By Ray Stern
By New Times
By Amy Silverman
By Stephen Lemons
By Stephen Lemons
By Monica Alonzo
By Chris Parker
By New Times
Late in July of last year, the Maricopa County Board of Supervisors held a special meeting. It was time to churn some debt.
Periodically during the previous two years, the county had developed an unfortunate habit of running out of cash to pay its bills. When that happened, the supervisors were called upon to move millions of dollars between funds, patching over the shortfalls.
On July 26, 1993, the supervisors met to shuffle sizable amounts of money.
That day alone, the five-member board would approve $128.8 million in short-term debt--equaling about one-tenth of the county's entire budget--to meet the county's pressing financial needs.
And on that day, the Maricopa County Board of Supervisors, led by former board chairman Jim Bruner, may very well have committed federal securities fraud.
Since New Times reported the full depth of the county's financial crisis four months ago--showing that Maricopa County had racked up nearly $100 million in hidden debt by using short-term credits--the county's financial meltdown has become a public matter.
The bills have come due for three years of county deficit financing. During that time, budget documents show, the county borrowed money it could not repay, using inflated guesses of each year's tax revenues to justify its action.
Most of the appointed county officials who oversaw the debt spree, including former county manager Roy Pederson, have been run off. A new management team is battling to bring the finances back under control.
The cleanup will be painful. A tax increase is likely in the next two years, although the supervisors continue to downplay that possibility. County employees have been laid off. Parks are closing, health services face the ax and the budgets of county departments are being pared to cover the tens of millions of borrowed dollars that must be paid back.
Supervisors have even been forced to consider selling the seat of county government--the downtown County Administration Building--for cash. While that embarrassment has been avoided, the county is planning to effectively take out second mortgages on two of its jails.
And it turns out that part of the financial sleight of hand that sank Maricopa County into this mammoth sea of debt may well have been illegal.
You are deeply in debt. You go to the bank and apply for a loan, saying you want money to buy a house. As you fill out the myriad papers that the bank requires, you neglect to mention that you owe a truckload of money on your credit cards. The bank doesn't catch on, and you get the cash.
Instead of buying a house, you use the money to pay off your other debts.
You have just committed fraud.
Although the mechanics are more complex, Maricopa County essentially played the same deceptive game last summer.
As part of a creative financing package that was taken before the Board of Supervisors last July, county officials asked for permission to sell $25.5 million worth of general obligation bonds. Those bonds had been approved by voters in 1986, but had not been brought to market.
After approving the sale of the bonds, the board promptly turned around and voted to lend the money to the general revenue fund to help cover daily operating expenses. (The money was to be paid back to the general obligation fund later, with interest.)
The bond money, of course, was supposed to be used to build specific projects--parks, jails and the like--that had been approved by the voters. But today, more than a year after the bond issue, none of the $25 million has bought a single brick, board or nail.
Instead, the money has been used as a cash pool for the county to dip into whenever it runs short of money. County officials, in fact, went on to promise one New York bond-rating agency that the county would deliberately not spend any of the money on capital projects for at least one year.
In and of itself, investing money obtained in a bond sale is not illegal. In fact, investing general obligation money so it can earn interest is a common government practice.
But in order to sell bonds, any government--including Maricopa County--must print a lengthy "Official Statement" that explains to potential investors what the borrowed money is going to be used for and what the financial condition of the government is at the time.
The Official Statement approved by the Board of Supervisors that day in July was a lie. It did not reveal that the bond proceeds were going to immediately be used to cover the county's operating deficit, and would be used for that purpose for more than a year.
Nor did it reveal that the county was engaged in a dangerous cycle of short-term credit that had plunged it into debt and threatened the very financial health of county government.
Investors would rely on the Official Statement to decide if the county's bonds looked like a safe place to put their money. But the statement did not tell them the truth about the county's financial situation.
In fact, the statement did not mention at least $100 million in county debt.
"That may be a real problem, between you and me," says a Washington D.C.-based municipal-bond-market insider. "That's the kind of thing that the Securities and Exchange Commission gets real excited about."
Four supervisors--chairman Jim Bruner and board members Ed King, Tom Rawles and Mary Rose Wilcox--voted for the potentially fraudulent bond issue. Board member Betsey Bayless, now chair of the board, abstained, because she is vice president of Peacock, Hislop, Staley & Given, the company that acted as financial adviser for the bond sale.