Originally published in the Lancaster Post on August 8, 2008
One issue that has been avoided by the mainstream media is the complex construction financing of the convention center project. Last week, we discussed the how the basic construction financing of the convention center was arranged. This article will try to explain what has happened to the financing of the project since the LCCCA's bond sale.
After the March 2007 Wachovia bond sale, the LCCCA had $63,920,000 in cash that it had to put somewhere. According to the terms of a 2003 ordinance passed by former County Commissioners Paul Thibault and Ron Ford, M&T Bank is the trustee of the LCCCA construction funds. Since the LCCCA is a governmental body, it is required that the deposit of these funds must be put out to bid, to earn the highest interest rate. One type of investment which was considered is a "Guaranteed Investment Contract", in which a financial company will re-invest funds for a maximum rate of return, then guarantee both the funds and the contract's interest rate. Bids were accepted only from companies with AAA credit ratings.
The winner of the bidding process was MBIA, a diversified financial insurance company that has several divisions, including one that specializes in municipal accounts. Their contract provides the LCCCA with 5.3% interest on the remaining balance in their construction account, which as of this writing is just under $29 million.
One of the terms of the "Guaranteed Investment Contract" agreement with the LCCCA is that if the rating of the investment company were to fall two full steps, the investment company had 15 days to either refund the LCCCA's cash balance upon request, or "collateralize" the remaining balance by holding enough equity to cover the LCCCA's account balance. No one seriously expected this clause to ever be invoked; however, the sub-prime mortgage security crisis has adversely affected most investment companies, including MBIA.
On Friday, June 20th, 2008, MBIA's credit rating was lowered by Standard & Poor's to "AA", and by Moody's to "A2". Fitch has ceased rating the company. These actions triggered the "collateralization" provision of the "Guaranteed Investment Contract"; MBIA had until Monday, July 7 to fulfill the terms of the agreement. Had MBIA declared bankruptcy before this was resolved, the LCCCA could have lost some or all of its remaining construction funds.
Fortunately for the LCCCA, MBIA came through in time. A new collateralized "Guaranteed Flexible Draw Investment Contract" includes MBIA's deposit of at least 103% of the amount of the LCCCA's remaining funds at Wells Fargo Bank, in the form of government securities. As the LCCCA's funds continue to be spent for construction, the "Guaranteed Investment Contract" will expire in October of 2008. No decision has yet been made on how to invest whatever funds may remain at that point.
Unfortunately, there are other financial issues that plague the convention center project.
The individuals who put together the convention center's construction budget calculated that there would be enough excess funds from the "hotel tax" to build up more than enough of a surplus to pay for any budget shortfalls. Even though the proceeds from the "hotel tax" have been higher than expected, this has not happened.
In late 2007, LCCCA board chairman and then-acting executive director Art Morris carefully studied the convention center's construction budget, and uncovered some serious concerns. Mr. Morris observed there was $200,000 or more in "change orders" requested every month; for the most part, these are for issues which were unanticipated in the design of the building. This amount is not out of line with other projects, however the LCCCA's construction budget only provided for $1.3 million in contingency funds. In anticipation of additional cost overruns, State Sen, Gib Armstrong had already promised another $1.5 million in State grants; this provides the LCCCA with a total of $2.8 million in reserve funds, which is still not enough to cover all of the expected additional costs. As a result of his research, Mr. Morris announced a request for an additional $3.2 million in State grants at the LCCCA finance committee meeting on November 27, 2007. At the same time, the Penn Square Partners requested an additional $2.8 million State taxpayer dollars to complete its part of the project.
As usual, the wheels of government turn slowly. As of the writing of this article, the LCCCA has been able to apply for $500,000 of the original $1.5 million in additional reserve funds promised by State Sen. Gib Armstrong. There is no word about the status of the additional funds being requested, although Sen. Armstrong has reportedly promised the LCCCA that it should know by the end of September if and when it will actually receive the funds it requested.
This additional money is required to complete the project. If for some reason this State grants are not approved, the LCCCA will be forced to find another source of revenue - possibly through an increase in the "hotel tax".
But that's not the end of the story…
