$15 Million More of Your Money About to be Wasted by GY City Council


After reading a recent financial analysis prepared by GY city management (and presented to GY city council at a June 18 work session) that any first year Finance 101 student would recognize for its ineptitude, improper representations of the facts, and therefore incorrect conclusion, I decided to go to last night’s Goodyear city council meeting to ask them a single, general question about how GY makes financial decisions for tax payers and use the Venida lease vs purchase analysis that they had seen the week before as an example.

My single question (as you can see on the video) to council was,

“Do any of you realize how flawed and improper this analysis ($15 million dollar lease vs purchase financial analysis for Venida Office purchase) is?”

Of course, none of them answered my question and then they went on later that night to disparage me and unanimously approve spending $15 million of your money based upon a faulty analysis that I had just pointed out to them.

Did any of them ask Dalke or Lange what I might have been referring to? No.
Did any of them ask me to elaborate on what I may have been referring to? No.

You can view the meeting video here. June 24 council meeting.

At minute 8 of the video I get my 3 minutes to speak. Then Sheri Lauritano attempts to show how smart she thinks she is by asking the city lawyer for clarification that the Venida deal is a “purchase” agreement not a “lease purchase” agreement. It is obvious from Sheri’s question, that she did not understand even a word that I said to them since I never referred to the contract type, but rather, I referred to a lease purchase financial analysis which is where you compare purchasing something vs leasing it. I tried to correct her from the audience but of course Georgia wouldn’t allow that and I don’t want the GY police showing up at my house like Roger Matlin.

Then Joe Pizzillo told me and the audience that he, Joe Pizzillo, had spent 30 minutes to an hour reviewing the finances on the Venida deal with city management and (I suppose) that makes it right. Instead, Joe has just admitted to all of us that he apparently, after working years in government finance, along with city management does not know how to do an appropriate lease purchase analysis either.

If you forward the video to hour 1:30 – 2:07 you will see council consider the $15 million dollar spend and you’ll see them in their statements try to guess just what I might have been referring to that they may have missed before they vote.

Gelzer parades Larry Lange up to speak. Gelzer is guessing that maybe I think the rates are wrong, (nope, that’s not it) and asks Lange questions about cost of capital and refers to how government does things differently than business, like maybe it is a “cost of capital” or “hurdle rate” issue that I have with the analysis (nope, that’s not it). While evaluating a project like this using those financial tools might be a good thing to do, but I already know not to make that argument since that is the red herring argument that GY politicians throw at anyone from the private sector when it comes to how government makes financial decisions. “We do it differently”.

What Gelzer apparently is uninformed about is that a lease vs purchase evaluation is in itself a form of hurdle rate analysis. One uses a true cost of capital or comparison to an internally generated hurdle rate analysis in order to compare and evaluate disparate
investment projects that compete for scarce resources. In this case we are only looking at a single project and trying to determine the most favorable approach to that single project. Gelzer may have had “graduate courses in finace” as he likes to brag, but he does not seem to have any experience applying any of the theory in which he may consider himself to be an expert. Sort of like Barack Obama.

Each of them makes a little speech about how good a job the city has done. Lauritano has them repeat that the purchase price on the complex is only $12.2 million and back in 2008 Venida was “asking” $23 million for it. Today, the Maricopa County Tax Assessor says the Full Cash Value of the property is only $6.4 million and dropping (see below). Once again, Sherri’s proclamation is completely irrelevant to this or any other discussion about purchasing the office today. It is the same as saying, “gas prices used to be $1.50 a gallon so buying a gas guzzler car looks like a sweet deal to me today”.

Wally states that while she was originally against this because she questioned the appraisals for the property (which I do also, because;
a) the two appraisals were so far apart
b) Dalke mentions one reason for the difference is different “lease rates” were used which makes me suspicious and
c) the 2013 full cash value of this property is listed as only $6.4 million (and going down) according to the Maricopa Tax Assessor (Maricopa link) and while this may not accurately reflect its market price it is so much less than the $12.2 million that GY is planning to pay for it, but I will get to that in a future article).
But Wally is all for it now.

Finally, Georgia wraps it all up by saying that my criticism of the analysis was “unjustified” even though they all still have no idea of what I might be referring to and that the city is “absolutely correct” on this.

I explain below in detail just how improper a job this was. What this turns out to be is a nearly $15 million dollar gift to local developer, Cornwell Corp.

Let’s Buy Venida Office Park for $15 Million Dollars. It Won’t Cost us a Dime!
Last week city management presented a proposal to purchase existing city leased office space based upon a financial analysis so obviously flawed and improper that as I said above, a first year Finance 101 student would find it laughable. It would be laughable if this analysis was not giving away another nearly $15 million of GY tax payers’ dollars to local developer Cornwell Corp, and private college, Franklin Pierce University.

In their analysis, GY concludes that they should purchase and invest a total of $14.75 million dollars to purchase the Venida office park where the city leases 60% of the space. Here is a link to GY’s own lease vs buy logic that they used to arrive at this conclusion. City Powerpoint analysis.

GY’s analysis is based upon the following assumptions;

  1. GY currently pays $23 per sq ft rent each year to lease their space in an agreement that has 4 years remaining. If GY no longer paid that amount in rent, they would save $1.3 million dollars per year.
  2. GY says they can borrow $10.1 million dollars for 10 years to purchase the space and the financing cost for $10.1 million would be about $1.3 million per year and GY would own the facility at the end of 10 years. Note that GY is planning to borrow the money from a bank because GY cannot by state law bond the money because GY has no bonding ability because of GY’s enormous debt. GY will have to go to a bank to borrow the money as a mortgage and pay it out of the General Fund. This outside bank borrowing will violate GY’s financial policies to not pay out more than 10% of the General Fund in debt and council will probably have to change that rule to go forward.
  3. GY would no longer pay $130,000 per year to the landlord for common area maintenance.
  4. Therefore, all of this results in, “no increase in payment amount to the City to Own”.

There are at least 3 major flaws in Goodyear’s analysis, none of which did city council guess correctly at last night’s meeting.

  1. The building and related project costs $14.75 million to purchase not the $10.1 million that GY plans to borrow. But GY uses only $10.1 million dollars in their financing calculation. Why? Because they apparently consider $4.9 million in available impact fee cash on hand as “free money” that they can use to purchase the offices. They subtract this amount from the $14.75 million dollar total investment to arrive at a $10.1 million dollar financed amount. This would not pass muster in any valid financial analysis. GY does not seem to care that at the end of the day, this money still came from taxpayers. It does not seem to matter to them that it might be used in other competing (and possibly better) financial investments that would actually benefit tax payers. They consider it free money. There is no other way to say it.
  2. Goodyear uses the remaining four years on their current $23 per sq ft lease cost at the Venida offices to justify the purchase and come up with $1.3 million dollars per year in total lease cost. But that is not what office space in GY currently rents for. In fact, you can go on line today and find over 34,000 sq ft of space advertised in the same facility for $10 – $12 per sq ft. Venita Business Park Lease Rates Link Couple this with the fact that their current lease only runs until 2016, a mere 4 years, while their purchase comparison is for 10 years! Sounds like the Obamacare cost savings analysis, doesn’t it?!
  3. After purchase, Goodyear allows themselves $130,000 CAM (Common Area Maintenance) savings for their 60% of total space in the office park in their analysis. But do they include any costs to maintain the entire site that they would own in their purchase comparison? No. Not a dime. GY claims they can take this credit because the building “will come off the tax roles”. Where is the debit then, for the $204,000 property tax revenues the city will lose in their analysis?

Goodyear does not have a lease vs purchase problem, they have a paying-above-market-rates rent problem. They should start saving tax payer dollars right now and sit down with developer Cornwell Corp and re-negotiate an extension to the 4 years remaining on their existing lease while at the same time start looking for another location to replace this one in 2016 and try to lock in low rates now.

The questions GY taxpayers must ask themselves are;

  1. Is this one more example of incompetence on city council being mislead by a clever city management?
  2. Is this incompetence on both sides?
  3. Or is this something more sinister like elected officials directing city resources to provide cover in order to satisfy their personal and political agendas at the expense of tax payers?

As a result of Goodyear city council’s behavior last night, I’ve answered these questions for myself. As a result, I plan to send a copy of this article to the Arizona Attorney General’s office and ask them to look into GY’s misappropriation of public funds or the obvious negligent misfeasance of Goodyear’s elected officials and/or city management. Contact information for the Arizona Attorney General is; communityservices@azag.gov

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2 Responses

  1. Good luck Howard!! Hopefully the AZAG will listen, but I’m not holding my breath on this one. Tens of emails were sent from me in 2008/2009, not one response was received… not even a “Lady, you have been deemed crazy by City government, therefore you are crazy… please leave us out of it.” response. NOTHING. Again, Goodyear citizens, watch carefully the actions of Dalke. Genesis 3.

  2. Howard, you say “As a result of Goodyear city council’s behavior last night, I’ve answered these questions for myself. As a result, I plan to send a copy of this article to the Arizona Attorney General’s office and ask them to look into GY’s misappropriation of public funds or the obvious negligent misfeasance of Goodyear’s elected officials and/or city management.”

    Many have experienced the same “boiler plate” letters from that office as well. Little will get done while the AG is under investigation and being sued by two whistleblowers, the office in chaos. I would be very surprised if you got their attention and an effective response.

    Try the DOJ Public Integrity Unit where corruption and fraud are handled.

    USDOJ: CRM: Public Integrity Section (PIN)

    http://www.justice.gov/criminal/pin/

    Jack Smith
    Chief, Public Integrity Section

    Public Integrity Section Direct Line
    (202) 514-1412
    Department of Justice Main switchboard
    (202) 514-2000

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