Missoula pays $1.78 million in water-company condemnation case, so far (February 2, 2015)

It would be a big hit to cash reserves, but just a slice of the city’s capacity to bond.

So far, the city of Missoula has paid $1.78 million in its quest to condemn Mountain Water Co., according to City Hall. And the money the city is using to pay the legal bills and other expenses wasn’t earmarked in the budget, chief finance officer Dale Bickell confirmed.

To make the payments, the city has set up a separate fund, one currently running a deficit, Bickell said. He said the city is borrowing from itself on a temporary basis to cut those checks.

He anticipates the city will incur a total $2.4 million in its own costs through the end of the condemnation case’s upcoming trial.

(But) we can’t permanently spend that money, Bickell said.

The city of Missoula’s eminent domain case against Mountain Water Co. and owner the Carlyle Group goes to trial in March.

After the trial, the city will determine how to reimburse the fund and pay remaining expenses.

It will pay its own legal and expert witness bills, plus the necessary expenses of litigation the court awards to defendants, a total Bickell estimated will come to $4.2 million for all parties.

If the city wins the case and gets to buy the utility, it plans to roll legal and other acquisition costs into the total purchase price using a revenue bond backed by customers’ water bills.

Barclays Capital has said the city could afford to pay back $102 million based on current water rates.

If the city loses, it could pay those bills several different ways, Bickell said. He said it could dip into general fund reserves, internally finance a portion of the total, externally finance some or all of the debt, or use a combination of approaches.

In the unlikely event that we lose … we’d probably do a combination of external and internal financing, Bickell said.

Recently, the city used a judgment levy to pay for the legal costs in another lawsuit. However, Bickell said the administration has not discussed using it in the condemnation case and does not know whether doing so would be legal.

If the city wanted, it could externally finance the whole $4.2 million in the form of a limited obligation bond, he said. He said the city can legally bond up to roughly $102 million.

Currently, the city has borrowed $11.5 million of its limit for projects such as fire stations and water parks. Those bonds are financed over 20 years, and the annual payment is $1.18 million, he said.

Adding the total estimated legal bill to the current $11.5 million would push the amount borrowed to $15.7 million. That approach doesn’t move the dial a whole lot in terms of the city’s legal capacity to bond; the city would be using 15 percent of its capacity, as opposed to 11 percent.

It would mean a considerable jump in the annual payment, though. The city would have to pay roughly another $325,000 a year, or a total $1.5 million.

A $325,000 debt payment is something we would be able to handle. It’s not negligible. It’s real money, but it’s something we could handle out of current resources, Bickell said.

The city also could opt to borrow a smaller portion from itself, Bickell said. The internal financing would offer the city flexible repayment terms and an interest rate that’s lower than the rate for a limited obligation bond.

The city also could repay a portion of the water acquisition fund using its reserves, Bickell said. However, he said he would not recommend tapping reserves because the city has only recently been able to grow the balance to the recommended $4.26 million, or 7 percent of its general fund.

If the city uses reserves to pay even just its own estimated portion of the bill, $2.4 million, it would hurt city coffers, he said. He said it could affect the municipality’s solid credit rating, unlike the other financing options.

If we had a $2.4 million hit on our general fund reserve, that could be a serious problem for our credit rating, Bickell said.

The 2015 budget narrative notes the city’s general fund obligation bonds went from an A+ rating to AA. The city’s general obligation bond rating also went up, from AA- to AA+.

City Councilman Adam Hertz, a Realtor and former retail analyst, said he agrees with Bickell’s assessment of how litigation expenses could affect the city’s bonding capacity. Hertz, however, does not sign onto the administration’s priorities.

We could instead bond for things we’ve been told the city can’t afford, like public safety improvements, said Hertz, the single consistent vote on the council against paying water acquisition bills.

The city can afford to bond for the estimated $4.2 million, but the annual payments would cut into city services, Hertz said. Even if the city used a bond for only its own estimated $2.4 million portion of the bill, the annual payment could push $200,000.

(It’s) an awful lot of snowplowed streets and filled potholes and new sidewalks, Hertz said.

This year, the citywide road district increased $200,000, an amount the budget narrative referred to as significant. The city is putting $100,000 a year to the Missoula Economic Partnership, a project Mayor John Engen deemed a priority for the city.

The cost of losing the condemnation case is higher than the city estimated last spring. Then, the mayor estimated the city would pay as little as $100,000 if it lost, or as much as $800,000 – including the defendants’ legal bills.

Currently, the city’s bills alone are at $1.78 million, but the total bill for the attempted acquisition of Mountain Water is up in the air. The trial doesn’t start until March, the clock is still ticking, and appeals are possible.

Montana’s eminent domain statute says the court shall award necessary expenses of litigation to the condemnee if the defendant prevails. The defendant gets necessary expenses if the court denies a sale – or if it orders a price that’s more than the plaintiff’s final offer.

In this case, the city’s final written offer was $50 million, but it earlier had offered $65 million.

Mayor Engen recently has argued defendants are racking up unnecessary litigation expenses, and he does not believe the court will award all the costs Mountain Water and Carlyle will claim.

In court documents, for instance, the city notes Carlyle has spent time reading lengthy documents aloud in depositions, even though the city agreed in advance the contents could be part of the record.

As of late 2014, total legal costs for the three parties was some $3.5 million; Carlyle’s bill was at $700,000, and Mountain’s was at $1.4 million.

Source: Keila Szpaller, Missoulian