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Posted on Wed, Jan 26, 2011 : 10:33 a.m.

Chelsea will use fund balance, bonds to pay $3 million judgment from development lawsuit

By Lisa Allmendinger

John_Hanifan_Kent_Martinez_Kratz_Bill_Holmberg_1-25-11.JPG

Chelsea City Manager John Hanifan, left, and Chelsea City Council members Kent Martinez-Kratz and Bill Holmberg listen at the meeting Tuesday night.

Lisa Allmendinger | AnnArbor.com

Chelsea will pay $1 million in cash from its electrical and general funds and issue bonds for an additional $2 million to pay a $3 million judgment in a lawsuit filed against the city over a housing development. But paying the judgment will not cost residents additional taxes or fees, city officials said.

“There is no easy way, no politically correct way, to soften what we have here,” said City Manager John Hanifan.

After Hanifan explained the city’s options Tuesday night, the Chelsea City Council voted 6-1 to use $250,000 from the general fund cash reserves and $750,000 from the electric fund cash reserves for $1 million of the total debt, and then authorized the city’s bond counsel to prepare a resolution to bond for the remaining $2 million.

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Chelsea Council members Cheri Albertson, Frank Hammer and Rod Anderson listen to Chelsea City Manager John Hanifan explain how the city will pay for a $3 million judgment.

The City Council is expected to approve the resolution to authorize 10-year bonds on Feb. 8. The city will include bond repayments in its budget over the next 10 years and does not intend to raise taxes or utility rates to pay them off, said Hanifan. The burden for the repayments will be split among the general fund, electrical, water, wastewater, solid waste, and stormwater budgets.

Chelsea Investment Group LLC sued the city and former City Manager Mike Steklac in 2006 alleging breach of contract, among other things, when problems with the city’s sewer and water system halted additional phases of the Heritage Pointe subdivision along Dexter-Chelsea Road.

Circuit Court Judge David Swartz awarded the investment group about $2.8 million in damages plus interest and taxes. Swartz also ruled that Steklac was entitled to governmental immunity on the claim of gross negligence.

The city appealed the decision to the Michigan Court of Appeals claiming it didn’t breach its contact and contesting the amount of damages, but the appeals court upheld a majority of the lower court decision, including damages, interest and taxes. The city then appealed the case to the Supreme Court.

On Dec. 20, 2010, the highest court refused to hear the appeal.

Council member Rod Anderson voted against the resolutions Tuesday night after asking about whether the budget amendments would affect utility rates or the city’s bond rating.

Hanifan said the payment plan would not increase utility rates.

“This is very difficult for the city to deal with and have to do,” said Council member Cheri Albertson. “This does not mean the citizens will pay, it will be done by belt tightening (across all city departments.)”

Lisa Allmendinger is a reporter with AnnArbor.com. She can be reached at lisaallmendinger@annarbor.com. For more Chelsea stories, visit our Chelsea page.

Comments

Outofthebox

Tue, Feb 1, 2011 : 1:46 a.m.

What is truly remarkable is that there are only 11 comments on a topic that will affect every Chelsea resident. Meanwhile, there are over 100 comments regarding the snow storm. The true storm will come to Chelsea when all the bad decisions, fiscal mismanagement and official arrogance result in a bankrupted city or one where a ever dwindling number of residents have to pay for them with increased taxes or reduced services. I feel bad for Councilman Anderson - he is the only one that watches out for the city residents. The others, including the City Manager believe its "their money" and are accountable to no one. Remember, it took public shaming for the DDA to allow itself to be televised. This is another entity that wastes tax payer money without accountability. No one can break their strong hold since they are "self-appointing".

Rod Anderson

Mon, Jan 31, 2011 : 2:51 p.m.

As the lone "no" vote on this issue, let me me explain my reasons for doing so (within the space allowed). The City has known that there was a very high probability that we would be on losing end of this litigation for nearly a year. The plan we voted on was revealed (to me, at least) with the release of the Council package the Friday before the meeting. Not enough time to review and consider alternatives. In fact, no alternatives were considered. The proposed motion was incomplete and inconsistent. Neither the bond interest rate or the annual payment were stated. Allocations of the payment among the various Chelsea funds were specified, but during the meeting it was stated that there would be no effect on utility rates, for example, and my attempt to get clarification was dismissed. Similar comments hold for the General Fund. The payments will have to come from somewhere, either a rise in taxes, or from City staff layoffs resulting in a reduction in services. If the latter, the question arises: if these layoffs do not effect essential services, why haven't they been implement previously, and if essential, how can they be carried out at all? (Many of the Comments here that address this issue are absolutely correct.) The City's overall financial picture was not considered as part of this decision. The City is preparing to break ground for a new Police Station/City Hall Annex. Some of us opposed this project when proposed last year for because of the uncertainty of the litigation outcome and downward revenue trends due to falling taxable values. The litigation has been lost, and City revenues are expected to continue to decline for another two years or so. But the police station is going forward regardless. Rod Anderson Chelsea City Council PS Lisa attempted to contact me after the meeting for a statement, but I was unavailable. Sorry, Lisa!

julieswhimsies

Thu, Jan 27, 2011 : 8:54 p.m.

Another reason we left Chelsea. The city over-taxes, makes decisions and promises they cannot keep, and encourages over-development which strains city resources. When the developments "fall through" and the city's population does not increase as expected, there are fewer children attending school....hence the decision to close the city's newest elementary school. Bad management has always been Steklac's signature, and the city's management as well.

Trouble

Thu, Jan 27, 2011 : 5:06 p.m.

If no one is accountable for this tragic error, then it will happen again, and again, and again. The Cure is the Cause!

countryfolks

Wed, Jan 26, 2011 : 9:25 p.m.

I'm sure the councilwoman that made the statement would like to retract it. Saying things off the cuff is what got them it trouble in the first place!

grye

Wed, Jan 26, 2011 : 6:30 p.m.

Tax money will be used to pay the bond. Taxes come from the citizens. What a deceiving web they have weaved. But then again, maybe the council is taking some other funds to the casino and betting the black or red.

Jim Heinold

Wed, Jan 26, 2011 : 6:12 p.m.

Was this agreement approved by an attorney? Did the attorney approve the action that resulted in the default? If so, has the attorney committed malpractice? Does the attorney carry malpractice insurance? Can the city recover under that insurance policy? Just asking questions.

Concerned Citizen

Mon, Jan 31, 2011 : 9:33 p.m.

I would also like to know what role the city's attorney had in all of this. Did the attorney tell the board it would be okay to stop the building efforts? Did the attorney tell the board whether the developer would have a leg to stand on if the city were to stop in the middle of the process? If the board should be expected to be responsible for its mistakes - and of course it should, when it makes them - why shouldn't the attorney, who is paid for his/her services, also be held responsible for mistakes made? That's why they have insurance! At the very least, can't we get answers to these pretty basic questions?

RTFM

Wed, Jan 26, 2011 : 5:21 p.m.

As a financial analyst, I must be the dumbest financial guy is Southeast Michigan according to Chelsea City Officials. So a city can take on debt & raid the cash in the bank, spend it and no one in the city tax base will incur any financial burden. This sounds like something off an infomercial or better yet political promise speak. If the statement of the City Officials is correct, the citizens of Chelsea should look into the taxes here. It sounds like you are being overtaxed already if the city is flush with cash and another $2 million over 10 years + interest will not be a problem that will create a need for additional fees and/or taxes. Wake up and follow the money.

SMAIVE

Wed, Jan 26, 2011 : 5:07 p.m.

"This does not mean the citizens will pay, it will be done by belt tightening (across all city departments.)" Really, so how will belt tightening be accomplished? Unless there is cushion in the existing budgets, there will be a cost through reduced services or lost opportunities. Quite an expensive lesson on how not to make promises on the back of the taxpayres.

djl

Wed, Jan 26, 2011 : 4:37 p.m.

Issuing bonds and utilizing general fund reserves are causing the citizens of Chelsea to pay for this Gross Negligent Act. Even though the Council states they will not raise taxes now what will stop them in the future. Cutting services is causing the citizens loss of services they deserve. This is so wrong on so many levels. Why wasn't there insurance coverage for this project? Dan Lord