Last week’s presentation by the auditing firm KPMG answered some questions about Pelham’s finances while simultaneously raising others. As of this week, here’s what we know and what we don’t. For easier reading, numbers are rounded.
The 3.3 acre land purchase and credit-swap scheme
What we know.
● The Town approached the owners of this East Fonthill property in 2014 hoping to acquire about one-third of the 8.9 acre parcel. The owners informed the Town that they were not interested in selling only portions of the land. The Town says that it did not have the funds, or wish to take on debt required, to acquire the entire 8.9 acres, so it approached the Allen Group to see if it would purchase the full parcel of land with the idea that the Town could later buy from the Allen Group the 3.3 acres it wanted.
● The Allen Group negotiated a purchase price using an appraisal paid for by the Town of $202,000 per acre. It acquired title to the land in May 2015. The purchase price was based upon the land being zoned for agricultural use. The total price for the 8.9 acres was $1.8 million dollars.
● Later in 2015, instead of purchasing the 3.3 acres it needed to build Summersides Boulevard through conventional means (i.e. cash or loan), the Town issued “Municipal Credits” to the Allen Group—IOUs, in other words, that could be used like cash to pay any future fees that the company might owe the Town.
● The Town negotiated with the Allen Group to value the 3.3 acres of land it wanted not as agricultural, but as if it were building permit-ready, even though nothing about the land had actually changed since the Allen Group bought it. The Town contends that this valuation was required under a by-law to compensate developers for their “lost opportunity cost.” KPMG did not state whether the by-law actually applied in this case.
● The Municipal Credits did not technically constitute debt in 2015, according to KPMG, since the Allen Group could not compel the Town to pay out these credits. (However, the credit mechanism was clearly stipulated in a written agreement between the parties.)
● Even before the Allen Group had transferred title for the land to the Town, the company was re-selling the Municipal Credits it had been given. The company approached other developers, offering the credits at a 5% percent discount. One developer so approached was Rainer Hummel, whose Niagara-on-the-Lake company has substantial holdings in East Fonthill. Such re-sale was permitted by the original agreement, but the Town’s lawyers contended that the land title should have been transferred first. Hummel, who had never encountered such a scheme, says that he first took his concerns to Pelham’s CAO, Darren Ottaway (Ottaway denies this), then some months later to the Region.
● In summer 2016, the Town decided that the credit scheme was an “unanticipated burden of administration” and bought back the unused credits from the Allen Group for $3 million in cash. Councillors were told that no loan was needed to cover this amount, although former Councillor Marvin Junkin says that Council was not told where the Town had found the $3 million.
● This Municipal Credits agreement was not subject to the Development Charges Act and thus could not have contravened it.
What we don’t know.
● Whether the Municipal Credit scheme was created as a way to mask what otherwise would have appeared as long-term debt on the Town’s financial statements.
● Why the Municipal Credit scheme was not disclosed in notes to the Town’s 2015 financial statements. This information would be a material disclosure for certain users—for example the Region/Infrastructure Ontario and the Town’s bankers. It would have highlighted the impending transaction and may have changed minds regarding approving financing in 2016.
● Why the Town agreed to appraise the 3.3 acres the way it did, as if the land were fully serviced with water, sewer, gas, and electric. It would appear that Town by-laws relating to Parkland Dedication give the Town the ability to negotiate the value of Parkland Over-Dedication by any method desired. Why the Town chose this extraordinarily more costly method is a question that the Voice has asked KPMG, the Town, and the Town’s lawyers, with no response. In an interview with the Voice this past spring, the developer Rainer Hummel, approached by the Allen Group when it was still selling its excess Municipal Credits, characterized the deal as looking like “bonusing,” a form of municipal bribery that is illegal in Ontario.
● Where the Town got the $3 million dollars necessary to buy back the Municipal Credits from the Allen Group in summer 2016. Then-Treasurer Cari Pupo told Council that the $3 million would be paid out from the Town’s operating bank account. But as the balance of this account was just $554,000 at the start of the year, this explanation appears unlikely.
● Why the Town recorded future development charges as a current account receivable asset in 2016. Regional Audit Chair Tony Quirk says that this approach “created revenue out of thin air.” KPMG only presented the journal entry that was made. It did not conclude whether the entry was appropriate. The Voice has asked the Town, KPMG, and Deloitte, the Town’s 2016 auditor, to clarify the accounting standard used to justify this approach, a question that has also gone unanswered.
Summary
● In 2015, the Allen Group bought 8.9 acres of agricultural land for $1.8 million dollars—$202,000 per acre.
● Eight months later, the Town agreed to buy 3.3 acres of this land for $3.5 million in credits (which became $3 million dollars in cash when the credit scheme was suspended)—$928,000 per acre.
● Why did the Town spend $3 million dollars for 3.3 acres in 2016, when it could have spent $1.8 million dollars for the entire 8.9 acres just a few months earlier in 2015?
General Town finances
What we know.
● The Town’s reserve funds are nearly empty. The Treasurer has confirmed that the Town has minimal cash on hand to cover these funds and that reserves were expended on capital projects in 2016 and prior years.
● The Treasurer has confirmed that the Town’s cash position will likely not be better by the end of 2017. In fact, it could be worse, given that the Town’s Line of Credit may be maxed out at $3 million at the end of this month.
● Based on the Town’s 2015 audited financial statements, five of seven of provincial financial indicators showed a challenge of “Moderate.” Two showed a challenge of “High.” Per KPMG, ratings of “Moderate” on just two of the seven prompt follow-up contact from the province. These indicators are likely worse for 2016, as the Town took on yet more debt.
● A Municipal Advisor from the province will be visiting Pelham in January to discuss the financial situation with the Town Treasurer.
● In July of this year, KPMG found that the Town had $17.2 million in approved but not-yet-acquired loans. Last week, KPMG said that it “understands” that this figure is now $9.9 million.
● The Treasurer has confirmed that the Town needs $9.9 million in debentures in 2019 to primarily finance projects that were completed in 2016 and prior years. (Though she suggested that some of the $9.9 million may be financed through other methods.) She indicated that the Town would not take out any new loans or debentures in 2018 other than $15 million from Infrastructure Ontario, relating to the new community centre (which she says will be fully repaid within one year).
What we don’t know.
● On which capital projects—and when—reserves funds cash was used.
● Why the Town chose to ignore Public Sector Accounting Board (PSAB) recommendations and deplete itsreserves to fund extensive capital projects through “internal borrowing.” Such measures may have been taken, for example, to keep conventional long-term debt such as bank loans or debentures from appearing on the Town’s financial statements.
● Whether this internal borrowing was always done with Council’s approval. Councillor Peter Papp and former Councillor Marvin Junkin have said that it was not.
● Why the Town didn’t immediately inform lenders when new information about the lackluster state of the Town’s finances was presented to Council on September 5.
● Why the Town did not respond to, or publicly acknowledge, communication from the province regarding its “Moderate” and “High” financial challenge when first received. The Voice has learned that this communication was made prior to former Treasurer Cari Pupo’s departure.
● How the $17.2 million in approved but not-yet-acquired loans found by KPMG in July was been “updated” to $9.9 million. No details have been provided as to which capital projects in the 2017 capital budget have been cancelled or delayed.
● What alternative financing plan is in place for the $7.8 million to be recovered from developers, should the real estate market cool. At present, only an increase in property taxes appears to be the back-up plan.
● What future long-term debt beyond 2019 will be required to be taken out to fund required capital expenditures.
● The revised balances for projected five year (and beyond) Development Charge and Parkland Dedication Funds.
Still to come.
It should also be noted that no real information was provided last Wednesday with respect to the 2018 operating budget, and the potential for a property tax increase. (One resident in the audience posed this question to the Treasurer during her presentation. It went unanswered.)
Neither the Town nor KPMG will say when the full audits will be released. At this point, only KPMG’s PowerPoint presentation has been posted to the Town’s website.
As of press time the Town had yet to confirm whether a follow-up meeting will be scheduled, at which residents will be allowed to ask questions of KPMG, the Town Treasurer, the Mayor, and Council. Pelham’s Public Relations and Marketing Specialist Marc MacDonald said that the matter would be discussed by Council during its regularly scheduled meeting on Monday evening.
KPMG has not responded to, or acknowledged, any question posed by the Voice since the firm’s presentation last Wednesday.
