In 2005, the City of Buena Vista in the Shenandoah Valley issued $9.2 million in bonds to pay for construction of the Vista Links golf course. To obtain financing, the city purchased insurance for $400,000 and pledged the golf course, police station and municipal building as collateral.
The city made its debt payments for several years but encountered difficulties in 2010 when the annual payment was scheduled to increase to $660,000 and the golf course was still operating in the red. The city went into default and entered into an agreement with its insurer, ACA Financial Guaranty Corp., to make half payments for five years. ACA remitted the other half but added it to the principal. The agreement calls for the city to return to the full $660,000 annual payment in 2016 and continue for 27 years.
On the logic that the city will be unable to make the full payment in 2016 if it continues make the half payments today, City Council voted earlier this week to default on its bond payment due in January 2015. Needless to say, ACA is unhappy with that decision. “The unilateral act by the current city council demonstrates an unwillingness to act in good faith to negotiate a solution,” said ACA in a press release. According to the Roanoke Times, ACA could foreclose on the golf course, police station and the portion of city hall that does not include the courts.
What possessed the City Council of Buena Vista, a city of less than 7,000, to go deep into hock to fund construction of a golf course? The Roanoke Times provides some background:
Vista Links was viewed as an economic development project that would move the city away from its industrial base and spur commercial and residential development while attracting visitors and their money.
“In the 1990s we were struggling to find an economic driver to enhance our aging housing base and diversify our economy,” [Mayor Frankie] Hogan said. “So we hired some consultants who showed city council projected numbers for a golf course that exceeded reality. Little did we know. But we should have.”
Bacon’s bottom line: Three lessons here. First, beware economic-development Hail Mary passes based on municipal debt. The city is far worse off now, saddled with debt and a ruined credit standing, than it would have been had it stuck to more prudent policies. Second, beware consultants. Maybe they know what they’re talking about, maybe they don’t. Third, beware fads. Other municipalities turned to golf courses as a development elixir. Many of those have fallen short of rosy projections. Indeed, the entire golf industry, public or private, is hurting.
The only people who should build golf courses are those who really understand the business and are prepared to handle the risk of failure — which excludes just about every municipality in the country. The lesson applies not just to golf courses but convention centers, baseball stadiums and other speculative “economic development” ventures. Local governments should stick to core competencies like education, public works and public safety at which they can excel.
(This article first ran in Bacon’s Rebellion on December 12, 2014)