Learning from Buena Vista’s Golf Course Default

vista_linksby James A. Bacon

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 $660,00 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.

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31 responses to “Learning from Buena Vista’s Golf Course Default”

  1. good post. Now I want to know the political makeup of the City Council that did what can only be described, as an incredibly stupid thing – with taxpayers money.

    I strongly suspect this was one or two guys idea that was “sold” to the others.

    there is a story here… on how it got started…in 2004

    and the Auditor of Public Accounts has this:


  2. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    “Second, beware consultants. Maybe they know what they’re talking about, maybe they don’t.”

    No – they very rarely know what they are talking about. Don’t believe anyone who does not have a substantial amount of Skin in the Game.

    1. what they don’t have apparently is bond counsel or financial advisors like Davenport.

      They only have about 5 million a year in tax revenues..

      they basically bet the farm on the golf course – and if it failed, it could
      take the city into bankruptcy and may well do that if the debt holders get serious.

    2. Indeed. Never hire a lawyer or visit a doctor or dentist. They have no skin in the game. C’mon Reed. Lots of people sell their expertise without having skin in the game.

  3. TooManyTaxes Avatar

    Skin in the game is critical. Transurban has invested its money in the construction of the Beltway HOT Lanes. Bechtel did not invest a dime in the construction of the Silver Line, Phase I. Yet both were constructed under the PPA. How can that be?

    The best thing local government can do to attract business is to operate efficiently, providing effective services, making sound decisions, regulating sensibly and keeping taxes and fees reasonable. These are the places where people like to live and businesses follow.

    1. Reed Fawell 3rd Avatar
      Reed Fawell 3rd

      In building second expansion phase of Dulles Airport the Authority paid their construction consultant in fees three times more than it cost to build the entire airport project the first go around.

      And despite (or perhaps because) of those consulting fees, the cost overruns during construction of the expansion were astronomical. The supervision of these sorts of public work projects in Virginia have recently been a scandal, crony capitalism on steroids. It did not use to be this way. VDOT was highly competent at one time, and perhaps still is today.

    2. makes me wonder why Buena Vista did not try to get some of that Tobacco money, eh?

    3. So, low taxes are correlated with population growth? San Francisco is pretty much of a ghost town. C’mon TMT.

      1. Buena Vista also has a Community College AND University!

      2. TooManyTaxes Avatar

        Average per capita income in Fairfax County decreased by more than 2% from 20012 to 2013. But I guess ordinary people don’t count. How many years do think taxes can increase faster than incomes as is happening in Fairfax County? You need to hang out with more commoners.

        1. You need to hang out with more mathematicians. Show me where, on an overall basis, low tax rates draw in people and high tax rates send people packing. Tax rates are exorbitant in San Francisco and there is a housing crisis given the number of people moving in.

          This seems to be one of those conservative theories which doesn’t hold up once you do the math.

          I am fine if you prove me wrong. I like the government less than you do. I just don’t see the statistical relationship between high taxes and population shrinkage or low taxes and population growth.

          I think taxes turn out to be a relatively minor point versus other factors.

          1. it’s an interesting enough thesis though – and surprised the anti-tax folks have not cooked up some sort of study to prove it.

            The questionableness of some other claims from the right has not kept them from cooking up similar studies!

          2. TooManyTaxes Avatar

            Fairfax County has become dependent on foreign immigration for population growth as more existing residents are leaving than are being replaced by other residents of the United States. I got that from the late Chris Walker. I cannot find the materials he gave me, but I did read them carefully a few years ago. They demonstrated how dependent Fairfax County is on immigration for growth.

            Ed Long made a number budget talks last spring where he noted more higher income people are leaving the county than are moving in. As expected, with the flat-lining of high-paying jobs and strong growth in low-paying service jobs, that makes sense to me. I think we are far from calamity, but Fairfax County’s strong dependence on federal spending and contracting is posing the strongest challenge to County government in many years.

            Unless something has changed recently, no one expects growth from the commercial real estate sector. Even in Tysons, much of the new commercial space consists of existing companies consolidating their offices in Tysons, at least, according to the Tysons Partnership. Essentially that’s what CapOne is doing. That’s why the forthcoming move of Intelsat to Tysons is so important.

  4. Desperation. It’s not the same as Richmond or Raleigh or DC. It’s a small city that relied upon manufacturing and small town businesses like insurance agents and little department stores and car dealers. When the manufacturing went everything else followed. What’s left? Tourism _ it’s a beautiful part of the state but nothing fancy or upper class. It was a risk but when you are faced with desperation you clutch at straws. And guess what – there were professionals who glad to give a little false hope for a fee.

    I think a lot of the political issues and extreme conflict arises from the conflict between the educated urban and semi urban areas and the rest of the state. One is growing and one is losing wealth and young people – a process of deterioration that no one seems to have an answer for. The rural areas are desperate, they are losing their young adults and their culture, they feel betrayed by the country and they resent and blame the new order.

    I got a little excited but in retrospect the town elders of Buena Vista must feel abashed and a golf course must now seem like a bad idea. But the investment.banks, the bondholders and the insurance company compay should shoulder part of the blame and the burden – I am sure that their primary concern was the sale and the fee and not the business sense of the deal. What are the bondholders going g to do with a municipal building or a fire station of a city that can’t pay its ills?

    1. totally on board with the commentary. But by any measure it was reckless..and at the least they’re going to lose the golf course and probably try to extract tax reductions on it and perhaps waivers on development restrictions. Whatever happens – it likely won’t be good for the town.

      Buena Vista – is a stones throw from Lexington – with two significant colleges so it’s probably better off than many rural towns with their industry gone away.

      1. Reckless? If those are revenue bonds (vs general obligation) it was brilliant. The City Council of Buena Vista gambled on economic development and the insurance company and bond holders are left holding much of the bag.

        Meanwhile, somebody will buy and operate the golf course free of debt.

        So, Buena Vista gets a golf course to attract tourists after paying several years on a 30 year note.

        How big could the police station be in a town of 7,000? Saving $660,000 per year is enough to build a new police station every year.

        Yeah, those dunces on the Buena Vista City Council really screwed this one up.

        1. sorta like a scofflaw saying he came out well after letting the loan company take his car back ….

          the article said they had provided city buildings for collateral – that might well have a downside – downstream – but more than that – this will surely impact their credit rating – for all future credit. At some point, they will need capital facilities and the loan market for them is going to be brutal.

          beyond that Don – this is not “brilliant” in terms of good governance and best practices unless you also want to apply the same label to Detroit and other cities and towns that have demonstrated irresponsible behaviors that those on the right will undoubtedly say – is an example of reckless tax and spend scofflaws…

          here’s what it looks like to future potential lenders:

          ‘CCC’—Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.
          ‘CC’—Currently highly vulnerable.
          ‘C’—Currently highly vulnerable obligations and other defined circumstances.
          ‘D’—Payment default on financial commitments. <<<<<<<<<<

          yes.. yes.. I know.. this too is Obama's fault…

        2. here’s all of them – that gives an appreciation where Buena Vista will likely end up.

          What do the letter ratings mean?

          The general meaning of our credit rating opinions is summarized below.

          ‘AAA’—Extremely strong capacity to meet financial commitments. Highest Rating.
          ‘AA’—Very strong capacity to meet financial commitments.
          ‘A’—Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.
          ‘BBB’—Adequate capacity to meet financial commitments, but more subject to adverse economic conditions.
          ‘BBB-‘—Considered lowest investment grade by market participants.
          ‘BB+’—Considered highest speculative grade by market participants.
          ‘BB’—Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.
          ‘B’—More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.
          ‘CCC’—Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.
          ‘CC’—Currently highly vulnerable.
          ‘C’—Currently highly vulnerable obligations and other defined circumstances.
          ‘D’—Payment default on financial commitments.

          1. I understand bond ratings. You need to understand the difference between general obligation and revenue bonds. General obligation municipal bonds are issued against the taxing capability of the issuer. These bonds become worthless only when the issuing city defaults (essentially goes bankrupt). Revenue bonds are issued against the revenue from a particular project. They become worthless when the project fails to generate enough revenue to cover the bond payments.

            The Buena Vista bonds in question were lease revenue bonds secured by the golf course, the police station and part of city hall. The bondholders will be paid by the insurance company ACA.

            While the default will make it harder for Buena Vista to issue revenue bonds in the future I am not sure it will affect the overall credit rating of the town.

            Two important points:

            1. Per Jim Bacon’s statement, “The city is far worse off now, saddled with debt and a ruined credit standing …”

            This is quite obviously incorrect since the city has defaulted on the debt – meaning it effectively no longer exists. The city may have to negotiate with the insurance company to get a release on the foreclosed properties or it might decide to just move on. The question of a “ruined credit standing” is quite debatable given that these are lease revenue bonds not general obligation bonds.

            2. “Second, beware consultants.” The consultants in the late 1990s who told Buena Vista of the benefits of building a golf course were wrong. However, that was during the height of a golf course building boom driven by baby boomer demographics and a robust economy. Buena Vista and their consultants were not the only people who misread this trend. Additionally, whoever advised Buena Vista on how to structure this debt did a good job of protecting the people of Buena Vista from much of the damage that could occur in a default.

            Jim’s point to “Beware fads” is dead on. At the end of the day the golfing fad of the late 1990s drove this bad overall decisions. All of which makes me wonder what Bacon thinks of the possibility of the craft brewer / pub operator coming to Richmond with the help of taxpayer money – is that a fad too?

          2. Every Year, a company called Davenport – comes to brief the BOS on it’s financials and the discussion is fascinating …

            and what I got out of it is that no matter what debt instrument – if you are not scrupulous in repaying it – it will have consequences on your entire ability to access credit – even if it is lower level than GO bonds – it can affect the GO bonds.

            the other thing(s) – is that you not only have to maintain a healthy contingency fund but you must have a tax rate that can pay all the bills including servicing the debt and keeping the contingency fund topped off.

            and this year – they were told the things that kept them from a AAA rating which includes a DIVERSITY of revenue sources – to not rely on just a limited and inflexible number of revenue streams.

            They also don’t like exceeding the debt to budget ratio as well as debt to revenues.. etc…

            By the time they get done with you – you’re down to your underwear and they are pulling back parts of that to getting an even closer look!

            and they show ratings from all 3 agencies – and explain what there are downgrades on select items.. no stone unturned.. almost better than an audit!

            what Buena Vista did – is going to have negative consequences that will harm it’s ability to do business and limit what it can do – even things that might save it money in the longer run.

            so I don’t know bonds and debt like DonR does but I do – do a pretty good listen to folks like Davenport …

          3. I profess no expertise, but I think Don is right to say that there is an important difference between GO bonds and bonds backed by a particular revenue stream. In all likelihood, the bonds in question were Economic Development Authority bonds. The city is not legally required to make good on them, and its G.O. bond rating may not be directly effected. On the other hand, Larry is surely correct that there will be negative repercussions in the credit markets. For certain, Buena Vista will find it difficult to issue EDA or other revenue bonds in the future. And it might suffer some spill-over on its its G.O. bonds as bond investors wonder if these guys know what they’re doing.

            Regarding consultants and fads… my problem with consultants is that they tend to chase fads. Not all do, but many do.

          4. we might be saying similar things – but GO is generally “full faith and credit” with no collateral.

            if a jurisdiction bails out on ED or similar bonds – you can pretty much write off future “full faith and credit” loans because who would trust repayment with no assets to backstop the loan?

            I think Buena Vista is going to have a heck of a time getting ANY loan money in the future without paying huge interest… imagine if they have to build a school or a fire house.. or perhaps a govt building to replace the one that was repossessed?

            you should go look at the Virginia Auditor report. If not mistaken – their total revenues are about 4-6 million a year.. trying to build a 20-30 million school … without getting a loan…

            go back t Richmond – and the beer deal – I was frankly surprised to see that RIchmond had a solid credit rating – I thought AAA -.. so they have the capacity to “gamble” a bit. Buena Vista had zero capacity to gamble – fad or not.


          5. TooManyTaxes Avatar

            Fairfax County’s debt management staff has indicated that, while revenue bonds are not a taxpayer debt, bond rating agencies consider the amounts of revenue bonds when issuing credit ratings.

          6. re: ” Fairfax County has become dependent on foreign immigration for population growth ”

            you make it sound like Fairfax would not be growing without foreign immigration.. right?

            re: debt and credit agencies… you default – and it will affect any/all credit you seek… guaranteed.

        3. What an interesting way to look at it. Of course I doubt the City Council was that calculating but I suppose they might have considered the deal a low financial risk. Embarrassing and good luck trying to sell any bonds for a while.

    2. re: ” ….small city that relied upon manufacturing and small town businesses like insurance agents and little department stores and car dealers. ”

      from my view – conflating manufacturing with rooftop demands like food, department stores, auto, etc – clouds the issue.

      Manufacturing are what I call “net” jobs – jobs that would not exist organically due to a symbiotic service economy for a given jurisdiction.

      In other words – people need food but they repair furnaces or a doctor provides services to locals and from those transactions – buys a car – but it’s all contained within a jurisdiction/region/bounded area/MSA, etc).

      what generates jobs in those areas over and above the symbiotic rooftop economy ?

      That would be any company that produces good and services that it sells beyond the local economy .

      it would also included things like a military base, or government services not provided via local taxation – post offices, regional fed/state offices, etc.

      and then retirees over and above the normal percent for a given area – for instance a retirement community consisting of people who do not earn money from the local economy.

      and you can pretty much prove this by looking at what is left in a given community after it’s major manufacturing has left. don’t count the “rooftop economy” – take that out – then see what is left. and in those places where there is very little left – no big population of retirees and no county seat where govt is present (including colleges) – then you have basically incorporated communities with weak economic activity – more a name than a place where any significant commerce is present.

      Virginia has dozens, if not hundreds of places like this. Often they are little more than a sign announcing their name.

  5. errata – they will lose the golf course and the new owners will… somehow do whatever they can to get their money back.

  6. The bonds came out with a coupon rate of 5%. As far as I can see trading started 4/8/2005 with an effective yield of 5.1% given the discount on face value of the bond. Over the time between 2005 and now the bonds have traded at effective rates as high as 8.2%.

    Those are remarkably high rates given that the bonds were insured.

    In other words, the risk of this venture was priced into the bonds from the get go.

    What I don’t know is how much the bond insurance cost Buena Vista. One would assume that it must have been quite pricey since the bonds have traded at effective rates far above market even with the insurance.

    People who buy near-junk bonds should expect that they may get burned. Insurance companies that insure near junk bonds should expect the same.

    As an aside, as I understand it – Buena Vista is still willing to negotiate with the bond insurance company. They have voted to suspend the expected 1/15/2015 payment which has created something of a ruckus.

    While the bonds may be in technical default there is every chance that the technical default will be resolved through renegotiation.


  7. TooManyTaxes Avatar

    Larry, the data I saw, which is now several years old, showed domestic out-migration for Fairfax County, made up by in-migration by people from other nations. And more recently, I’ve been told the income/education levels have decreased, quite possibly from the slowdown in government contracting. I don’t suspect Fairfax County is alone. I was told last night Rosslyn has a 30% commercial office vacancy rate. Fairfax is at 19%.

    1. TMT – I guess my take is to ask if this is a national wide or virginia wide urban trend or just something unique to NoVa?

      what do you think?

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