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BEAUMONT, CA….
... AMERICA’S
BOND OR BUST CITY
All references to Bond documents and all screen shots and cut and paste examples can be found at the link listed below. Specifically the particular Bond used in this presentation is:
BEAUMONT CALIF FING AUTH LOC AGY REV (CA)
BEAUMONT CALIF FING AUTH LOC AGY REV SER A (CA)*
Dated Date: 06/21/2000
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CITY OF BEAUMONT
Community Facilities District 93-1
...and how to make Bond proceeds disappear in a complex maze of misstatements, misdirections layers of legal language, deceptive accounting and questionable ethics by City Staff and Counsel.
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First, from the Official Statement, I will show the Cover Sheet for a basic overview.
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Also of interest is:
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About this point some might ask a very good question.
Q. What do Beaumont Financing Authority Local Agency Revenue Bonds have to do with my CFD’s?
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What is the reasoning behind all these convoluted permutations between the City
and it’s JPA’s? Quite frankly, in my opinion, it is all smoke and mirrors with an emphasis on distortion, distraction, and deviant behavior.
___________________________________________________________________
“Power tends to corrupt and absolute power corrupts absolutely."
“Limitation is essential to authority. A government is legitimate only if it is effectively limited.”
John Dalberg-Acton ___________________________________________________________________
Cross- Collateralization. It is defined in basic terms as using a loan as an asset to secure another loan. Simply and clearly speaking this is the only reason for the existence of the Beaumont Finance Authority (another JPA of the City)
The CFD Mello-Roos Bonds have rigid terms in regards to pledged revenues, where that revenue comes from, and how it is used in regards to the Area that it was issued for. The gray Area seen by few is how that money is paid back and who is actually paying .
By forming the BFA and allowing concurrently issued parity (equal value) bonds
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called “Revenue Bonds”, the BFA is now able to buy the CFD “Limited Obligation
Tax Bonds” in their entirety. At a very generous Underwriters Discount I might add.
What this allows them to do is AVOID the Covenants and Agreement of the CFD Bond Indentures by allowing inflows of tax revenues to be applied to any of the CFD
Area debt service schedules at the BFA level. An apparent example of this is the
extraction of as much as 190% of taxes exceeding actual Principal and Interest payments from certain areas. Then applying excess funds to Areas that were never built or not generating taxes to pay for Bonds already issued and spent acquired specifically for that Area and/or are not being paid for by a Developer. (That is beyond the scope of this presentation and a story unto itself best explained by others)
What I do see commonly now in the Official Statements for CFD Bond Issues from the debt reporting site EMMA, is obvious. Municipalities, in general, are making it clear that they are neither cross-collateralizing nor issuing any type of parity bonds
on par with their CFD issues to avoid any appearance or allow improprieties to occur. It is about time.
One need only look at the schedule of payments for Beaumont acquired Bonds and see the impending Term Bond balloon payments that are due and payable between
approx 2020 and 2041. It isn’t pretty and while the structure of repayment is supported by the value and number of home owners responsible, there will be no
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relief or reduction or early retirement of Bond debt. The crucial time for refunding (refinancing) the outstanding balance is at buildout /occupancy with 20-25 years still left on Bond repayment schedule remaining. REAL SIGNIFICANT savings could be made at that point.
Not coincidentally and the reason it was never done is that is also the Holy Grail of Cash Cows for the City to pocket taxes in excess of debt service as nearly ALL Bonds are structured with initial very small Serial bond maturities payments in relation to taxes collected and ultimately ending up in Residual Account not pledged for Bond repayment.
There were no Free concerts in the Park. The City was never able to afford the compensation and benefits package they offered, Past Council KNEW that Councilman’s wife cell phone, City Managers wife cell phone, Consultants AND their spouses health insurances were being paid for by the City. Council knew the City Manager was giving out interest free loans to individuals and outside private companies. All the while telling everyone about the $11 million reserve they had.
Are you still believing the story about the $5 million loan payback scheme? The City has not had 2 nickels of its own to rub together since who knows when.
Now I want to show you some more information from the Official Statement
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(Recall that from earlier that the sitting City Council is also the governing body for the BFA. An example, Roger Berg as Mayor was also the Chairman of the BFA)
And now City Council, on behalf of the District, enters into Contract with BFA for purchase of District Bonds.
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So let me take a moment to review. From slide 3 and the Cover Sheet from the Official Statement declares that
$14,725,000 of Bonds are being issued by the BFA. The BFA has a purchase agreement with an Underwriter to purchase the entire Authority issue for $14,103,805.60
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Then after paying Consulting Expenses and setting aside the Reserve requirement, the BFA is left with $12,222.802.79 to acquire $14,725,000 worth of District Bonds and is the Underwriter for the District Bonds.
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In the language of Bonds the “Authority Bonds” acquisition looks like this:
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No such information is provided for the “Authority” acquisition of the “District” bonds. However it can be easily determined by the formula:
(Price paid) (Face value)
$12,222,802.79 / $14,725,000= 83.0%
As with O’Connor and Company underwriting the Authority
bonds and the BFA underwriting the District bonds these financial gains are spread out over the life of the Bond. (see Arbitrage)
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Now with each and every Bond Sale there are a myriad of requirements that assure repayment of the Principal and Interest to the Bond Purchasers. These are generally known as “Covenants” and are legally binding and spelled out in detail (not surprisingly usually in between the abundant legalese and the nearly indecipherable repetition of terms)
So we can assume the vast majority of the covenants are for the benefit of the Bond Investors and assure repayment. Among these Agreements there are many separate accounts established for Bond funds. The names of these Accounts would include , but not limited to, an Escrow Account, Revenue Fund, Interest Fund, Principal Account, Redemption Account, Sinking Account, but the point of all this is that the BFA also establishes and Covenants for the City’s benefit an account called the Residual Account.
The Bond investors are not idiots and have little faith ,if any, in the borrowing entity to act in the investor’s best interest, so a Trustee (Union Bank) is established to insure that the investor will be made whole.
I am not going to go into details about the various accounts other than the Residual Account. Here is how this story goes. Biannual payments are
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due to Bondholders. In March and September and it is no coincidence that these also correspond closely with property tax and assessments that property owners must pay.
As we all have heard many times by our former tax wizard that all the CFD property owners were and are charged the maximum rate and it does not matter if it is a flat rate or a teeter totter (low to high) payment schedule. The fact of the matter is that MORE (in some cases as much as 190%) money is collected by the County than is needed to service the Bond principal and Interest payments.
The Trustee has Covenanted with the borrowing entity (the BFA) that these monies collected by the County will go STRAIGHT to the Trustee and be deposited into the designated accounts in the way the structure of the Bond was set-up.
With foresight and deception that began in about 1994 and only exceeded by the lack of transparency and honesty apparent in this arrangement here is what happens.
After all the Accounts receive the amounts required needed to pay Bondholders or maintain Reserve levels or account for Interest gains etc and those Bondholders are paid...ANY AND ALL REVENUES remaining (not designated) are
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transferred to the Residual Account. The monies in the Residual Account ARE NOT pledged or responsible for repayment of any outstanding Bond payments.
The City may request that any monies deposited into the Residual Account be disbursed to the City by simply notifying the Trustee by letter that it wishes to do so. (THIS IS WHERE THE MONIES TO PAY OFF THE SEWER BOND CAME FROM)
http://publicdocs.beaumontcares.com/WebLink8/DocView.aspx?id=108798&dbid=0
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This is the “Black Hole” of Accountability in Bond Activity. Recently posted documents online by the City confirms what I have long suspected. That is correct CFD people …..Nearly $1 million in excess collections that COULD of gone to the Redemption Account for early repayment of outstanding Bonds...DIDNT. Remember your Tax Wizard telling you by law he could not extend the length of payment. There are many legitimate ways to shorten and reduce it. Staff and Consultants and every entity and person listed as having provided a professional opinion regarding these Bonds have absolutely no intention whatsoever of having these or any Bonds redeemed or defeased early. When the wool gets long on the sheep it is time to fleece the herd...year after year after year. Excess monies do not go to Redemption Accounts.
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What makes this possible?
The September 2, 2015 date is from the most recently issued Bond (6-15-2015) and similar
language is contained in all Beaumont Bonds.
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An
http://emma.msrb.org/Search/Search.aspx
I am fairly certain you will not find one penny deposited into (non-mandatory) Redemption Accounts for any Beaumont Bond Accounts.
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(I wrote this months ago and never got around to finishing and posting . There maybe some minor errors, but the overall narrative is essentially unaffected.)
Addendum 9-2-16
Now City Staff wants to go to the well and try to shove through a “Thirty-second Supplemental Indenture”. Staff even has the nerve to imply that the “TRUSTEE”
is seeking reassurances for its Bondholders that this will not negatively impact
repayment terms. In fact, it is Staff and the City’s own Bond Counsel that needs this Supplemental Indenture changed to cover their a**. The Trustee already has unchangeable covenants and pledges of revenues generated by CFD AND BFA bond Indentures
I am afraid that through record destruction , deception with motive, purposeful incompetence in the duty of care and responsibilities regarding former Staff, we will never know the true extent of the damage done to Beaumont
Such is life in Beaumontville. Now to make sure no Bond is retired early or
defeased the City is going to change the Indenture ensure that NEVER happens. Maximum (RMA) tax for the maximum amount of time for the maximum amount
of revenue to be captured by the City.
robjamco3@gmail.com
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If it's your job to eat a frog, it's best to do it first thing in the morning. And If it's your job to eat two frogs, it's best to eat the biggest one first.
Mark Twain
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Just to be clear, the BUA was formed in May 2001. It entered into an agreement to lease the “Wastewater Enterprise” from the City and then called it the “Utility Enterprise”. At the same time entered into a Management agreement for operations and maintenance with the City. In other words nothing changed but a new Bond issuing JPA was formed that proceeded to issue the 2001 Variable Rate Bond backed with Letters of Credit.
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SSo now having issued a $9.7 million Bond, the BUA makes its “lease” payment (the majority of the Bond amount) to the City. The City uses that money to refund an earlier 1996 Bond that was Refunding an even earlier Bond. Confused yet? That IS the intention of all these manipulations and lease agreements and management agreements between the City and it’s JPA’s. Staff believes that the Public cannot understand these actions or cares.
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