OXFORD — The development of two large commercial projects in Oxford happened because the City Council made a promise to pay back debts of its Commercial Development Authority.
But these promises had the potential to leave the city's taxpayers on the hook for millions of dollars if the proposed deals didn't get done.
At least two times since Oxford created its Commercial Development Authority in 1994, the City Council has promised to pay back money the board borrowed for commercial development projects.
The council's actions appear to conflict with the state law. The law says municipalities cannot be liable for paying the bonds of commercial development boards, but people familiar with state law and municipal bonds say that doesn't mean cities can't agree to pay these debts with taxpayer money.
CDAs are created by cities to offer incentives to lure large commercial projects, like Oxford's Wal-Mart Supercenter and the Oxford Exchange shopping center. Oxford's CDA developed the properties for these businesses using a combination of borrowed money, money made from the sale of city-owned property, and taxpayer money.
The state law authorizing CDAs says cities that create them can't be held responsible for any money borrowed by the board. Clifford Lanier, owner of The Frazier Lanier Company which sells municipal bonds to investors including Oxford CDA bonds, said Oxford has an A1 bond rating, which he calls "as strong as rope."
"It's as solid as it gets," Lanier said.
Mayor Leon Smith, speaking before undergoing surgery in March, said Oxford's CDA wouldn't take out loans if the city couldn't legally repay them.
The only catch: planned CDA projects can fall through, potentially putting taxpayers one the hook for millions borrowed to fund projects that might not work out.
That was the case with a proposed deal in Oxford for property across from the Wal-Mart Supercenter. The CDA issued $4 million in bonds in 2004 for the project. The CDA borrowed the money to develop the property, but the project didn't pan out. But the taxpayers were still on the hook for the $4 million.
The city in 2005 transferred the bulk of that money for development of the Oxford Exchange.
Problem solved. And it wasn't even a problem, according to Lanier. Lanier, who has sold municipal bonds to investors for 50 years, said the city saw another use for the money.
"It was an assigned obligation with Home Depot and there was some out in the contract and the process did not go forward and the money was held fully invested and applied toward the Oxford Exchange," Lanier said.
What if the Exchange had not come along?
"The bonds would be called back in," Lanier said.
Lanier said there is a risk doing deals this way, albeit a small one.
"The risk would be this: that the Oxford Exchange closes, all the stores close, they generate no sales tax and the city is still paying back the money they borrowed, several million for the perpetration of the site," Lanier said. "But I think the chance of the Oxford Exchange closing with all the separate leases and so forth is not anything to be concerned about and they have already received many times over what was put into that site."
City attorney John Phillips said without city backing, the CDA could not borrow money for projects.
Tracy Roberts, assistant general counsel with the Alabama League of Municipalities, said the wording of the law just means CDAs can't borrow money on their own and make a city pay for it. It doesn't bar cities from agreeing to pay the debt, he said.
Alston Ray, a Birmingham attorney who works with municipal bonds, said the law isn't clear on whether cities can promise to pay the debts of boards like the CDA. Before constitutional amendment 772 passed in 2004, cities could not give something of value to a private company. He said the passage of 772 makes it more likely cities could make such a guarantee. But that would not have applied in 1995, when the city guaranteed the bond payments for the Wal-Mart Supercenter.
Oxford Council President Chris Spurlin said if a project is in the city's best interest it should be willing to pay back the bonds. Councilwoman June Land Reaves said if the CDA acts on behalf of the city, the city council should back its actions.
"I think if the (city's CDA) takes on a debt the city should be responsible for covering that debt," Reaves said.
Councilman Steven Waits agreed.
"Because of the fact that the CDA is an arm of our city's government, I think we have a responsibility to back them," Waits said.
Attempts to reach councilmen Phil Gardner and Mitch Key were unsuccessful.