Arena in Hock?

by Ted S. McGregor, Jr.


It was supposed to be a new kind of project for Spokane. Governments would cooperate and citizens would be consulted. Due diligence would be the order of the day. Maybe in the process of expanding the convention center and fixing up Mirabeau Point and the county fairgrounds, the project could also prove that Spokane could do something big without screwing it up. Voters bought into the vision, and everything looked good. Until now.


Plans seemed to be moving ahead smoothly until a few weeks back when Spokane County essentially said to the Public Facilities District, "Sure, we'll borrow money for you. But, oh -- by the way, you'll need to pledge the Arena to get it."


It's not too late to get a fairy-tale ending, but at this moment -- when project planners had hoped to be selling bonds instead of rewriting documents for the 20th time -- the entire project could just as easily slip into the more familiar formula of finger-pointing. As the project stalls, marginal voices calling the state-financed $100 million deal a boondoggle gain traction. Complications start to multiply, and doubt can creep in.


While the financing package has become more complex than anyone last May expected, the point of contention between Spokane County and the PFD has come into focus. That's the Arena, the PFD's crown jewel. Will it be used as a bargaining chip? The good news is that if the two sides can reach an agreement on that point, officials on all sides believe the project can move forward rapidly. The bad news is that neither side appears willing to budge from its position. Spokane County wants the Arena pledged to guarantee that the PFD will continue to pay its bills; the PFD believes there is already enough security in the deal and wants to maintain a separation between the Arena and its new responsibilities regarding the convention center.


"This is a whole different proposal than we have been talking about since March," says Shaun Cross, a volunteer PFD Board member and Spokane attorney who has been working on the expansion project for five years.


But, counters County Commissioner Kate McCaslin, "If your spreadsheets are right, and you're confident in your numbers, why don't you agree to this?"





The Voters' Message -- While the County's desire to include the Arena is a new development, the PFD's insistence on keeping the Arena out of harm's way is longstanding. A few years back, it was not at all clear that the PFD would agree to expand its mission beyond running the Arena. Leaders on the PFD Board at that time seemed to prefer focusing on making the Arena as strong and successful as possible. By all accounts, they have succeeded at that, having been profitable six out of the past seven years and accumulating an $18 million reserve fund.


"It's a very good organization, and certainly the city couldn't do this," says City Councilman Dennis Hession. "By law, it has to be a PFD."


At one time, the idea of creating a second PFD was considered as a way to tackle the convention center expansion. But when the state law was passed to allow the sales tax refund for the construction of convention centers -- largely out of guilt over giving King County such a break to build not one but two new stadiums in the 1990s -- it became clear that the existing PFD would have to take on the project if it was to happen at all.


Then, in May, all Spokane County and city voters endorsed two ballot measures that allowed the PFD to expand its mission to accommodate the expansion of the Spokane Center, Mirabeau Point (which is in the new city of Spokane Valley) and the Spokane County Fair & amp; Expo Center, which is also in the new city but which will continue to be administered by the county. Convention planners have long argued that Spokane could compete to host more and bigger conventions with a larger facility. And, the argument goes, those conventioneers are great for the local economy because they spend lots of money. Additionally, the improvements in that part of downtown could help connect the core to the growing Higher Ed campus, clean up some urban blight and perhaps spark additional private investment.


But just how binding was that vote? While expansion backers use words like "mandate" to describe the voters' decision, McCaslin believes the voters made a "broad public policy statement" and agreed to "sideboards" on the scope of what the PFD could do. The county has already drawn fire for ignoring the overwhelming support for a ban on billboards received in an advisory vote last fall, but McCaslin is adamant that voters in May never intended to do anything that might jeopardize the county's general fund.


"I will put the Arena at risk way before I will put essential services at risk," says McCaslin.


The PFD might say (although they aren't -- yet) the county is contradicting the will of the people in holding up the deal over achieving levels of security only recently dreamed up. The county, on the other hand, says the deal has to change to respond to facts that have only recently come into focus. Primarily, the complication boils down to how much the PFD can borrow. This is where it gets complicated.





By the Numbers -- When the legislature wrote the law that created the PFD, it capped how much debt it could take on. According to that figure, the PFD has about $70 million in debt capacity left. Subtract about $10 million for the standard cushion, and the PFD has about $60 million to work with. Trouble is, they need $96 million to do the projects on their drawing board.


According to the advice of Spokane County's bond counsel, Roy Koegen, also known as architect of the River Park Square parking garage bond structure, that extra $36 million cannot be loaned in a lump sum to the PFD. It must show up on the county balance sheet as short-term debt. As such, the PFD Board would have to vote to reallocate the payment on that portion of the overall debt every year for 20 years.


This is what is making county officials nervous. What happens if a future PFD Board decides not to reallocate the payment for that year? That's where the Arena pledge comes in. The county's plan is that if some future PFD Board reneges on the arrangement or winds up flat broke, then the Arena would become county property and could be sold to make up the shortfall. But rather than envisioning the liquidation of the Arena, McCaslin sees it more as an arrangement in which the Arena foreclosure is the hammer over the PFD Board's head, compelling them to continue to make the annual payments.


If this sounds like getting from point A to point B via point Y, it is -- it seems unnecessarily convoluted. Why not just get the PFD to agree to make those payments over the life of the loan? For one thing, you can't bind future public policy-making boards to decisions. For another, if you had such a long-term agreement, it wouldn't be a year-to-year deal anymore.


Cross says he appreciates the care county officials are taking to make sure the deal will never affect their general fund, but he says the project is as close to a sure thing as you'll ever see. "You can't eliminate all risk," he says.


But the level of risk associated with convention centers has grown since the plan first surfaced. Both 9/11 and the economic downturn have cut into the convention business, and after the state tax refund law passed, a number of cities in Washington have formalized plans to build or expand convention centers, creating more competition for the business that is out there.


Still, dedicated tax revenue streams are a powerful tonic, making the debt security already being offered by the PFD appear strong. Along with that revenue, the PFD would use the operating profit of the expanded facility to pay off the annual debt payments. To add security, the PFD would agree to establish a reserve fund of $2 million right from the start. This would come from the Arena's operating profits accumulating over the years. The debt from the $96 million project would start out at around $2 million a year, but it grows over time, with much bigger payments starting in 2018. The PFD would plan to grow its reserve fund by 2018 to nearly $10 million, and would even allow the convention center to borrow from the Arena's overall reserve in the event of a down year.


The tax revenue streams (one-tenth of a percent of sales tax and a 2 percent hotel/motel tax) will fluctuate, allowing excess proceeds from up years to go right into the reserve fund. No can say what the future holds. But if the past is any indication, the PFD should be able to pocket some extra cash. Since 1980, the growth in Spokane County sales tax receipts has averaged 5.4 percent every year. Last year -- one of the worst -- still hit 3.1 percent in growth. In fact, that might be the public debate that should be happening during this time of state budget problems: How much excess cash should any PFD be allowed to hold onto?





How Conservative? -- As for its own projections of how fast the local tax base will grow, the PFD penciled in a 3 percent annual growth rate, which Cross characterizes as "ultra-conservative."


The county, however, is not impressed with 3 percent; they're looking more at zero percent growth, which, says County Finance Director Marshall Farnell, is exactly how the bond market will look at the deal. Under zero percent growth in sales tax receipts, the PFD projections would add up to a significantly smaller project.


"Really, in the strictest sense, what they can afford is $63 million," says McCaslin, applying that calculation.


But while Cross says worst-case scenarios are important to consider, the county seems to be looking at something more like total financial Armageddon. "If the world grinds to a halt, we'll have way bigger problems than this," he says.


Still, the risk comfort level appears to be the county's to set. The PFD is asking the county to use its good credit to issue the bonds and loan them the money (and to burn through a third of its remaining capacity in the process). Despite the voters' wishes -- however one interprets them -- the county has the right to just say no.


But along with deciding on how to share the burden of shortfalls in weak-performing years among the city, the county, the PFD and perhaps even the new city of Spokane Valley, it all comes back to the question of the Arena. PFD officials have floated the idea of pledging the convention center, which they would take over from the city, instead of the Arena. The county wonders if it is valuable enough and if the timing of the PFD taking ownership would work. Ostensibly, the value of the asset pledged should be about $36 million, that amount beyond the PFD's bonding capacity. Cross says the convention center is currently valued at about $23 million.


Still, if the concern is for what might happen down the road in later years, the value of the convention center might increase enough to act as the hammer needed to enforce discipline on that future PFD Board. Farnell and McCaslin say they are willing to listen to options.


"Our business is that this loan is secure," says McCaslin.





The Big Picture -- All parties are still looking for a happy ending. County officials say they have spent lots of time on the issue and are anxious to move on to other issues, like the integration of the new city of Spokane Valley into the county's web of public services. PFD officials are antsy to get into the bond market, where rates are at a 40-year low. And the city of Spokane, eager to streamline in the face of budget problems, has a chance to shed a program that might not be considered a "core service."


"[The PFD is] in the entertainment business," says Councilman Hession. "The city would largely be getting out of that business. It's time for the city to let go."


All agree that meetings in the next couple of weeks will be crucial. The city would be first to act, in endorsing its share of the risk and in transferring the convention center and other land to the PFD. But that decision has to wait until the underlying agreements with the county are firmed up. Hession says he's impressed by the dedication and conscientiousness of the various public servants involved, but he says it's also time for everyone to realize they ultimately represent the region. In this case, the political fallback position of protecting one's turf might need to take a back seat when a project comes along that can help float all boats.


"If you take the posture that we're all in this together, we ought to get beyond that," says Hession.


But the clock is ticking: If the project isn't underway by the end of the year, the region will miss out on the state tax rebate program. And with the current situation in Olympia, don't expect to see another offer like it in this lifetime.


"You have to look at the broad picture," adds Hession. "The bigger picture is getting this facility underway."





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