Will the Issuance of Bonds for the Convention Center Hotel Affect the City's Credit? We're Going With Maybe.
When Mayor Tom Leppert testified last week on behalf of the U.S. Conference of Mayors, he conveniently failed to mention his own agenda while lobbying the U.S. House Financial Services Committee to loosen the municipal bond market. Instead of arguing the merits of the convention center hotel, he mentioned "building and repairing schools, firehouses, highways and water systems" as examples of projects held up by the struggling economy.
"It is also worth mentioning that unlike the federal government, local governments do not have the luxury of carrying a deficit," he told the committee. "By law, they are required to balance their budget every year. For many, the only way to provide vital infrastructure is through the issuance of bonds, which has been a viable way of financing critical infrastructure projects for more than 100 years."
We're not sure how much of a "luxury" it is to have the ability to carry a deficit, but his statement about issuing bonds got us thinking about the hotel's potential impact on the city's bonding capacity and bond rating.
Dave Cook, the city's chief financial officer, says the city has no limit on its ability to issue bonds, which means the issuance of $500 million in revenue bonds won't affect the city's ability to sell bonds for future projects. But things get muddier when considering the impact of another half billion bucks on the city's bond rating -- an evaluation of the city's credit used to determine the interest rate and pricing of bonds.
In plain English, despite arguments presented by Leppert and other pro-hotel'ers about how much money the city saves by owning the hotel, we wondered if adding that much debt could affect interest rates for future bond programs. Essentially, if the hotel does in fact cause interest rates on issuances moving forward to rise even a fraction of a percent, it could cost taxpayers untold millions.
"The more and more debt we have -- on a risk scale -- we would slide a little bit," Cook says regarding the city's bond rating.
Cook stresses that he doesn't want to overstate the impact of the bond issuance for the hotel project, pointing out that anything can impact the city's bond rating, such as the mayor resigning or replacement of the city manager.
"I cannot tell you that it will affect the rating, and I cannot tell you that it will not. It is just an unknown," he tells Unfair Park. "I just can't say it definitely -- [the bond rating agencies] won't tell us. It's just not anywhere near that simple."
We'll take that as a "maybe," but it helps put in perspective the additional risk of taking on $500 million in debt for the hotel. If it causes even a tenth of a percent in future bond issuances, the city could be out some serious cash.
Just how big is a tenth of a percent? It's massive when you're talking about so much dough. For example, the city is targeting a 5.5 percent interest rate for the hotel project, but it's balking at the current rate, which last time Cook checked was "a little more than 5.7." The difference adds up to more than $22 million over the course of a 30-year loan, according to our calculations.
As Cook points out, the city council usually approves bond issuances with several parameters, including an acceptable interest rate. So why hasn't this been done yet?
"That's where we're headed," he says. "We had the vote that we kind of needed to stop for."
Yet Leppert, Ron Natinsky and others weren't stopping for the May 9 referendum. They were clear that their intent was to move forward with the issuance if the 5.5 percent rate was available.
"Maybe back in December, January or February, but, at some point, when [the vote] got closer and closer, it didn't seem to make sense, I guess," Cook says.
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