Monday, April 25, 2011

Is Carmel a Municipal Enron That Is Heading Toward Collapse?; Carmel's Debt More Than Doubles During Last Four Years

Many Indianapolis Republicans complain that Mayor Greg Ballard turned out not to be the fiscal conservative he claimed to be during the 2007 campaign.  Ballard has taken corporate welfare to a new level and increased taxes and fees more than 100 times.

Carmel Mayor Jim Brainard
But as bad as Ballard has been for Indianapolis fiscal conservatives, Mayor Jim Brainard has been worse for our neighbor to the north, Carmel.  Brainard is seeking a fifth term.  Brainard's tenure has been marked by spending millions of dollars of taxpayer money for private business development.  During his tenure the city has seen a number of projects started, probably the most notable being the Palladium, one of the most elaborate performance halls in the country.  Awhile back, Brainard fessed up that the building wouldn't pay for itself, that property tax revenue would have to be tapped to pay for the operation of the building. 

As two primary opponents, City Councilor John Accetturo and businessman Marnin Spigelman, have argued, Carmel's success has been built on a foundation of debt.  Much of the debt of the Carmel has been assumed by the Carmel Redevelopment Commission which governs the 30 plus TIF districts in the City.  .

Carmel Mayoral Candidate
Marnin Spigelman
Of course, these redevelopment commissions are used by cities to get around the constitutional limit on municipal debt.  According to Spigelman the city's debt, including that owed by the Redevelopment Commission, has more than doubled over the past four years and will cost Carmel taxpayers more than a billion dollars in interest.  Spigelman explains it in a publication on his website:
In the Mayoral Debate, on March 29th, I made mention of the fact that Carmel has debt of nearly one billion dollars inclusive of long term interest. That is fact. Does it mean that if we would pay that debt off in full today that would be the total? The answer is, of course not. That payoff, if made today, would be approximately $550 million dollars. However, interest is accrued on a daily basis until the entire original debt is discharged. Therefore, any finance charges must ultimately be added to the base amount to determine the actual overall outlay for said debt.

Accounting principles show that interest must be capitalized to the base cost of the project until such time it is completed and ready for use. There was certainly quite a bit of bond and loan interest accrued from 2005 to the end of 2010 that was deferred, but earned. However, the first installment payable just on the original bond, for $6.9 million, did not occur until January 2011. There were also payments made on those loans secured in banks, such as Regions Bank, prior to completion of the Palladium enhancements. After project completion it appears that the accounting for interest is viewed as an expense item. See,

The City of Carmel, the Carmel Redevelopment Commission, or for that matter most municipalities, do not have that kind of surplus ready cash to be able to pay off all of their debt. That surely is the case in Carmel where we have had two consecutive years of operating deficits. That means, in the end result, when full repayment is tendered then the ultimate cost of any financed project must include all accrued interest paid by taxpayer money to satisfy the requirements payable to bond holders, or banks.

Carmel's Palladium
An example would be the initial $80 million bond issued for the Palladium. According to the Clerk-Treasurers office, if that bond goes full term to the year 2033, the total repayment would be $173 million dollars. The chance for that bond to be called before its maturity, given our burgeoning overall debt, is very unlikely. So, the taxpayers of Carmel will have to pay the full financed amount including interest, in the long run, which must be considered as part of the actual end cost for that building. It cannot simply be ignored or covered up as inconsequential.
Carmel is a municipality, which is not the same as an individual buying, for example, his own home. Carmel is not filing income tax returns, and is unable to write off the interest on any obligation. That interest is hard cash that comes out of a specific fund, usually the General Fund, or from Carmel Redevelopment business tax increment funds, to pay for the required financing costs to satisfy the terms of the bond or loan. Not so with an individual who is able to take advantage of a tax deduction for the interest that they pay through the years. That makes that interest for Carmel more significant when it comes to considering the overall costs of the debt.

So when I say that the City has one billion dollars in debt, what that means is that notwithstanding some revenue windfall, of enormous proportion, which could create a large cash surplus in the General Fund or CRC accounts to immediately pay off the debt, all projected interest will ultimately get paid to the creditors. As aforementioned, that must be included in the final cost paid by the taxpayers for the project.

To further put it into perspective, during the last election season the City had a net debt of approximately $300 million, excluding interest (with interest about $450 million), more or less, but now it is $550 million, excluding interest (with interest conservatively about $1 billion), principally because of the over the top liberal spending by the Mayor for his visionary projects. Had he kept to his promises of costs, within reasonable boundaries, then we would not be in a troublesome financial situation. It doesn’t take a professional planner or accountant to understand the ultimate costs for project expenditures principally because it is usually well defined in long term projections, or in actual loan documents.

The further danger of another term by the current Mayor is simply that with a liberal borrowing and spending policy the debt could increase even more dramatically, including the long term ultimate costs. Are we in Carmel willing to take that risk in the next four years after we have already seen the writing on the wall in the last six years?
Carmel City Councilor John Accetturo
Over on his campaign website, John Accetturo has a fact sheet which deals with Carmel's financial problems.
 11. Carmel Redevelopment Commission sold the energy center for $5.5M in a three way deal and bought it back the same day for $16.3M to be paid over a 25 year period. These numbers are according to public documents in the County Assessor’s office.

8. The most meaningless number Mayor Brainard is giving out concerning Carmel’s fiscal health is the $50M he says Carmel has in the bank.

7. In 2010 the Carmel Redevelopment Commission borrowed $37,500,000 at a 7.81% interest rate and $2,500,000 at a 9.25% interest rate. Why are they paying these high rates if the City has an AA+ bond rating like Mayor Brainard claims?

6. The Carmel Redevelopment Commission could have given excess tax money to the Carmel Clay School District if it had not spent it all on the Performing Arts Complex. This would have reduced the money needed in the School Tax referendum.

5. Over $1M of taxpayer money was paid to a single lawyer to find loopholes in state statutes so the Mayor could have his Redevelopment Commission unilaterally borrow over $100M with no approval by the City Council.

4. The exact cost of the Palladium and the Performing Arts Complex is unknown to me, a member of the Carmel City Council.

3. It is known that a $80M bond was approved to build the Performing Arts Complex by a prior City Council, and a document I have from the Carmel Redevelopment Commission indicates that another $97.8M was borrowed through third party finance agreements.

2. The Carmel City Council has voted twice to provide a total of $4M in taxpayer money to The Center for the Performing Arts, Inc. to subsidize the operation of the PAC Complex.

1. There is no contract in place between the City and The Center for The Performing Arts, Inc., who is operating the Performing Arts Complex.
Over the weekend I watched "The Smartest Guys In the Room," a documentary about the collapse of Enron. Enron for years was viewed as one of the most successful, innovative companies in the world.  But it was all smoke and mirrors.  Enron executives' true expertise was the use of accounting tricks to make the numbers look good to investors.   One trick, that I'm sure would sound familiar to Accetturo and Spigelman, was Enron's use of subsidiaries to hide debt on the balance sheet.  That's exactly what the City of Carmel is doing with the Carmel Redevelopment Commission.

Unfortunately the problems with Enron didn't become apparent before it was too late for many people to get off the sinking ship.   Accetturo and Spigelman are both sounding the alarm about Carmel's Enron-like fiscal status. Will Carmel voters heed the warming?

To get information about the three candidates, click on the below three links:

John Accetturo Website

Mayor Jim Brainard Website

Marnin Spigelman Website


Gary R. Welsh said...

Brainard is blessed by his two opponents, neither of whom are running credible campaigns and are only dividing the opposition vote.

american patriot said...

30 TIF districts for 18 square miles seems a tad too high, especially when compared to California's 425 TIFs for its 163,700 square miles.

I can understand the poor ignorant schmuks in Speedway getting bamboozled by their redevelopment commission, but Carmel's per capita income is almost double the state's average, I would expect more open minded take charge business owners to question the spending habits and ask questions.

Cato said...

Here's the thing: after all that spending, Carmel is gorgeous and far more easier to navigate than it was. After all of Indy's spending, the neighborhoods are dumps, and still nobody goes Downtown unless they have to be there.

Carmel is now the center if the metro area, and people willingly go there.

If you're going to blow money, which governments seem bound to do, at least get something for it. I'm impressed with what Carmel has done with that money. They've made improvements that better the city for all of its residents.

Indy needs to follow Carmel's lead and make Keystone Carmel-grade from 96th St. to I-70.

Nicolas Martin said...

Branard's opponents aren't his major blessing; the irresponsible voters of Carmel are. Let them eat concerts.

Nicolas Martin said...

In one post Cato excoriates government, and in the next post he celebrates it. Some introspection and reading might help in developing a coherent political philosophy.

Government buys nice things that make people happy. It buys new roads, new libraries, new parks. But the rub comes later, when those gems need to be maintained. There is no money in the kitty with the accrued debt.

Last summer I took my daughter to a Carmel park and noticed that in the central grassy play area was covered with clover and bees. I called Carmel Parks & Rec and was told that the system didn't have the money to spray herbicide on the clover due to "budget cuts."

Politicians get votes by plying voters with glitzy new gifts, but not for boring infrastructure works. It's the oldest trick in the political bag, Brainard knows how to play it, and the Carmel voters fall for it.

Cato said...

"In one post Cato excoriates government, and in the next post he celebrates it. Some introspection and reading might help in developing a coherent political philosophy."

Nick, understanding the great minds is not accomplished at a rush. Reread.