HomeMy WebLinkAboutDecision on terms of Settlement with MMIA - combined materials
Commission Memorandum
REPORT TO: Honorable Mayor and City Commission
FROM: Chris Kukulski, City Manager
Greg Sullivan, City Attorney
SUBJECT: Decision on Terms of Settlement with the Montana Municipal Interlocal
Authority and Government Entities Mutual, Inc. in Cause No. DA-120311 (First Judicial
District Court)
MEETING DATE: December 10, 2012.
AGENDA ITEM TYPE: Action.
SUGGESTED MOTION: I hereby move to authorize the City Manager to execute a settlement
agreement and release in substantial conformance with the terms outlined in the staff
memorandum.
BACKGROUND: This agenda item requests you consider the MMIA’s final offer of
compromise in the declaratory judgment action the City filed against it and the MMIA’s reinsurer,
GEM, over coverage of a $3 million damage award in Delaney v. City of Bozeman. If acceptable, I
ask you authorize the City Manger to execute a final agreement in substantial conformance with the
terms of settlement listed below. A suggested motion is provided below.
This memorandum does not provide discussion on the underlying litigation which began in 2003
and was finalized with a decision by the Montana Supreme Court in December of 2009. Also,
because all the parties to this litigation are public entities your discussion must be open to the
public. Commission decisions on accepting settlements must be open to the public as a matter of
law.
In the early spring of 2010, you authorized the filing and serving a declaratory judgment action to
resolve a legal dispute between the City and the MMIA/GEM regarding whether the MMIA was
obligated to provide coverage for the entire Delaney damage award. The complaint is attached.
Judge Seeley ruled in favor of the MMIA on the grounds that the City had financially gained from
the purchase of the Mandeville Farm property denying coverage. Judge Seeley’s decision is also
attached. The City has appealed Judge Seeley’s decision to the Montana Supreme Court.
Over the past several months as part of the Supreme Court’s mandatory settlement mediation, the
City Manager, Commissioner Taylor, Beth O’Halloran (retained counsel), and myself have
discussed settlement with the MMIA. Out of those discussions the MMIA has issued its final offer
of compromise.
The MMIA’s final proposal includes the following terms:
1. The City shall reimburse the MMIA1
in the principal amount of $2 million in three equal
installments: the first of which shall occur no later than January 15, 2013, in the amount of
$666,666.00 (plus interest noted below); the second of which shall occur no later than July
15, 2013, in the amount of $666,666.00 (plus interest noted below); and the third of which
shall occur no later than July 15, 2014, for the remaining portion of the Settlement Amount
(plus interested noted below).
2. Each payment will include interest on the remaining principal amount, compounded
monthly at the rate of 1.0% annual interest, commencing with the date of execution of this
Agreement by all parties. The City may prepay any amount without penalty.
3. The City agrees to reimburse the MMIA up to $1,000,000.00 (one million dollars) if the
City sells the Property (defined in the agreement by its legal description) for a profit. Any
reimbursement shall occur on a 2/3 City and 1/3 MMIA basis. A “profit” shall occur only
when the City has recovered its total investment in the Property2
, which includes the
original purchase price together with all “Costs of Development” which shall include the
following: those costs and fees, whether incurred prior to or after execution of the settlement
agreement, related to: engineering; grading and site preparation; utilities and their
installation; roads, curbs, gutters, stormwater; and sidewalks/pedestrian walkways.
4. If the City ever sells the Property, the City will provide the MMIA an accounting of all
“Costs of Development” the City claims as part of its investment, when the proceeds are
distributed.
5. The City may not be prevented from selling or transferring ownership of the property to any
entity, nor shall this Agreement preclude the City from selling or transferring ownership of
the property to an economic development authority for less than the purchase price. Further,
the terms of the Agreement do not run with the land, nor shall they constitute an
encumbrance on the title of the property.
1 The MMIA paid the $3million Delaney judgment pursuant to an agreement that will require the City to reimburse the
MMIA for any amount agreed to in settlement.
2 The “Property” consists only of the real property purchased by the City in 2003 that lead to the underlying litigation.
6. The City will release both the MMIA (including its counsel in the declaratory judgment
action) and GEM (including its counsel in the declaratory judgment action). In addition, the
MMIA is requiring as a term of settlement the City release the MMIA’s general counsel,
Browning, Kaleczyc, Berry, and Hoven, P.C. The MMIA is requiring the release of these
entities to include all future claims related to the declaratory judgment action and those
related to the handling of the Delaney action.
UNRESOLVED ISSUES: Should you adopt a motion approving the settlement, a final settlement
agreement and release in substantial conformance with the above will need to be developed and
executed by the City Manager. The City may pursue claims for professional negligence against the
law firm that represented the City in the underlying litigation.
ALTERNATIVES: As the final offer of compromise is open only until 5:00 PM, Tuesday,
December 11, 2012, the options for the Commission are limited. The Commission may accept the
proposal or reject the proposal.
FISCAL EFFECTS: During budget development and adoption for FY2013, the Commission
reviewed and discussed financial plans in the event the City was required to pay the full $3 million
judgment (see Commission Memo, June 11, 2012, “Fiscal Year 2013 (FY13) Budget Work Session
– General Fund). On the attached document (Settlement Option #3 – Revised) we have updated this
previous financial information to illustrate how the proposed settlement would affect the City’s
current and future General Fund Reserves.
The City’s proposed $2 million share of Delaney damage award, the interest charged by the MMIA,
and the timing of payments are reflected on the attached Settlement Option #3 – Revised.
Accepting this settlement will require the General Fund to pay approximately $2,013,000.00 over
fiscal years, 2013, 2014, and 2015. The City’s estimated General Fund Reserve would remain
above the minimum according to the described plan.
Attachments:
• Complaint for Declaratory Judgment, City of Bozeman v. MMIA & GEM.
• Judge Seeley’s Decision on Summary Judgment, City of Bozeman v. MMIA & GEM.
• Settlement Option #3 - Revised
THE CITY OF BOZEMAN,
Plaintiff,
V.
MONTANA MUNICIPAL
INTERLOCAL AUTHORITY and
GOVERNMENT ENTITIES
MUTUAL, INC.,
Defendants.
Cause No. CDV-2010-395
MEMORANDUM AND ORDER
ON MOTIONS FOR
SUMMARY JUDGMENT
DEPUTY
MONTANA FIRST JUDICIAL DISTRICT COURT
LEWIS AND CLARK COUNTY
Plaintiff City of Bozeman (City) filed a complaint for declaratory
judgment seeking a determination of responsibility for payment of a $3,000,000
judgment entered against the City in Delaney and Co., Inc. v. City of Bozeman,
Gallatin County Cause No. DV-03-354. Defendants Montana Municipal Interlocal
Authority (MMIA) and Government Entities Mutual, Inc. (GEM), have answered, and
all parties have filed motions for summary judgment. The motions have been briefed
and were orally argued on September 22, 2011. The Court will resolve all motions in
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this single Order. The Court concludes that the City's motion should be denied, and
the motions of MMIA and GEM should be granted.
STANDARD OF REVIEW
Summary judgment is appropriate when "the pleadings, the discovery
and disclosure materials on file, and any affidavits show that there is no genuine issue
as to any material fact and that the movant is entitled to judgment as a matter of law."
Rule 56(c)(3), M.R.Civ.P.
The party moving for summary judgment must establish the absence of
any genuine issue of material fact and entitlement to judgment as a matter of law. Tin
Cup County Water and/or Sewer Dist. v. Garden City Plumbing, 2008 MT 434, ¶ 22,
347 Mont. 468, 200 P.3d 60. Once the moving party has met its burden, the party
opposing summary judgment must present affidavits or other testimony containing
material facts that raise a genuine issue as to one or more elements of its case. Id., 411
54 (citing Klock v. Town of Cascade, 284 Mont. 167, 174, 943 P.2d 1262, 1266
(1997)). Conclusory statements and assertions will not prevent summary judgment.
Id. In this instance, the parties agree there are no material issues of fact tobe
decided. The issues before the Court involve questions of law — the interpretation of
the Memorandum of Liability Coverage.
DISCUSSION
Delaney and Company, Inc. (Delaney), is a Montana corporation and
property developer in the Bozeman area. In 2003, Delaney was negotiating with
Lloyd Mandeville to purchase property for a development that was to include a waste
transfer station site. Delaney and Mandeville agreed on a price per acre for the
property, and Delaney then made additional arrangements in furtherance of the
development.
MEMORANDUM AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT — Page 2
Delaney discussed his development plans with the Bozeman city
manager. The city manager told Delaney that he would review the plans and provide
Delaney with waste transfer station design layouts. Instead, the city manager
undertook negotiations to purchase the property on behalf of the City without
Delaney's knowledge.
The City ultimately purchased the property, and Delaney filed suit
against it, alleging constructive fraud, negligent misrepresentation, and intentional
interference with prospective economic advantage. During the course of the litigation,
the district court held that, as a sanction for discovery abuses, the City was liable to
Delaney. The matter then proceeded to jury trial on the issue of damages. The jury
awarded $3,000,000 to Delaney for lost profits, and the verdict was affirmed on
appeal. Delaney & Co. v. City of Bozeman, 2009 MT 441, 354 Mont. 181, 222 P.3d
618.
MMIA, a public entity risk pool to which the City belongs, paid the
judgment under a reservation of rights conditioned on a judicial determination of
which party or parties — the City, MMIA, and/or its reinsurer, GEM — are
ultimately responsible for payment of the judgment. MMIA's coverage has a limit of
$750,000 for each claim, with a $1,500,000 limit for each occurrence. GEM reinsures
above those limits for claims not subject to the tort claim limitations of Section
2-9-108, MCA. In Delaney, the district court determined that the judgment against the
City was not subject to the statutory limits, and this determination was upheld on
appeal. Id., 25.
The City contends that MMIA is responsible for payment of the
judgment pursuant to the terms of the Memorandum of Liability Coverage issued to
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MEMORANDUM AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT— Page 3
the City for the time period at issue. Both MMIA and GEM seek a determination that
there is no coverage for the Delaney judgment as a matter of law.
Although MMIA is not an insurance provider in the usual sense, the
Montana Supreme Court has applied principles of insurance policy interpretation to
coverage disputes relating to MMIA indemnity agreements with municipalities. See,
e.g., Town of Geraldine v. Mont. Mun. Ins. Auth., 2008 MT 411, 118, 347 Mont. 267,
198 P3d. 796.
An insurance contract is construed according to the general principles of
contract law:
General rules of contract law apply to insurance policies and we
construe them strictly against the insurer and in favor of the insured.
Courts give the terms and words used in an insurance contract their
usual meaning and construe them using common sense. Any ambiguity
in an insurance policy must be construed in favor of the insured and in
favor of extending coverage. An ambiguity exists where the contract,
when taken as a whole, reasonably is subject to two different
interpretations. Courts should not, however, "seize upon certain and
definite covenants expressed in plain English with violent hands, and
distort them so as to include a risk clearly excluded by the insurance
contract."
Travelers Cas. & Sur. Co. v. Ribi Immunochern Research, Inc., 2005 MT 50, It 17, 326
Mont. 174, 108 P.3d 469 (citations omitted).
A contractual ambiguity does not exist simply because one party claims
to perceive language as ambiguous. The supreme court recently reaffirmed this
principle, stating:
A contract provision is ambiguous if it is susceptible, without violence,
to more than one reasonable interpretation. Whether a provision is
ambiguous is a question of law, which courts resolve from the viewpoint
of the layperson "untrained in the law or the insurance business."
"Ambiguity does not exist just because a claimant says so," or just
because the parties disagree as to the meaning of the contract provision.
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MEMORANDUM AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT — Page 4
Further, courts will not distort contractual language to create an
ambiguity where none exists.
Giacornelli v. Scottsdale Ins. Co., 2009 MT 418, ¶ 32, 354 Mont. 15, 221 P.3d 666
(citations omitted).
The language of a contract governs its interpretation if it is clear,
explicit and does not involve an absurdity. Section 28-3-401, MCA. If the words of a
contract are "clear, certain, and unambiguous, the language alone controls and there is
nothing for the courts to interpret or construe." Morning Star Enters. v. R.H. Grover,
247 Mont. 105, 111, 805 P.2d 553, 557(1991); Section 1-4-101, MCA. The Court
concludes that the issue to be resolved in this case does not involve a contractual
ambiguity; rather, the question is whether the language of the relevant exclusion
negates coverage.
In support of its motion for summary judgment, the City sets forth a
detailed analysis of the provisions of the Memorandum of Liability Coverage it
contends obligates MMIA. Essentially, the City asserts that coverage exists under the
property damage or public official errors and omissions clauses of the memorandum.
It points out that the threshold factors required to generate coverage are a finding of
damages resulting from property damage, or by errors and omissions caused by an
occurrence as those terms are defined in the policy. According to the City, the
damages awarded by the jury were directly tied to Delaney's claims of constructil'ie
fraud, negligent misrepresentation and intentional interference with prospective
economic damage.
Citing Town of Geraldine, GEM points out that the Montana Supreme
Court has "repeatedly held that it is the acts giving rise to the complaint which form
the basis for coverage, not the complaint's legal theories or conclusory language."
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MEMORANDUM AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT — Pages
Town of Geraldine,1124. GEM asserts that because all of the conduct alleged in the
complaint was intentional and willful, no matter how it may be stylized legally, it does
not fit within the definition of an "Occurrence" as that term is defined in the
memorandum. The relevant portions of that definition state:
"Occurrence" - - means:
1. With respect to Bodily Injury or Property Damage, an accident or
event which results during the COVERAGE PERIOD, in Bodily
Injury or Property Damage neither expected nor intended from
the standpoint of the Covered Party, . . .
3. With respect to Public Officials Errors and Omissions, actual or
alleged conduct during the Coverage Period as described in the
definition of Public Officials Errors and Omissions.
(MMIA's Mem. Supp. Mot. Summ. J., Ex. 1, at 4 of 20.) The definition of "Public
Officials Errors and Omissions" referred to in subparagraph 3 states that it "means any
act, omission, neglect, or breach of duty, including nonfeasance, misfeasance, and
malfeasance by the COVERED PARTY." (Id., at 5 of 20.)
GEM maintains that in terms of the public officials errors and omissions
provision, if the acts of the covered party are intentional or deliberate, they are
excluded from coverage. It notes that the Delaney complaint did not allege an
"occurrence" but rather willful and intentional misconduct. Moreover, it argues that
the City's claims under the property damage provisions of the memorandum render
the errors and omissions claims irrelevant because they are mutually exclusive
according to the terms of the Memorandum of Liability Coverage.
Both GEM and MMIA acknowledge that the City is covered
presumptively under the language of the memorandum that describes general grants of
authority. However, they assert that the broad areas of coverage are subject to the
exclusions. GEM and MMIA also maintain that because the City still owns the
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MEMORANDUM AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT — Page 6
property, it has suffered no loss or damage as those terms are defined in the
memorandum. Relying on exclusion 23, they argue that the Delaney judgment
constitutes a financial gain to which the City was not entitled. The exclusion states:
"Any liability of the COVERED PARTY arising in whole or in part out of the
COVERED PARTY obtaining remuneration or financial gain to which the
COVERED PARTY was not legally entitled." (Id., at 11 of 20.) GEM also avers that
exclusion 24, or at least the first paragraph thereof, applies as well. It states that
coverage is excluded for lalny liability arising out of any deliberately dishonest or
fraudulent act or omission, or any criminal or malicious act or omission, or any willful
violation of the law." (Id., at 11 of 20.)
The City proffers the "reasonable expectations" doctrine as a basis for
avoiding the exclusions for deliberate dishonesty and willful statutory violation. This
concept is explained in Hanson v. Employers Mut. Gas. Co., 336 F. Supp. 2d 1070,
1075 (D.Mont, 2004):
The reasonable expectations doctrine provides that the
objectively reasonable expectations of insurance purchasers about the
terms of their policies should be honored even if a painstaking study of
the policy would negate those expectations. An insurance contract is to
be interpreted from the viewpoint of a consumer with average
intelligence, with no training in law or insurance.
(Citations omitted.)
MMIA and GEM assert that the reasonable expectations doctrine has no
application to the situation in this case because the City is not an average insurance
consumer. Instead, it is one of the founding members of MMIA, has held a seat on its
board of directors since its inception, and signed the most recent MMIA liability
program agreement in 2009. The City is a member of a pool of self-insured — all
sharing responsibility for claims made against the Authority. The nature of this type
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MEMORANDUM AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT — Page 7
of organization was discussed in City of Arvada v. Colorado Intergov 'ti Risk Sharing
Agency, 19 P.3d 10, 13 (Colo. 2001), in which the Colorado Supreme Court observed:
Mnsurance pools do not undertake the indemnification of a third party.
Rather, an insurance pool is, in essence, an extension of each member,
as the funds that provide the coverage come directly from the members,
and the type and extent of coverage is determined collectively by the
members themselves. Thus, self-insurance pools are more properly
likened to simple self-insurance than to insurance companies.
After consideration of the arguments of all parties, the Court concludes
that coverage is excluded under exclusion 23. For this reason, it need not address
application of exclusion 24. The Montana Supreme Court decisions in Delaney and
City of Dillon v. Mont. Mun. Ins. Auth., 2009 MT 393, 353 Mont. 370, 220 P.3d 623,
are instructive. City of Dillon involved a question of whether interest earned on
wrongfully retained pension benefits, was "financial gain" as that term appeared in a
policy exclusion identical to exclusion 23 in this matter. The court held that it was,
and stated:
The District Court held that while the Williams claim was a covered
loss, the clause referred to as the "financial gain" exclusion precluded
coverage. The District Court applied the "financial gain" exclusion only
to Williams' claim for the principal amount of her unpaid pension
benefits, but declined to apply it to Williams' claim for interest.
This approach construes and applies the "financial gain"
exclusion too narrowly, and in contravention of its plain language. The
exclusion, as noted above, provides that there is no coverage for lalny
liability" of Dillon that arises "in whole or in part" from Dillon's
obtaining money that it is not entitled to. The clear and explicit
language of a contract governs its interpretation, § 28-3-401, MCA, and
the words are to be understood in their ordinary and popular sense, §
28-3-501, MCA. The unambiguous plain language of an insurance
policy coverage exclusion is applied. We therefore apply the plain
language of the MMIA memoranda governing exclusions from
coverage.
Id., 11112, 13 (citation omitted).
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MEMORANDUM AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT — Page 8
The City contends that the Delaney judgment does not represent
financial gain to the City — instead it constitutes lost potential profits to Delaney. As
such, in the City's view, exclusion 23 does not apply. Viewed from this perspective,
any future financial gain that may be realized by the City is irrelevant when
considering the application of the exclusion. However, as the Montana Supreme
Court decision recognizes, the award made to Delaney was based on the testimony of
the City's own expert, who established his calculation based upon what the City could
realize as profit from the property. That decision states:
Delaney presented the testimony of a consultant who had been
retained by Bozeman to assist the city in preparing a master plan for the
development of the Mandeville property. His work included an
economic analysis and a feasibility study of various ways in which the
property could be developed. His analysis predicted a profit to Bozeman
of $ 3,000,000, which was ultimately the amount of the jury's verdict.
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Delaney, IT 35.
The City argues that the supreme court's decision in City of Dillon is
"inapposite" to the situation in Delaney, primarily because in City of Dillon there was
a conversion of property not present in the instant case. The City asserts:
It is the conduct associated with the acquisition of property, not the
holding of the property itself, that supported Delaney's three claims...
These claims are based upon the conduct of the City of Bozeman
officials in pursuing legitimate title to real property when the actual title
was held by Mandevilles, not Delaney and Company.
(Combined Br. Resp. MMIA's & GEM's Brs. Supp. Mots. Summ. J., at 7.)
However, the City's characterization fails to acknowledge two salient
factors. The first is that City of Dillon does not limit the application of the language
in exclusion 23 to situations only involving conversion; conversion was simply the
underlying factual circumstance in that case. The second is that the verdict in Delaney
represents what the jury considered to be wrongful, willful conduct by a city official
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MEMORANDUM AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT — Page 9
resulting in the City obtaining financial gain to which it was not legally entitled. The
supreme court recognized this fact in affirming the district court when it stated: "In
this case, Bozeman tortiously interfered with Delaney's ability to acquire the
Mandeville property, causing Delaney to suffer a loss of profits." Delaney, IT 24.
Attached as an exhibit to the City's combined response brief to MMIA' s
and GEM' s motions for summary judgment is the affidavit of Chris Kukulski,
Bozeman city manager, which contains a statement that the City paid $3,057,000 for
the Mandeville property and that, as of the date of the affidavit, the City has realized
no financial gain from the acquisition. However, that situation is irrelevant to the
issue of whether MMIA is obligated to assume the debt.
Delaney affirmed a jury instruction that stated in part: "Your award
should include lost profit or other prospective gain from the operation of Delaney &
Company's business, which in this case was the purchase and development of the
Mandeville Ranch property." Id., ¶ 39. As MMIA points out in its reply brief, the
Delaney judgment represents profit to Delaney lost to the City after expenditures made
in pursuit of that profit. In Ophus v. Fritz, 2000 MT 251, 1124, 301 Mont. 447, 11
P.3d 1192, the supreme court relied on the two dictionary defmitions to define profit:
"Profit" is defined in Black's Law Dictionary as "the excess of revenues over
expenditures in a business transaction." BLACK'S LAW DICTIONARY 1226 (7th ed.
1999). Likewise, Webster's dictionary defines "profit" as "the excess of the selling
price of goods over their cost." WEBSTER'S NEW AMERICAN DICTIONARY 415 (1995).
What the City gained and Delaney lost was the projected $3,000,000
over the expenditures incurred in obtaining and developing the property, according to
the testimony of the City's own expert. That gain was only realized through the
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MEMORANDUM AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT — Page 10
tortious actions of the City, which still retains the property and thus the future
profit-value of the property.
In SAFC0 Ins. Co. v. Liss, 2000 MT 380, ¶ 30, 303 Mont. 519, 16 P.3d
399, the Supreme Court noted that "well-established" public policy precludes
indemnification of willful acts. It would be contrary to public policy in this case to
require the insurers to pay the City for acts that were determined to be wrongful as a
matter of law.
Based on the foregoing, IT IS HEREBY ORDERED that the City's
motion for summary judgment is DENIED. The motions for summary judgment of
MMIA and GEM are GRANTED.
DATED this day of April 2012.
6:44,704621e-,
KATIlY SE EY
Distri t CourijJudge
pc: Elizabeth A. O'Halloran
Curt Drake
Joe Seifert
T/ICS/bozeman v mont municip auth m&o mots summ j.wpd
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MEMORANDUM AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT — Page 11
Settlement Option #3 ‐ Revised for Commission Comments and Updated Financial InformationGeneral Fund Reserve FY13 Budget FY14 Estimate FY15 EstimateNotes:Fiscal Year Ending Balance 5,578,416 6,608,416 6,434,294 From the FY13 Appropriation Resolution, plus FY12 Updated Ending BalanceAmend: MMIA Settlement (667,000) (674,122) (672,660) Per Current Proposed SettlementAmend: Fair Housing Settlement (150,000) Tax Estimate vs. Certified Amount (68,000) FY13 Budget HOLD ‐ Capital ‐ PD Design Costs 250,000 FY13 Budget HOLD ‐ Capital ‐ Bogert Pool Maintenance/Design 177,000 FY13 Budget HOLD ‐ Capital ‐ Lindley Park Restroom Replacement 175,000 SID Revolving Fund excess ‐ TRANSFER 613,000 Would still leave 2x the statutory minimum in the fund, plus money for future road projects.FY13/14 Unspent Budget Authority and Revenues 700,000 500,000 Known each Sept following the Fiscal Year end.Adjusted Balance 6,608,416 6,434,294 5,761,634 Adopted Minimum 16.67% 3,862,238 4,031,581 4,031,581 Difference for Adopted Budget Purposes 1,702,713 1,230,053 Indicates whether a Special Budget Hearing is likely needed to be needed