Arizona town’s approval of bonds challenged in court

A $70 million bond issue for a central Arizona town is the target of a lawsuit that claims the debt’s approval last month violated the state constitution.  

Council members in Payson, a town of about 16,680 in Gila County, passed a resolution for the sale of the tax-exempt, fixed-rate “pledged revenue obligations” in a 6-1 vote at an Aug. 21 meeting with the expectation of selling the debt through Stifel, Nicolaus & Co. in early September. 

A complaint filed in Gila County Superior Court Tuesday by the conservative Goldwater Institute on behalf of a Payson resident contends town officials denied residents an opportunity to organize a referendum on the debt issue by fast-tracking its issuance “under the pretext of an emergency” in violation of the Arizona Constitution.

It argues the council aimed to bypass the constitution’s right of referendum by using a narrow exemption allowing municipalities to enact emergency measures when such actions are “necessary for the immediate preservation of the peace, health or safety of the city or town.”

“The so-called ’emergency’ here is nothing more than town officials’ apparent belief that interest rates might rise in coming months, and that they’ll secure slightly better municipal bond terms now than they could in 30 days if they gave residents the opportunity to organize a referendum,” a statement by Goldwater Institute staff attorney John Thorpe said.

Payson promised a vigorous defense against the lawsuit, which could increase the cost of the debt, potentially leading to a counterclaim for damages, the town said in a statement.

“It is a common practice for elected bodies across the state of Arizona to adopt excise tax-backed bond sales with the use of the emergency clause,” the statement said. “We are not aware of any previous litigation in the state of Arizona challenging the use of an emergency clause, when used in combination with the approval of the sale of bonds.”

It added the town has several explanations for invoking the emergency clause, including the 2019 closure of a pool that limited the ability to teach children how to swim and avoid drowning and for others to participate in health-promoting aquatic activities. 

The plaintiff is seeking a temporary restraining order to stop the debt sale.

The $70 million of debt is backed by a first-lien pledge on Payson’s excise tax and state-shared revenue and structured with serial maturities between 2025 and 2049, according to a draft preliminary official statement submitted at the Aug. 21 council meeting. The town has no outstanding general obligation or excise tax revenue and state-shared revenue bonds outstanding.

S&P Global Ratings assigned a AA-minus rating and stable outlook to the debt, citing “very strong coverage and liquidity assessment, pledged revenue stream with low volatility, and close relationship between the priority-lien pledge and the obligor’s pledge.”

Proceeds from the issue would fund “the construction of public safety facilities, streets improvements, paths and trails improvements, drainage improvements, parks and recreation facilities, an event center, an aquatic and recreation center, and additional related municipal facilities and capital improvement projects,” according to the POS.