Peary Court Purchase: Speculators Win; Key West Loses

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Commentary by Dr. Martha K. Huggins…….

Key West, an island seven miles long with 7.4 square miles of land mass, is saddled with almost $107 million dollars of long-term debt.   City Commissioners have asked voters to approve yet another $55 million dollars in debt. Their appeal is couched in humanitarian concern for low-paid workers who need “affordable” housing, Ironically, such workers are often employees of the very City Commissioners who want KW government to subsidize housing for their exploited employees.

Key West needs affordable housing, but committing our government and its taxpayers to a new and extremely high long-term debt to purchase Peary Court is not the way to go. As Key West Senior Planner Kevin Bond[i] explained to Key West City Staff in February 2015, “The Poinciana Plaza housing complex has been a reservoir of affordable and workforce housing from the time” the city bought it in 2004 from the US Navy. Poinciana has three housing parcels: Poinciana Royale (50 units), Kathy’s Hope (16 units), and Casa de Meredith (16 units). This land parcel, of 28 acres still has land open for new units.

I propose that Key West government turn the Poinciana Housing into mixed social class housing to include low income renters along with better paid ones. Key West government might be able to fold some new expenses into the Poinciana Complex’s existing debt, use its current housing revenues as collateral for future bond issuances, and secure funding from US Housing and Urban Development to rehab units for the lowest income residents, especially to include special needs upgrades .

The Poinciana Housing Complex’s remaining land can be used to build new apartments for workers with incomes that are not over 70% of the region’s median income—our city’s teachers, fire fighters, law enforcers, and others who fall into that general income bracket. And unlike Peary Court, the Poinciana Complex is close to affordable markets, hardware, home merchandise, clothing and other stores. It is also close to schools and medical offices and has excellent access to city transportation into Old Town.

Key West Should Not Assume New Debt Attached to Purchasing Peary Court

On the face of it Key West seems solid financially. However, at the same time, it manifests some tell-tale signs of cities considered “distressed.” Not Detroit, Michigan, or Stockton, California’s ‘belly-up-distressed.’ The bell needs to be sounded for fiscal indicators that could point to ‘on-the-way-to-being-distressed.’   A very good and appropriately cautious Finance Director, Mark Finigan, believes that Key West is economically solid. But would Key West be if it added $45 million in Peary Court debt?

Here are some indicators that banks and other money lenders might look at when deciding upon extending a $45 million-dollar loan to Key West government for the purchase of Peary Court:

  • Key West’s Investment Earnings fell sharply and deeply between 2010 and 2013, recovering slightly in 2014, albeit still at a level almost equal to those disastrously low levels of 2004.
  • Key West’s “Property Tax” revenues have been relatively flat for the last 7 years. Not a good thing for lenders and their fiscally conservative bond purchasers. Even though a revenue bond is paid out of the proceeds of what it funds, investors like to see that a city has potential revenues—whether from property or other taxes and investments– to regularly cover any short-fall in revenues from the property to be bonded.
  • Two of Key West workers’ pension funds remain underfunded. Over the most recent 7 years (2007-2013), Key West government contributions to police and fire fighters’ pension funds have fallen from 86% of the expected 100% contribution by city government in 2007, to 71% of the needed contribution in 2013. This contrasts with Key West government’s ‘general’ employees’ pension funding, which ranged between 106% and 112% of the cities’ required level between 2007 and 2010, only declining to 100% in 2013. But the Key West Housing Authority’s (KWHA) employees’ pensions were the most underfunded: As a “component unit” of Key West government, the latter seemed to be dedicated to funding about half of KWHA’s required pension funds, with KWHA presumably being responsible for the other half. But the KWHA seems not to pay a good portion of its share of the (perhaps matching) pension funds of KWHA employees’ pensions. Their pensions, which were funded at the 86% level in 2007, declined sharply after that, from 79% in 2009 to 72% in 2013.

Research on cities across the US has consistently found that when municipalities are fiscally stretched they short-shrift workers’ pension funds. In addition to that possibility, the remarkable decline in KWHA’s payments toward its own workers’ pensions (KW government pays its share in full regularly), could indicate that the Authority—finding current Poinciana rent revenues insufficient to pay the principal and interest on their housing complex revenue bonds–deems it necessary to use pension fund payments to service their bond debt.

If Key West government and its taxpayers have to pick up the tab for KWHA’s revenue-bonded properties the city could use revenues from sales taxes. These have already spiked sharply and consistently upward and Key Westers are soon going to the polls to consider yet another sales tax increase.

Steady-State Economic Planning Creates a Myth

Key West government, like most other US municipalities, reports its debt in two categories: short-term and long-term. Since voters are about to consider letting Key West government take out more long-term debt, that is the focus of this Blue Paper article. Long-term debt—the monkey on our backs who hangs around like a really bad and enduring hangover— usually takes the form in Key West of floating a revenue bond to investors. Fausto’s Food Palace head, Jimmy Weekley, Historic Tours of America’s chief, Ed Swift, and the “Housing First” PAC set up by Weekley with a generous donation from Ed Swift, want voters to approve a new revenue bond so that the City can purchase Peary Court. ‘How can anything go wrong with that?’ supporters say.   ‘After all, the bond will be paid annually from Peary Court rent revenues!’ Their steady-state economics ignores the fact that our seven-mile island will continue to be on the track of destructive hurricanes that could devastate at lease some portion of Peary Court rentals. It disregards the potentially expensive maintenance on Peary Court’s aging buildings that might exceed rent revenues. And no one asks whether an exceedingly expensive Peary Court purchase would seriously burden our city government’s (and taxpayers’) own budgets for a very long time.

Can Key West really afford more debt? And that question generates another one: how much debt does Key West now have? Answering the latter question is not as easy as it seems because, “There’s Debt and Then There’s Debt.”

To Reduce Government Risk and Keep Taxpayers Happy, Governments ‘Outsource’ Debt

One might initially assume that the main stumbling block to discovering Key West Government’s current indebtedness would be that the city’s end-of-year reports (CAFRs) have had a number of graphic presentations that specifically omit revenue bond debt. Luckily I found some data in those reports that included revenue bond debt in the city’s calculations of all long-term debt.   I also found that City government had a calculation of all residents’ ‘debt load’ from this long-term debt of our city. The city’s calculation gives a relatively sunny picture of debt for the period from 2010 through 2013: Within each of these years the city’s debt burden decreased.

Likewise, so did the debt burden laid on Key West residents from the city’s debt: By 2013, each Key West resident—man, woman, and child—carried a debt burden from Key West government of around $1,356. Obviously, Key West residents do not write their own check each month to pay the city’s creditors. But they do approve–or not–new revenue bonds, like that being voted on March 15. The money’s got to come from somewhere and Key West residents one way or another pay for Key West government’s debt. We are paying for the sewer bonds through taxes on water. Residents in low-income housing pay down Key West debt through their rent payments and also through their water use. All of us pay sales taxes and some of these may ultimately go to pay any number of pressing government debts.

However, the previous sunny debt figure provided by Key West government is misleading; Key West residents actually carried a much heavier debt burden in 2013 than $1,356 dollars–a fact that I could only learn by examining what Key West government’s calculation had left out of its equation.

Calculating Municipal Debt When Some Debt is Excluded: Huh?

Well, for example, the debt on housing for poor folks was excluded from the Key West government’s calculus. Through a crafty slight-of hand, debt on Key West properties was handed over to the KWHA, at least as far as I can see. This slick strategy even has a name: “Conduit debt.” When a government issues municipal securities for investors to purchase—for example, selling revenue bonds as a way of financing a land purchase or/and rehabilitation of a land parcel’s structures–such as in 2003/2004 when Key West needed $16,000,000 to purchase the Poinciana Complex and its land from the US Navy. Enter the “Conduit Loan”: a “third party” is designated to collect rent revenues and make annual or semi-annual payments to the revenue bond’s investors. In the case of Poinciana Housing, the Key West Housing Authority (KWHA) became the “third party” responsible for living up to the bond’s loan agreement. However, if the bonded project fails—for example, goes into default because of falling rent revenues, or hurricane destruction of dwellings, or a fire—then the actual conduit bond issuer—in this case, Key West government and its taxpayers, cannot be held directly responsible for paying the bond’s interest and principal. No responsibility for the debt seems to equal not including the Poinciana debt in city government measures of its total debt load. In any case, according to Finance Director Mark Finigan, Key West government maintains funds on hand to cover default events, which, of course, are filled with taxpayer money.

While Key West government states in its end-of-year CAFRs that “the City is not liable on the [revenue] note [for Poinciana Housing and land],” in fact, all Key West residents could ultimately be responsible for the approximately $33 million dollars in outstanding debt associated with the Poinciana Housing Complex. Taking an out-of-sight, out-of-mind approach to the Poinciana debt, Key West government states that it does “not record…[the loan] on the City’s books.” [ii]

As I stated earlier, “There’s Debt and Then There’s Debt.”

Another set of debts that do not appear in Key West Government’s 2013/2014 debt load calculations is the non-interest-bearing loans that Key West government used to acquire the “Washington Street” property, to rehabilitate projects “on the land, [in its] ‘Home Investment Partnership Program,” to secure a mortgage for the low-income housing at “Key Plaza Sites A and B” and for “Roosevelt Gardens.” These debts, presumably also in the hands of the KWHA, equal just over $7 million dollars.

By adding these debts to those already included in the city’s long-term debt portfolio for 2014, one comes up with a less optimistic picture of Key West government debt: As of 2014, each Key West resident had a $4,114 share of Key West’s long-term debt. While a small amount of this debt will expire in 2018, most of the largest amounts will not.

If voters give Key West government the okay to purchase Peary Court and to do this through a revenue bond, then each KeyWester’s debt burden will more than double, to $5,952.

And by the way, the Peary Court purchase will not be free of fees. The city will need a “bond counselor” to ‘structure the deal’ and secure investors for the revenue. Key West government already has one on its Rolodex, since it has already used Tallahassee’s Bryant, Miller, and Olive [iii] before. I cannot say what BMO–as they are called by City government executives–will charge for their services. Similar cities with similar purchases have paid upwards of one million dollars for these services—plus, of course, a whole range of fees accompanying the purchase of property and the fees for lawyers to guide the city in its purchase. Peary Court rents will pay neither the Bond Council’s fees nor the other charges associated with purchasing a $55 million dollar property.

In the event that the Peary Court referendum passes with its accompanying revenue bond proposal, the most patriotic thing that taxpayers can do for their city is to get traffic and parking tickets and commit a crime that would end up with their valuable property being confiscated. The revenues from these items has fallen and you would assist in pumping up city revenues to pay for the enhanced burden placed by an over-the-top debt load.



[ii] CAFR, 2013:p. 74


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14 thoughts on “Peary Court Purchase: Speculators Win; Key West Loses

  1. Thank you for bringing up the Poinciana Complex, for which the city paid $16,000,000. If the city had agreed to make all of that housing “affordable,” they could have had the property at no cost. Instead, they agreed to pay $16 million instead, so that they could charge “moderate” rates. Just another case where the tax payers were saddled with the burden of subsidizing the rents for the children and employees of the well-connected.

  2. I love this analysis, but hope you will go further and publish the City’s assets, so we know what the debt to asset ratio is, without which we can conclude or evaluate little. I suspect it is very low, much lower than banks need to feel safe in making loans.

    Also, your closing comment implies that you do not expect the rents to be able to service the debt if the City purchases Peary Court, whereas income/expense projections show complete coverage plus SURPLUS.

    We can all just speculate, which is what’s been going on for three months, or we can vote for the referendums and let the City see if they can get financing with the debt covered by the rents. The way the referendums are written, they can’t go forward unless the income pays all the expenses.

    Peary Court was 98.5% rented throughout the recession. Anything that could cause a default, like a major hit from a hurricane, would have to be part of a much, much bigger crisis. You can count on the lenders to insulate themselves.

    Give this issue a chance. Save 157 homes for workers in perpetuity, without a penny
    falling on the backs of taxpayers, or push another 500 people into the out-of-reach rental market or out of Key West altogether. Only developers win if we lose Peary Court. Vote YES for worker housing.

    1. Just one small correction. The referendum DOES preclude the City from using any funds other than rents to pay the debt service; however, if you read it a little more carefully you will come to realize that it DOES NOT preclude the City from using our property taxes for expenses. Repairs, maintenance, utilities, management fees, etc, etc. could all legally be paid for using the City’s property tax revenue.

  3. I don’t know what is up with Key West and Monroe County governments lately. Why the desperate rush to spend all this borrowed money?

    Your point about steady-state economic planning is excellent. The Deep Water Horizon spill was five short years ago, and the housing bubble a year or two before that. Local governments need to plan for a rainy day. The affordable housing crunch is always present but it ebbs and flows. Purchasing Peary Court is such a resource suck. What if there is a bad storm, or an oil spill or a Zika outbreak? Or the Keys simply decline in popularity as a tourist destination? Will there be enough people willing or able to pay $2400 per month (or more) to live in Peary Court?

    The version of the pro forma presented to the banks in Addendum 1 of the RFP shows that the units need to be rented for $2400 per month in order to make the payments. And that’s just for the first year or two. Rents go up after that. (Note that there are different versions of the pro forma floating around. This one appears to be the most recent.)

    It just seems like some at the city haven’t looked at all possible options before rushing to Peary Court as THE solution that they have to throw money at RIGHT NOW. Many people have raised the idea of a living wage. Or building on existing city land.

    I get the feeling that the county and maybe Key West now, are counting on state money to bail them out of some rash spending decisions. Comm. Carruthers is pushing that Emergency Services Surtax as well, which is another sales tax. It’s such a weird proposal as it adds an additional burden on low to moderate income households (especially renters) – the very people who are being squeezed by the affordable housing issue. It makes me wonder if county finances are heading into rough waters but we just don’t know it yet.

    Anyhow, great analysis. Thanks for looking at this.

    Have you ever considered running for the County Commission? Somebody with your financial smarts would be an absolute game-changer.

  4. Margie;
    You mentioning only version 1 of the pro forma definitely slants the picture. When it was made, based on what was then market rates, they came up with a $750k excess. So they made version 2 (note dates -a couple days later,published right below it on the City’s home page red banner site).Version 2 redistributes $500k of the excess to lower the rents, to show a plan that allowed 40 low income rates, $1571, 38 median, $1965, and 79 moderates, $2358 – and they still have $250k excess. I never know when I read whether these are oversights or intentional, meant to slant the picture, but as you are quoting from the rfp, I’m allowing for the possibility that you have never seen Version 2, which is later.

    These numbers and all numbers to date are only speculation until and unless we pass the referendums and give the other 15 banks who expressed interest after the deadline, saying they couldn’t perform due diligence in time (before the referendum) but would consider the proposal if the referendum passes. Yes, only 1 bank, Centennial, made it to the deadline with a counter. I would not expect this negotiation to be done in just one offer and one counter, and with Key West’s excellent credit rating and net worth, I expect the City will/would have choices.

    1. The ONLY proforma shown to banks, as per the public records we requested, was the one that states that ALL 157 units will rent at the “moderate-income” level [$2358/month]. The only bank to respond thus far required a debt service ratio that would not allow the rents to go any lower. Neither of the proformas were based on “market rates” – both versions are based on the definitions of affordable housing at the different categories: low, median, moderate.

    2. If I recall correctly, there was one version of the pro forma presented in the original RFP that called for a variety of rentals as you described. The banks expressed concern over the debt coverage ratio shown in that pro forma. So the city issued a new one in addendum 1. That revised pro forma shows that all units will rent for $2358 per month.

      If the project is going to pay for itself from rental income, the rents have to be at least what is stated in the pro forma. Or no bank is going to finance it. The response to the RFP made that very clear.

      You can find a link to the amended pro forma here:

      1. O.K. so, to clarify: the banks have specifically rejected the proforma that shows rents lower than $2358 per month. Yet, the PAC continues to inform the public that rents will “initially be set from $2000 to $2400 a month.” How many people might vote yes because they believe what the PAC is saying about rents being lowered to $2000? Tsk. Tsk.

  5. Additionally, the following which is in the FAQ of the PAC’s website is disingenuous:

    “Who will be served by this purchase

    You. The entire community benefits from worker housing. The homes at Peary Court are targeted for median and moderate income workers​ as defined in our city code. Rents will initially be set from $2,000 to $2,400 a month. Should the stabilized cash flow from the project meet the purchase proforma the city will have excess funds to lower future rents or invest in more worker housing.”

    As you state “faithful reader” we don’t know what type of financing there will be and therefore don’t know what the rents will be. So telling voters that the rents will be lowered to $2000 is well … kinda not truthful… wouldn’t you say?

    1. but but but its only a little itsy bitsy lie.. ain’t it? 🙂
      in all seriousness I would think a pac originated by jimmy weakley with a blatant lie imbedded is next to meaningless and in his normal political scheme of things.

      considering the position he holds on the city commission it would seem like a gigantically huge ‘conflict of interest’. no?
      perhaps he needs resign the city commission and devote his full time to HIS PAC!
      best of cheers. wjm

  6. / Wonder why Weekly so deviously supported Bob Dean’s residency in Key West as FKAA Chair when so obvious he lives in Key Haven? Now you may suppose he did not want to lose that ally perhaps.

  7. All of the comments are interesting, thank you. I cannot respond to each of you because I lave a brutal lung infection and am just not functioning. Hope all of you vote and let’s just wait and see. Martha

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