Speculative Bust: How Widening Old Kings Road Left Palm Coast on Hook for $6.7 Million
FlaglerLive | May 16, 2013
Because of its speculative construction of a major road project with money it did not have—the $10 million four-laning of a portion of Old Kings Road in 2010–The Palm Coast City Council is now legally against the wall.
The city administration borrowed more than half the money from its own utility fund to complete the project on the assumption that the real estate market would pick up and enable the city to re-finance with bonds. That never happened. The city has commitments to investors through its utility fund. Those bond holders want their money back. The city has no choice but to start taxing property owners along Old Kings Road to get that money.
The mechanism is in place to do just that: the city set up a special taxing district as part of the Old Kings Road project. But that doesn’t ease the difficult position the city is finding itself in: it is forced to levy taxes the property owners may have issues with, largely as a result of overambitious speculations by both the city and Walmart, one of the property owners that had pledged to build a store in the district, only to reverse course, for now anyway.
“According to our bond counsel, the assessment has to get started in order to keep the assessment district in place,” City Manager Jim Landon said, summing up the city’s situation to the council. “This is one of the few times in my option you don’t have an option. There is definitely a legal obligation to pay the utility back. And the way you pay the utility back is starting the assessment. So this is one of those where we’re saying we have to start the assessment this year in order to meet our obligation.”
On Tuesday, the council agreed to go ahead with what amounts to a technicality: an agreement with the Flagler County tax collector that lays the groundwork for tax collection from the district. But the document served to bring back to light—for council and public—the somewhat complicated underpinnings of a soured deal that has caused the city some grief and spun off not just rumors, but also contributed to an ongoing (if minor) movement to recall Mayor Jon Netts.
A special taxing district is set up when a local government needs to collect tax revenue from property owners in a specific geographic area, to pay for improvements largely benefiting those property owners (although, naturally, the benefits extend to anyone using the services that result from that investment, as with a road). Palm Coast in 2005 set up just such a special taxing district along Old Kings Road, when it was planning that road’s expansion from two lanes to four, from Palm Coast Parkway down to State Road 100.
The expansion was in part to accommodate the planned Walmart at the southern end of the project, near State Road 100. Walmart had bought the property and was telling the city that it would build there, only to pull back when the economy tanked and Palm Coast’s population stopped growing as it had before the crash.
Walmart’s about-face was emblematic of what was taking place across the city, the state and the country: project after project designed with boom-time assumptions in mind faltered and died or had to be revamped after the bust. The Old Kings Road project was among those: the four-laning of the road had to stop with Phase 1, at Town Center Boulevard. Phase 2 would have taken the four-laning to Palm Coast Parkway.
Not only was the city out of funds: it never had more than half of the $10 million to widen the road in the first place. (That $10 million was just for the first phase, from State Road 100 to Town Center Boulevard. But the sum includes some design costs for the second phase, too.) The city had originally planned to use the special district as collateral to float bonds to finance the project. That proved to be a miscalculation. The bond market had soured on such real-estate driven investments, especially in areas severely affected by the crash.
Palm Coast used $3 million in impact fees and $1.5 million out of its utility fund to pay for part of the project, justifying the utility fund spending, with some creative accounting, as required by the realignment of the road. But the city still had to borrow $5.2 million from its rich utility fund to finish the project, again on the assumption that projected developments would eventually generate money to pay back the fund. That never happened.
In sum, that still left the special district with a $6.7 million bill it has not paid. That’s the amount the city is trying—and needs to—recoup.
That’s why the project has been the source of what Landon calls “many rumors and false information I’m hearing out in the community.”
Dennis McDonald, who unsuccessfully ran for a county commission seat last year and has been a persistent critic of Landon’s administration, chiefly because of financial issues, has pointed to the Old Kings Road project as an example of what he considers the city’s misuse of dollars. “Our elected officials, including former County Commission member and clueless advocate [Frank] Meeker and Landon have failed miserably with this project as it has done nothing to generate any positive results,” McDonald wrote in an email shortly after the Tuesday meeting, when the city council took on the Old Kings Road matter.
McDonald claims the special taxing district “siphoned” $9.8 million out of city coffers, triggering the recently approved utility rate increases. The city has been under federal mandate to build a new clean-water plant since 2007, and because of that double commitment (the loan to the special district and plant funding), the utility had to raise rates, McDonald claims.
Property owners in the special taxing district have been paying 5 percent interest on the city loan since construction began. That has generated $640,000. That money goes into the utility fund’s operating budget. But it also defrays the utility’s own loan cost. So it’s not an entirely net benefit to the utility coffer.
But paying interest is not enough: for “legal and practical reasons,” the city says, the principal itself must start to be repaid. Put more simply: the city legally has no other option.
Last year the council approved an ordinance that would start levying actual taxes on property owners in the special district beginning this November. Property owners have until June 1 to come up with an alternative. So far, they have not.
“When will the city recoup its investment?” council member Bill McGuire asked the manager. He did not get a clear answer. Since the city did not build the whole road, the actual benefit to property owners is not the same as it might have been had the four-laning been competed to Palm Coast Parkway, That affects the amounts they will have to pay back.
There is also the distant possibility of bonds picking up the financing. But before that happens, investors want to see real constructions: homes or businesses in place. While that remains an option, it’s not yet a possibility the city can plan on. That leaves the burden on the property owners. McGuire, who does not always choose his words carefully, nevertheless raised the salient question on the matter: “The people that belong to the cartel, for want of a better word, that is involved in this, what’s their position on repaying the special assessment?”
“It’s fair to say that they’re all in a different position and they all have different opinions,” Landon said. “We find that when we get 10 of them in the room we usually get 10 different positions, or maybe 15 sometimes. We are hoping—and there are discussions—that we can reach a general agreement that we all can move forward with. But at this time, we’ve made it very clear to them that we can’t wait for them to reach an agreement because we have some deadlines in order to get the assessment started this year. So we’re moving with our process meantime.”
How much each property owner will be taxed hasn’t yet been calculated. Nor has the administration or council settled on whether to tax property owners evenly across the district, or differently depending on which property owners fall within the part of the district that has been four-laned, as opposed to the part of the district that has not. That’s currently a source of conflict. Landon acknowledges that property owners have a right to question being taxed for a road that was never built. So the city is focusing on the first phase. But he’s leaving no doubt as to the council’s obligation to get its money back.
The council has until August to approve the agreement with the tax collector in order for it to be in effect by November.