While three ordinances related to Pagosa Springs’ April 8 municipal election passed on second reading with very little discussion or debate at Tuesday night’s town council meeting, the rec center issue continued to generate some buzz.
As soon as town manager David Mitchem read the title for Ordinance 804, Mayor Ross Aragon said he would entertain a motion to approve it, but before anyone could make such a motion, council member Darrel Cotton asked, “Mr. Mayor, can we have some discussion?”
When the Mayor gave him the go-ahead, Cotton said, “Maybe I’m wrong, but in the ballot language it says ten percent of the principal amount may be used to fund a reserve. I took that to mean ten percent of the eighteen million dollars. I believe now that it is in addition to the eighteen million. That’s another 1.7 million, if I’m reading things right. Someone correct me if I’m wrong.”
However, Section 7 of Ordinance 804 spelled out the language that will appear on the ballot in April. The first part of the ballot issue asked, “Shall the Town of Pagosa Springs taxes be increased $1,950,000 (first full fiscal year dollar increase) annually and shall the town of Pagosa Springs debt be increased by an amount not to exceed $18,000,000, with a maximum repayment cost of $44,895,000?”
Another section of the ballot question specifically stated, “Not more that 10% of the aggregate principal amount of the bonds may be used to fund a reserve or reserves to secure the payment of the bonds.”
During a special work session held in November of last year, Mark Weiler, one of the advocates for the rec center proposal, gave a presentation to town council outlining how the financing would work for the rec center.
“The building itself will cost twelve million dollars,” Weiler explained, “with soft costs at thirty percent and a ten percent contingency for the building, so we’re going to borrow nineteen and a half million dollars, but we are going to use eighteen million. The other million and a half will be our reserve for sales tax.”
At this week’s meeting, it was unclear to Cotton and several other town council members as to where the extra 10 percent reserve will come from. Will the town be borrowing $19.7 million with $18 million for construction of the rec center and $1.7 million for reserves, as Weiler explained? Or will the town only borrow $18 million and use 10 percent of that for a reserve, leaving only $16.2 million for construction?
“I’m looking at what the bond company gave us,” Cotton continued, “and it’s in addition. Is that fair, or no?”
“I believe it is in addition,” Mitchem responded, “and the purpose for that ten percent is to draw down the interest rate and make the interest more affordable. Having that reserve in place makes it a safer loan for the lender, and I believe it is in addition.”
“I think it’s misleading,” Cotton countered, “to talk about eighteen million and ten percent of that eighteen million. That’s the way I read it, but then if you look at what the bond people gave us and it’s not; it’s an additional 1.7 million dollars. I think it’s significant and the voters should understand that the loan is twenty million, not eighteen.
“I may be full of crap. I’m not sure what it is. I guess I’m asking, because I’m not sure how what the bond company gave us relates to this.” Cotton indicated his version of Ordinance 804. “I don’t know how to interpret this.”
At this point, Mitchem turned to Weiler, who was present in the audience gallery, to verify that he had explained everything correctly. Weiler reassured him that his explanation was accurate.
Council member Tracy Bunning agreed with Cotton, “It was my understanding that the reserve was going to be taken out of the eighteen million.”
After further consultation with Weiler, Mitchem reaffirmed that the loan would be for $18 million and the 10 percent reserve, or $1.7 million, would be in addition to that amount. “That is the way the lending agency would calculate it.”
“Has anybody found in the actual ordinance where it states that?” council member Don Volger asked. “Is there a way to clarify the wording on that?”
“This wording was developed by bond council,” Mitchem argued.
Town clerk April Hessman pointed out that the council was given three options for ballot language at their last meeting—one without any mention of a reserve, one explaining the reserve would be ten percent of the loan, and one giving the dollar amount of the reserve.
“We don’t have to put it in,” Hessman argued. “Bob (town attorney Bob Cole) actually recommended we not put it in. We can still come up with the same thing once they sale the bonds.”
“If we have that reserve in there,” Lattin countered, “we will get a triple-A rating on the bond. That gives the town a back up to be able to make payments if there ever is a decline in sales tax. We can use that money to pay it off early, as well. It’s a reserve, just in case.”
“I understand that,” Cotton replied, “but again, I think we should be honest. What we are doing in fact is borrowing twenty million. If the bond company says that is the best way to get your bond on the market, then we are going to borrow the money. It just ought to be clear that the real loan we are asking for is 19.7 million, not eighteen.”
Cotton gestured towards SUN staff and asked, “The press will take care of that, right?”
The discussion then turned to what it would take to change the wording of the ordinance. Would changing it from $18 million to $19.7 million be a simple clarification, or would it be a significant enough change to the language of the ordinance that the town would be required to start over with the first reading? The meeting went into a five-minute recess so Hessman could run down stairs and call Cole to get his opinion.
When Hessman returned, she said, “The town is only asking the voters to approve an eighteen million dollar loan, period. When the bonds are issued, that is when we can let them know we are going to put that 1.7 million dollars into a reserve account in order to get the triple-A rating.”
Cotton argued that it would be wrong for the town to ask the voters to approve one amount and then issue the bond for a higher amount than what the voters have approved.
“We don’t necessarily need to ask the voters to approve that ten percent,” Hessman argued. “It’s not an additional ten percent. What happens is the ten percent, the 1.8 million dollars, goes into a reserve account and we build it (the rec center) with 16.2 million dollars.”
“Which is the way I thought it was all along,” Bunning said.
“So our construction cost can’t exceed 16.2 million?” Cotton asked. “So if the bid comes in at seventeen million, then we forego the reserve, which drives the bond price up, the interest rate up, and all these numbers go away. The projections aren’t correct anymore, is that right?”
“Based on Bob’s explanation,” Mitchem confirmed, “You would build it for 16.2 million. You would modify your plans to make sure you are under that figure.”
In the end, Lattin made a motion to approve putting the question on the April 8 ballot. Council member David Schanzenbaker seconded the motion and everyone except Cotton and the mayor approved.
However, SUN staff received a last-minute phone call from Hessman Wednesday morning, just before this story went to press.
“I needed to call you to clarify some of the rec center stuff that I said last night. Apparently, I was incorrect. The ballot language is correct. It will ask the voters if they would like to borrow eighteen million dollars. It’s not more.
“George K. Baum is going to sell the bonds for us. When they sell the bonds, they’re planning to sell them at a premium. That premium is going to generate 1.7 million dollars. Apparently, some people will buy a bond with a five percent interest rate and pay a premium so they will receive a net effect rate of four percent. So people will pay that premium in order to buy those bonds.
“That, according to George K. Baum, is going to generate approximately 1.7 million dollars. Of that, 1.5 million is going to be retained into a reserve for the principal and interest payments. The rest of it will pay for bond council, legal fees, selling of the bonds and stuff like that.”
Don Diones, the bond council from George K. Baum, sent an e-mail to Hessman to clarify the issue. “The town will issue $18,000,000 in bonds, which is the par or face amount; the bond issue will be sold at a premium, which results in a dollar amount of $19.7 million; the town will receive proceeds in the amount of $18,000,000; the debt service reserve fund of $1.5+ million will be funded by the premium; the balance of funds (monies) go to pay the cost of issuance (COI) and underwriters’ compensation.”