Reserve Fund May Not Protect Taxpayers If Trouble Finds Dallas' Convention Center Hotel
City leaders pushing Dallas to build a convention center hotel have been adamant: Money for the controversial $555 million project will not come from your property taxes. Loans to finance building the city-owned hotel will be paid back from money the hotel collects from visitors who stay there.
Ah ha! hotel opponents counter. But what if a recession—like the one we're in now—keeps the dentists and Kiwanis and other assorted conventioneers at home, and the hotel can't cover its nut? Then the taxpayers will pay, right?
No worries, supporters say. That $555 million includes a healthy $50 million savings account to cover the hotel debt in case it loses money. Think of that as cash squirreled away for a "rainy day," as Dallas County Commissioner John Wiley Price said in his October 22 speech to the city council urging construction.
As Mayor Tom Leppert, the driving force behind the hotel, puts it: "If tourism takes another 9/11 hit, those reserves will all be tapped out before the taxpayers do." Or consider this quote from the Web site for Build the Hotel, a committee that favors construction: "If there were a few tough years, this fund would be utilized long before voters were ever asked to kick in."
Well, maybe not. Like many things about the convention center hotel, that's not exactly clear.
Dave Cook, chief financial officer for the city, and A.C. Gonzalez, assistant city manager in charge of the hotel project, confirm that while the city intends for the reserve fund to work that way, the bond market will decide its function when the bonds are sold in January.
"We're including $50 million in reserves," Gonzalez says. "The exact mechanics on how it really, actually works is part of what still needs to be developed."
What's the point in having a rainy day fund if the city can't drain it when the hard times are pouring down? To keep the bondholders happy. Take the loans the city recently restructured for the Dallas Convention Center, for example. Like the hotel, the center is financed with revenue bonds and has a reserve account—of about $21 million, which can only be accessed when the center is unable to make debt payments from its revenue. But lenders expect that account to remain at $21 million, which means if the convention center needs to draw from it for operations and doesn't earn enough to replenish it, the money has to come from somewhere else. You can probably guess where.
"We're required to maintain that reserve level," Cook says. "So that was more sacred, if you will. That reserve requirement had to be met, even if it meant going to the general fund."
The council authorized subsidies from the city's taxpayer-supported general fund to the center in fiscal years 2006-'07 ($3.8 million) and '07-'08 ($3.9 million), and one is scheduled for '08-'09 ($2.4 million).
Frank Poe, director of Dallas Convention and Event Services, confirms that if the convention center's reserve fund is accessed, it must be refilled as part of the bond ordinance. When asked if the hotel financing will work in a similar fashion, he says, "The answer is yes."
Cook stresses that the details haven't been worked out yet. "It probably will be similar, but I'm not sure," he says. "There might be a little nuance that could be different."
Council member Angela Hunt says the hotel's reserve account only exists to provide a sense of confidence and certainty to the bondholders. She says the claim by Leppert that the reserve stands between the taxpayers and the debt on the hotel is a pretense.
"It seems to me that the mayor needs to be honest with taxpayers and let them know that if this hotel gets in trouble, taxes will go up if we have to dip into the general fund to pay off the debt because the reserve doesn't protect us," Hunt says.
The city council is scheduled to vote December 10 on a final development agreement and maximum price with Matthews Southwest, which is developing the hotel and assumes no risk in the deal. Gonzalez says it's likely the council won't know the function of the $50 million reserve account before that vote because the financing arrangement won't be determined until the bonds are put into the marketplace.
Hunt says she's worried other council members are unaware the city is being "very deceptive" about the reserve account because it likely will need to be replenished with taxpayers' dollars.
"The mayor...will spin it any way they can to get this through, but there are two salient facts here: One, the taxpayers are ultimately responsible, and, two, the reserve account is a fiction," she says.
The council will also be moving forward with the project without knowing what plans the developer has to supplement the hotel, such as an entertainment venue, restaurants and residential units. The ancillary development plan by Matthews Southwest isn't due until June and progress has stalled, Gonzalez says.
"Unfortunately, given the financial situation that we have nationwide, some of that will have to be put off until there's more sense of reality that the hotel is actually happening and we have an improvement in our financial situation in terms of market liquidity," he says.
In the meantime, the city council on October 22 voted to go ahead with plans to refinance the convention center's existing $263.9 million debt.
Under that proposal, the city could issue up to $325 million in new bonds, yielding an undetermined amount of cash to upgrade the convention center and add meeting space. The refinancing also would lower the center's debt payments by $2.5 to $4 million annually over the next 13 years.
Loans for the convention center are paid in part from the city's hotel occupancy taxes. The new bonds, not coincidentally, would specifically exclude the occupancy taxes paid by the convention center hotel and dedicate that money to pay for the hotel itself.
Cook says the interest savings in those 13 years will amount to approximately $50 million. However, he admits the total cost of the refinancing to taxpayers over the 30-year life of the loan is approximately $220 million in interest.
Gina Norris, an executive with Crow Holdings, which owns the Hilton Anatole Hotel and funded most of the petition drive triggering a citywide May referendum on the hotel project, says the convention center refinancing was not discussed in an open forum. "Unless somebody took the time to read the very, very fine print and had a finance background to understand it, they would not have understood that this is increasing bond payments by $220 million over the next 30 years," she says.
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