One issue that has been avoided by the mainstream media is the complex construction financing of the convention center project. As one local reporter told me, this subject can make people's eyes glaze over. Unfortunately, this is one issue that has the potential to cost taxpayers a lot of additional money, both in the short term and for decades to come.
I have gathered information about the convention center construction financing from a number of different sources. I'm no accountant, but I will try to understand and explain these important issues to the best of my ability. Please note that this article is limited to convention center financing only; the financing plan for the hotel is yet another complex issue.
The first part of the convention center's financing started out as a $40 million bank loan. During the campaign for Lancaster County Commissioner in 2003, almost all of the candidates opposed a taxpayer guarantee for the convention center. After the election, incumbent commissioners Paul Thibault and Ron Ford needed to take drastic action to make certain the LCCCA would be able to borrow as much money as possible to build the proposed convention center. By a 2 to 1 vote (Pete Shaub voted "no"), the Lancaster County Commissioners agreed to guarantee one-half of a $40 million bond sale. But for the guarantee to stick, there needed to be a bond to guarantee. Consequently, the LCCCA borrowed $40 million from Citizens Bank, paying hundreds of thousands of dollars in fees to do so. The LCCCA then deposited the balance in this same Citizens Bank, receiving $18,000 less in interest per month than the cost of interest for the loan. Over the three year and three month duration of this bank loan, taxpayers had to pay well over one million dollars in interest and fees, all so that future County Commissioners would be held hostage to the convention center project.
When the construction bonds were finally sold at the end of March in 2007, the "hostage loan" was converted into bonds. To maintain the fiction that the original bank loan was indeed a bond, the March 2007 bond sale included $40 million in "Series 2003" bonds, with a maturity date of October 1, 2043.
By March of 2007, the convention center project had grown far beyond its original relatively modest design. Besides an increase in exhibit space, the LCCCA is now responsible for building half of the public areas of the hotel, known as "shared space". An additional $23,920,000 was required to complete the greatly expanded project. This part of the bond sale is known as the "Series 2007" bonds, with a maturity date of March 1, 2047.
Neither part of this combined "bond sale" was sold as a conventional municipal bond. Instead, Wachovia Bank was charged with selling "seven-day variable rate demand bonds" of $100,000 or more, in increments of $5000. According to the offering documents of both the 2003 and 2007 bonds, the purchaser never receives a certificate of ownership; instead, the bonds are registered in the name of "Cede & Co.", which holds a bookkeeping entry in the name of the bond purchaser. The bonds bear interest at a weekly rate determined by Wachovia. There is also a provision for these bonds to be converted to a "term mode".
All of the documents which describe these bonds clearly state that their creditworthiness is based on a guarantee by Wachovia Bank, not on the credit rating of the LCCCA. Wachovia Bank has issued a five-year "letter of credit" for all of the LCCCA bonds, which expires March 1, 2012. This "letter of credit", which is designed to lower the interest rate paid by the LCCCA, costs taxpayers 9/10 of a percent for the "series 2003" bonds, which include the Lancaster County guarantee, and 1.25 percent for the "series 2007" bonds. There is no word on what happens to the bonds when the five year "letter of credit" expires.
There have been many reports in the news recently about the volatility of interest rates. The LCCCA anticipated this, and in an attempt to limit its risk it entered into an "interest rate swap" agreement with Wachovia Bank. This means that both parties gamble that future interest rates will move in a direction that favors their part of the agreement. The base interest rate that the LCCCA pays Wachovia Bank is fixed at 3.65 percent; adding the costs of the Wachovia "letter of credit" plus the bond remarketing fees brings the total cost to taxpayers to 4.843 percent on the $63,920,000 40-year bond sale.
The catch is, either party can buy their way out of the "interest rate swap" agreement, at considerable expense, if they see they are losing large amounts of money on the deal. With current market conditions, it is likely that Wachovia is paying far more for interest on the bonds than was anticipated at the time of the bond sale. If Wachovia would terminate the "interest rate swap" agreement, it could cost the LCCCA far more in bond payments than can be paid by the proceeds of the "hotel tax". This would mean that taxes would need to be raised to keep the LCCCA from going bankrupt.
…to be continued
