BY VOICE STAFF
Some Niagara councils have recently passed symbolic resolutions in support of Mayor Dave Augustyn and Pelham Town Council, arguing that the Niagara Region has no business mixing in the affairs of municipal finances and borrowing. Some observers have intimated that the Region is attempting to control lower-tier finances and borrowing, or that political motivations relating to past disputes are at work.
Regional councillors, including the Mayors who sit on Regional Council, must consider the following questions as they decide whether there is legitimate concern over the state of the Town of Pelham’s finances:
1. Has any lower-tier municipality in the Niagara Region ever spent all of the cash from its reserve accounts in the manner that Pelham has?
2. Has any lower-tier municipality ever had a per-capita debt that the Town of Pelham will now have?
3. Has any lower-tier municipality ever had as big a cash- flow shortage as the Town of Pelham?
4. If a real estate correction or crash occurs, how will Pelham fund over $1.5 million in annual debt payments, and numerous capital items it says it will pay for through the collection of future development charges?
For nearly a year, questions have swirled around Pelham’s financial practices and fiscal stability.
On Thursday night, Regional Council will decide whether to ask the Ontario Municipal Board to investigate Pelham’s finances. These issues seem complicated, but they don’t have to be. Here’s what you need to know as the Region makes its decision.
The issues fall mostly into two categories: First, the use of reserve fund and whether the Town has been forthright about its general financial position. Second, the circumstances surrounding the Town’s purchase of 3.3 acres of land in East Fonthill, land on which Summersides Boulevard is being built.
Reserve use and Town finances
On November 6, Councillor Marvin Junkin resigned from Council. He alleged that two months earlier, on September 5, Council was told during a closed-door meeting that the Town had virtually depleted its reserve funds, and that this meant the Town was $17 million dollars deeper in debt than previously believed, given that the Town would need to borrow money to replace the cash gone from the reserves.
In response, in December the Town released an amended version of the report given to Council on September 5. This updated report showed that the Town would soon need to take on $10 million dollars in debt to replenish the reserves, not $17 million. The Town’s Treasurer suggested that this $10 million dollar figure could end up being lower.
Junkin said that Treasurer Teresa Quinlin told Council that the Town would not have qualified for provincial loans required to build the community centre if the Town’s near-depletion of reserve funds had been public knowledge.
Was Council aware?
According to Junkin, Council was unaware of the use of reserve funds in this manner before September 5. The projects on which reserves were spent were approved by Council to be funded by loans. Councillor Peter Papp has corroborated Junkin’s account of Council’s surprise on September 5.
Junkin said that neither CAO Darren Ottaway nor Mayor Dave Augustyn seemed surprised by the information provided in the meeting.
How did the Town respond?
Hours before Junkin resigned, and two months after the September 5 presentation, Mayor Augustyn told the Voice in a face-to-face interview that he had “no reason to believe that number is not correct” when asked about the reserve balances.
After confirming that reserve cash had been spent, the Town asserted that the reserves were now backed by “non-cash assets,” and that this is why it did not have to show the accounts as empty in its financial statements.
Since revealing that the reserves were indeed emptied, the Town has called its use of cash reserves “strategic investment.”
The Town has not explained why Council was not informed of the extensive use of reserve funds until September 5.
What does KPMG say?
In 2014, 2015, and 2016, then-Treasurer Cari Pupo told Council that “year end reserve balances remain healthy and capable of supporting the Town’s ongoing commitments.”
KPMG says, “This statement appears misleading as the Town does not appear to have the cash balances on hand to support the year end reserve balances.” As Treasurer, Pupo reported to CAO Darren Ottaway. Ottaway reports to the Mayor and Council.
What is the Town’s general financial health?
KPMG revealed that in 2015 the Town was given two “high” and four “moderate” indicators of financial risk by the province. This prompted follow-up contact to the Town from the province.
KPMG also concluded that “the Town went from a net financial assets position of approximately $4.1 million in 2008 to a net debt of approximately $13.7 million in 2016. This represents a significant drop in the financial health of the Town.”
1. Why did the Town extensively expend reserves on projects which had been approved to have been funded by debt?
2. Why did Town Staff not reveal the extent of its internal borrowing to Council or to the Region when applying for the community centre loan?
What impact did the internal borrowing have on external borrowing?
In 2016, the Town applied for a $36 million loan, called a “debenture,” through the Region (in addition to a $5.75 million debenture for prior capital projects). At the time, the Town said that it would be within its annual borrowing limits if it took on the additional debt.
However, at the time of the application, it would appear that the Town did not, in fact, inform the Region of the internal borrowing that the Town had been doing from its reserve fund cash.
Why should the Region be concerned?
The Region essentially acts as a co-signer on lower tier municipal debentures and is responsible for them should municipalities be unable to repay their debts. The Town of Pelham excluded a number of items from its calculations to arrive at the assertion that it was within its debt limit, an assertion that was provided to the Region.
The Town was approved to borrow the full $36 million dollars for the new community centre project, but it excluded almost $15 million of this debt (and the required repayments) when making its calculations. This was done because the Town asserted that this portion of the loan would only be short-term, repaid within one year by selling off $12 million dollars-worth of Town-owned land in East Fonthill, and by raising $3 million dollars in donations.
The problem is that to date the land has not been sold, and only one or two interested parties have come forward to express interest in even making an offer. The Allen Group, a developer working closely with the Town, has an option to buy a number of acres of the property, an option that does not expire until March 2019 and seems so far to have scuttled any sale.
On the donation side, pledges are well short of the $3.3 million needed to be raised ($300,000 is to be paid to a fundraising consultant—in essence a 10% commission) and many of these donations will not be collected immediately, but rather in small increments over multiple years.
It would appear that the Town should have included this additional $15 million dollar amount when applying for its loan through the Region. Had the Town done so, special OMB approval of the additional risk would have been required, a step that almost certainly would have eliminated any Regional concern from arising. Either the OMB would have concluded that the Town’s financial planning was sound, or it would have concluded that the Town’s expectations were unrealistically optimistic. Either way, the Region would not now be in the middle.
Questions that remain unanswered:
1. It would appear that the Town did not disclose the fact that its finances were in worse shape than believed after KPMG informed them of this in early September of 2017. Did they not have an obligation to inform the Region once they became aware of this?
2. Did the Town misrepresent its financial position and available debt limit by not disclosing to the Region at the time of the debenture application in 2016 that reserve fund cash had been spent on capital projects that should have been financed by debentures?
3. Should the payments on $15 million of the debenture have been included in determining the Town’s debt limit when it applied for the $36 million debenture in 2016?
4. Should the Town have sought out and obtained OMB approval for the $36 million debenture in the first place, and avoided all of the issues between the Town and the Region? If so, why was this not done? Why did the Town not disclose the poor financial indicators it received from the province?
The 3.3 acre East Fonthill land deal
What was the land purchase?
In 2015, the Town bought 3.3 acres of land from Fonthill Gardens, spending nearly $1 million dollars per acre. This price is about five times greater than what Fonthill Gardens originally paid for it. This valuation was based on a so-called “extraordinary assumption,” namely that the land was at the building permit stage, even though it was not.
Instead of taking a loan to pay for the land, the Town issued Fonthill Gardens with some $3 million dollars in “municipal credits,’’ a type of IOU that Fonthill Gardens could use in the future to pay Town fees occuring during the development process, valid for development charges, parkland dedication fees, deposits and other building permit fees. Fonthill Gardens could also sell these IOUs to other developers.
After objections to the scheme came to light, the Town decided to end it. In 2016, the Town paid Fonthill Gardens some $3 million in cash to buy out the remaining credits. The Town has refused to say where it acquired the cash it used to buy back the credits.
In 2016 the Town applied for a $5.75 million loan that it said was to pay for a number of prior projects. This debenture was not planned for in the 2016 budgeting process, and appears to not have been approved by a specific bylaw by Council like all other borrowing. Instead, the Town claims that it was approved by a bylaw passed some years earlier, when the items were approved in the passing of a previous budget. It would appear that this debenture may, in fact, have been the source of cash used to pay off the Allen Group.
In December, KPMG’s reporting disclosed a second agreement with another developer, River Realty, for additional lands acquired as parkland. However, these credits were not bought back by the Town and presumably were sold by River Realty to other developers.
What does the Town say?
According to the Town, it will recover the amount it paid for the East Fonthill land by collecting future “parkland fees” from developers. The Treasurer has said that, in the end, this transaction “should be a wash.” However, the Town only collects about $3000 in parkland fees per lot. To recover $3 million dollars, more than 1000 homes would have to be built.
This amount appears on Pelham’s financial statements as a “receivable,” or an amount owing to the Town. Accounting experts consulted by the Voice question the appropriateness of this, saying that the figure should have appeared as a purchase. Through such improper classification, $3 million in additional revenue appears, though it is far from clear whether such funds will come in.
KPMG does not address this concern in its report, and the Town, KPMG, and Town auditors Deloitte have refused to comment on the subject.
The Town and its lawyers appear to be arguing that the Development Charges Act (which has a number of rules regarding the issuance of Development Charge Credits) does not apply to these agreements because the credits issued can be used for other Town fees in addition to development charges. This despite the fact that the KPMG report seems to show that the majority of the credits used before the cash payout were applied to Development Charges and Parkland Dedication Fees.
When were questions about this credit scheme raised?
In June 2017, before Regional Council, developer Rainer Hummel questioned the legality of the credit scheme and the reasoning behind the high valuation of the land. Hummel said that in the summer of 2016, Fonthill Gardens tried to sell credits to his company.
Last Autumn, the Region’s Audit Committee called for an audit of this transaction, and requested that the terms or scope of the investigation be determined in part by the Region.
After first denying that an investigation was necessary, the Town relented and said that it would hire KPMG to conduct a third-party audit of the land deal. The Town set the terms of reference (the scope: what was to be examined, and who was to be interviewed) for this process.
Was this actually an audit?
In late 2017, KPMG released its findings, but clarified, “KPMG has not audited or otherwise independently verified the accuracy or fair presentation of any of the Information.”
KPMG spoke only to current Town staff and the Town’s lawyer. KPMG states that its comments “are not intended, nor should they be interpreted to be, legal advice or opinion.”
Because of these limitations, the KPMG report does not address the three most important outstanding issues.
1. Was the credit scheme legal? Does it violate the Development Charges Act? KPMG concludes that it doesn’t know. “We are unsure if this contravened any By-laws or municipal legislation.”
2. Why did the Town choose to value the land as it did? The Town says that this money will eventually be recovered, and that it had to overpay for the land. But KPMG suggests that this is not correct. “It appears the Town had flexibility to negotiate the acquisition price of the Excess Parkland Dedication rather than pay the appraised value at the building permit stage.”
3. Was it appropriate for the Town to record future Parkland Dedication Fees as a revenue, even though these amounts are not due until a building permit is issued, by a number of future builders, at an unknown future date?