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Sedona Sales Tax Revenue Falls Sharply

This article is about Sedona’s last bond/debt obligation of $18,000,000, known as the Series 2007 Bond Obligation…a debt this City clearly should have known it couldn’t afford and didn’t need. In my e-mail to City Council of February 12, 2009, which so infuriated Councilors Scagnelli and Colquitt, I said: “Some of you continue to question whether there is a cost/benefit ratio favoring or disfavoring the time required by Staff to service the [now disbanded Economic Steering] committee. Unequivocally, you’re asking the wrong question, which if ignored, irrespective of the answer to the question upon which you are focused, will lead this City to dire consequences. The question you should be asking is, ‘What is the cost to the City of having staff perform budget busywork that leads, not only to work product of no practical consequence but, to work product that leads the City to adopt financial policy that will place the City in a risk position of not being able to refinance its debts in the municipal bond market three through six years from now?’ ”

   Last week Sedonabiz.com stated “For February 2009, Sedona’s retail sales tax collections dropped a whopping 25% from the prior year, 8% below 2005’s retail sales tax levels. In addition, State budget cuts haven’t fully trickled down to cities yet but Zelms is projecting a more negative impact next year.  ‘The state hasn’t impacted shared revenue with budget cuts thus far. We have seen a decline in State Shared Sales tax – about 11% based on the downturn in statewide sales. We have been realizing a bit over a 6% increase in urban revenue sharing (shared income tax). Next year we do anticipate declines in both of these shared revenues. About 15% reduction from 08/09 budget for State Shared Sales Tax and 13% reduction from 08/09 budget for Urban Revenue Sharing (Income tax).’ ” 

  Meanwhile, Moody’s just assigned a negative outlook to every local government in the U.S., due to plunging tax revenue and investment losses. Moody’s didn’t report on specific municipalities, but did offer the same warning I’ve been giving to the now disbanded Mayor’s Economic Steering Committee and certain City Council members since last summer. A study that’s coming out in the Journal of Monetary Economics, written by two professors and a Fed economist, proves what I’ve tried to explain to this City for too long! The bond market is far better at predicting the economy than the stock market. According to this study, changes in the market for corporate bonds with a maturity of 15 years or more were incredibly accurate in predicting big changes to economic growth and unemployment, a year before they occurred. What’s the corporate bond market saying now about the economy next year? Production will fall another 17%, and 7.8 million additional jobs will be lost (Stansberry Research). This shows that Sedona’s budget preparation methodology, regarding tourism-based revenue projections, is dangerously flawed since it’s totally out of touch with reality…a point of view for which I was labeled a part of “shadow government” by Councilor Scagnelli at the February 17 Council meeting.

   Why is this situation so dangerous, though? At the July 24, 2007 City Council meeting (Agenda Item No. 7), Sedona’s then City Manager, Eric Levitt, explained that “based on [then] current projections, connecting the Chapel area to the City’s sewer system would deplete the City’s reserves to less than $1 million at the time.” He also said, “This is not financially prudent because that [reserve] is not enough if we experience a flattening in our sales tax revenue.”  As it’s turned out, they didn’t flatten, they went over a cliff as this writer forewarned!

  But, the City went right ahead and authorized the Series 2007 bond issue anyway, and then Mayor Pud Colquitt signed it, when she should have known that the Financial Statement in the Preliminary Prospectus was seriously flawed as evidenced by Mr. Levitt’s aforementioned public statements. In the publicly issued Series 2007 Bond Prospectus dated November 28, 2007, it was never disclosed that the City was practicing questionable accounting methods as revealed in the following year’s City Audit of June 30, 2008 (which was backwards looking to June 30, 2007, meaning that the same thing was likely going on before the subject bond issue sale). The City’s Auditor, Cronstrom Osuch & Company, sent to the City of Sedona, under separate cover apart from the originally transmitted Fiscal 2008 financial statement, a letter of “significant deficiencies” dated October 19, 2008. It disclosed that the City had been deferring the current portion of then scheduled long-term debt by recording it as “not due debt” and had been doing the same thing, in significant amounts, relative to accruals. This had the effect of showing stakeholders that the City had more available funds in the General Fund than it really had. At this point, this matter of nebulous operating funds was becoming more and more opaque, not more transparent as City government should have been committed to. This issue is what precipitated the March 25, 2009 special session of Council.

   If anyone needs further confirmation of Eric Levitt’s concerns before the fact, then consider his implicit confirmation of his warning after the fact. On January 16, 2008, the City had accepted the subject bond (loan) proceeds, but hadn’t begun payments, nor specifically reserved for debt service. On that date, City Manager Eric Levitt e-mailed a letter to Terry Nash which states, amongst other matters, that “The wastewater fund will use some reserves to pay debt…”

   The facts, statements, and circumstances so far mentioned make it abundantly clear that the Councilors and past Mayor who voted for the Series 2007 bond issue must have known, or should have known, that the City couldn’t afford to pay for it from “standard bond practice” excise taxes even if the economy hadn’t deteriorated further, which of course, it has!

   More recently, on March 10, 2009, I sent an e-mail to Interim City Manager Alison Zelms asking the following question (after an introductory comment): “…would I be close if I guesstimated that the City was paying somewhere between $1.0 million and $1.5 million out of the Wastewater Enterprise Fund to augment revenues in order to make debt service on all outstanding bond issues combined?”

   Alison’s e-mailed answer dated March 11, 2009 stated:  “Rick, You are correct, it was planned to pay about $1 to $1.5 million from reserves – about $1.3.  That is, of course, dependent on whether all the projects in the 5 year outlook end up coming in at current costs, on time, etc…”

   This admission by Alison Zelms comports with the admission sent to Terry Nash by Eric Levitt on January 16, 2008. Both Alison Zelms’ e-mail and Eric Levitt’s e-mail, when read together in light of Eric Levitt’s comments to Council on July 24, 2007, and in light of the accounting reconciliation of the City’s Books by Terry Nash and the City Auditor’s letter of “significant [accounting] deficiencies,” make it unequivocally clear that the City has not been able to make debt service on the Series 2007 bond issue since day one and knew it wouldn’t be able to do so before voting to obligate itself to an unnecessary debt.

   Again, I reiterate, the members of the October 23, 2007 Council meeting who voted in favor of the Authorization Resolution for the Series 2007 bond issue either knew, or should have known, of their dangerous folly! If the latter is the case, those who voted for the Authorization Resolution were likely derelict in their duties to the citizen’s of Sedona. If the former was the case, then we need a formal investigation of the affirmative voting member’s reasons! The latter statement begs another question, made in light of the fact that Eric Levitt testified to the City Council at the October 23, 2007 Council meeting, just before councilor Scagnelli made the motion to approve the Series 2007 bond issue Authorization Resolution, that: “City Management Staff has structured a financing that will be able to complete the Chapel sewer without adversely impacting the reserves.” Since this statement was patently false, why was it made?

   This statement by Eric Levitt is diametrically opposed to what he said on July 24, 2007, and contradicts what he admitted to Terry Nash that he had to do to make debt service just seven weeks after the bond issue was funded, and contradicts what Alison Zelms has admitted is still going on to this day. Who pressured Eric Levitt into making that public statement? Its significance is that he, and the Council members who voted for the Series 2007 bond obligation, should have known at the time, that the City could NOT make debt service without impacting the reserves. Now, our revenues are tumbling catastrophically and our capital reserves are being decimated. God forbid anyone who voted us into this debacle should ever become Mayor of Sedona!

To date, Sedona still has NOT been able to make a single monthly interest (only) payment, much less make any principal reductions, on its last bond issue without dipping into the Wastewater Enterprise Fund which is now seriously deficient…just when huge rehabilitation of the City’s plant is desperately needed. Wait until you see the report being prepared by Carollo Engineers on the costs to upgrade our dilapidated wasterwater treatment plant. Strangely enough, this delivery of this report to the City has been delayed until just AFTER the election. How convenient.

This article was submitted by a reader and its opinions and content are the sole responsibility of the author and is not a reflection of the opinion of the Sedona Times, its publisher and staff.

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