Wichita being sued, alleging improper handling of bond repayment savings

A lawsuit claims that when the City of Wichita refinanced its special assessment bonds, it should have passed on the savings to the affected taxpayers, and it did not do that.

A lawsuit filed in Sedgwick County District Court charges that the City of Wichita improperly handled the savings realized when it refinanced special assessment bonds at a lower interest rate. The case is 2018-CV-001567-CF, filed on July 13, 2018, and available here.

The suit names David L. Snodgrass and Leslie J. Snodgrass as plaintiffs, and a long list of defendants, namely:

• The City of Wichita, Kansas
• Wichita City Manager Robert Layton
• Wichita Finance Director Shawn Henning and Former Wichita Finance Director Kelly Carpenter
• Wichita City Clerk Karen Sublett
• Wichita Mayor Jeff Longwell and former Wichita Mayor Carl Brewer
• Current Wichita City Councilmembers Brandon Johnson, Pete Meitzner, James Clendenin, Jeff Blubaugh, Bryan Frye, and Cindy Claycomb
• Former Wichita City Councilmembers Lavonta Williams, Janet Miller, Sue Schlapp, Paul Gray, Jeff Longwell, Jim Skelton, and Michael O’Donnell
• Springsted Incorporated
• Gilmore And Bell, A Professional Corporation
• Kutak Rock, LLP
• Sedgwick County Treasurer Linda Kizzire

The suit asks for a class to be created consisting of “all other affected land owners paying excess special assessments,” which would, undoubtedly, be many thousands of land owners. No specific amount of relief is requested.

The suit’s basis

The city borrows money by issuing bonds to fund improvements to (generally) new neighborhoods. These bonds pay for things like residential streets, water pipes, and sewer lines. The debt service for these bonds, that is, the money needed to make the bond payments, is charged to benefitting property owners in the form of special assessment taxes, often called “specials.” These specials are separate from the general property taxes that are charged to all property.

General property taxes are based on a property’s assessed value multiplied by a mill levy rate. Specials, however, are based on the cost of the infrastructure and the payments needed to retire the debt. This amount is determined at the time bonds are sold and the repayment schedule is established. (Bond payments depend on the amount borrowed, the length of the repayment period, and the interest rate. All this is known at the time the bonds are issued.)

These specials usually last 15 years, and after paid, no longer appear on a property’s tax bill. Sometimes special assessments are prepaid.

What the city did, and didn’t do, according to plaintiffs

During the last decade, interest rates on long-term bonds generally fell. In response, the city issued refunding bonds. These bonds took advantage of low interest rates by paying off old bonds that had higher interest rates, replacing them with bonds with lower interest rates. The lawsuit alleges that since 2009, the city has issued $216 million in refunding bonds saving $60.2 million, according to city documents cited in the lawsuit. The suit does not specify how much of this savings is attributed to special assessment bonds.

So the city refinanced special assessment debt at a lower rate, reducing the cost of the debt. That’s good. Homeowners often do this when mortgage rates are low, and it’s good that the city does this too.

The problem, according to the lawsuit, is that some of the refinanced debt was special assessment debt. The lawsuit contends that, based on Kansas law, the city should have passed on the savings to the property owners that were paying off this special assessment debt. Instead, says the suit, “the City of Wichita transferred the excess special assessment money paid by affected Wichita taxpayers to support its general fund and/or other municipal funds.” In other words, the city spent the savings on other things, when it should have directed the savings to land owners who were paying the special taxes.

Plaintiffs allege that the conduct of the city and its advisors constitutes fraud against those paying special assessment taxes:

The fraudulent actions of Defendant City of Wichita, along with the other Wichita Defendants, and Defendants Springsted, Gilmore and Bell and Kutak Rock resulted in the misappropriation of millions of dollars of “saved” tax payments that should have been returned to Plaintiffs along with all other affected land owners paying special assessments levied under the General Improvement and Assessment Laws of the State of Kansas.

Further, the suit alleges that the liability faced by many of the defendants is personal:

Because the Wichita Defendants actively participated in the fraud practiced by Defendant City of Wichita, they cannot escape personal liability for the fraudulent actions of the City of Wichita upon Plaintiffs and all other affected land owners paying special assessments.

While there is one named party as plaintiff, the suit alleges that all similarly situated persons have been harmed, and so a class action is appropriate. That would be all property owners who have paid special assessment taxes to Wichita since 2009, including myself.