Scottsdale Bond Ratings Stumble

Moody’s Investors Service issued a press release dated 14 November 2014 (between post-election press obsession and Thanksgiving, which may explain why the Republic and KJZZ missed it) announcing that it has assigned a AA1 rating–one notch below AAA–to bonds Scottsdale’s leaders are issuing to pay for improvements at the taxpayer-owned golf facilities known as the Tournament Player’s Club Scottsdale.

These improvements were the obligation of the TPC and PGA themselves prior to a favorable amendment to their no-bid, 20-year lease last year, approved by Mayor Jim Lane and the city council majority (including Linda Milhaven and Suzanne Klapp).

I objected strongly to what amounts to about $35 million in taxpayer funded subsidies, and for a time I was a plaintiff in a lawsuit seeking to reverse those subsidies. I withdrew from the lawsuit due to differences with my co-plaintiff about legal strategy.

The Moody’s press release explains:

Moody’s Investors Service has assigned an Aa1 rating to the City of Scottsdale Municipal Property Corporation’s Excise Tax Revenue Bonds, Tax-Exempt Series 2015A, and Excise Tax Revenue Bonds, Taxable Series 2015A. Proceeds will be used for wastewater system improvements, continued construction of the Museum of the West, and renovations to the TPC Golf Course clubhouse and stadium course. The city has pledged its city-wide transaction privilege (sales) taxes, state-shared revenues, franchise taxes, permit fees, and fines and forfeitures to make loan payments to the corporation. The city’s excise tax credit ratings carry a stable outlook.

So what does “AA1” mean? Wikipedia (among other sources) describes AAA (Moody’s highest rating) and AA1 as:

AAA: An obligor has EXTREMELY STRONG capacity to meet its financial commitments.
Aa1: An obligor has VERY STRONG capacity to meet its financial commitments. It differs from the highest rated obligors only in small degree.

This would seem to be an insignificant distinction. But what is important is that there IS a distinction, and Moody’s wouldn’t have chosen the lesser rating if there wasn’t a good reason.

It’s also important to note that Jim Lane was crowing about Scottsdale’s “AAA bond rating” as recently as May of last year. Newly-seated councilman (and former city treasurer) David Smith posted on his campaign website as the second bullet of his “About Scottsdale” page:

A special rating of “AAA”… I will insist on financial integrity, transparency and sound financial decisions to preserve our AAA bond rating.

Newly re-elected council member Linda Milhaven bragged in an October 2014 AZCentral campaign op-ed:

This year, the rating agencies reaffirmed our AAA bond ratings. Next year’s budget is balanced and sustainable. We are in great financial shape.

“Balanced and sustainable” is terminology that (in the words of Mark Stuart) has been reduced to word salad. As a Columbia-educated Wells Fargo banker [Wells Fargo is the trustee, or issuing agency, for the bonds in questions], Milhaven knows (or ought to know) better. Scottsdale’s budget for the last handful of years has had a structural deficit that the council has “balanced” (as a verb) by sweeping money from reserves. And if you have continuing deficits (your planned spending exceeds your planned revenue), the budget is de facto not “sustainable.”

Lane, Smith, and Milhaven follow closely in the footsteps of Mary “Jane Bond” Manross in their bragging about bond ratings.

Even the City’s official website says:

AAA bond ratings
Scottsdale continues to maintain the highest possible rating from the three major national bond rating agencies…

If pressed on these statements, our esteemed elected officials (and probably the charter officers) will undoubtedly say, “Well, we were talking about the General Obligation bonds,” which are indeed still at the top rating levels.

What’s the difference in the types of bonds, you may be asking? GO bonds pledge the value of YOUR property and the property taxes you pay as the security and means of repaying the lenders (bond purchasers).

A municipal property corporation (MPC) is a sort of holding company that “owns” specific infrastructure (usually things like the water and sewer infrastructure), and borrows against the value of that infrastructure and the payments to be collected for its use (your water/sewer fees). That borrowing is an MPC bond, for which payments are also pledged against the more general taxing ability of the city, like sales tax…but not property tax.

I have expressed and continue to express great concern about Scottsdale’s debt. I’m especially concerned that we don’t have a plan to pay it down. Doug Ducey, quoted in the Goldwater article before he was elected governor, said,

Taxpayers should care about [debt] because it’s an obligation that they or their children are going to have,” said Arizona Treasurer Doug Ducey, who advocates paying down the billions in debt owed by the state. “People should be concerned about the amount of debt, the type of debt, and the fact that there is no overall plan to pay down the state debt.

Those same concerns should apply to Scottsdale, right? In fact, our elected officials in Scottsdale plan to RAISE your debt by re-floating another version of the voter-rejected $200 million-plus bond package that failed in 2013.

To that end, did you read this fine print in the Moody’s press release?


– Significantly reduced debt service coverage due to either declining economic performance or additional leverage

“Additional leverage” means “borrowing more money,” as I said when I argued with Jim Lane publicly in 2013 about his denials of the seriousness of Scottsdale’s debt, in our case, the highest per-capita of any major city in the Valley of the Sun.

Lane seems to argue against himself in an extensive 2012 article put out by the Goldwater Institute [Debt and taxes: Arizona taxpayers on hook for $66 billion tab, run up by state, local governments],

“The appropriate use of debt is to build the infrastructure that the city relies upon, whether it’s streets and sidewalks, or it’s water lines and treatment facilities or a public safety building or city hall; any of your hard assets,” Lane said.”

I don’t know how golf courses became “infrastructure that the city relies upon.” And of course, as I have noted many times in this forum, Goldwater Institute applies it’s standards rigorously to its enemies (mostly Dems), and not so much against friends like Lane (whose former chief of staff, JP Twist, is the son of Goldwater founder Steve Twist).

Of course, Lane also said in that article,

Not all debt is bad debt.

I completely disagree. Some debt is just plain bad. The rest of it is a necessary evil, to be avoided if possible, to be used very cautiously if it can’t be avoided. Kind of like chemotherapy.

Beyond those objectionable assertions and a few others, there is actually a lot of good information in the Goldwater analysis. Just read it with a critical eye.

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