Absent a settlement, council members could decide to default on what city attorney Brian Kearney calls “a moral obligation” to make a $160,000 payment on Jan. 15. Should Buena Vista default, ACA Financial Guaranty Corp. would be legally obligated to pay the bondholders, Kearney said.

If that were to occur, the insurance company could foreclose on the city’s property and possibly force Buena Vista into bankruptcy court, said William Sihler, a finance professor at the University of Virginia’s Darden School of Business. Or at least that’s what occurs in the business world. Municipalities, especially Virginia municipalities, just don’t default on bonds.

A unique bond issue

The Buena Vista 2005 bond issue is unique. The city needed $9.2 million to satisfy bank loans incurred to purchase the hilltop land and construct Vista Links.

Kearney is quick to point out that it is not a general obligation bond, the type that municipalities frequently employ to finance the construction of a school, for example. That type of bond is guaranteed by the local government’s general fund.

The commonwealth of Virginia has such strong protections in place to protect these general obligation bondholders that it holds the power to swoop in and commandeer local revenue in order to satisfy the debt.

The golf course was funded through a lease revenue bond. This type of bond is used by a water authority, for example, to extend lines or build a treatment plant. Customers’ fees are pledged as payment.

To use this type of financial instrument, the city council created a separate legal entity, the Buena Vista Recreational Authority, and turned over the deeds to the golf course and surrounding land. It is the only property the authority owns.

When the authority sought financing, the potential income from golfers did not satisfy bond writers.

“The company that sold the bond and the insurance company that insured the bond wanted additional assets,” Kearney said. “The city pledged city hall and the police station. … Those are the only two assets pledged.”

And they are the only two properties he views at risk for foreclosure if settlement negotiations fail.

Sihler said that the insurance company’s lawyer might view the scenario differently. Since the city pledged its assets, it guaranteed the debt. The insurance company could then argue the city has more than two buildings and a golf course on the line.

Though the potential exists for ACA to force Buena Vista into bankruptcy court, Sihler said no one ever desires that scenario as the process is long, expensive and unpredictable.

“Usually the insurance company agrees to take a haircut and avoid lengthy litigation that ends up with them taking a haircut anyway,” he said.

No one from Buena Vista has contacted ACA yet. Kearney said that will occur if the council tonight votes to pursue a settlement.

Attempts to speak with an ACA representative for this story were unsuccessful.

This is not the first time that the Buena Vista council has considered defaulting on the bond.

In fact, technically, it is already in default. The city has been making only half payments for three years.

Trouble from the start

Buena Vista, according to its accountants, has sunk about $16 million into Vista Links. When conceived in the late 1990s, the golf course and the housing and commercial development that was expected to spring up around it were expected to be a catalyst for growth in the waning industrial town.

Feasibility studies, which cannot now be immediately accessed, determined the golf course project was viable. The council began purchasing land and created the Hilltop District that would encourage residential and commercial growth around the course.

“Council did the best it could with the studies that were presented,” Kearney said. “It was a different time and age. They were trying to move from an industrial town. We had very good industry, still do today, but they were trying to look in a different direction.”

But even before the first golfer stepped onto a green, a marketing consultant found the initial income calculations were off by 16 percent, but figured the project would still be viable if the number of annual rounds of golf were to increase by 20 percent the first year from a projected 20,600 rounds.

The first year, the target was hit: 24,173 rounds of golf were played. That was the highpoint. The number has slipped each year; last fiscal year only 13,263 rounds of golf were recorded.

But back in 2004, as the ribbon was cut on Vista Links, the nation was at the height of a residential golf-course building frenzy, and real estate ventures seemed destined to always appreciate in value.

Then the bubble burst.

By 2010, the city council said it could no longer afford the $660,000 annual debt payments, so it stopped paying. ACA drew down the city’s reserve fund to make the payments, and a year later negotiated a forbearance agreement.

The terms call for ACA and the city to split the annual payment to bondholders for five years; Buena Vista pays $330,000 per year, split in two payments due in January and July.

ACA’s payments are tacked onto the principal, meaning that the original $9.2 million debt is now north of $10 million, Kearney said.

Golf or government?

In July 2016, Buena Vista will be responsible again for the full amount. Vista Links, which still requires operating subsidies from the city’s general fund, will not be in any better position to assume the debt payments.

“We will have 27 additional years of payments,” Kearney said. “Do we continue to defer maintenance? To lose teachers to neighboring jurisdictions? To lose good people because we don’t give raises in city hall? This debt is sitting there and will be for many years to come.”

City Manager Jay Scudder said, “We’ve almost retooled the whole city from a financial standpoint. We’ve reduced staff 20 percent on the city side and the school side. We are leaner and meaner. There’s no more room to go.”

The golf course debt, he said, is “a major factor in the lack of reinvestment in core government functions: streets and sidewalks, curbs and gutters, all the services a city is responsible for.”

Buena Vista has $16 million in other outstanding debt, and a long list of municipal projects deferred because $330,000 comes out of the general fund each year for the golf course debt, and most years, another $100,000 or so goes to subsidize its operation fund. Other than school funding, it is the city’s largest budget item.

The council raised real estate taxes 6.5 percent for fiscal year 2010, cut employees’ pay and eliminated staff. City officials say they can’t tax more.

The numbers back them up. Virginia ranks the fiscal stress of each locality and calculates how much taxpayers could pay and how much they actually do compared to state averages.

The capacity of Buena Vista taxpayers to fund local government based on the value of their homes, cars and income is among the lowest in Virginia, yet, based on the 2012 stress index, they pay more than taxpayers elsewhere. Most Virginians pay, on average, 94 cents for every dollar worth of revenue capacity. Buena Vista residents pay $1.40.

“We’re missing opportunities,” said Economic Development Director Brian Brown. About 33 acres of prime industrial land lack a road and conduits that companies want to see.

Also, the sidewalks are buckled, water lines are aging and very little is being done to improve infrastructure or appearances.

“We have got to have curb appeal,” Brown said.

Moving forward

Kearney and Scudder declined to say what the starting point would be in negotiating a settlement with ACA. It is likely, though, to be pennies on the dollar.

The assessed value of the municipal building, police station and golf course add up to about $10 million. But true market value would likely differ.

The more likely scenario, under a foreclosure, would have the city leasing the buildings from ACA.

It is not clear how a foreclosure would proceed against city hall since the courts operate out of that building, and the judges control the courthouse.

Kearney said he wanted to make it clear that nothing has happened or will happen until the council acts tonight. It will be the first time council members have discussed a settlement or default in public, though it has been the topic of closed-door sessions. The meeting begins at 6 p.m.

Scudder said that he and the others have been gathering information to present to council members.

“This situation that Buena Vista found itself in is just an insurmountable situation for a decent-size locality, let alone a locality with 6,600 people and the socio-economic and cultural demographics of the area.”