On a blustery late-October evening, a parade of SUVs, sedans and trucks weaved through the immaculately paved roads of a subdivision just south of the city of Lake Lotawana. They motored past a beige stone sign proclaiming the name of the expanse - Foxberry Estates - and down a divided street with a row of a dozen or so three-bulb streetlights guiding them toward a little building called "the clubhouse."
Inside the clubhouse, about 30 residents of the Lake Lotawana Community Improvement District walked past a tabletop map showing the unrealized Foxberry empire. In the building's conference room, the neighbors gathered to listen to Deputy State Auditor Harry Otto debrief them on the failed CID.
There was little small talk as the neighbors flipped through copies of the audit report. One gray-haired man in a suit muttered "wow" to himself as he read the damning findings. Then Otto, flanked by two other state auditors, began unpacking the political and domestic ramifications of the CID's collapse - starting with the announcement that the CID was the only such subdivision in Missouri ever to file for bankruptcy.
"For better or for worse, and I guess for worse, you're a little bit unique to be in the condition you're in," he told his audience.
The bankruptcy itself wasn't news. The CID went belly-up in 2010. The evening's jolts were in discovering just how badly the CID had been operated.
A CID is an area, defined by its municipality, that can sell bonds for special projects and levy special assessments on property to pay off the bonds. CIDs can also raise the sales tax, typically by 1 percent. The revenue raised is used to finance what the state Department of Economic Development's Business and Community Services Division defines as "public-use facilities and establishing and managing policies and public services relative to the needs of the district."
Property owners who want to start a CID must petition their municipality and show in detail how it will function. The city then must pass an ordinance creating the CID. For instance, Main Street Corridor Development Corporation (MainCor) has a CID, as does downtown Kansas City, Missouri, and the River Market. There are even CIDs with a single property owner. This summer, the City Council approved a CID that includes only the Ameristar casino. The City Council is now considering limiting the use of CIDs.
The Lake Lotawana audit report's 17 pages lay out the ways in which the developers in charge of the CID mismanaged the district, which the city authorized in 2005. It's a baffling history that brings into question the use of special districts anywhere. (Kansas City, Missouri's City Council is currently weighing whether to curtail its use of CIDs, with Lake Lotawana an illustration of the argument against.)
Developers within the Lake Lotawana CID earmarked CID funds to build a sewer plant and lines for the 352 new homes and big-box businesses planned for the area. It was a modest goal that the CID's board of directors turned into a spectacular botch.
The CID board issued $8.85 million in bonds to construct the sewer plant and its accompanying system. The bonds were a rarely used kind called "bond anticipation bonds." How rarely used? Otto had to look them up. "The first time I read it and got into this," he told the homeowners, "I said, 'What is a BAB?'"
The CID planned to pay off the BABs by issuing more common, longer-term bonds. But that never happened. The CID ran out of money.
And there was another problem with the $8.85 million in BABs: The CID spent only $4.7 million for the wastewater treatment plant.
"It's a bit unusual to see someone borrow the interest," Otto said at the meeting. "When you go borrow money for your house, you borrow the amount, and then you pay the interest. You don't up the loan so that you have money to pay the interest on the bigger loan."
Otto explained to the homeowners that the board apparently planned to pay interest on the bonds with the money remaining in its coffers - the $4.15 million not spent on the plant. But in March 2010, the cash ran out, and the CID defaulted on the bonds.
The audit shows another glaring shortcoming of the CID: Developers didn't pay as much assessment as they should have, which would have provided the CID with needed revenue.
"For example, the total special assessment calculated for 2009, 2008 and 2007 was $2,047,836 for the development companies," the audit report reads. "But the amounts actually billed only totaled $25,216." The total assessment for Gibson's General Store, one of only two businesses in the CID, were calculated at $15,627, but the billed assessment was only $2,502.
"These special assessments, although they were written up, were never collected," Otto said. "The bills for these assessments didn't go out to the developers. They did go out to the homeowners."
The audit cites numerous other flaws with the CID's management and rates it as "poor," the state's lowest possible audit score.
Among the audit's other findings: The board did not keep minutes for closed meetings; the CID didn't submit annual financial reports to the State Auditor's Office (as required by law); and two members of the board (developers Klonda Holt and Pat Holt) voted to lend $60,000 to their own company, Lightfoot Development LLC. The property owned by that business was foreclosed on in December 2010.
The loan to Lightfoot Development went through in January 2010, just two months before the district defaulted on its bonds. Lightfoot has since filed for bankruptcy. A separate $100,000 loan was made to Lone Summit Development Group, which also had members on the CID's board. Neither loan has been repaid.
The city of Lake Lotawana seems shy about the doomed CID it spawned. The Pitch requested a map of the CID from Lake Lotawana's city clerk. She said the city didn't have a map of the district but could provide the legal definition of the CID boundaries. Asked for that definition, however, the clerk said Mayor Howard Chamberlin would consider sending the documents only after The Pitch filed a formal Sunshine Law request.
Chamberlin, who ran unopposed for his office in 2009, spoke at the meeting, mostly to criticize the scope of the audit. He felt that the audit hadn't gone deep enough, and he asked the auditors why they were unable to kick board members out of the CID and charge them with crimes.
"We don't carry guns. We don't have badges," Otto told him.
Chamberlin, a doppelgänger for the deadpan Breaking Bad assassin Mike Ehrmantraut, wouldn't comment for this story. He said only that he didn't want to put anything on the record while the CID was in bankruptcy.
Only 25 homes were built on the CID's 352 lots by 2010, and just two businesses opened: the Lone Summit Bank and Gibson's (a BP gas station and convenience store). The latter is named for owners John and Judy Gibson, of the Lone Summit Development Group. Judy Gibson is a member of the CID board. In 2010, a few months before the CID's default, Lone Summit Bank was put under an FDIC consent order. It was sold to a Kansas bank earlier this year.
Development that might rescue the CID is unlikely to happen anytime soon. A bankruptcy judge gave the CID until 2016 to pay off its bonds and dropped the interest rate from the original 7.75 percent to 1.5 percent. But even at the reduced rate, the CID isn't on track to retire the bonds on time.
"I would say it's going to be really iffy," Otto said in the meeting with homeowners.
Bill Lloyd, executive vice president and chief lending officer of Midwest Independent Bank, which owns the majority of the CID bonds, is more blunt. "There's no way in hell that they can pay the principal on the bonds by the time they mature in 2016," he tells The Pitch. "I mean, there's just not money to pay that." He adds that he has never seen bonds fail like this, and that Midwest Independent just wants to recoup its investment.
After the meeting, The Pitch approached about a dozen angry homeowners from the CID, all of whom declined to speak on the rec-ord. Some said they were afraid to talk because one resident was sued for defamation by one of the people associated with the developers. (That case was settled out of court.) All of them, however, are in similarly bad straits. Special assessments have been levied against them to pay the bond interest, and there's no new retail development nearby to contribute to the bill.
"If they don't pay that special assessment, there's a lien generated against that property," Lloyd explains. "If they don't pay for three years in a row, their property is sold in a tax sale on the courthouse steps. It's a pretty rotten deal for them."