Whoops! Virginia Town Puts Up City Hall as Loan Collateral, Then Defaults

Aug. 19, 2010— -- Virginia officials who put up a city hall and police station as collateral against a $9.2 million loan for a lush municipal golf course are now mired in an embarrassing and potentially costly financial blunder after defaulting on their payments.

The Buena Vista City Council had hoped that the rolling greens of the Vista Links golf course would help revive the city's economy when it opened six years ago. But now, with $8.2 million left to pay off and a vote to not include loan payments in next year's budget, guarantors may be coming for city property.

"They've been looking at this for several years, trying to figure out what to do," city attorney Brian Kearney told ABCNews.com. "We're just trying to see what can be worked out at this time."

Although neither Kearney nor ACA Financial Guaranty Corp. would comment on what negotiations might be taking place, Kearney noted that the value of city hall, the police station and Vista Links don't come close to covering the city's outstanding debt.

The par-72 golf course, which boasts panoramic views of the Blue Ridge Mountains near Roanoke-Lynchburg, is already showing the effects of a cash-flow problem. An appraisal done this year valued the property at $950,000.

City hall and the small police building haven't been appraised recently, but "they're not worth $8.2 million, I'll tell you that," Kearney said.

The city of about 6,500 people had been making debt payments -- technically in the form of rent to the city's parks and recreation authority, a separate legal entity -- but even that stopped this year when the city council decided it didn't have the money in the budget.

Neal Menkes, director of fiscal policy for the Virginia Municipal League, said the situation in Buena Vista was a warning for other cities and towns.

With the economic downturn and the fleeing of manufacturing overseas, many of Virginia's cities have suffered.

"But none of them have teetered like Buena Vista has in this instance," he said.

In a four-page public announcement, city attorney Kearney noted that several attempts have been made to sell the land, with no success, and the town has been hit hard by a $2 million reduction in state aid.

The city has also asked for help from its state senators, the state secretary of finance and state Department of Treasury.

"Although everyone was sympathetic to the plight of the city, no one was able to provide any assistance," Kearney wrote, later welcoming any suggestions from the public.

City Official Hoping Worst-Case Scenario Doesn't Come True

Most municipalities, Menkes of the municipal league said, put up their general fund when borrowing, not their meager city hall.

"I'm not familiar with any other community, city county or town that has done that," Menkes said. "I'm just going to assume ... that they needed to put up a lot to leverage the money to make this deal happen."

The golf course section of the budget showed how badly the course was suffering. There was a 100 percent increase in marketing and maintenance scheduled for the 2011 budget, but office supplies were wiped out.

And expected revenue from the affordable greens fees were expected to be down 36 percent, funds from the driving range, 37.9 percent.

City leaders, including the mayor, city manager and council members, either declined to comment or didn't immediately return calls and e-mails seeking comment. Those reached said they'd been told to refer comment to Kearney.

In his written announcement, Kearney said Buena Vista has exhausted all its options for now.

"No one has been able to give us any solution short of a dramatic tax increase," he wrote. "We determined that we could not cut essential government services nor ask our citizens to pay a dramatic increase in their taxes simply to continue an economic and recreational development project."

The worst-case scenario, Kearney told ABCNews.com, is that the city forecloses on all three properties. "I guess we'd have to move to another location," he said.

But he's hoping it doesn't come to that.

So does the municipal league's Menkes. Virginia, he said, is "very conscientious about debt and indebtedness.

"This is a very serious type of situation," he said. "It's not something we would expect to be replicated elsewhere."