Water and Sewer Upgrade Costs -- $274,000,000?

[Mark Kindt]

So What's Wrong with "Off-Book" Assets or Liabilities?

Well, the biggest issue in Lakewood over the past few years was the use, misuse, and value of Lakewood Hospital--an "off-book" asset.

And, the next big issue in Lakewood over the next few years will be the nature, cost, and rate increases related to Lakewood's wastewater permit--an "off-book" liability.

None of this is spare change. These are all big numbers. Millions upon millions of dollars.

Little of it is transparent to either a citizen or a bond-holder.

[Mark Kindt]

The Next Recession

In the next recession, we may well discover that municipal bonds are as poor of an investment as mortgage-backed securities were in the last recession.

There are several reasons for this investment risk:

1. Unfunded "off-book" liabilities for federal mandates, like Clean Water Act compliance costs;

2. Underfunded public employee pension obligations;

3. Public fund accounting principles that permit the under-reporting of unfunded or underfunded liabilities or obligations;

4. A bond-rating system that over-rates the financial capabilities of the the municipal issuers of bonds; and,

5. A weak or missing regulatory environment.

This is not just a problem for the City of Lakewood.

[Mark Kindt]

"The Regulators"

The Ohio EPA and the U.S. EPA are not the bad guys here.

The City of Lakewood has had 45 years to comply with the Clean Water Act and, in fact, could have been -- should have been -- a leader in pioneering the mitigation of storm-water run-off and waste-water discharge to Lake Erie.

Postponing this effort, year-by-year, did nothing but increase the ultimate financial costs and citizen burden of implementation. Now, postponing compliance to future permits will have the same effect. Future engineered infrastructure is likely to be more expensive.

However, our friend, the Government Accounting Standards Board ("GASB") let's each city administration "whistle as it walks past the graveyard" and blithely ignore a $300,000,000+ "off-book" environmental liability.

Thank you, Great GASB!

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[Mark Kindt]

So What's Wrong with "Off-Book" Assets or Liabilities?

Well, the biggest issue in Lakewood over the past few years was the use, misuse, and value of Lakewood Hospital--an "off-book" asset.

And, the next big issue in Lakewood over the next few years will be the nature, cost, and rate increases related to Lakewood's wastewater permit--an "off-book" liability.

None of this is spare change. These are all big numbers. Millions upon millions of dollars.

Little of it is transparent to either a citizen or a bond-holder.

The hospital example is set-out with documents in another set of posts:

http://lakewoodobserver.com/forum/viewt ... 44#p184444

[Mark Kindt]

However, I want to continue to make my point about "off-book" assets and liabilities in terms of clarity and transparency in light of rulings by the U.S. Securities and Exchange Commission.

1. The 2017 CAFR describes how the former hospital site will be used for commercial redevelopment, but it is unclear to an educated reader whether the asset value of the hospital building or its real estate was carried on the books of the City of Lakewood or the Lakewood Hospital Association in 2017. Its asset value is described (see above), but where it appears in the 2017 CAFR is obscure. It could be there or it could still have been on the LHA or CCF books in 2017. (I can't tell and I've been out of law school for about 40 years.)

2. The 2017 CAFR is simply not transparent with respect to the long-term planning costs associated with the City's mandatory obligations under its 2014 NPDES Permit to complete major infrastructure improvements.

These observations are relevant to those who hold or will in the future purchase the municipal bond indebtedness of the City of Lakewood.

While the 2017 CAFR may be functionally accurate and fully comply with government accounting standards (GASB), as a document in the municipal bond market it has a variability of about $56M to $71M across a range of seemingly undisclosed assets and liabilities.

GASB versus SEC

Here's the problem with just relying on GASB and GAAP for public fund accounting.

Without additional meaningful disclosures, we can see that "off-book" or unreported assets or liabilities may present to the participants in the mutual bond market a materially unrealistic presentation of a city's actual financial condition. In the situation of the City of Lakewood, this was exacerbated by sworn affidavits filed in court that made material financial misrepresentations about the proceeds of the liquidation of Lakewood Hospital or the value of future tax revenues to the City.

While subsequent reporting may have cleared-up this problem, even that highlights the concern of the SEC about influencing the total mix of information available to the bond market.

Next I will post two pages from the Interpretive Guidance issued by the the U.S. Securities and Exchange Commission in 1994. This problem is well-understood.

[Mark Kindt]

U.S. Securities and Exchange Commission Interpretive Guidance (1994)

The full document is attached as a PDF.

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[Mark Kindt]

How Serious Is SEC Enforcement Action In the Public Bond Market?

Let's let the SEC answer that question for us:

https://www.sec.gov/municipal/oms-enfor ... tions.html

[Jim O'Bryan]

How Serious Is SEC Enforcement Action In the Public Bond Market?

Let's let the SEC answer that question for us:

https://www.sec.gov/municipal/oms-enfor ... tions.html

Mark


So if I understand your comments in this thread correctly, the City has violated the law in not reporting the facts of what is going on.

That while in the CAFR they report an active effort to keep the hospital going and making money until 2026 and beyond, they had already planned on closing it. That many of the "efforts" they commented on for the bright future of Lakewood were in fact smoke screens that had no actual depth or physical presence.

Hmmmmmmmmmmmmm.

[Mark Kindt]

In Summary

Neither local officials, nor their public relations consultants, are permitted to engage in misrepresentations related to the financial condition of the public entities that they represent.

Such misrepresentations would also include omissions of information that participants in the market for public bonds would find relevant to making an investment in such bonds.

Local officials do so at their own risk.

Practices like this can be sanctioned (and are routinely sanctioned) by the Enforcement Division of the U. S. Securities and Exchange Commission.

And, by "sanctioned", I do not mean "approved."