Article by Erik Smith. Published on Monday, December 05, 2011 EST.

Lawmakers Warned They Must Act Quickly, or Default Will Cost Taxpayers Millions

Wolfgang Opitz and Jay Reich of the state treasurer’s office testify at Friday’s hearing.

UPDATE: At 1:23 p.m. Monday, the state House voted to pass House Bill 2145, 56-33. The debate took a bit less than 10 minutes, and launched so abrubtly that TVW, the state’s public-affairs TV network, missed the crucial first few minutes — so much for those who have been following on TV. Before final passage, the House adopted on voice vote a Republican amendment that removes the authority of the affected city and county governments to increase sales taxes without a vote of the people. The bill’s sponsor, Rep. Mike Armstrong, R-Wenatchee, voted against his own measure, saying that he thought the bill would become unworkable, and that default would be the ultimate result. But seatmate and cosponsor Rep. Cary Condotta, R-Wenatchee, voted yes, saying that it was important to keep the bill alive and send it to the Senate. Rep. Ross Hunter, D-Medina, chairman of the House Ways and Means Committee, spoke in favor of the bill.  

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, Dec. 5.—A bill that aims to head off the costly statewide consequences of a Wenatchee-area municipal default is headed to the House floor, perhaps as soon as today – and there’s no telling what will happen.

            Republicans aren’t crazy about the plan – it’s a bailout, they say – and it would allow local governments in the area to raise sales taxes without a vote of the people. Without that provision, Democrats will peel off. And if that philosophical disagreement is enough to kill House Bill 2145, cities, counties and taxpayers across the state can expect to pay millions of dollars in additional interest charges, if Wall Street interests are willing to extend credit in the first place.

            But that’s not all. The clock is ticking. The Wenatchee public facilities district that oversees the Town Toyota Center, the 4,300-seat arena that started the mess, defaulted Thursday on $42 million in bond anticipation notes. It is only a matter of days before creditors begin filing lawsuits that will bury the Apple Capital in so much litigation that it will be years before the city and state recover, warn officials of the state treasurer’s office. The eyes of the financial world are on the Legislature right now, they say, and lawmakers need to make up their minds pronto.

            It is a drama with more suspense than the Legislature has seen in years, and there is a good chance much of it will play out in the state House by sundown.

            House Committee Votes Out New Bill

            An indication of just how dicey the matter has become occurred in the House Ways and Means Committee Friday evening, as the committee passed a new version of the rescue bill. The measure would provide a bridge loan to the troubled Greater Wenatchee Area Regional Events Center Public Facilities District, and it would assign each of the nine participating local governments a share of the responsibility for paying it back. If they fail to find alternate financing by the end of 2012, the state would begin garnishing their sales-tax distributions and charge them a punitively high interest rate.

            The Legislature’s solution has created an uproar in the largely agricultural town along the Columbia in Eastern Washington, where local government officials outside the Wenatchee city limits have been thundering that the debacle is the city’s problem. But the idea of any help at all for a dysfunctional local taxing district is causing even more consternation at the statehouse. The bill limped out of the committee with a vote of 19-8. All but one of the no votes came from Republicans. Republican members said they want to see big changes before the bill passes the House floor.

            Republicans say they are troubled by a provision that would allow each of the cities and counties in the area to impose a sales tax increase of up to two-tenths of a percent to pay off the debt. The bill would allow the taxes to be imposed without a public vote, quite probably the only way the unpopular tax could be imposed. Some Republicans say they want it gone. “For now I’m going to vote for it,” said state Rep. Ed Orcutt, R-Kalama, “but I want to have that discussion.”

            Meanwhile, the majority Democrats have enough votes to pass the measure on their own. But they are demanding that Republicans provide a share of votes for the measure, lest they be tagged as the “party of bailouts” in the next election. The fact that the Wenatchee area is represented entirely by Republicans and the three members from the area are the leading advocates of the measure lends the argument some weight. Democrats say the solution has to give local governments the ability to raise taxes on their own. If a sales-tax increase goes to the conservative voters of the area, there is almost no chance of passage, and local governments will wind up slashing services in order to make the debt payments.

            Has Already Cost Kennewick $200,000

            The debate is causing great nervousness among city and county governments statewide, as well as at the state treasurer’s office. If the local governments of the Wenatchee area fail to make good on their obligations, they say municipal agencies statewide will face substantially higher borrowing costs. The national financial press is following the Wenatchee situation closely, and there are reports that lenders nationwide have been tuning in to TVW webcasts of Washington legislative hearings to see if the state will come to the rescue.

            Already there is one sign of the trouble that will come, said Wolfgang Opitz of the state treasurer’s office. Last month the Kennewick Public Facilities District refinanced a little under $10 million in bonds for the Three Rivers Convention Center. Bond buyers were skittish, and the district was forced to accept an interest rate three-tenths of a percent higher than the offering. That means Kennewick taxpayers will pay $200,000 more over the life of the loan.

It was “known by the bond-buying community to be trailed right back to concerns on the Wenatchee [situation], right back to this specific instance,” Opitz said.

Last Friday, officials of the city of Kennewick told the Tri-City Herald that they do not believe the then-impending Wenatchee collapse had caused them any problems. Opitz said the financial community says otherwise, and city officials may be “uncomfortable” making the problem public.

He also noted that on Friday, the city of Wenatchee’s bond rating was downgraded to triple-B. “That’s the worst investment grade,” he said. “One level above junk.”

            Warnings From Around the State

Local government officials are warning of far more serious troubles if the Legislature fails to act. In the Kennewick case, the bond rating was not affected. But if Washington gains a reputation as a state that is willing to let taxing districts behave irresponsibly, they say it is likely that bond ratings for all districts will go down at least a notch. That means big money to taxpayers.

State Rep. Larry Springer, D-Kirkland, said he asked Kirkland’s finance director what the cost would be if the city’s bond rating was downgraded a single notch on a $10 million bond for a 10-year debt. The city’s current rating is double-A. “The number that came back was that by being downgraded one spot, it would cost an additional $400,000, over the course of a 10-year bond,” he said. “If in fact the city is downgraded to a triple-B, that number jumps to $626,000 on a $10 million bond.”

The House Ways and Means Committee heard from a parade of local-government officials Friday who said consequences will be dire, particularly for smaller cities that do not often go to the bond market for financing. Ehman Sheldon, city manager for the Adams County town of Othello, population 7,420, said the city had to endure microscopic examination of its finances before it was able to obtain financing for a recent $3.1 million street-paving bond. “Our concerns are those of increased borrowing costs, increased scrutiny of applications, the ability to get money and that bond buyers won’t be able to distinguish my community from that of Wenatchee.”

            Affects Labor’s Plans

City and county government associations have strongly been urging support for the bill since the session began, and the Friday hearing demonstrated that two new sets of players are turning their lobbying muscle toward passage of the bill. Labor unions are beginning to weigh in on the measure – they are planning to push a jobs bill this session in which bonding is a central feature. If interest rates go through the roof, there goes the plan. “We just feel like in this environment we can’t risk jeopardizing local and state ability to create jobs in the future,” said Rebecca Johnson, lobbyist for the Washington State Labor Council. “Every dollar we send out of state in higher interest payments is a dollar we are not putting to getting workers back to work.”

At the same time, the bill is getting a push from school district officials. Their bonding ability isn’t directly impacted, because the state provides a guarantee for school bonds, and they are backed by the faith and credit of the state. But they fear the state’s own bond rating will be downgraded, and that will mean higher interest payments and less money for school projects.      

            “We don’t know the full extent of the impact of the Wenatchee default, but it does appear likely that the state’s bond ratings and local bond ratings would be lowered,” said Dan Steele of the Washington Association of School Administrators. “That would frighten the shrinking pool of bond buyers, according to the bond houses that I’ve been talking to the last couple of days. It doesn’t appear that there is a major fear that school bonds would not be sold, but we are concerned about the actual cost of those bonds, and the resulting availability of funds for projects and the impact on taxpayers.”

            A Nod to the National Audience

            The Wenatchee lawmakers who are pushing the bill acknowledge that they have a big selling job on their hands. State Rep. Cary Condotta, R-Wenatchee, said he is hoping for a vote on the House floor today, to get the measure over to the Senate and onto the governor’s desk before the creditors begin filing lawsuits.

            While Republican misgivings may be the biggest stumbling block, there also are signs that the bill may have problems on the “progressive” left. State Rep. Bob Hasegawa, D-Seattle, was the only Democrat to vote no on the measure, saying that it called attention to “the unfair nature of Wall Street.”

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