High Finance in Mission Viejo
by Dale Tyler

The City Council recently approved a proposal (4-1, Reavis voted No) at the May 5, 2008, meeting (Item No. 9) that would pay ATS a 10-percent fee for any cell-phone lease arrangements that are monetized. “Monetized” sounds like “money,” so that must be good. Right? Wrong!

This item came as a recommendation from the Investment Advisory Commission, a group of citizens who are supposed to have significant financial experience and the ability to tell a good deal from a stinker. Unfortunately, these folks failed in their job and, because ATS is a big campaign contributor, forwarded this to the City Council, where ATS's friends would have their say.

It might be helpful to understand just what is being proposed here. In this case, monetization is in some ways similar to receivables financing. If a business has a need for immediate cash, it will go to the bank and ask for a loan based on the debts owed (receivables) to the business. In this way a business can satisfy short-term cash needs without having to wait for its money owed to be paid. Of course, the bank looks carefully at the quality of the debt and charges interest based on the perceived risk. Another monetization scheme is used by individuals who win a big legal judgment or lottery prize that will be paid over a long period of time in monthly or annual installments. In these cases banks will calculate the sum of all the payments to be received, then discount (reduce) the amount by the amount of interest they would lose on the lump sum they give to the individual holding the lottery ticket. Banks also reduce the amount further to account for any uncertainty in their getting payments, which would be small for a lottery ticket but larger for lawsuit payments. Each of these examples could be called monetization.

What ATS is proposing is that they would find a bank or other investors to give the city a single payment up front in exchange for all of the payments on the cell-tower leases in the future. This might sound like a good idea to some, bringing out the old saw “a bird in the hand is worth two in the bush,” but this is an inaccurate comparison. First, one has to look at the fees that would likely be charged in this transaction: ATS, 10 percent off the top, banks, 6 percent to 8 percent plus a “risk premium” that could be as high as 20 percent. This means that we would likely lose at least 10 percent and possibly as much as 30 percent on the money we would take in over the next 20 years, even assuming that we invest all of it and use it for reserves.

One also needs to look at the reason for wanting the cash up front. We often hear council Pollyannas like Lance MacLean and Trish Kelly citing the strong city reserves. Yet, they want this cash. If the city has no immediate cash requirements because of its large reserves, then why get the money up front? There are several possible answers. The first and most likely is that Frank Ury seeks to get additional kickbacks in the form of campaign contributions from ATS, a longtime source of money for his campaigns. Another possibility is that the city's reserves are below the “healthy” level that is claimed, and this is a way to get them back to minimum levels. The third possibility is that the council needs more money to spend on wasteful projects. To be fair, there is a fourth reason why the council wants to do this, and that is they have information that the cell-site leases are not as solid as they have claimed in the past, and this would be a way to get money from leases that will be canceled before their terms run out. While one could imagine this might occur as new technologies become available that require fewer towers or cell companies merge and fewer individual sites are needed, it seems very unlikely, considering the accelerating pace of cell-site deployment.

It is clear to me that this is a bad deal for the citizens of Mission Viejo and, at the very least, a back-room way to enrich ATS at our expense. The unspoken claim that the city really needs the money is, at best, a gross exaggeration designed to make it look like the City Council is finally doing something that is fiscally responsible when nothing could be further from the truth. Taking this cash away from future city operations will be one more reason why people will cite this City Council as pandering to today's population at the expense of the people who will live here in 20 years.

The NewsBlog will be watching this story as it unfolds in the months ahead. We need to do more work on the city's finances and find out the truth about our actual financial condition. With projects like the senior center and rec centers going 150 percent to 200 percent over budget, maybe there is nothing left in the cookie jar.