Article by Erik Smith. Published on Friday, November 19, 2011 EST.

Lawmakers Face Dec. 1 Deadline – Treasurer Warns of Dire Consequences for Entire State

The Town Toyota Center in Wenatchee.

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, Nov. 18.—A $42 million financing snafu involving a Wenatchee arena will roar to center stage in the Legislature during the opening days of the special session that starts Nov. 28. Lawmakers must break all speed records to pass a bill to avoid a municipal default that state Treasurer Jim McIntire warns will cost big bucks to taxpayers across Washington.

            If lawmakers fail to pass the rescue bill by Dec. 1, the Greater Wenatchee Area Events Center Public Facilities District will go into default. It would be the biggest default by a government agency in Washington state since the infamous $2 billion implosion of the Washington Public Power Supply System 28 years ago.

            The treasurer’s office and Wenatchee-area lawmakers are scrambling to make the case for the rescue bill, which will be introduced next week. It appears that the timing of the special session may be one of the luckiest accidents in state history – if lawmakers move at lightspeed, they might just be able to make it.

            “Isn’t that something?” asked state Rep. Cary Condotta, R-Wenatchee. “Without a special session, this couldn’t be done.”

            To meet the deadline, lawmakers will have to hold House and Senate hearings on the bills and vote them out on opening day of the session – an almost unheard-of prospect. At least one of the houses will have to pass a bill by the second day of the session. The governor must sign the measure into law by 10 a.m. on Dec. 1.

            The trouble concerns the Town Toyota Center, a 4,300-seat arena in Wenatchee that opened in the fall of 2008. Its operations are in the black. Trouble was, the construction financing plan fell apart, and the city of Wenatchee, the biggest participant in the public facilities district, stumbled as it tried to solve the problem. Now the state has to jump in.

            Wenatchee Trouble a State Concern

            Details of the rescue plan are being released today. Under the bill, the state would offer a $42 million “bridge loan” to the public facilities district, which includes seven cities and two counties in the greater Wenatchee area. That will give the nine local governments time to come up with alternate financing plans. If they don’t do it by Jan. 1, 2013, the state will begin deducting payments from the local sales tax money they normally get.

            The most important thing about the plan is that the state’s repayment terms are so steep that the local governments will have good reason to come up with the cash. “The goal is to get the state paid back as soon as possible, but if they don’t, they are going to pay dearly,” Condotta said. “We made the terms bad enough that we gave them plenty of incentive to refinance.”

            The loan won’t deduct money from the state general fund budget – a big issue in a session when lawmakers face a $2 billion shortfall. The money would come from the fund that is used for distribution of sales taxes to local governments.

            It is a five-alarm emergency in the Wenatchee area, where the public facilities district was downgraded last week by Standard and Poors to an anemic triple-C bond rating, and the city of Wenatchee’s bond rating has been downgraded as well. That means taxpayers in the area must bear higher borrowing costs, and government budgets are squeezed.

            But the state treasurer’s office is warning that it’s not just a Wenatchee problem. If the public facilities district defaults, it will affect other local governments across the entire state, driving up their borrowing costs as well.

            Would Hurt State’s Reputation

            The problem is that Wall Street might have trouble telling the difference between Wenatchee and Tukwila, the treasurer’s office explains.

“A default of this nature could have a far-reaching effect on other local governments throughout the state in terms of their ability to borrow money at reasonable rates,” said Chris McGann, spokesman for the treasurer’s office. “In the bond world or in the financial markets, we have something called a ‘reputational risk.’ So you have bond buyers in New York or Boston or wherever who look at opportunities to invest, and they have literally thousands of choices. So if there is some sort of a default in Eastern Washington or Washington state, it is really hard. It looks bad, and it reflects badly on the district that defaults.

“But to somebody in New York, the next public facilities district [to issue bonds] could be 200 miles away, yet it still looks like a public facilities district in Washington, and they might say, ‘Wasn’t there a default recently over there?’ Whatever financial condition caused it – it could be a completely different financial situation, it could be a completely different facility, but that reputational damage affects the other district’s ability to finance projects.”

The rescue plan came from the treasurer’s office, and will be introduced in the House and Senate as treasurer-request legislation. 

            Casualty of Economy

The Wenatchee arena, which bears the name of a local automobile dealer, is a casualty of the same economic recession that has doomed so many other real estate developments. Planning began last decade when the economy was going gangbusters. The idea was that 680 condominiums would be built as part of the project, and their property taxes would be diverted toward paying construction debt.

Bond-anticipation notes were issued for the project, with the idea that the public facilities district would issue bonds that would be secured by the property-tax revenue. The notes come due Dec. 1.

The trouble was that the economy tanked and the condos were never built. It was the kind of problem anyone might have seen coming, and because the city of Wenatchee bore a 73 percent share of responsibility for the project, it was the key player. The city assumed that it could cover the debt by backing bonds for the public facilities district. Trouble was, the city’s debt capacity was $25 million and the obligation was $42 million.

A local judge nixed the idea. That case is headed for argument before the state Supreme Court in January.

Other ideas were tossed about, including a city takeover of the arena – that was defeated by fears the city might lose money. “The city really got confused, I think,” Condotta said. “In essence, they didn’t make a decision, they had some choices, but they didn’t make them, and really the thing is they ran out of time. And all we are trying to do is to buy them time here. We are not doing them any favors, because we are going to rip their guts out if they don’t get their act together.”

            Financial Incentive

The rescue bill apprortions responsibility according to each government’s share of the project. It gives each of them the option of a public vote to raise sales taxes by two-tenths of a percent. Current law doesn’t allow them to raise taxes individually. The city of Wenatchee was willing last year, but the other local goverments were not.

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