Article by Erik Smith. Published on Friday, December 10, 2011 EST.

Couldn’t Find Votes for Bridge Loan Measure – Default Expected to Trigger Years of Litigation, Drive Up Borrowing Costs for Other Municipalities

Sen. Linda Evans Parlette, R-Wenatchee.

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, Dec. 9.—State Sen. Linda Evans Parlette says she’s throwing in the towel on an effort to provide a bridge loan for a Wenatchee public facilities district that defaulted on $42 million in bonds last week – and now it’s time for the state to pay the consequences.

            For weeks now, bond experts and the state treasurer’s office have been predicting dire effects if the default is allowed to stand, and Washington will find out if they are right. Lawsuits from creditors can be expected shortly in the case, perhaps racking up millions of dollars in legal fees over the next three to five years. The treasurer’s office and local-government associations have been warning that similar municipal taxing districts can expect higher borrowing costs as a result – meaning Washington taxpayers will pay more to Wall Street when financing can be obtained for new construction and other public works projects.

            And then there are the losses for those who hold the debt on the Wenatchee Town Toyota Center, a 4,300-seat arena that opened in 2008. While the common perception is that Wall Street takes the hit, at least $6.5 million of the $42 million in bond anticipation notes were held by Washington investors.

            There was one curious development in the story Thursday: Three Washington public agencies that had purchased $2.1 million in Wenatchee debt were repaid in full last week by U.S. Bank. It was unclear why, attorney Pete Fraley told the Wenatchee public facilities board Thursday. It also was unclear whether they will be allowed to keep the money, or whether it will be clawed back in the court proceedings that now appear certain.

            Couldn’t Find the Votes

            In a statement issued Thursday night, Sen. Parlette, R-Wenatchee, said she was unable to convince her fellow lawmakers that the default posed a serious problem for the state. A measure that would have provided a bridge loan for the troubled district passed the House 56-33 on Monday, but it foundered in the Senate.

            Procedurally speaking, House Bill 2145 ran out of gas because it was referred to the Senate Ways and Means Committee, and Parlette was unable to round up the votes to win passage in the committee. But Senate Ways and Means Chairman Ed Murray, a Seattle Democrat and an opponent of the measure, said all along that he would not prevent a vote if Parlette could find enough support. The real problem was that it takes 25 votes to pass a bill in the state Senate, and Parlette’s vote-count remained just shy of 20.

            The central irony of the situation is that the Wenatchee area, one of the most conservative sections of the state, is represented entirely by Republicans. All three area lawmakers worked to convince lawmakers to pass the bill. Democrats were willing, and said there was just enough support on their side, but insisted that Republicans provide enough votes to prevent them being tarred as the “party of bailouts” in the next election.

            Ultimately it was a lack of Republican support that killed the bill, due largely to antipathy toward anything perceived as a bailout.

            Meanwhile, Democrats like Murray questioned the case for the bill, and said it would set a bad precedent for other municipal taxing districts that get in over their heads. Murray introduced a bill Wednesday that would require additional scrutiny by the state Department of Commerce when similar public facility districts are formed. The state treasurer and the state auditor would be required to conduct a lightning-fast analysis to determine if any of the state’s other 2,400 taxing districts are in trouble.

            Was an Uphill Battle

            In her statement, Parlette said, “This issue was a very important one, both on the local level and for our state, which was working diligently to avoid a municipal default. The state treasurer requested the bill for that very reason – in fact, the default may have already affected borrowing rates for several local entities across Washington. In all likelihood, its impact will continue to grow.

            “We knew from the start that it would be an uphill battle to pass this bill, due to the complexity of the issue and the short time frame we were working under. In the end, it simply did not have enough votes to pass.

            “With all the work that went into this bill, I would be remiss if I did not thank the chair of the Senate Ways and Means Committee for his willingness to hold a hearing on the initial bill, as well as all of the members of the Senate for their time and consideration of this difficult issue. While the bill did not pass, I believe that there is value in the discussions it created.”

            Meanwhile, state Rep. Cary Condotta, R-Wenatchee, called the bill “a no-brainer,” and said he was dismayed by the lack of support. “Once again, politics over policy,” he said. “It appears Eastern Washington senators preferred default to remedy. Not exactly principled, is it?”

             An Odd Payment

             Three public agencies that invested in the Wenatchee debt were paid in full last week even as the district declared a default, Fraley said Thursday in comments reported by the Wenatchee World. They are Central Washington University, one of the largest investors at $1.6 million, Franklin County, which invested $300,000, and Douglas County, which invested $200,000.

            Ordinarily in such a case, the public agencies would be in the same class as the nearly 400 other creditors who invested in the Wenatchee notes. It was not clear Thursday why payments were made to those agencies, or whether the money was remitted in error.

            Linda Schactler, spokeswoman for Central Washington University, told Washington State Wire Thursday night that the school had received payment for both principal and interest, in the form of a wire transfer from U.S. Bank. Central Washington University has not decided on its response.

            Kennewick Disputes Claim

            Meanwhile, the city of Kennewick is disputing a claim from the state treasurer’s office that the impending Wenatchee default meant higher borrowing costs for taxpayers in that city on a recent refinancing of bonds for the Three Rivers Convention Center. The treasurer’s office says the city wound up paying three tenths of a percent more interest for bonds when buyers shied away. That translates to $200,000 higher costs over the term of the loan.

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