Mayor Rob Adams favors an independent investigation into Sedona’s bond financing after one critic accused the city of running a Ponzi scheme and another said Sedona was violating securities laws.

The accusations, flatly contradicted by both the city’s bond attorney and financial advisor, were made at a special Sedona City Council meeting March 25.

“It’s for the council to decide,” Adams said after the meeting, “but an independent, second party to review the situation might be a good idea. If in fact the accusations were correct and we didn’t ask for a second party investigation, there could be liability.”

The special meeting was called to answer questions raised by several residents who believe the city’s ability to pay back $18 million borrowed to finance city sewer projects may be in jeopardy.

Rick Normand, former member of the mayor’s now defunct economic advisory group, warned the council language in the 2007 series bond documents requires the $18 million be paid “solely from excise taxes,” citing the city’s financial report for 2008.

In contrast, the city “has been partially paying bond debt service from reserves,” Normand said, a technical default on the city’s bond obligations.

The reserve in question, known as the Wastewater Enterprise Fund, was created for the purpose of financing sewer projects. A five-year projection presented to the council March 25 showed the fund would be depleted by 2013 unless fees charged by the city for sewer service, fees which have not gone up in 10 years, are raised.

Normand also warned the city is in violation of federal securities laws.

The insurance company that backs the bonds, MBIA, has been downgraded in the face of the national credit crisis, Normand said, but the city failed to report that fact to the Securities Exchange Commission, a violation of SCC regulations. [Several independent firms provide ratings for life and health insurance companies like MBIA. These independent firms include Fitch, A.M. Best Company, Standard and Poor’s, and Moody’s, among others. These independent ratings reflect the opinions of the rating agencies about the financial fitness of the company in question].

“We don’t agree with the allegations,” said Michael Cafiso, a Phoenix attorney who has advised Sedona on bonding issues since the city was first incorporated in 1988. “They are factually incorrect.”

The phrase, “payable solely from excise taxes,” appears in the bonds, Cafiso said, but does not come into play until and unless the city fails to make a scheduled payment. Until then, the city can use other funds, including reserves, to make bond payments.

Sedona’s financial advisor, Kurt Freund, managing director of RBC Capital Markets in Phoenix, agreed, telling the council Normand misunderstands the language of the bonds, which contain legal terms of art.

Sedona’s bond repayment plan is consistent with similar plans implemented by other cities to repay excise bonds like those issued by Sedona, Freund said. Drawing on reserves to partially pay excise bonds is not an unusual strategy, he said.

As to the allegation of securities law violations, Cafiso confirmed MBIA’s recent downgrade from AAA to A, but denied SCC regulations require the city to report it.

Normand, who has no legal training, was reading the regulation out of context, Cafiso said.

Addressing Normand, Freund said, “I’m not sure why you would want to promote a downgrade in the rating of your bond insurer. I’m starting to suspect an ulterior motive here.”

Even if the bonds were downgraded, it would not affect the amount of interest the city pays, Freund said. “It’s a fixed rate.”

Cafiso certified the documents creating the 2007 series bonds and staked his professional reputation on their soundness.

“I’ve never had a bond deal go bad. Never had a lawsuit,” Cafiso said, informing the council he advises more cities and towns on bonding issues than any other lawyer in Arizona.

Normand said after the meeting Cafiso was biased because he is under contract with the city.

Terry Nash, another Adams campaign supporter, followed Normand to the podium, calling the city’s bond financing plan a “Ponzi scheme.”

“All of the bonds are problematic,” Nash said. “I want the city to do something about this now or face the consequences.”

“I’m beginning to think something else is afoot here,” Councilwoman Pud Colquitt said. “To me, it is about the integrity of the city and council.”

Mayor at the time the 2007 series bonds were issued, Colquitt signed the bonds on behalf of the city.

Adams said after the meeting Nash’s comments were not helpful.

Greg Ruland can be reached

at 282-7795, ext. 127, or e-mail editor@larsonnewspapers.com