Wednesday, November 17, 2010

November 17, 2010 Mayor, City Council, And the Nutty Lowland Sewer Contract

Yesterday, City Council approved ("ratified") City Administrator Tony Cox's hiring several weeks or maybe a month or more ago of an outside attorney (Mark Mamantov) to help the Council handle numerous financial issues with the State Comptroller's Office.  Click here for the State Comptroller's July 8, 2010, 5-page letter to the City.

[Cox did not have the authority to hire outside counsel.  A City Ordinance states that the Council, not the City Administrator, may hire outside counsel. Council's after-the-fact approval of what Tony had already done provided cover for Cox's violation of the City Ordinance. There is no doubt that Mr. Mamantov is an outstanding attorney.  Cox, however, jumped the gun and exceeded his authority in presuming to retain an attorney without a vote by Council.]

The big issue that Mamantov, City Attorney Dick Jessee, Mayor Barile, and City Councilmembers must deal with is the Lowland Sewer Contract ("Asset Purchase Agreement" is its title).

I'll put the contract on the blog soon. Yesterday, I spoke about the contract briefly during public comments. Much of the Lowland agreement is one-sided with just about every major term in favor of the Sellers (MPLG/Joe Fielden/Mike Ball).  Parts of the contract are outrageous/borderline outrageous. Former City Administrator Jim Crumley apparently negotiated the terms of the agreement and then brought the contract to Council in February 2009.

Crumley may have fed the Council a lot of bull when he presented the contract to them, but even with Crumley's sugarcoating, there is no doubt that several provisions in the contract should have raised serious questions and should have caused the current contract to be rejected by the entire Council in February 2009. Instead, five voted in favor of the contract (Mayor Barile, Councilmembers Rooney, Senter, McGuffin, and Jinks) and only one councilman (Rick Trent) voted "no."

Here are three of the contract terms that should have raised red flags and caused the contract to be revised or rejected:

1) Flow fees: The contract provided that the City would make a one-time payment of $750,000 to the Sellers and then pay "flow fees" of $182,500+ per year to the Sellers for 25 years. A total payout of about $5 Million.  Then a CPA came in for the City and converted the "flow fee" payments to a principal and interest schedule.  This 25-year flow fee/principal and interest schedule sent up big, red flags at the Comptroller's Office.  Apparently, the State Comptroller views the 25-year agreement (whether flow fees or principal and interest disguised as flow fees) as the equivalent of a long-term loan--the type of loan agreement that requires approval by the State Comptroller's Office. The City, of course, never requested approval of this contract/loan by the Comptroller's Office. Had it gone through that office as required, some of this mess might have been straightened out at the start.

2) Abandonment clause: This is a one-sided contract term that leaves you scratching your head.  The City paid $750,000 down for the plant and has already made the first $182,500 annual "flow fee" payment. The City will have to spend $50-$70 million or more in improvements to the plant. The "abandonment clause" says that if the City later decides to abandon or quit operating the Lowland Sewer Plant, the City must GIVE the Plant with the millions of dollars of improvements back to the Sellers AND still make all remaining payments for the 25-year term of the contract.  Sweet clause for the Sellers. Poison clause for the City.

That's like a businessman buying a small store, making a downpayment of $5,000, making payments of $10,000/yr, fixing it up at his expense, and then when he decides to quit operating the store, the contract says that he can't sell the store with the improvements he has made to the best bidder and pay off what he owes and keep the rest----no, he has to GIVE it back to the person who sold it to him AND STILL MAKE THE MONTHLY PAYMENTS to that person. No sane businessman would sign a contract with such a clause.

If you agree to make the payments NO MATTER WHAT, why would you ever agree to GIVE the plant back if you decide to quit operating it?  If you have to make the payments, for Pete's sake make sure the contract says that you get to keep the plant or that you can sell it to whoever you want to!!

And, no, this nutty abandon, give it back, and keep paying clause was not hidden in legalese in the 2009 contract. It was in plain English in black-and-white. It makes you wonder if the Lowland Sewer Contract was like the national healthcare bill. Nobody paid attention and read it.

3) Operating permit: Before approving the Lowland contract in 2009, the City knew that it would have to get a permit to operate the Lowland Wastewater Plant.  According to a statement made at yesterday's meeting by George Haggard,  the City does not have an operating permit. Sixteen months after purchasing the plant and $932,000+ later, the City doesn't have a permit to operate a plant that it "owns."

The City may get a permit --later.  The crazy part of the contract is that any businessman who was spending his own money would have held off on signing the contract or would have simply paid some earnest money and included a clause stating that the contract would not take effect and no further payments would be made until such time as the City obtained an operating permit. [Sort of like a real estate contract where you put down earnest money with the provision that you will make a good faith effort to obtain a loan, but if you are unable to get a loan, then the whole purchase agreement is void and you get your earnest money back.  The City, like any business or individual, should have had a clause stating that nothing would be paid until the City got its operating permit.]

Councilman Gene Brooks stated that he had been concerned about the Lowland deal before he was elected in May 2009. Brooks added that he got the Lowland documents, reviewed them, and went to Nashville to discuss this situation and other financial matters with the Comptroller. Carl Murphy and I went with Gene on that lengthy trip to discuss the legality of terms of the Lowland contract, the "flow fees" and principal/ interest schedule, and the illegal sewer fund to general fund loans that had been made in 07,08, and 09.

George Haggard, a local businessman, made some strong and important public comments yesterday.  Haggard noted that the City paid $750,000 down and has paid out over $182,000 more and still has no permit to operate the plant. Haggard added that the Lowland facility is in poor shape, that the Lowland contract was a bad deal, that Jim Crumley did not tell them the truth back in 2009, and that the City should try to get out of or renegotiate the Lowland contract now that the Comptroller has stepped in and everyone is looking more closely and questioning the original contract.

Although Councilman Brooks requested public discussion of this matter, the Mayor cut his remarks short. Brooks then added that Tony Cox has asked councilmembers to talk to Dick Jessee one-on-one about the Lowland deal. If Cox has his way, there will be little, if any, public discussion about the Lowland Contract and the huge costs that loom ahead if the City doesn't at least try to get out of this.

Once Cox decides that he has the magic number (four) in hand, then he'll put it on the agenda for a quick vote. There will be little or no public discussion because all the discussion will have taken place outside of the public eye.  Cox wants to minimize public deliberation by Council in regular meetings. and the Mayor and most councilmembers are going along for the ride with Cox just like they did with Crumley.  And we know where that got us!

Cox has made it clear that he prefers a tiny, cosmetic "patch" to the contract and then proceed down the $50-$70 million dollar path of more debt. Now the public is waiting to see if and when the Mayor or any councilmember has the courage to engage in public discussion of this important public issue.

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