Over The Brink 03/23/00

by Ted S. McGregor Jr.


If the controversy surrounding the River Park Square parking garage was a war, it would be the Cold War. Superpowers on either side of the issue have the ability to trigger mutually assured destruction, with downtown Spokane as ground zero. Now a dangerous game of brinkmanship is being played out as the two camps look for any opening in the stalemate that has defined city politics for the past three years.


Those closest to the issue say the next few weeks are crucial; within that time frame, it will become clear whether the city is on a path to detente or if a scorched earth policy will prevail.


Here's how it works: City officials hold the fate of River Park Square in their hands because if they renege on the pledge of parking meter money to cover the parking garage's shortfall, the mall project will suffer; and the developers hold the fate of the city in their hands because if they refuse to cover the shortfall, they could precipitate a crippling blow to the city's bond rating. But the full brunt of this potential destruction would be borne by downtown, as revitalization progress could grind to a halt as a result of the controversy slipping into a legal abyss.


But the issue doesn't have to "go nuclear, " and many are hoping that instead of pushing the button, the leaders on both sides will, one day soon, emerge from a negotiating session all smiles and back slapping with an announcement that a settlement has been reached. It took the U.S. and the Soviet Union 40 years and billions of dollars to get there. But in Spokane's little version of the Cold War, it's going to have to happen in about a month.





getting to the table


Part of the difficulty in getting a negotiation underway is that the developers don't necessarily see the need to open the matter up to find a new solution. They say that if everybody just stays the course, with the help of the city's parking meter fund now and into the near future, the mall and other downtown improvements will kick in and the garage will begin to pay its own way. People who have looked at the garage's performance and its projected revenues, however, don't share that view. They say that the garage will never be able to pay its own way -- an assertion they expect will be bolstered by the findings of Keyser Marston Associates, a consulting firm hired to rerun the numbers that were relied upon in gauging the garage's prospects for success. Furthermore, even if the garage grows out of its current malaise, it would do little to rehabilitate the bonds that were sold to fund it. Those bonds were downgraded as a result of the garage's troubles, and it could take years for them to recover, even under the rosiest circumstances. Some feel it's only a matter of time before a third party -- the bondholders -- enters the fray and demands a solution.


Meanwhile, city officials are in agreement that a negotiated settlement is the best solution to the problem. But getting their partner to the table has been tricky, not only due to the developer's reluctance to reopen the issue, but also because of how they are behaving in trying to get them to the table. It's widely known that in negotiations you need to bargain from a position of strength, but there is also a fine line between showing strength and making threats. By the developer's way of thinking, some city officials are crossing that line by suggesting that there may be some fraud involved in the origins of the public-private partnership. It's hard to ask someone to open their checkbook just after you call them a crook. But it's really the only bargaining chip the city has in getting the developer's attention (aside from relying on the developer to simply want to do the right thing and help solve the problem). If there is no fraud, however (and now there is no proof that there is), then the developer has all the cards as its contracts with the city are about as ironclad as they get, having been already reviewed and endorsed by the state supreme court. So discussions of hiring an outside law firm to investigate the matter or to encourage the federal Securities Exchange Commission to look into it appear to be efforts to force the developers to the table. But it's a somewhat heavy-handed approach that could backfire and precipitate just the kind of legal armageddon that everyone so badly wants to avoid.





a win-win solution?


The developers have shown a willingness to meet with city officials, and all sides sat down last Friday, emerging only to say they would meet again on March 31 (when Keyser Marston hopes to have some preliminary numbers). But so far the only openness they have shown to negotiations is in restructuring the deal so that the politically poisonous parking meter money is worked out of the equation. Perhaps that chunk of sales tax that can be directly traced to River Park Square could be used as a guarantee instead? As for refinancing the bonds, they are skeptical that it is a costly plan. And on the matter of revisiting the contracts, including ground rent and the purchase price of the garage, the answer is an unequivocal no.


But officials representing the parking garage on the Public Parking Development Authority (PDA) have been hammering away at an idea that they hope could be acceptable to the developers. As it currently stands, it would not involve the contracts at all, but would focus more on the bonds and who assumes the risk for them. Under the plan, two new sets of bonds would be issued to pay off the current bondholders at an agreeable rate of return (probably around $33 million worth). This would take the looming threat of angry bondholders out of the picture. Only $26 million worth of those new bonds would be tied to the garage's performance, making bills easier to pay over the next 20 years (or 25 years if they choose to extend the term). The rest of the bonds, perhaps $8 million worth, would most likely be general obligation bonds. (These figures will be firmly set based on the findings of the Keyser Marston study, which is expected to be completed by April 10.) And here's the kicker; you get the developer -- Spokane's Cowles family -- to buy up the $26 million in bonds. It's a tidy solution since the Cowles family is among America's wealthiest, and it would also give them a chance to put their money where their mouths are: If the parking garage and the mall are such fabulous projects, then there's really no risk that they wouldn't get a good return on such a bond investment (and, if their projections hold, they could even get paid off early). The city's share of the pain in extracting itself from the situation is the $8 million in general obligation bonds.


But this scenario depends on the findings of the Keyser Marston study projecting a certain level of financial vitality on the garage. If the projections come in lower than expected, the city and the PDA may find themselves needing to ask the developers to go back and open up some of those contracts (including ground rent) that are making it so hard for the garage to pay its bills. And there's an idea that's being floated to answer this eventuality as well. The city may decide that it doesn't care about owning the garage at the end of 20 years after all, as the contracts currently stipulate. If the deal was renegotiated with public ownership of the structure factored out, there would be no purchase price and suddenly the PDA's stewardship -- if that agency was still in the picture at all after such a move -- would get a lot cheaper. Although the developer would then get an asset they have said is worth $26 million, it appears this scenario doesn't have much chance for success. This is why so many people are so anxiously awaiting the results of the Keyser Marston study -- it will dictate what is possible and what isn't.





a legal abyss


While such solutions appear to make sense, there is a worry among the key players in the issue that they may be losing control -- that chances for a productive negotiation may be slipping away on a stream of angry invective, mutual distrust and pride. One way to focus on the task at hand -- a method used often by environmentalists -- is to project the tragedy. For environmentalists, it means scanning a green slope, lush with wildlife and trees, and imagining a clearcut in its place, with life shoved aside and beauty corrupted. Rather than seeking solace in pointing fingers over who cut the slope and how they broke the law, environmentalists aim to prevent what they would view as a tragedy. Downtown Spokane is the green slope, and while not exactly lush, in the past couple years it has been sprouting success in some surprising ways (and like it or not, downtown's fortunes have become hitched to the success of River Park Square). In the case of River Park Square and its parking garage, it's not hard to project the tragedy.


The trigger point for legal armageddon -- in which lawyers would take up the issue to the likely tune of millions of dollars and years of labor -- appears to be the city's looming decision to loan money from the parking meter fund to the PDA to cover the garage's shortfall. There's some question as to why this isn't a simpler transaction -- like sending the city a bill -- since it's all contractual, but the loan format was written into the deal, putting the city council's finger squarely on the trigger. The council has tabled the decision, as it waits for the Keyser Marston report. Although the council rescheduled the decision for March 27, it appears April 17 may be more realistic if they want to have time to digest the findings of the study.


If the council decides not to make the $450,000 loan at that time, it would be tantamount to defaulting on the garage bonds (it's not quite that simple, but in a roundabout way, that would be the end result). This would trigger two actions: First, bondholders and the developer would bring a legal action against the city, basically calling on it to live with the contracts it has already signed; second, bond rating agencies would start to study whether this default should impact the city's good credit. Put in the simplest terms, if you don't pay off your credit cards, they won't give you any more -- and cities play by the same rules as consumers. This bond rating issue is at the crux of the matter, since it is the primary downside for the city. A lower bond rating would make projects like road improvements, the Davenport Hotel improvement district, the expanded convention center, wastewater treatment upgrades and a public-private partnership at the Summit property more and more difficult. A downgraded rating could bring the public side of downtown -- and citywide -- revitalization to a halt for years. But a new theory has surfaced recently, that the city can renege on the deal without affecting its bond rating at all. This theory is being called dangerous by some since it may lull council members into a false sense of security. The theory is that the city's rating wouldn't be affected since the bonds were issued by the Spokane Downtown Foundation, not the city. But bond experts believe the city's bond rating would be damaged because by failing to live up to its financial commitments, it caused the default.


While the briefs are being prepared by attorneys suing the city, the city would likely hire a law firm of its own to investigate the entire affair, going back four years. The only way to get off the hook would be to somehow prove that the risks associated with the project along with costs (like the price of the garage) were knowingly misrepresented, or that council members who voted for the deal were given some consideration for their votes. The developers and council members of that era have strongly rejected these claims. And it does make for a hard-to-prove case when, for example, four different consultants agreed on the price of the garage -- how could the developers have influenced four different studies? But many of the assumptions in those reports relied upon the information supplied by the 1996 Walker Report. Analysis from three years ago and today suggests that Walker was terribly wrong about how much money the garage would generate. Since it was used as the source document for so much of the project, including the purchase price, it has come under increased scrutiny. How, people wonder, could such a respected firm be so wrong? If it could be proven that Walker used bogus numbers that were somehow supplied to it to make certain calculations pencil out, it would not only be on the hook to the bondholders, but it could take the city off the hook for the whole deal. An investigation into who is to blame for the city apparently getting into such a bad deal would likely focus on Walker and its contacts in Spokane. Although ostensibly hired on the city's behalf, some believe Walker worked most closely with the Downtown Spokane Foundation, the non-profit entity that issued the garage bonds. Those same people believe the foundation has acted more as an ally of the developers than as an advocate of the city. The investigation would likely try to prove that some of Walker's more outrageous assumptions -- like the average length of stay being three hours, which complies with no known national models -- were fed to it, which would call into question the validity of its report and undermine the foundation of the entire project.


But consultants make mistakes all the time, and a variety of separate entities, from Coopers and Lybrand to real estate appraisers to three Gonzaga University business professors, told the city council that it appeared Walker could be mistaken in its analysis. The fact that the council was told repeatedly about the problems in the Walker study makes any case against that consultant even more difficult to prove. There was no fraud, Walker could argue, since you were repeatedly warned and chose not to act on those warnings. A more recent revelation suggests that yet another red flag was waved before the council's eyes, this time by people much closer to home. In 1996, then-Assistant City Manager Pete Fortin and the city's bond counsel Roy Koegen are said to have told the council not to pay more than $18 million for the garage; the council eventually agreed to pay $26 million. Why they spent $8 million more than two of their closest advisers told them to could be another point of interest in an investigation. In an ironic twist, $8 million turns out to be just the amount the general obligation bonds could turn out to be in a possible settlement, suggesting the pair were right on in their recommendation.





a look over the brink


So what's the potential tragedy of not reaching a negotiated settlement? A bankrupt, $26 million parking garage. A mall so shrouded by clouds of suspicion that it and other downtown projects have a hard time succeeding. A city unable to create progress because its bond rating has been compromised. A family not only willing but able to help revitalize downtown Spokane becoming more and more distant. A city government so weighted down by the controversy that nothing else, from growth management to neighborhood empowerment to public safety to roads, can get the attention it needs. And a reputation, deserved or not, for being a hard community to do business in. By Cold War standards, it's a textbook case of mutually assured destruction.


While it seems that deterrence is guaranteed under such circumstances, in this case it appears that the need to assign blame and preserve pride may prevent negotiations from progressing. But 20 years from now, people won't remember who was to blame, or who was needlessly vilified; they'll just know that downtown Spokane got the jump start it needed -- or that something tragic happened.