Ladies and Gentlemen:
I write to you as the Mayor of the City of McCall to inform you of recent legal developments that impact all of the members of this community. The City of McCall must find a way to pay judgments entered against the City by the United States District Court for the District of Idaho in excess of Six Million Dollars ($6,000,000.00). These judgments are
final and irreversible.
This is a critical time in the history of our community. The City does not have the ability to immediately pay these judgments. The City, however, must make difficult financial decisions in order to satisfy the judgments entered against it because we must find a way to raise significant revenues for immediate payment of the judgments while simultaneously providing vital public services.
I urge each of you to read what is written below describing the crisis the City faces. I personally invite each and every member of this community to attend the Town Hall Meeting scheduled for this Monday, May 14, 2007, at 6:00 p.m. at the Hunt Lodge. The City Council values your opinion and sincerely seeks your input because the decisions the City must make will affect us all.
Very Truly Yours, Mayor Bill Robertson
The City is required to pay over $6 million to Employers Insurance of Wausau and St. Clair Contractors Inc. As of this writing, the City does NOT HAVE THE MONEY TO PAY!
The City has been ordered by US District Court Judge B. Lynn Winmill ("Judge Winmill") to immediately pay surplus funds and to borrow additional funds sufficient to immediately pay the Judgment in full. Judge Winmill's Order requires immediate action by the City.
The City believes very strongly that the methods of payment identified by the Federal Court are not authorized by Idaho State law. The City disagrees with Judge Winmill. However, the City
is in the very difficult position of balancing its respect for the Federal Court with the equally important obligation to comply with State Law, the Idaho Constitution, and to protect its taxpayers and residents.
What Does This Mean to Property Owners in the City?
The first option ordered by the Court is to borrow enough money to satisfy the Judgment and then raise property taxes next year to entirely repay the loan. The necessary loan would equal approximately $5.8 million dollars. To repay that loan in one year would require a property tax increase in one year of about $730 per hundred thousand dollars of assessed value. This increase would effectively double the amount of property taxes each landowner paid last year. This action requires the approval of Valley County officials and the Idaho State Tax Commission. The response of these agencies will be determined only after the City borrows and imposes the tax. The second option ordered by the Court is to issue coupon bonds. However, coupon bonds are only available to pay approximately $3.3 Million of the Judgment. After issuing coupon bonds, nearly half of the Judgment would still remain unpaid.
The City Wants You to Understand the Problems.
The City Council is hosting a town hall style meeting on Monday May 14 to present these issues to the community. Please come to The Hunt Lodge at 6:00 p.m. Monday evening to learn more.
HOW DID WE GET HERE?
McCall forced to stop discharging treated wastewater into the Payette River
The events that led to the entry of the judgment against the City began in the mid 1990s when the City was ordered by the Idaho Department of Environmental Quality ("DEQ") and the
Environmental Protection Agency ("EPA") to discontinue any discharge of treated wastewater into the North Fork of the Payette River. In an effort to comply with the orders by DEQ and EPA, the City undertook the complex process of determining how it could design and administer the construction of land application facilities for both the storage and disposal of the City's treated wastewater. This process took several years.
In the late 1990's, the City sought the involvement of the community to determine both the location of the pond that would be required to store the City's treated wastewater and the engineer
to design and administer the construction of the new wastewater facilities. There was disagreement over where the storage facility should be constructed and which engineering firm the City should have retained for this important and vital project. After much debate, the City ultimately chose the current location of the storage facility and the retention of JUB Engineers, Inc. ("JUB") as the engineer for this project. The City obtained funding sources through a combination of both grant and loan funds for the construction of the land application facilities.
J-Ditch Phase Two Project Construction
In May 2000, the City entered into a contract with St. Clair Contractors, Inc. ("St. Clair") for the construction of the storage facility for the City's treated wastewater ("Facility"). Employers
Insurance of Wausau ("Wausau") provided bonding to St. Clair to ensure performance of the construction of the Facility. The Facility was supposed to be completed by the late fall of 2000. St. Clair did not complete the construction of the Facility within the time frames set forth in the contract with the City. After consulting with JUB and the City's attorneys, in January 2001 the City decided to hold St. Clair in default of the contract for the construction of the Facility. St. Clair challenged the City's decision to hold St. Clair in default.
Wausau agreed to complete construction of the Facility, but also challenged the City's decision to hold St. Clair in default. Wausau hired a different contractor to complete construction of
the Facility and commenced construction in the spring of 2001. Disputes arose between the City and Wausau soon after Wausau took over construction. After consulting with JUB and the City's attorneys, the City decided to hold Wausau in default of its agreement to complete the construction of the Facility.
The City refused to accept the Facility as constructed by St. Clair and Wausau. In 2002, the City hired another contractor, Contractors Northwest, Inc., to complete the construction of
the Facility. The City exhausted all of the funds available for constructing the Facility by 2002.
The City and Contractor Are Sued by Wausau
In December 2001, Wausau sued both the City and St. Clair for claims relating to the construction of the Facility. St. Clair also sued the City for claims relating to the construction of the Facility.The City countered with its own claims against both Wausau and St. Clair. Additional parties were joined to the lawsuit and complex litigation ensued over the next two years in a schedule controlled by the Federal Court. The trial was held in the spring of 2004. On May 13, 2004, the Federal Court entered its Judgment against the City of McCall ("City") in the amount $4,955,096.00. The Judgment was entered after a 27 day jury trial was conducted before Judge Winmill in the Federal Courthouse in Boise.
McCall Appeals the Judgment
The City requested that a new trial be held based on errors the City believed occurred during the course of the trial. Judge Winmill did not rule on the City's request for a new trial until March 31, 2005 when he denied the City's request and further awarded an additional $985,901.64 to Wausau for attorney's fees and interest.
In April 2005, the City, through new counsel, filed its appeal to the Ninth Circuit Court of Appeals requesting a reversal of the District Court's Judgment and a new trial. The City followed
the appeal process and had its appeal heard on February 8, 2007. The Ninth Circuit Court of Appeals denied the City's appeal and affirmed the trial court's Judgments on February 28, 2007.
While the City's appeal was pending, in June of 2005, Wausau filed a motion to enforce its Judgments. The City vigorously defended against Wausau's motion believing the City
may prevail on its appeal. During this time, the City also analyzed its ability to satisfy the Judgments, in the event the appeal was denied. The City concluded that it has a limited ability to pay the Judgments under the constraints contained in both the Idaho Constitution and the Idaho Code which allow a city to pay only the amount that they can raise in a single year through property taxes.
Wausau's motion to enforce the judgments was not set for hearing by Judge Winmill until July of 2006. While the appeal was still pending, in October of 2006 Judge Winmill entered
an order requiring the City to pay any surplus funds the City was holding and to "collect and pay funds by such means as are available to it to satisfy the Judgments." The City did not then, nor has it had any surplus funds since the time the October 2006 Order was entered and may not have sufficient surplus funds available this year to pay anything more than a fraction of the Judgments. In accord with Judge Winmill's October order, the City included the Judgments into its plan for budgeting for the upcoming budget process as required by state law. Based on the City's good faith interpretation of Idaho law, the City can only raise a limited amount of revenue to satisfy the Judgments.
McCall is Ordered to Raise Property Taxes
In March 2007, Wausau and St. Clair filed another motion seeking to hold the City in contempt for not paying the Judgments. Judge Winmill set the motion for hearing on April 18, 2007. The City argued it was not in contempt because it had no surplus funds available and because it had included payment of the Judgments into the budgeting process. Further, the City was advised by legal and agency experts that Idaho law specifically limited the amount of money the City could raise to pay the Judgments.
On April 23, 2007, Judge Winmill did not hold the City in contempt. However, he did order the City to (1) immediately pay surplus funds and ordered the City to (2) immediately borrow
money to pay the Judgments and/or (3) issue bonds to pay the Judgments. The District Court did not agree with the City's interpretation of Idaho law, and found that the 3% cap on property tax increases did not apply to the City for the purpose of paying the Judgments.
WHAT CAN THE CITY DO TO COMPLY WITH JUDGE WINMILL'S ORDER?
The City Council is making every possible effort to comply with Judge Winmill's orders while also protecting the City's obligations to its citizens and continue to operate and provide services. This has been a difficult process. The City has reached out to various professionals, including accountants, attorneys, bankers and engineers, to determine how the City can meet both of these goals.
The City recognizes that the Judgments entered by the District Court are final. The City's ability to pay the Judgments and the revenues available to pay the Judgments, however, have been, and are currently being explored by the City Council and City Staff. The City is considering appealing the Court's most recent Order.
The three alternatives specified in the April 23rd Order are each discussed in more detail below.
What Surplus Funds are Available?
In the ordinary City budget process, following each year's statutorily required audit, the City is advised of all revenues and expenses and based upon the audit, is allowed to declare any funds in excess of expenses to be `surplus' for allocation and use by the City. The City presently believes that it may have approximately $300,000 in `surplus' funds. These funds could be declared and available for immediate payment in the next few weeks.
Can the City Borrow the Money to Pay the Judgment?
Under Idaho Code Section 50-1006, the City has the authority to `immediately' borrow as much as it can raise in property taxes in the next fiscal year. The City believes its ability
to raise property taxes is limited by Idaho Code Section 63-802, which creates a 3% cap of the amount a municipality can increase property taxes in a single year. Judge Winmill disagrees, and has ordered the City to borrow the full amount of the Judgments immediately.
The City uses U.S. Bank as its principal bank. Following the entry of Judge Winmill's April 23' Order, the City asked U.S. Bank to loan it the money needed to pay the judgment under 50
1006. U.S. Bank declined. The City presently does not have any bank willing to loan it the funds necessary to pay the judgment, using 50-1006 as the basis for repaying the judgment.
Can the City Use 50-1019(2) (the "Coupon Bond") to Raise the Money?
Following the entry of Judge Winmill's April 23,d Order, the City has sought to borrow money using the Court's Order and Idaho Code Section 50-1019(2) as the basis for the indebtedness.
The City has been unable to borrow using this authority, and has been advised that if it wants to use this statute and the Court's Order as a basis for securing revenue, it must obtain State Court judicial authority under the `ordinary and necessary' exception to voter approval for obtaining the bond. Alternatively, the City could hold a valid bond election and obtain voter approval to raise approximately $3.3 Million of the judgment. It remains unclear and uncertain as to how the City could then raise the additional funds necessary to pay the remainder of the Judgments.
CAN THE CITY SELL PROPERTY TO PAY THE JUDGMENT?
Yes. However, by statute the City cannot be forced to sell City property. Idaho Code Section 50-217 prohibits any property of the City to be seized and levied to satisfy a judgment. Before the City can sell property it must be declared `surplus' in a public process where the City must declare that the property is not essential to the City and not being used for a `public use.' Any citizen can object during the public process.
CAN THE CITY RAISE SEWER RATES TO PAY THE JUDGMENT?
The City does not believe that it can raise sewer rates to raise funds to pay the Judgment under Idaho law.
The Idaho Supreme Court has ruled that rates may only be used to pay for actual operations and actual construction of facilities used in the particular City enterprise (e.g. the water treatment plant).
WHAT HAPPENS IF THE CITY CAN'T PAY THE JUDGMENT?
If the City cannot pay pursuant to Judge Winmill's current order, then Wausau/ST. Claire will-no doubt ask for new and additional `orders' mandating other actions by the City (such as
drastic cuts in City operations and services, and the like) in order to raise more `surplus' funds.
In addition to the items set out in Judge Winmill's order, Wausau/St. Clair has suggested that perhaps the voters in the city of McCall will choose to `vote' in a bond election to impose taxes on themselves in order to pay the Judgment. That will be up to the voters.
The City has also explored the possibility of filing a Chapter 9 - Municipal Bankruptcy. This is a federal bankruptcy exclusively available for municipalities like the City of McCall.
As opposed to Chapter 7 liquidation, Chapter 9 is similar to a Chapter 11 reorganization, and would allow the City to reorganize its financial affairs in an effort to be fair and equitable to all of the City's creditors. This would stay the order by Judge Winmill and allow the City time to explore alternatives and attempt to determine the impact of Idaho law on the obligation to pay the Judgment while the City continues to operate and provide the full range of services to its citizens pending a final resolution.
WHAT HAPPENS NEXT?
The City is inviting all of the citizens of this community to meet with the City Council, the City Manager and Staff to discuss how the City will proceed in light of the current situation. Difficult
decisions must be made and sacrifices will be necessary. The City will continue to protect the interests of all of the members of this community because we are all facing the serious problem of raising adequate revenues to pay the Judgments.
TIMELINE OF EVENTS
• 1995 - EPA orders McCall out of River
• 1995-1999 - Planning and financing
• May 2000 - Contract with St. Clair signed
• Nov./Dec. 2000 - St. Clair defaults - McCall terminates the contract in Jan. 2001
• Dec. 2001 - Wausau and St. Clair file suit
• May 2004 - Wausau/St. Clair win judgment for $4.95 million + fees & interest
• March 31, 2005 - Motion for New Trial denied - Judgment becomes final
• April 2005 - Appeal filed with US 9th Circuit Court of Appeals
• June - Sept. 2005 - City attempts mediation & negotiation with Wausau - Efforts Fail
• June 2005 - Wausau files Enforcement Motion to Order Payment by City
• Oct. 2006 - Judge Winmill rules on Enforcement Motion - Orders City to: Immediately turn over surplus funds - Use "such other means as are available" to pay
• Feb. 2007 -Appeal argued at the 9th Circuit
• Mar. 5 2007 -Wausau files contempt motion
• Mar. 8 2007 - 9th Circuit denies the appeal
• April 18, 2007 - Contempt Motion argued
• April 23, 2007 - Winmill Orders City to: - Immediately turn over surplus funds - Immediately borrow and tax under IC 50-1006 and / or - Issue coupon bond under IC 50-1019(2) April 26, 2007 - City receives Audit Report and may identify surplus funds
May 10, 2007- City has choice(s)
