's registered voters than is required under the Code of Iowa," Nixon said.

Pete Hamilton read the petition:

The City of Emmetsburg proposes to construct a Community Center next to Five Island Lake. Emmetsburg City Council has approved almost $2.5 million in expenditures toward construction of the proposed Community Center. The Emmetsburg City Council has expressed its intention to enter into a loan agreement for approximately $850,000 toward the construction of the proposed Community Center. We, the undersigned eligible voters of Emmetsburg, Iowa, pursuant to section 384.24A of the Iowa Code, request that the question of entering into a loan agreement by the City of Emmetsburg for the project described above, be submitted to the voters of Emmetsburg at a special election on this issue.

Mayor Myrna Heddinger acknowledged receipt of the petition submitted by citizens of Emmetsburg.

"I'd be happy to research it further if you need further explanation, however the proposed loan documents, the proposed agreement that's in place, does not use taxpayer money," said City Attorney Brian Thul, addressing the room of residents. "It's not backed in any way by the full faith and credit of the taxpayers. Therefore, this proposal is exempt from any type of petition referendum, anything along those lines."

" I don't want to argue with an attorney," said Bertha Mathis, "but I do think you might be incorrect because in your resolution it states that you will follow Iowa Code 384.25 or 24. Therefore since you did the resolution, you stated in the resolution you'd follow the Code, therefore you have to follow the Code."

Thul acknowledged that the City is required to be legal and follow the Code.

"And the Code states that you will have a public election," Mathis said.

City Administrator John Bird said, "I will just tell you that the council's information if the proposal was to service this loan, to pay down this loan with property tax dollars, it absolutely would be subject to reverse referendum because it exceeds $400,000. So the Code of Iowa does provide for reverse referendum in a case like that."

Bird continued, "In this case, this loan there is no chance repayment of this loan will fall on the backs of property taxpayers. The first security is pledge payments over the next five years. If, in the event there are any defaults in the pledges, those defaults would be covered by the Municipal Utilities lowering their payment in lieu of taxes, which is an annual payment they make to the city and is based on the decatherms they move through the gas system and deliver to gas customers. So if, in fact, there are any defaults on the pledges over that period of time, each year we would look at those defaults and they would be covered by lowering that pilot payment to the city.

"Bill (Councilman Burdick), you asked where that money (PILOT payment) goes when those payments are made," continued Bird. "They go into the general fund. However, that should not be twisted to think that, okay, let's just say for the sake of this conversation the PILOT payment is reduced by $5,000 so the general fund is $5,000 short, so we're going to tax the people $5,000 more. You can't do that. There's such a think known as the E10 levy there's a statutory limit on the dollars that can be taxed per thousand by a city for general fund purposes. It's $8.10. This city has been at the $8.10 limit since long before I got here. A huge majority of the cities in the state of Iowa are at the $8.10 limit. If that PILOT payment is reduced because of defaults at any time during repayment of this loan that just means that the general fund will be short whatever that money is and the city is going to have to spend that much less in the general fund."

Bird concluded, "This is not subject to reverse referendum. We have the biggest bond firm in the state guiding us through this process. This is not subject to referendum."

Questions were posed on Emmetsburg Municipal Utilities cash reserves the source of the funds and whether or not these are taxpayers' funds. Bird stated that there are commonalities because natural gas customers are taxpayers, but there are also renters who do not pay taxes.

"Obviously you've researched this, other people have researched it. Did you take this to a commercial bank, Iowa Trust or any other bank, this loan idea, to borrow the money directly from a bank rather than another city entity? Was that ever discussed?" asked Pete Hamilton. "Would they do this loan the way it's set up?"

Bird answered, saying they had spoken with the bank and they would approve this type of loan, but the interest rate would be higher.

"Has EMU made other similar loans to any other entity or organization?" questioned Margay Grose.

Bird stated that EMU has previously made internal loans to the city.

Discussion then turned to funds held by EMU. Linda Koppie questioned how much EMU has in excess fund.

Bird answered that their total cash and investments, both reserved accounts and undesignated funds is $5,425,833.28. "Those funds are held in the funds for natural gas, water and sewer departments," he said.

"That would really be an EMU question, for the EMU board," said City Attorney Thul.

Bertha Mathis questioned, "Is there a guarantee coming from the city council that, number one they will stay within their budget for the Community Center, which they have not done at this point, and number two, that they would, as of June 30, 2014, that they would accept and start using GAAP, which is general accepted accounting principles? I know that you're not mandated by the state to do this, but I think it's the right thing to do."

Acknowledging Mayor Heddinger's statement that this has nothing to do with the loan question, Mathis added, "I know, but how do we know what you're spending if you're not doing good accounting?"

The Mayor said the city is audited every year.

"And every year there's a comment about GAAP accounting," said Mathis. "The issue is, how are you going to keep it within budget with an $850,000 bridge loan? You're already at $2.5 million, add another $850,000 to that and you're way over budget."

"This $850,000 is not an addition to the cost," said Bird. "This $850,000 is to be advanced so we can pay the contractors as they do the work. You don't add the $850,000 to the cost of the project. This is no different than improving your home and not having the money up front to do it. You go and borrow the money and you pay it back."

Bird continued, "For anyone to make a claim, which you have to Jessica O'Riley at Vision Iowa, that we have an $850,000 shortfall."

"I did not make that claim," Mathis interjected. "I said you were going for a bridge loan."

"I can show it to you," Bird said, referring to Bertha Mathis' e-mail to Jessica O'Riley . "It says $850,000 short fall. I know that for a fact because you listed shortfall as two words and it's actually one."

Bertha Mathis' e-mail to Jessica O'Riley at Vision Iowa was provided by Kristin Hanks, Project Manager/Counsel, Iowa Economic Development Authority:


"I was hoping never to have to contact your office again, the CAT Board. However, I would like the board to be aware that the city has a short fall of $850,000.00 and they are having a public hearing on the Community Center Bridge Loan on April 28th at 6:00pm

"The citizens here have started an organization to monitor city spending and projects. The group is Citizens for Responsible Government. This was formed because of the Community Center. The city would not build a smaller building and the majority of citizens feel that his building has to big of a foot print for Emmetsburg and will not be sustainable. The actions the city took in taking out 22 Burr Oak Trees and 22 Cedar Trees did not help their cause. They removed these trees prior to opening bids for the project. Currently the estimate for the building is around 3.3 million!!!! Well over the city's budget in the business plan.

"Again, I feel the city stretched their position when presenting to the board the support and funds that they have.

"I feel that the board should be aware of the impact that their decisions have in communities. Most of their decisions are for the betterment of the community, but not this time.

"Sincerely, Bertha Mathis"

City Administrator Bird stated, "For anybody to say this is an $850,000 shortfall on this project is, at the very least, disingenuous."

"That's not true," interjected Mathis.

"At the very least, disingenuous," Bird stressed. "For anybody to say that we have an $850,000 shortfall, let me say this. "If it was true that we have an $850,000 shortfall, one of two things would have to be true. One would be that we were going to accept pledges to be paid over multiple years, but we were not going to start construction until every last pledge payment was made. That was never the truth. That was not part of our application.

"The other one that would have to be true, would be that we never, ever meant to, never strove to, accept pledges over multiple years, that we were going to take cash and cash only. How many major improvement projects does anybody here know of and the Wellness Center would be a wonderful example and there are a few people in here that were very instrumental in going out and asking for pledges for that project.

"I don't care if it's the community center wellness center, churches, for goodness sake. When you go out and raise funding for big projects you do accept multi-year pledges because if you don't you are going to so drastically reduce the pool of potential donors you'll never get the project done.

"It was never ever told to anybody, it was never anticipated, that we would not accept multi-year pledges. We are happy to take them. We encourage anybody that hasn't made them to make them now. We are borrowing against those pledges.

"The professional fund-raiser has told us, two to three-percent is what we can anticipate in terms of default. Okay, so $850,000 that is pledged and not paid today and it's two-percent of that. We're talking about one-fourth of the average PILOT payment throughout the entire project, throughout the whole five years of repayment.

"Honestly, I think that this last wave of fund raising will probably generate enough additional pledges, whether they be cash or multi-year pledges, that we won't come anywhere near having to borrow this $850,000. We had to put a number in this resolution and in this note, a not-to-exceed number. I don't believe we'll ever come anywhere near that $850,000. These will be the last dollars in. We'll use all of the cash that we've received from pledges, whether it be from public entities or private entities, the Municipal Utilities' money will be the last in."

"Terminology," Bertha Mathis added. "A shortfall means that you do not have the funds right now. I did not say that you may not get them A shortfall, as of this day, right now, on that date, at this time, you do not have the money. You have pledges, unsecured notes."

Discussion continued on the cost of the Community Center project.

Pete Hamilton commented, "We were kind of talking at one time $1.9 million and I think we're considerably above that. Where do you think, all in all, where this project is going to end up in terms of the building that was purchased and torn down, all the things... I know the committee talked about $2.5 million at one time for everything."

Bird answered, "I?believe it's going to be just under $3 million if you include the purchase of the property back in 2008 or 2009 and obviously the demolition of the building. And those things were included in our application to the state."

Councilman Brian Campbell added, "Am I correct in understanding that this is going to be similar to a home equity loan that you draw it if you need it? Like if I?had a home equity loan or line of credit for my home for $100,000 and I needed $20,000 and I get $20,000. It doesn't mean they gave me $100,000 in my bank account."

Bird acknowledged, "It will be taken in draws as we need it... If pledges come in quicker or if we come into some money - someone bequests money to the Community Center - we can pay it off early."

Emmetsburg City Council voted unanimously to approve Resolution 14-11 authorizing and approving a loan agreement and providing the issuance of a $850,000 Community Center Pledge Revenue Note.



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