Seeking settlement 07/26/01

By Ted S. McGregor, Jr.


In recent months, it was looking more and more like the dispute over the troubled public-private partnership related to the River Park Square parking garage was going to end up in court. Despite a variety of voices calling for settlement of the dispute, it appeared to be a legal quagmire no one could climb out of. But in the past few weeks, something changed. Overtures from council members Roberta Greene and Phyllis Holmes (the two remaining from the 1997 decision to endorse the plan) were successful, and the developer of the mall project finally came to the table with an open mind -- and, more importantly, an at least partially open checkbook.


Previous solutions supported by the developer, Spokane's Cowles family, were focused on improving the garage's performance so that it could outgrow its current problem. Previously, the original deal was sacrosanct, and the developer was unwilling to agree to change the terms. Their position has long been that the city entered into binding contracts, has benefited from those contracts and now must live up to the terms it agreed to. But the developer now appears willing to make some cash contributions to a solution, including reworking the original deal to give the garage a chance to pay its own way. "Appears" is the operative word here, as getting information is difficult as the negotiations are shrouded in secrecy.


What is known is that the developer feels the problem could be solved quickly, while the city, still smarting over the last time it rushed to judgment in the area of parking, envisions a more measured and likely slower approach. A looming deadline to keep the Parking Development Authority afloat is complicating matters. Some see making a loan to that entity and reaching a comprehensive settlement as intertwined; others see them as distinctly separate issues. On Monday night, the City Council will decide whether to make an $800,000 loan to the PDA, which already owes the city $280,000.





The loan


The last time the PDA -- the entity charged with operating the garage -- asked for money to keep up with its bills, the City Council said no. That was a year ago, and the decision sparked a variety of lawsuits and political recriminations that have made lawyers the only real winners ever since. Unfortunately, the PDA is in even worse shape than it was last summer. Any way you look at it, the entity is bankrupt. There is a reserve fund, ostensibly in place for times like this, but some argue against using that fund, as it could send a message of weakness to the bond markets.


If the PDA allows that fund to be tapped instead of funneling new money into the PDA, some fear that the city will suffer. Terry Novak, the volunteer chairman of the PDA and a former Spokane City Manager, believes it would lead to another blow to the city's bond rating. He also worries that the city would be pegged as a failure in the financial press.


Others, however, are wondering what all the fuss is about. After all, the bondholders know the PDA is bankrupt. Even now, they are waiting on the sidelines for the next move -- which they hope includes a full bailout of their position. There is also the more basic question of whether the failing bonds are even the responsibility of the city at all. After all, they were issued by the Downtown Spokane Foundation, not the city. The city's current legal position, at least from the mayor's office, is that it is not bound to cover the bond payments at all. The developer, on the other hand, says the city is responsible in the form of the parking meter pledge -- a pledge inserted into the original plan to guard against this very problem.


The major concern is how the bond markets will react to the city's decision -- nobody wants to see the city's credit rating drop any more than it already has. The bond market, it's worth pointing out, is good at seeing to its own interests, and letting failed projects wriggle off the hook is not in those interests. That is not to say that the bond rating agencies act as enforcers, but there is a lot of subjectivity in how ratings are made. So it appears that if the city does not make the loan on Monday, its rating may suffers in large part due to the fact that everyone involved in the issue expects just that to happen. It becomes a self-fulfilling prophecy.


Another approach to solidifying the bond rating, however, may be in removing the threat of the dissolution of the PDA, which would essentially pull the rug out from under the garage. Currently, that decision would be put to the voters in November, but it was mentioned by Moody's, one of the rating agencies, as a worrisome development. Mayor John Powers is expected to seek the removal of that issue from the ballot on Monday, which would take four City Council votes. Perhaps the combination of not making the loan but removing the threat to the PDA would keep the bond market from reacting at all.


But would a drop in the rating be so bad? Even if the rating is dropped down a notch, the impact would likely be only a one-tenth or one-fifth of 1 percent increase to the interest rate charged on a public project. The cash difference that would add up to for a typical project would not come close to the amount of money it will take to continue to prop up the PDA. If the August payment is made, then the February payment looms -- this is a chronic problem.


The PDA is expected to bring a loan proposal to Monday's meeting that has ample security and a payment plan that would have it paid off by early next year. But if the PDA can afford to pay back such a loan, why not just use that income stream to refill the reserve fund, which could be used to make the August 1 payment? Most agree that all the August payment buys is time to find a comprehensive settlement; without hope of that, any loan to the PDA could be characterized as sending good money after bad.


And that is precisely why some see the decision on the loan as wrapped up in the bigger picture. The developer had said it would have contributed to the loan if it was part of a larger settlement, but that didn't happen.


Whether the developer has an interest in seeing the loan made is not entirely clear. The developer's attorney Les Weatherhead will only say that it would be a good sign if the city would recognize that it has a financial responsibility to the garage and the PDA. If the developer does indeed see a need for the city to make the loan, then the city may be able to leverage continued negotiations from the making of the loan. In fact, some believe that if the loan is not made, negotiations on a comprehensive solution will cease.





A settlement


If negotiations survive the next week or so, the chances for a resolution of this nagging problem would appear to be better than they have ever been. Still, there seems to be a disconnect between the two sides and their vision for what a comprehensive settlement should look like.


It appears, at least in general terms, that the developer's vision includes the city issuing new bonds over a longer term and a waiver of its past and future ground rent charges to the PDA. Between these two financial concessions, and other, smaller ones, the garage would have a much better chance of paying its own way.


The mayor and his counsel Lauri Siddoway, however, see more parties contributing to a solution. The bondholders may be asked to accept a reduced return on their investment (after all, they bought BBB- bonds, almost the riskiest available), Walker Parking Consultants would be invited to accept responsibility for missing the mark in predicting the garage's performance, the developer would be asked to contribute to the solution in some way and the city would get behind the garage and rebond it, probably for a longer term, taking the Downtown Spokane Foundation out of the mix. It's a more complex solution, but by bringing in more parties, the amount the city and the developer will ultimately be responsible for gets smaller.


This approach also depends heavily on understanding the actual size of the problem. Just how much money will be needed to keep the garage's head above water every month for 30 years? Learning the answer to this question requires the best numbers available, and the city is seeking the developer's own performance numbers for the garage (the developer, not the PDA, has been operating the garage since it opened and the dispute arose).


While there are stark differences, there is also some common ground emerging. Both sides seem to have come to the conclusion that the garage cannot be managed out of its current problem (even though the developer still wonders why operational changes recommended by the Keyser Marston study a year ago have not been acted upon). And both sides (save a couple council members) seem at least willing to entertain the idea of the city actually taking more ownership of the garage, not less. Still, getting there from here can be difficult, and landing in court still remains a very real possibility.





Resolution


So how can these footholds of common ground be pieced together in such a way as to blaze a trail to a comprehensive solution? The two sides can continue to negotiate, but perhaps it is time for mediation. Since the case is in federal court, the various litigants could agree to participate in mediation. Federal mediation is non-binding, so there is no requirement at the end of the day to take whatever they give you. But it does offer the opportunity to inject an unbiased point of view into the polarized mix.


Still, there are problems with mediation, as it requires that one person from any side be empowered to negotiate and accept all, nothing or anything in between. The developer's longstanding frustration has been that there is no one who fits that description at the city. Some solutions are sought by individual council members, other times it has been the mayor or various attorneys hired to argue the case. Who would actually represent the city at the table is a question that would have to be solved, and how could it be guaranteed that a solution arrived at through mediation wouldn't be rejected later by whoever wasn't at the table? The City Council and the mayor have indicated they would support federal mediation, but the developer does not, although Weatherhead doesn't rule it out at some point down the line. Other parties like the bondholders, Walker and even the city's former bond counsel are all believed to be willing to enter into mediation.


But to look ahead a little bit, if there ever is a resolution to discuss, it will become a political decision for the city's elected officials. The council could endorse a proposal from the mayor's office with four votes; to override his veto of their own plan would take five votes. This puts the newest council member, Dean Lynch, at ground zero (if, in fact, such a resolution comes before the end of the year; three council seats are up for grabs in November). Conventional wisdom has it that Rob Higgins, Holmes and Greene would support a reasonably fair settlement. Steve Eugster is on record against any settlement, and Cherie Rodgers will set a high bar for her support. Steve Corker, meanwhile, has been tough on the garage, but he has also shown inclinations to find a solution in the past. If Corker votes with Rodgers and Eugster, which isn't guaranteed, that would leave Lynch as the swing vote.


The voting pattern seems to hold for the loan to the PDA as well. Those who think the loan may keep hope alive for a solution will likely vote for it; those who think its throwing good money after bad and are not afraid of the bond market's judgment will not. Again, Lynch is the swing vote. Powers has said he would not support a loan that was not sufficiently guaranteed, and just who will guarantee repayment of such a loan remains to be seen. Finally, if the loan is made, some predict that Eugster will gather signatures to put the decision before the voters in the form of a referendum, which makes the loan even more difficult to secure.


But the elected officials could come to a completely different kind of political decision. Corker says he does not want to make the same mistake that the council of 1997 made. While the secret sessions at City Hall have been valid, there will come a time when the public will need to be let in on the plan -- and Corker promises at that time there will be rigorous debate and tough questions will be asked in the full light of day. But to really ensure that level of scrutiny, the council, the mayor or both could decide to put any proposed comprehensive settlement to a public vote.


Certainly there are arguments to be made about letting elected officials do what they are elected to do, and timeliness may be an issue, as waiting for election day could mean more hard times for the garage, the city and the developer. But there's a logical symmetry to allowing the public the vote they never got on the plan. A public vote would require full disclosure, would allow ample public airing of the issue and ensure that the settlement agreement would be sound -- otherwise it won't pass muster. But most importantly, a public vote would close the book on this ugly chapter in our political history and begin to restore the public's faith in government in a way that no other resolution could match.