What's the Risk?
by Molly Henderson, Lancaster County Commissioner
Last week Sunday News Editor Marv Adams said the risk from the County guaranty of the convention center bonds is "just more than
$40 million." Assuming for discussion that the guaranty is valid, I will show that the County's maximum total payments under the guaranty of the construction bonds equal
$60 million. But this $60 million is only one part of three significant risks created by the public guaranties of the hotel/convention center proposal.
First, the combined City and County principal and interest guaranty risk exceeds $115 million. Penn Square Partners risks only $10 million. The $24 million in lease payments they claim to be an investment will be paid from future revenues of the hotel. Penn Square Partners is a limited liability company which means that owners High Industries, Fulton Bank and the Lancaster Newspapers, Inc. have no responsibility for its debts.
Second, when, as often occurs, there are construction cost overruns, the community risks either additional tens of millions in public funding or a half-completed skeleton on Penn Square. The Authority has refused to cap change orders, despite the
$26 million bid overrun. Neither the Convention Center Authority nor the City Redevelopment Authority have taxing power to pay the bills.
Third, after construction, PKF Consulting estimates $2.2 million to
$4.8 million yearly operating shortfalls -- even after the hotel tax money is spent. The City and County will be required to raise taxes, or cut funding to essential services or projects, or be responsible for an expensive, shuttered white elephant on Penn Square.
The maximum County guaranty liability is, in round terms, $60,000,000, as confirmed by the Authority's own financial advisor in a report filed with the State.
Under the 2003 loan documents, the Convention Center construction bonds could last up to 40 years. The County guaranty limits the maximum County payment to
$1,506,960 per year.
Fairmount Capital Advisors, the financial advisors for the Convention Center Authority, in its 2003 Unit Debt Act Report, calculated the maximum County exposure at
$59,268,097.13. The Authority may hope that its debt payments will be low enough that the County risk is
$1.3 million a year for 32 years, but with an estimated project cost which has increased tremendously since 2003 and increasing interest rates, actual annual debt payments are likely to exceed estimates. In any case the maximum is approximately
$60 million.
Of course every project has risk, the County provided a $10 million guaranty for Clipper Stadium -- that project had risk too. However, the baseball stadium financial structure controlled the risk to the taxpayer and made sure the private sector shouldered most of the financial risk and rewards. Result? A successful project. The Commissioners are committed to downtown revitalization and a similar result is possible with a fairly structured "Plan B" for Watt & Shand.
The financial structure of the current proposal, especially as greatly altered since 2003, unnecessarily imposes risk upon the public, both an indication and a cause of a much greater chance of failure. City guaranties were added in 2005, with as much as
$38 million in principal and $17 million in interest. On a per person basis, these new burdens alone amount to
$4,000 for a City family of four.
Without government guaranties, the private sponsors of this proposal would have been as insistent as the County on a current independent feasibility study like PKF. If similar risk to the City and County, the private sector lenders and investors would then have required changes in the proposal so it was economically feasible with the current levels of government grants, loans, guaranties and tax support. Instead, we have just the opposite result, project planners plunging ahead with demolition despite a 30% budget overrun.
The risks are not limited to the $60 million potentially payable under the County guaranty, but they spring directly from it. For the last year, the Commissioners, through the "57 Questions" and the "12 Points for Taxpayer Protection" attempted to solve these unnecessary risks, without a serious response from project planners.
The public is aware of the legitimate concerns with the hotel/convention proposal financial structure resulting from dramatic increases in project costs, unnecessary delays caused by desire to minimize private investment and increase public risk, the ever-increasing diversion of State funds that would have in large part been available for other financially feasible tax paying downtown projects, and the increasing imposition of risk and burdens to the taxpayers.