[quote=“Dex”]
So we are all in agreement then, the lack of dividends is in no way an indicator of the share value and/or a measure of any benefit to the shareholder.[/quote]
I don’t know why you draw that conclusion. Dividends are an indicator of share value (eg blue chip stocks usually command high prices because they pay steady dividends) and dividends are also a measure of benefits to the shareholder.
If the City had invested in Microsoft (to borrow your Bill Gates example) the lack of dividends would not have been a problem because Microsoft is a publically trading company and its shares have appreciated substantially in value. Rather than receiving dividends, the City could have sold some shares to receive a return.
Unfortunately, the City did not invest in Microsoft; it invested in CityWest, whose shares do not trade on the stock market and are not easy to sell, and whose asset value has been declining. If the City does not receive dividends (or interest on shareholder loans) there is no benefit to the shareholder.
[quote=“Dex”]
Shareholder loans to corporations with reduced interest or interest free are common. It is also common for shareholders to pass assets to corporations, either through loan forgiveness or many other ways. Short of seeing the full financials it is difficult to quantify the performance of these measures.[/quote]
Shareholder loans at reduced interest or interest free are not uncommon, especially in Ma and Pa businesses where the shareholders also run the business. The problem with interest free loans is that they tend to be forgotten. In effect, there is a hidden subsidy to the business. That may be fine when dealing with a private business, but not when public funds are at stake and where transparency is important.
Posing ‘what if’ questions about how much the City would make if interest was charged helps to measure the value of the return on the City’s investment. The council was shocked that CityWest will not be paying a $500,000 dividend this year, but that is not even equivalent to interest at prime (currently 3%) on its $21.7 million loan to CityWest. In contrast, if the City was receiving a $1 million a year in dividends it would be making equivalent to prime + 1 on its’ debt and a return on the value of its’ equity. When the City is receiving neither interest on the debt nor dividends on its’ equity, that is not a good situation.
There is also an ‘opportunity cost’ to interest free loans. As we now know, the City will not be receiving dividends this year. It also did not receive dividends in 2010 and 2011, and it is not expected to receive dividends for two or three years. The City would be much better off if it had invested the $21.7 million loan to CityWest, and its $6.3 million in equity, in interest bearing securities authorized under section 183 of the Community Charter.
As for assets being passed to corporations by forgiving debts, that is not why assets are written off. Municipal finances have to be audited and auditors are required to ensure that the statements fairly present the financial position of the public body. The $20 million was written off (‘forgiven’) because there was no longer a reasonable expectation that those funds would ever be repaid.
[quote=“Dex”]
I can judge the performance of the City’s financial state easier because they are using a different accounting model, Fund accounting, which better focuses on accountability and fiscal responsibility, not profit.[/quote]
Fund accounting is not an “easier” way of judging financial performance, it is the accounting method that applies to government bodies (and other non-profit entities) in this country. The City’s financial statements as prepared using fund accounting shows that the value of the City’s investment has declined significantly over the years.
[quote=“Dex”]
My original post on this subject was to challenge the belief that was going around that we were funding Citywest, and also with the impression the City was out 20 million dollars and lost interest income. These practices are common with shareholders and corporations for benefit. No one here can quantify these practices without more financial information so one cannot say with authority “that the shareholder’s $20 million revaluation and interest reduction for its company has not resulted in a net benefit to the shareholder”. Short of that, maybe our approach and language to our concerns should be modified.[/quote]
On some of these points we are not far apart. I have not said that the City funds CityWest by, for instance, writing them cheques. I also do not see the Monarch purchase as necessarily having been a problem. The purchase was financed with arms-length debt and the City does not appear to be on the hook for it. Perhaps revenues from cable services are what is propping up CityWest. Or maybe that is where CityWest is doing poorly such that it has missed dividend payments in 2010, 2011 and this year and will continue to do so into an uncertain future.
I agree that more information is needed from CityWest so that we can make sense of why their performance has been so dismal in recent years. Hopefully the company will present its’ audited financial statements at a public council meeting as its’ articles require.
As for the $20 million dollar write down, at one time the auditor was of the opinion that CityWest was worth more than it is currently valued at. Whether the company was accurately valued in the first place may be open to question, but there can be no doubt that in the auditor’s opinion the value of the City’s investment has declined. That should give cause for concern.
If the $20 million write down in 2008 was done to provide CityWest with a benefit, as you suggest, that has not worked out. The value of the investment subsequently declined from $33.9 million in 2009 to $28 million in 2011; almost an 18% decline in only two years. That’s not good news.
[quote=“Dex”]
I will say this though, this in no way attempts to excuse the current state of the city. But would any of the recent anger against Citywest exist if the Port’s property wasn’t reassessed and City Council wasn’t “shocked” about the lack of loan payment/dividend.[/quote]
I would hope so. The City has not been doing well on its’ investment in CityWest. The City would be better off if it had invested in low risk, interest-bearing securities.