Waterloo Region Record, 2001
The following feature story is part of an investigative series that won the Waterloo Region Record the prestigious Michener Award for Meritorious Public Service journalism.
By Kevin Crowley
Tom Stockie and John Ford were on top of the world. It was a clear, crisp September day and the two municipal bureaucrats from Waterloo were playing golf at the prestigious Glen Abbey Golf Club in Oakville.
Two weeks earlier, Tiger Woods had wowed the sporting world on this very course with a stunning 218-yard drive that won him the 2000 Canadian Open and the coveted Triple Crown Trophy.
Now, under a clear fall sky, Stockie and Ford were playing the same fairways and rubbing shoulders with another kind of elite player.
As guests of MFP Financial Services Ltd., they were enjoying a day of golf and gab at the company’s annual invitation-only tournament.
Three days earlier, the two men had watched with satisfaction as Waterloo city council approved a $48.3-million lease-style loan arranged by MFP.
Stockie, the city’s chief administrative officer, and Ford, the treasurer, had spent months negotiating the deal.
It was a long process but one that seemed well worth the effort.
The financing deal would enable Waterloo to build the biggest municipal recreation centre in Canada, a spectacular $57-million sports park that would mark the new millennium and provide a legacy for generations to come.
To top it off, the city was getting 31-year financing at an incredibly low interest rate of 4.73 per cent.
It seemed too good to be true.
And it was.
…
No one seemed more shocked than Waterloo Mayor Lynne Woolstencroft.
In June 2001, nine months after approving the MFP deal, she and other city officials were preparing for the preliminary opening of the 233-hectare recreation complex.
The lush fairways of the championship golf course were still being nursed to perfection. And the giant indoor rec centre, with its four Olympic-size ice rinks, two NBA-quality gyms and three soccer pitches, required a little more work.
But the outdoor sports fields and 15 kilometres of paved walking trails were ready for use.
Woolstencroft and her council colleagues had weathered some criticism over their decision to name the facility RIM Park in honour of a high-flying technology company that had donated $2 million to the project.
But an even darker storm hung over the opening-day festivities.
An investigation by The record found that the MFP deal would cost Waterloo more than twice as much as city officials first thought.
Woolstencroft, who had spent years on council but only six months in the mayor’s office, stumbled through the first two weeks of the controversy.
Finally, she met with Clarica Life Insurance, the company that had actually put up the money in the RIM Park deal.
The news wasn’t good.
The repayment formula in the contract required the city to pay $227.7 million over 31 years, more than double what staff had been saying since the deal was signed on Sept. 25, 2000.
What’s more, the interest rate was 9.25 per cent, twice as much as staff had said and two percentage points above the going market rate.
“It’s just awful, ” Woolstencroft said. “It’s a horrific problem.”
The idea for a new sports park first surfaced in the mid-1990s, but it really took off in 1999 when communities everywhere were scrambling to mark the millennium in grand style.
The park began as a not-for-profit project led by volunteers who wanted more ice time and sports fields for kids in Waterloo Region.
The initial concept was relatively modest: Two indoor ice rinks and two soccer fields, recalls Bill Gladwish, one of the early proponents.
Officials at Waterloo city hall were doing their own study of the community’s recreation needs. They joined the not-for-profit approach and the scope of the project grew rapidly.
In January 1999, a plan was unveiled for up to four indoor ice rinks, four gyms, outdoor soccer fields, baseball diamonds and walking trails. The estimated cost was $16 million.
The proponents considered a location in nearby Woolwich Township, but the site was abandoned because of zoning difficulties.
By April 21, 1999, a new site had been found in Waterloo and the city emerged as the project leader.
The proposal doubled in size to 170 hectares and the possibility of an 18-hole golf course was added.
Joan McKinnon, the mayor at the time, bubbled with excitement as she told a group of sports volunteers that the park would provide a legacy to future generations.
Officials were still talking of a $14-million to $18-million price tag.
Then MFP came calling.
MFP Financial Services has been in the leasing business since 1984.
Headquartered in a sleek building of tinted glass, the Mississauga company trades on the Toronto Stock Exchange and has a client list that includes blue-chip corporations, federal and provincial governments, universities, school boards and municipalities.
The company’s core business — the “block and tackle” work, as president and chief executive Peter Wolfraim calls it — involves computer leasing.
But in the early 1990s, MFP began to branch into a leasing niche called asset-based financing.
Government cutbacks were forcing municipalities, universities and other public agencies to look for alternative ways to finance capital projects like buildings and landfill sites.
MFP saw an opportunity.
Led by vice-president and super salesman Dave Robson, the company arranged four long-term infrastructure financings between 1997 and 2000.
They proved to be gold mines.
MFP made $11 million on RIM Park alone by arranging the deal and selling its stake to Clarica Life Insurance Co.
“These are deals that are . . . more lucrative than we had planned, ” Wolfraim said.
In 1999, Waterloo was juggling several major building projects.
The sports park, downtown redevelopment, a new parking garage and a new library were all on the table.
To pay for the city’s share, chief administrator Tom Stockie asked treasurer John Ford to look for an alternative to the debenture financing that municipalities traditionally relied on.
The approach was in keeping with the city’s self-styled “Waterloo Inc.” philosophy of running city hall like a business, complete with revenue-generating enterprises, pay-per-use fees and employee profit-sharin g.
“This is where we tried to take off our traditional thinking method and look at a park from a business perspective, ” Stockie said.
A native of nearby New Hamburg, Stockie joined the City of Waterloo as a 21-year-old, earning his accounting credentials part-time and rising to the city’s top job 20 years later.
Since becoming chief administrator in 1994, he had shown a taste for big deals.
Stockie led Waterloo’s $7.2-million purchase of the city hall building from its corporate landlord; he negotiated the city’s $4-million acquisition of the Seagram lands; and he played a lead role in a $230-million public-private plan to redevelop the downtown.
While the city hall deal appears to have worked out, the downtown redevelopment plan fell apart this year when the private partner failed to proceed by the agreed-upon date. As a result, the Seagram lands remain largely undeveloped.
John Ford joined the city in late 1997 after working for a number of municipalities over the previous 30 years, from St. Catharines to North Bay and Markham.
Like Stockie, he earned his accounting designation while holding down a day job. Ford also shared his boss’s enthusiasm for taking a business-like approach to running city services, including the proposed park.
“Tom told me right at the start that if we did this project we needed different financing, ” Ford said. “I went looking for someone who did a different kind of deal.”
On May 3, 1999, MFP‘s Mike Petrie made a presentation to senior city staff outlining the company’s alternative financing options.
It was during this meeting, the city says, that MFP first suggested it could offer financing at two percentage points below market rates.
MFP would later insist that the low-cost financing was never more than a possibility, and one that did not ultimately apply to the RIM Park deal.
Regardless of what was said, city officials were soon optimistic that Waterloo could afford a huge sports park.
Six weeks later, on June 21, 1999, council agreed to follow through on a plan to buy 170 hectares of land in the city’s northeast corner.
Proponents were now talking about a $30-million park, nearly double the estimated cost a few months earlier.
The design of the new park progressed rapidly.
Residents got their first look at the details during an open house on Nov. 17, 1999. The plan included an 18-hole golf course, an indoor sports centre with two ice rinks and two gyms, 11 outdoor soccer fields, six baseball diamonds, a protected wetland and 11.5 kilometres of walking trails.
Council approved the concept plan on Dec. 6. The estimated cost: $27.5 million.
Two months later, however, Stockie dropped a bombshell: City staff were contemplating an “ultimate” park design in the $50-million range.
Ten days later, on Feb. 21, 2000, Ford presented council with a plan to build a $57-million version of the park, complete with pro-level golf course and clubhouse.
Councillors gave unanimous support to the project and authorized staff to enter into a financing agreement with MFP.
The community was stunned.
How had the park doubled in size and cost in just two months?
It boiled down to a seductively low interest rate and the desire to build a “world-class” sports park.
City staff had been working with MFP‘s Dave Robson to forge a long-term financing deal. The intent was to match payments to revenues, both of which were expected to increase as the park matured.
MFP was also promising an interest rate in the “low five per cent range, ” according to a report by Ford. This was nearly two percentage points below the going debenture rate of 6.75 per cent. If the city had to use debentures it could never afford a park of this calibre, Stockie said.
But why did a city of only 98,000 people need such a massive park?
The answer, according to Stockie, was to meet the community’s future needs and to create a facility befitting the city’s image of itself.
“When does a community our size do something like this?” he asked. “We think we have a world-class community and part of building that community is creating those facilities that the community wants.”
Besides, there were operational savings in grouping many sports facilities in a single location.
City staff and MFP crunched the numbers and came up with a startling conclusion: A $57-million park would generate enough revenue to limit the annual taxpayer contribution to $1.2 million, just $170,000 more per year than the smaller version of the park.
But there was a nagging question: How could MFP afford such a low interest rate?
“That was exactly my question to them at the beginning, ” John Ford said when asked about the interest rate.
The answer, he said, involved corporate tax breaks.
MFP said it would get substantial tax benefits by structuring the deal as a lease-leaseback, a complex arrangement that let the tax savings flow back to the city in the form of a low interest rate, said Ford and Stockie.
The deal was set up as two 31-year leases: A headlease, in which the city rented the unbuilt park to MFP for an upfront payment of $48.3 million; and a sublease, in which MFP rented the park back to the city for monthly payments over 31 years.
But somewhere along the line the deal changed.
In its response to the city’s lawsuit a year later, MFP said it was unable to find an investor for the tax-benefit structure, and therefore it could not provide the low interest rate.
Furthermore, the lease structure had little to do with the interest rate, MFP said. It was primarily designed to let the city match debt payments to park revenue.
In its lawsuit, the city says it was not told prior to signing the agreement that the tax structure and the low interest rate was no longer available.
On Sept. 25, 2000, Waterloo city councillors approved the financing deal with MFP.
Ford assured them the city was getting long-term financing at an interest rate of 4.73 per cent.
In preparing the agreement, the city had its local lawyer, Bill White of White, Duncan, Ostner & Linton, review the legal documents. But it did not engage the help of a leasing expert, despite the size and complex structure of the deal.
Within a week of getting council approval, MFP exercised a clause in the contract that allowed it to sell its stake in the deal to a third party.
The buyer was Clarica Life Insurance Co., a pillar of the Waterloo economy and a company that had invested in previous MFP deals.
Clarica says it paid $59.4 million for the RIM Park deal, of which $48.3 million was sent directly to the City of Waterloo. MFP, which arranged the financing but put up none of the money, received $11 million.
The terms of the agreement seemed clear to Clarica: The insurance company was getting a 7.6 per cent return on its investment and the city was obligated to pay $227.7 million over 31 years.
Waterloo’s understanding was different by half.
Most lease agreements state exactly how much has to be repaid on a monthly or yearly basis over the life of the contract.
But not the RIM Park deal.
The sublease sets out the precise payments for the first six years, but the next 25 years are based on a formula.
In its statement of claim, the city says Ford didn’t perform the calculation until March 2001, six months after he presented the deal to council.
Why?
The city alleges that Robson pressured Ford to get the agreement approved before the end of September 2000.
Robson then delayed giving a final version of the repayment formula to Ford until an hour or two before the council meeting, the city says.
MFP denies that Robson pressured Ford. But in its statement of defence, it says it held off delivering the formula because the calculation depended on fluctuating bond rates and MFP wanted to fix the interest rate as close to the council meeting as possible.
Given the late delivery of the formula, the city says Ford relied on Robson’s verbal assurances and did not verify the calculation.
When Ford and his staff got around to doing the calculation six months later, they came up with a total repayment that was much higher than expected.
The city says Ford called Robson in April 2001 to discuss his concerns. Robson replied (according to the city) that Ford had misinterpreted the formula. By performing the calculation another way, the payments worked out to $112.9 million over 31 years.
Ford was satisfied.
Meanwhile, The record had begun an investigation into the financing agreement.
The city’s grasp of the deal seemed vague for such an enormous transaction.
Asked about the total payments, Ford said he hadn’t added it up but it was “around $104 million.”
In any event, the total wasn’t relevant, he said, because the park would generate enough revenue to keep the annual taxpayer contribution to $1.2 million.
Another grey area involved the tax breaks upon which the interest rate was supposed to be based.
The deal appeared to conflict with a clause in the federal Income Tax Act that targets lease agreements that transfer deductions from tax-exempt organizations, like the city, to taxable corporations .
Ford said any questions about the legality of the tax structure were MFP‘s concern.
MFP refused to discuss the deal with reporters.
In late May 2001, The record began publishing stories that questioned the city’s grasp of the agreement.
Stockie called the articles a “pile of bull shit.”
Two weeks later, Clarica confirmed that the city was required to pay $227.7 million, more than double what Stockie and Ford had been saying.
On June 28, an ashen-faced Stockie stood silently behind Woolstencroft as the mayor read from a carefully worded statement announcing that the city was filing a lawsuit against MFP and Robson, alleging fraud, deceit and fraudulent misrepresentation.
The city later added Clarica to the lawsuit, as well as The Mutual Life Assurance Co., which had bought 21 per cent of the deal from Clarica.
“We’re trying to make our city whole again, ” Woolstencroft said.
The controversy in Waterloo raised concerns among other MFP clients.
The record discovered that the managers of the municipally run Essex-Windsor landfill site had raised similar questions about their payment obligations.
As in Waterloo, the landfill deal had been arranged by MFP‘s Dave Robson and the repayment formula was nearly identical to the RIM Park agreement.
The record later uncovered similar concerns at Brock University in St. Catharines and the Union Water System near Leamington.
Like Waterloo, both organizations had formula-based deals that had been arranged by Robson, with Clarica supplying the money.
What’s more, officials at Brock, the Essex-Windsor landfill and the Union Water System all said they believed they were getting interest rates in the five per cent range.
They also said MFP told them that the low rates were tied to tax benefits.
In early August, the City of Windsor hired KPMG Investigation and Security Inc. to review the landfill deal and other leasing contracts between Windsor and MFP.
Shortly after, the Union Water System hired Cliff Sutts, the lawyer co-ordinating the Windsor investigation, to review its deal with MFP.
MFP president Peter Wolfraim, who, like Robson, was a graduate of Waterloo’s Wilfrid Laurier University, finally broke the company’s silence.
With a public relations adviser in tow, he met with
record journalists in early September for a wide-ranging discussion.
Wolfraim acknowledged that there were problems with the four formula-based deals and he vowed never to use formulas again.
But he insisted there were no problems with MFP‘s technology leases, which formed the bulk of the company’s business.
Yet even as he spoke, the City of Hamilton was entangled in a dispute with MFP over an emergency-services radio lease that had been arranged by Robson.
At Toronto city hall, concern over a multi-million-dollar computer lease with MFP had deepened upon hearing of Waterloo’s lawsuit. The city hired outside experts to investigate. They concluded that the computer lease had swelled to $85 million from $43 million.
As a result, Toronto councillors voted unanimously to sue MFP.
The Toronto lawsuit sparked a furor at Queen’s Park this past week, with the Liberals and NDP demanding an inquiry into MFP‘s dealings with the various municipalities and a forensic audit into the province’s own contracts with the company.
The events that began in Waterloo had already prompted the province to write new legislation to ensure that municipalities know exactly what they’re getting into with alternative-financing deals.
Meanwhile, Brock University had spent the summer renegotiating its deal with MFP and Clarica.
On Sept. 4, the university announced a new agreement. MFP had bowed out of the transaction completely. Instead of a $43-million lease-style loan, the university was getting a $22.3-million loan directly from Clarica.
Few details were released because the university had signed a confidentiality agreement.
But Grant Dobson, Brock’s director of external relations, said The
record’s investigation had helped save the university millions of dollars.
“My personal take is, at the end of this day, a number of institutions will benefit in the millions of dollars because of your hard work, ” he told The record.
Seven months after the RIM Park controversy erupted, the biggest question remains unanswered: How did the City of Waterloo come to sign a contract that was clearly more expensive than city staff had said?
As Peter Wolfraim notes, everything the city needed to know about the cost of the deal is contained in the contract.
City officials, on the other hand, insist that they were rushed into signing a deal that had changed abruptly.
A clear answer may never be known. At the very least, it will have to wait until the lawsuit is settled.
But one thing is clear: A great deal of trust existed between city staff and MFP.
“They’re a very tight partner with us and they’re going to be with us forever on this project, ” Ford said months after MFP had sold its stake in RIM Park, apparently unaware that the company had no further obligation to the city.
Such trust was forged in a variety of ways.
By many accounts, MFP‘s Dave Robson is a smart, courteous and ambitious salesman who impresses clients with his financial knowledge and attention to detail.
He’s also very successful.
The 41-year-old is a top performer at MFP who only handles deals worth $10 million or more, according to documents prepared for his divorce.
Robson made $4.1 million for the first nine months of 1999 and may have earned as much as $5.4 million for the full year. He appears to have earned at least $1.4 million on RIM Park alone, based on his 35 per cent commission rate and the company’s declared profit.
Entertainment is a big part of the lease-financing business and Robson took clients to dinner, hockey games and, according to his divorce affidavit, strip clubs.
Ford and Stockie, for example, attended two of MFP‘s company golf tournaments, in 1999 and 2000.
MFP also treated Ford and Stockie, as well as then-mayor Joan McKinnon and then-councillor Mike Connolly, to dinner and a Toronto Maple Leaf hockey game after signing the RIM Park deal.
In addition, a number of unnamed Waterloo officials attended two charity golf tournaments and two charity dinners as guests of MFP, Wolfraim said.
When the MFP controversy blew up, Mayor Lynne Woolstencroft demanded that Waterloo strengthen its conflict-of-interest policy. New guidelines were ta bled this week. But council rejected them without debate, saying there was no need for a conflict-of-interest policy for staff.
“It almost comes across that we don’t trust our employees, ” said Coun. Bruce Anderson, who has worked with Stockie on the park since 1999.
Perhaps one of the keenest insights into the MFP controversy comes from Dan Cowin.
A former head of the Municipal Finance Officers Association of Ontario, Cowin is now a senior official with the Ministry of Municipal Affairs. In the wake of the MFP controversy, Cowin is helping to write new regulations to educate municipal employees about public-private partnerships and alternative financing.
The big pitfall for city bureaucrats, he says, is that many fancy themselves financing experts when, in fact, they rarely deal with anything more complex than a debenture.
“Nothing makes you feel like you’re part of the group than to sit down and hobnob with (finance professionals), ” Cowin says. “All of a sudden you think you’re a Wall Street wizard . . . and then the next day you find yourself in the newspaper with your pants down around your knees.”
Kevin Crowley 