When it first became clear that the Washington State Legislature would be asked to come up with cash to prevent a bond default in greater Wenatchee, the prospects for that looked mighty slim at a time when the state has plenty of its own cash shortfalls to cover.
But State Treasurer James McIntire has come up with a plan that seems to enable the Legislature to cover the $42 million bonds in a way that appears painless–for the state. It will not be painless for Wenatchee and environs, but that is probably as it should be.
If the Legislature chooses to do nothing and the Wenatchee bonds default, McIntire warns that bond markets are likely to demand higher interest rates from any other municipality in the state, unfair as that might sound.
McIntire announced his plan last week. We had a very short summary in the paper at that time, but the details are worth delving into, I think.
Summary: The state will cover the Wenatchee bond shortfall with money from the state account that holds sales and use tax money awaiting distribution to local governments. McIntire says that can be done without cutting or delaying any payments to anybody else.
Then, the state will extract repayment–with interest–from greater Wenatchee by making deductions from the sales tax distributions to the city of Wenatchee and the other entities that are part of the Greater Wenatchee Public Facilities District.
Here are the full details, in a press relase from McIntire’s office:
November 18, 2011 – State Treasurer James McIntire today urged lawmakers convening for the upcoming special session to immediately pass new legislation to prevent the imminent default on bonds sold to build an events center in Wenatchee.
“A default of this nature would be costly and far-reaching for taxpayers around the state who have had nothing at all to do with this facility or its financing,” McIntire said. “Unfortunately, this situation now calls for state intervention to protect other local governments and their taxpayers.”
The $42 million bond anticipation notes taken out by the Greater Wenatchee Events Center Public Facility District come due Dec. 1, 2011, but the PFD does not currently have the revenue to repay this debt on its own. The proposed legislation would pay off the bonds with a bridge loan from the local sales and use tax account. The bridge loan would be repaid with interest over ten years by the PFD and local governments that make up the district. This loan uses only local funds. It would not make the general fund deficit worse, nor would it compete with the state operating, capital or transportation budgets.
“We have met with, advised and facilitated meetings among local parties in an effort to help them find a way to deal with this problem locally. However, the PFD and its local governments have run out of both the time and options to solve this problem themselves,” McIntire said. “Now, we must propose legislation that requires those who took on these obligations to repay their debt while also protecting all other local entities.”
A default on this event center’s bonds would have a significant impact on the borrowing costs of other public facility districts, cities, and counties in this state. Bond investors can choose among thousands of issuers throughout the country. Investors generally seek large interest rate concessions from borrowers who are perceived to pose a higher risk of default – or they avoid them altogether. A default like this in Washington would cast a long shadow over outstanding and future financings that are in no way related to the PFD bonds simply because of geographic proximity.
“This solution protects taxpayers in communities across the state,” McIntire said. “Now that all other options for dealing with this problem at the local level have been exhausted, we need action at the state level – but to be clear, this is a remedy that no jurisdiction would wish on itself.”
While the state has no legal obligation to prevent this default, action by the Legislature would protect the borrowing ability, finances, and good standing of all the state’s local governments. Again, because it’s a bridge loan from the local sales and use tax account, it requires no state funds, it does not make the general fund deficit worse, nor does it compete with the state operating, capital or transportation budgets because the loan comes from local funds. This bill does not relieve the PFD, the City of Wenatchee, or any other jurisdictions of responsibility to repay their debts because it allows the state to withhold the local tax disbursements to repay the bridge loan.
The proposed legislation would:
· Use local funds, not state funds. It allows the Treasurer to pay the principal owed to bond holders on Dec. 1, 2011 with $42 million from the local sales and use tax account collected by the state for local governments without changing the amount or timing of local sales tax disbursements.
· Not make the general fund deficit worse, nor does it compete with the state operating, capital or transportation budgets because the loan comes from local funds.
· Create a loan to the PFD to be repaid over no more than 10 years.
· Set an interest rate beginning Jan. 1, 2012 at a “20-bond bond buyer rate” plus one percentage point.
· Give the PFD and its jurisdiction(s) authority to raise revenue to support repayment with up to a 0.2 percent sales tax increase from either a popular vote or by councilmatic action.
· Allow the PFD or its jurisdiction(s) to seek longer term private bond financing at a lower interest rate to repay the local sales and use tax account early.
End press release from Washington State Treasurer James McIntire