CHICAGO -- Belfield, N.D., has reached a settlement with the holders of $1.9 million of special assessment bonds the city defaulted on in 1987, ending a threat by the town to become the first North Dakota issuer to file for Chapter 9 municipal bankruptcy protection.
Under the settlement, reached last month, the town has begun to retire the bearer bonds for 55 cents on each dollar of outstanding principal. As part of the agreement, the town will not pay interest on the bonds, according to Al Hardy, the town's attorney.
Belfield, a town in the Badlands area oil patch with a population of about 800, issued $2.38 million of special assessment bonds in 1983 and 1984. The proceeds were used to provide roads, water, and sewer services for a 90-lot tract of land that had been annexed by the city for the development of residential housing. The special assessment bonds were backed by property taxes collected only within the newly annexed area.
Mr. Hardy said the oil boom of the early 1980s severely strained the town's housing market, as hundreds of workers flocked to the city to take high-paying jobs in the oil industry. The annexed land was to have served as a residential area for the new workers.
"We had people living in tents, their cars; it was like something out of the movies," he said.
But not long after the bonds were issued, the oil market nose-dived, Mr. Hardy said, and only three homes were built in the special assessment district.
Revenues from the district were not sufficient to cover debt service payments on the bonds. Under North Dakota law, Belfield was then forced to institute a "deficiency levy" on all property within the town to make up for the shortfall in the special assessment district levy.
But as the town continued to raise the deficiency levy, more property owners either abandoned their property, or they refused or were unable to pay their taxes. By the time of the default, the deficiency levy was about equal to the the town's operating levy, Mr. Hardy explained.
"There came a point when [town] council members said they wouldn't increase the deficiency levy any higher; they would all quit before they'd do it again, and you wouldn't have found anyone to serve on the council who would increase the levy," he said. "The town would have died."
Rather than raise the levy, the town defaulted on the bonds in April 1987. At that time, town officials hired Bismarck bankruptcy lawyer Ross Espeseth to prepare for a possible Chapter 9 filing.
Mr. Espeseth said Belfield was prepared to file for bankruptcy protection if bondholders sued the town seeking compliance with the state law requiring the deficiency levy to be sufficient to pay the bonds.
"It was a very serious option and continued to be one until we reached settlement with the bondholders," Mr. Espeseth added.
The $1.04 million needed to retire the bonds under the settlement was raised from money that was collected from the deficiency levy after the town stopped making payments on the bonds and a $150,000 grant from the state.
Jim Luptak, director of the state's oil impact grant program within the Energy Development Impact Office, the agency that gave the grant to Belfield, said the state has assisted other oil-dependent towns in the state that have had problems with special assessment bonds.
"There's been a recognition by the governor and the legislature that we have to give help in curbing the boom and bust cycles," in oil-dependent towns, he said.
In 1985, the state gave the town of Gladstone a grant of $100,000 to help retire a $524,000 special assessment bond issue. In addition, the legislature for the past two years has authorized grants of $300,000 each to the towns of Dickinson and Williston to keep down the deficiency levies both towns have had to institute to cover special assessment bonds.
Moody's Investors Service rated the Belfield bonds Baa when they were first issued. The rating was lowered to Ba in September 1986, and to Ca after the 1987 default.