Imagine the following chain of events:
1. You buy a condo in the mid-2000s on Florida’s Gulf Coast, in a development just outside Tampa that promises to recreate the style of Venice, Italy.
2. The governmental body running the area is the Clearwater Cay Community Development District, which issues about $34 million of municipal bonds in November 2006. “All marketing efforts for Clearwater Cay will be coordinated through Cay Clubs,” according to bond documents, which also state that the developer “believes this to be a unique offering of resort services and amenities that will be unmatched in this area.”
3. Those luxury amenities, like a water park and gondola-lined canal, are never built.
4. In February 2016, Dave Clark, former chief executive officer of Cay Clubs, is sentenced to 40 years in prison because the company “came to operate as a Ponzi scheme,” according to the Justice Department. Evidence showed it experienced serious financial difficulties by “at least September 2006,” or two months before the district’s bond sale. Between 2005 and 2007, Clark extracted more than $22 million from the operations of Cay Clubs for himself.
5. All the while, you, the condo owner, are paying about $1,500 a year in assessments on your property to repay those bonds.
This is what Donald Dwyer is fighting against. As Bloomberg News’s Amanda Albright reported, the former Maryland lawmaker is fed up with the situation and has launched headfirst into a crusade against the outstanding debt. He rose up to become the chairman of the district’s board of supervisors, and earlier this month took the drastic step of filing for Chapter 9 bankruptcy protection.
“We’re going to let somebody else intervene on our behalf because this has gotten insane,” the 61-year-old Dwyer told Albright. “I’m not going to assess my community for a debt I can’t justify.”
Not surprisingly, this is seen as major foul play in the $3.8 trillion municipal market. This type of debt is “not supposed to be impaired,” said James Spiotto, a municipal bankruptcy expert. The lawyer representing OppenheimerFunds Inc., which owns all of the district’s remaining debt, evoked Meredith Whitney by warning of widespread defaults. Clearwater Cay must pay, he argued, “otherwise, every city, county, school board, 600 community development districts in Florida, et cetera, would be doing the same thing.”
Obviously, that is hyperbole. Plenty of debt from community development districts, which came to be known as “dirt bonds,” did default in the wake of the housing bust. But this situation — the whole “I’m not going to assess my community” part — is different, and speaks to bond investors’ instinctual alarm anytime covenants are under attack.