The Problem of the Crystal Lake Civic Center Authority – Part 4 “No Payments Go To Principal,” Just ”Interest”

October 4, 2016, was the next time the Crystal Lake Civic Center Authority met.

The Raue Center is across the street from the Home State Bank.

The minutes follow:

Call to Order and Roll Call:

Crystal Lake Civic Center Authority Board Members present were: Chairman Tom Hayden, Vice Chairman Lisa Waggoner and Members Pete Affrunti, Greg Danielson, William Mack, Jr., Tom Ormsby, Gary Reece, Mike Splitt and Fred Wickham. None were absent.

Mayor Aaron Shepley, City Manager Gary Mayerhofer, Finance Director George Koczwara, Special Counsel Vic Filippini, Kelly Kost of Chapman and Cutler, and Robert Lewis and Andrew Kim of PMA Securities were also present.

Executive Director of the Raue Center Richard Kuranda and members of the Raue Center Board of Directors were present in the audience.

Approval of the Minutes of the September 6, 2016 meeting.

Fred Wickham moved to approve the minutes of the September 6, 2016 as corrected. Mike Splitt
seconded the motion. On roll call, all voted yes. Motion passed.

Appointment of Secretary

Lisa Waggoner moved to appoint Patricia Eagle as Secretary to the Civic Center Authority Board. Gary Reece seconded the motion. On roll call, all voted yes. Motion passed.

Appointment of Treasurer

Lisa Waggoner moved to appoint Civic Center Authority Board Member Greg Danielson as Treasurer. Pete Affrunti seconded the motion. On roll call, all voted yes. Motion passed.

Update from PMA Securities as to its due diligence process with regard to the potential
issuance of revenue bonds.

PMA Securities representatives Bob Lewis, Senior Vice President/Managing Director, and
Andrew Kim, Director Public Finance introduced themselves, as did Kelly Kost, Chapman &
Cutler municipal bond attorney.

Mr. Lewis stated that their objective at this meeting was to go over the current loan from Home
State Bank to the Raue Center, provide an overview of how the Civic Center Authority borrows
money, provide an analysis of finances and discuss the financing to proceed.

Mr. Kim provided the following information:

Loan Details

The original loan between the Raue Center for the Arts, Inc. (the “Corporation”) and the CrystalLake Civic Center Authority (“Authority”) as borrower and Home State Bank (“HSB”) as lender dates back to July 20, 2001 in the amount of $4,000,000 (the “Original Loan”).

It was refinanced in 2002 for 2 million, refinanced again in 2005 and again in April 2015 with a current balance of$2,090,880.00.

The original loan was restructured at least twice, most currently on November 24, 2015 in the
amount of $2,308,111.57 (the “Loan”) and consolidated other notes including:

  • Loan 59471761 $2,090,880.00/
  • Loan 59471753 $1,667,367.81/
  • Loan 59471757 $150,567.95/
  • Loan 59471758 $193,927.02/
  • Loan 59471759 $85,322.29 /
  • $6,305.07 was contributed to the loan by the Raue Center /
  • Loan 59471762 $140,000.00 ($137,231.57 remained as of 11/24/2015)/
  • Loan 59471730 $85,305.14/
  • $54,694.86 remained undisbursed as of 9/24/2015/
  • $80,000 was used to pay to the Borrower.

It was noted that the Raue Center appears to issue small loans to finance operations that were been consolidated with the Original Loan at least twice.

Interest rate information on the Loan

The interest rate on the Loan is a variable interest rate, which is the Highest Prime Rate as published in the Wall Street Journal.

Per the Loan documents, the interest rate may change from time to time. At no point will the interest rate be less than 3.25%.

As of 9/19/2016, the interest rate is 3.50%.

Under the Loan documents, currently only interest is scheduled to be paid; therefore, of the entire $2,308,111.57, no payments go to principal.

The entire principal amount is due in one payment on January 5, 2018.


Comments

The Problem of the Crystal Lake Civic Center Authority – Part 4 “No Payments Go To Principal,” Just ”Interest” — 11 Comments

  1. A Relevant History Lesson:

    Back in the 1930s, the Chicago Board of Education borrowed money using Tax Anticipation Warrants.

    The unique thing about “Warrants”, as opposed to other types of borrowing, is that the Warrants were payable from one specific year’s operating tax levy.

    Unfortunately, the Board of Ed spent that money and the Warrants went into default.

    An attempt was made to issue general obligation bonds, backed by the power of the Board of Ed to levy property taxes unlimited as to rate or amount for the purpose of repayment.

    However, a taxpayer filed suit objecting and the Illinois Supreme Court ruled in favor of the taxpayers as a group, ruling that the risk the owners of the Warrants took was their problem, and the loss could not be transferred to the taxpayers.

    For many years the Board of Ed continued to carry the defaulted Warrants on their books.

    They had the legal obligation to repay them, but they did not have funds legally available for that purpose.

    Finally, after about 50 years, their auditors agreed they no longer needed to include information about the Warrants in the notes to their financial statements.

    The lesson here is that the Raue Center and the Bank may have made mistakes in the original borrowing, but it will be interesting to see if it can be cured by the issuance of bonds and, if so, what kind: bonds repayable solely from revenues of the Raue Center or bonds backed by the City of Crystal Lake, either their “moral obligation” pledge or some explicit property tax backing.

    I would deny that the City has any “moral” obligation with regard to the bonds.

    To imply this is to put the taxpayers on the hook sixteen years later for a risk they never agreed to.

    Let’s be clear: the Raue Center was one of those good ideas that had “unintended” consequences — and I use that term with tongue in cheek, since usually the consequences are obvious to everyone except those directly involved.

    Specifically, there is insufficient demand in the larger community for two civic centers.

    Turning the old movie theater into a civic center damaged demand at the Woodstock Opera House.

    It may have seemed like a wonderful civic idea, and I have no doubt that everyone involved had nothing but the best of intentions.

    And I applaud those who donated their own money to this cause.

    All wonderful people.

    I even like the Raue and have been to a handful of events there.

    But the fact remains that opening the Raue damaged demand for the Woodstock Opera House and now, instead of one civic center for which the larger community might — MIGHT — have sufficient demand, we have TWO civic centers ten miles apart competing with each other.

  2. Robert Lewis and Andrew Kim of PMA Securities were at the October 4, 2016 Crystal Lake Civic Center Authority Board meeting.

    There are almost certainly documents and presentations from PMA to the Board which have not been made available to the general public.

    Such documents are subject to a FOIA request to the Crystal Lake Civic Center Authority.

    PMA provides financial advisory services to many local units of government in the Chicagoland area.

  3. When Bill Dwyer was tin-cupping all over the county to get the funding for the renovation he repeatedly assured that it would make money and be self-sufficient.

    He never spoke to me again when I pointed out that Marengo had a theater that closed and that the Woodstock Opera House was never used to capacity.

    Politicians love to get their names on brass plaques paid for with other people’s money.

  4. The city of Crystal Lake has buried Agenda Packets for the Crystal Lake Civic Center Authority on its website with no clear path to the documents.

    AWFUL transparency.

    The last Civic Center Authority board meeting listed on the City Calendar of Events was February 7, 2017.

    The Civic Center Authority board had been meeting twice a month.

    There are no future Civic Center Authority board meetings scheduled.

    The Civic Center Authority board had been meeting every two months, and past minutes stated, after the faulty loan matter is resolved, there would be no more Civic Center Authority board meetings for some time.

    ——–

    September 6, 2016 Civic Center Authority Agenda:

    7. Resolution authorizing the Development of a Borrowing Plan for Potential Civic Center Authority Revenue Bonds and Authorizing and execution of a Financial Advisory Agreement with PMA Securities, Inc.

    ——–

    October 4, 2016 Civic Center Authority Agenda:

    6. Update from PMA Securities as to its due diligence process with regard to the potential issuance of revenue bonds.

    ———————

    December 6, 2016 Civic Center Authority Agenda:

    3. Approval of Minutes of the October 4, 2016 meeting (apparently there was not a November meeting).

    4. Update from PMA Securities as to its due diligence process with regard to the potential issuance of revenue bonds.

    5. Discussion of next steps with regard to potential issuance of revenue bonds.

    ————-

    February 7, 2017 Civic Center Authority Agenda:

    3. Approval of the Minutes of the December 6, 2016 meeting (apparently there was no meeting in January).

    4. Discussion regarding discontinuing potential issuance of revenue bonds.

    5. Land Trust No. 4498 – Transfer property to the Crystal Lake Civic Center Authority in its own name and dispense with the Trust.

  5. The Shady Lane Theatre in Marengo closed in 1999, was lost to fire in 2009, and the nearby restaurant was lost to fire in 2014.

  6. Typo in 05/08/2017 at 3:00 pm comment above.

    The clarification is the Civic Center Authority had been meeting once every 2 months (not twice a month).

  7. From the article:

    “Interest rate information on the Loan

    The interest rate is a variable interest rate, which is the Highest Prime Rate as published in the Wall Street Journal.

    Per the Loan documents, the interest rate may change from time to time.

    At no point will the interest rate be less than 3.25%.

    As of 9/19/2016, the interest rate is 3.50%.

    Under the Loan documents, CURRENTLY ONLY INTEREST is scheduled to be paid; therefore, of the entire $2,308,111.57, NO PAYMENTS GO TO PRINCIPAL.

    THE ENTIRE PRINCIPAL AMOUNT IS DUE IN ONE PAYMENT ON JANUARY 5, 2018.”

    note: emphasis added via capital letters

    +++++++++++

    “Bankrate

    Wall Street Journal Prime Rate

    Prime Rate, Federal Funds Rate, COFI Rate

    May 10, 2017

    WSJ Prime Rate

    This Week: 4.00

    Month Ago: 4.00

    Year Ago: 3.50

    What it means: The initials stand for the Wall Street Journal, which surveys large banks and publishes the consensus prime rate.

    The Journal surveys the 30 largest banks, and when three-quarters of them (23) change, the Journal changes its rate, effective on the day the Journal publishes the new rate.

    It’s the most widely quoted measure of the prime rate, which is the rate at which banks will lend money to their most-favored customers.

    The prime rate will move up or down in lock step with changes by the Federal Reserve Board.

    How it’s used: The prime rate is an important index used by banks to set rates on many consumer loan products, such as credit cards or auto loans.

    If you see that the prime rate has gone up, your variable credit card rate will soon follow.”

    http://www.bankrate.com/rates/interest-rates/wall-street-prime-rate.aspx

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