Loveland's Independent News Source
Loveland, December 31, 2015

In 2014 Loveland's City Council budgeted $74 million for the 2015 general fund which pays the
net expenses for traditional local governmental services like police, fire, parks, planning and public
works.  Six months into this year, the city changed that forecast to $89 million, a jump of 20%, and
is now budgeting $90 million for 2016 which could easily reach $110 million by next summer if
the trend continues.

Despite rapid growth in general fund expenditures the city's revenue forecast of sales and use
taxes, its single largest source of general fund revenue, was down 2.5% in mid-year projections for
2015.  In the 2016 budget the city is forecasting only a modest revenue increase nearly equal to
inflation but that is due to increasing use taxes, on building materials for new construction, and
not retail sales taxes
which staff worry will begin dropping precipitously next year.  The following
comment in the city's 201
6 budget document explains their concern,

"The projection is tempered due to concerns about the increased competition for retail dollars
from the surrounding areas are growing."

Property Tax Revenue Not Growing Either - By Design

The city's property tax revenue is stagnant despite literally millions of dollars in annual increases
in commercial property valuations since 2012.  This is due to the 2004 MFA (Master Financing
Agreement) which gifted 97% of Centerra's property taxes into a "quasi-government" entity
controlled by local developer McWhinney for 25 years.  Loveland, like the county and special
service districts, doesn't receive any benefit from rising property values in Centerra due to an
Urban Renewal scheme which diverts property tax dollars into McWhinney's metro districts to
repay public debt used to finance Centerra.

In 2004, when the MFA was signed, city leaders were induced into the agreement by sales tax

revenue projections generated by McWhinney that showed a generous and always increasing sales
tax revenue base for the City of Loveland coming from Centerra.  Loveland officials agreed to give

McWhinney's metro district
25 years of property tax revenue plus 40% of the city's sales taxes
within Centerra
resulting in an estimated $600-$800 million subsidy.

Unfortunately, McWhinney's
Centerra has failed to meet those sales tax revenue projections every
since - even the four years prior to the 2008 financial crisis.  Later, McWhinney and their
partner in Promenade
Shops at Centerra failed to pay creditors thus losing that property to bank
foreclosure before
it was fully leased and after cannibalizing significant tax generating businesses
from non-subsidized areas of Loveland like
Loveland's only movie theater.  

Incredibly, the City of Loveland continues to increase subsidies for McWhinney beyond the
generous MFA
original terms on a case-by-case basis.  Loveland's City Council approved additional
for the proposed parking garage at the aborted Grand Station mall and more recently a
shopping center anchored around Bass Pro Shops; despite the national retail
er refusing to work
with McWhinney
and pulling out.  Even if successful, none of these projects would have added to
the city's property tax revenue given the phony urban blight designations diverting any increase
in property taxes back to McWhinney
as agreed in 2004.

Curiously, city budget documents for 2015 place blame
for Loveland's stagnant property tax
upon the city's mill levy rate of 9.564 which they argue is lower than surrounding cities.  
Unfortunately, an increase in the city's property tax mill levy will have limited impact as Loveland
abdicated its authority to even decide which properties can be placed into Centerra Urban
Renewal district each year which is determined now by McWhinney. (read our articles
1, 2 & 3
detailing the council's decision on the flex-URA from 2008).  A former Loveland attorney sent
's City Council an email before their 2008 meeting when that decision was made that

"But these and other important issues are ignored in the pursuit of fickle retail taxes and ways to
give away the store to one, extremely large developer."

                                                                                                                           Mark Shaffer
                                                                                                                           August 2008

The Squeeze - Centerra's Increasing Debt Puts Pressure On Retailers

As the city's dependence on "fickle" retail sales taxes grew so did Centerra's public debt with the
promise that spending would increase retailers, shoppers and thus tax revenue into the City of

In 2016 the Centerra shopping areas in east Loveland will become the oldest regional big-box
retail center in Northern Colorado.   Boulder, Longmont
, and now Ft. Collins have all re-built their
regional shopping
complexes in just the past few years leaving Centerra's now decade-old
shopping areas dated by comparison.

Of special concern is not only the inevitable loss of regional shoppers to the newer stores
but also
the stores
themselves leaving Loveland to nearby areas like Johnstown's 2534 development that
don't carry the same levels of debt McWhinney
created for Centerra.  If a single retailer, like Best
Buy, moves out of Centerra and into Johnstown than Centerra's ability to repay its burgeoning debt
will be even more tenuous all while reducing sales tax revenue Loveland desperately needs to
fund its increasing spending.

On December 4, 2014 McWhinney refinanced
Centerra's debt using a new $139,700,000 loan
which matures on December 4, 2021.  Payments must be made quarterly at a  variable interest
rate of 1.95% plus 75% of the London Interbank Offered Rate (LIBOR).  According to an
independent audit of Centerra in 2014,

The loan is also secured by amounts held by the Custodian in the Reserve Fund(s). Required Mill
Levy means an ad valorem mill levy imposed upon all taxable property of Centerra Metropolitan
No. 2 each year in a amount sufficient to pay the principal, premium if any, and interest
on the bonds as the same become due and payable and to make up any deficiencies in the
Reserve Fund. The maximum Required Mill Levy is 72 mills..."

The variable interest loans are hedged using financial instruments the Government Finance
Officer's Association recommends
,  "extreme caution in the use of derivatives and structured
finance products. "

Besides using controversial and now largely discredited financing models which have been
blamed for the 2008 Great Recession,
Centerra's swap rate agreements (derivatives) are backed,
in part, by the Argentinian BBVA division rated by Moody's just above "junk" status at Baa2.

In other words, any significant increase in interest rates could topple Centerra's highly leverage
metro district since their artificially "fixed" interest rate depend
s on a barely solvent subsidiary of
a Spanish bank
bailing them out by funding the swap agreement.  Even without an increase in
interest rates, McWhinney has failed to show a path towards repayment that doesn't include a
dramatic increase in Centerra's current mill levy
far above 42 mills.
The Competition For Retailers
Why Loveland's Centerra is losing ground and may fall
short of revenue projections again in 2016 costing the city

special investigative report

Local Taxes - Overview

States and their local municipalities have
traditionally relied on the "three legged stool"
approach to local taxation.  State and local
governments divide the three revenue sources
property, sales and income taxes to fund
most local and state governmental services.

In Colorado, our state government relies heavily
on income tax revenue, counties and schools
upon property taxes while cities have grown
increasingly more dependent upon sales taxes.  
In fact, following TABOR (Taxpayer's Bill of
Rights) cities in Colorado have seen the
property tax portion of their revenue decline
especially from residential properties.

For the past twenty years Colorado cities have
become increasingly aggressive in attempts to
lure retail stores into their cities as a way to
grow revenue without the need of raising
property taxes (which requires voter approval).  
In 2004, the City of Loveland signed a 25-year
agreement with McWhinney to divert
significant property and sales taxes in hopes of
securing a long-term source of city revenue.

The story on the left details why those
assumptions were false and how Loveland is
now entering the worst period of any phony
"urban" blight tax scheme.  The city's sales tax
revenue is falling while Centerra's increasing
adjustable rate financing needs to be repaid by
2021 but current annual metro district taxes
are insufficent.

Below is an analysis of Best Buy in Centerra
personal property taxes actuals for 2015 and
real property taxes (assuming a building value
of $2 million) and how they will change when
the metro district mill levy is increased to repay
the growing public debt (click to enlarge)
Best Buy - A Case Study

As quoted above from Centerra's 2014 audit, the only remedy Centerra will have when their quarterly debt payments exceed revenue will be to
raise its mill levy from 42 to up to
as much as 72 mills.  It is important to remember some 97% of all the property taxes collected in Centerra's
Urban Renewal authority go back to McWhinney instead of the schools, county, city and other local entities for whom the tax is originally collected
Larimer County.

As illustrated in the box to the
upper-right of this story, Best Buy stands to pay significantly higher property taxes to remain in Centerra when the
Mill Levy is raised from its current rate to 72 Mills.  For the purpose of the calculations, we incorporated the actual personal property taxes paid
by Best Buy in 2015 and added the real property taxes assuming a $2 million value of the building they occupy.  When you combine the annual
increase of just under $20,000 with increasing property values, Best Buy could be forced to pay an addition (in other extra) quarter million
dollars in property taxes to remain in Centerra for another 10 years.
 By literally moving across the street (other side of Highway 34 from
Promenade Shops) to Johnstown 2534, Best Buy could avoid the additional property taxes and certainly remove the financial uncertainty retailers
report having over Centerra's Mill Levy which has not been constant.

Commercial property leases, like
Constant Contact's lease in Centerra, are typically "triple-net" meaning the tenant pays all property taxes,
insurance and maintenance cost for the building.    Uncertainty over increasing property tax rates can make the difference between a store
reporting a profit or loss and whether they will renew a lease.

In addition to paying property taxes, retailers must pay a "personal property" tax on all movable items used for the generation of income in their
business including furniture, equipment and fixtures.

Best Buy, for example, paid Larimer County $2,715 last year for their "personal property" tax on the $63,750 assessed value of personal property
in their store just for Centerra's mill levy.  In total, the personal and real property taxes between Centerra and Johnstown are in near parity when
the various mill levies are added together.  However, any future increases in Centerra's
Mill Levy from 42 Mills upsets that balance and will make
Centerra the more costly place to do business.    

Losing retailers to nearby Johnstown will have a severe impact on city finances as the city has increased its dependency on retail sales to fund
general government services over the past decade.  Already last summer Loveland's police force w
as so severely under-staffed that citizens calling
911 were told they could only respond to life-threatening emergencies instead of other types of crime.  
Shoppers, residents and businesses
locating into Centerra actually pay higher taxes than most other areas of Loveland only not to the benefit of the city or its police department.  

Most residents don't understand the nexus between the police dep
artment's inability to respond to their calls and the growing debt in Centerra.  
Because an inordinate portion of their taxes are being diverted for debt repayment, and Centerra doesn't operate a police department, Loveland's
other taxpayers are being forced to carry the burden.
 Unfortunately, it is the inevitable consequence of giving away too much of the tax base in
exchange for promises of additional "fickle" sales tax revenue
projections which McWhinney failed to deliver.
Loveland's Centerra
Johnstown 2534
Loveland's Centerra
Loveland's Centerra