Bond Plan Too Risky, Mayor Says Talbott Worried About Investment Rating On Funding For River Park Square Garage

Mayor John Talbott says the city should back out of its involvement in bonds for a downtown parking garage because he thinks the rating for the bonds is too low.

He acknowledges, however, the city’s not likely to do that. He doesn’t have the votes on the seven-member City Council to make that switch.

“But I do have the fiduciary responsibility to raise the flag and say we are at risk,” Talbott said Friday, after issuing a statement calling for the city to reconsider its role in the garage.

Critics said the mayor is overstating the effects of the rating on the $31 million bond issue.

Standard & Poor’s Rating Groups, an agency that examines projects for relative risks to investors, recently rated the bonds for the parking garage at BBB-, which is the lowest investment grade rating available.

Talbott said that’s too low, because a 1996 resolution required the bonds to have a minimum rating of BBB, which is slightly higher.

“I must view (the resolution) as a condition to be met, thereby protecting our citizens,” Talbott said in his statement. “As such, the bonds cannot legally be issued on behalf of the city at this time.”

The city will not actually issue the bonds for the garage, which is part of the River Park Square redevelopment project under construction downtown. A nonprofit foundation will issue them and manage their repayment.

But the city is tied to the bonds because it has pledged parking meter revenue to repay the bonds if garage revenues are below projections. After 20 years, the city will own the garage.

The River Park Square project is being developed by Lincoln Investment Co. and Citizens Realty Co. Both are subsidiaries of Cowles Publishing, which also owns The Spokesman-Review.

Duane Swinton, an attorney for the developers, believes Talbott is citing the wrong resolution.

In 1997, after the changes were made to the parking lot project, the City Council revoked that resolution and passed a new one. It doesn’t list a specific rating for bonds.

Talbott wasn’t on the council at the time. But Councilman Jeff Colliton was. He said the council directed that the bonds be investment grade, the quality that many large institutions require for the bonds they purchase.

Roy Koegen, the city’s bond attorney, said he hopes to clear up any confusion about the two resolutions in a report to the council on Monday. Although there are different views about the effect of the two resolutions, he believes the city is not required to have the BBB rating.

BBB- is still an investment-grade rating, said John Moore of Prudential Securities, the underwriters for the bonds.

Ratings help determine interest rates; the higher the interest rate, the more expensive the cost of paying off the bonds over their 20-year life.

The interest rate won’t be determined until the bonds are sold in about a month.

“In a strong market, as we are in now, we’d expect the difference (between BBB and BBB-) to be negligible,” Moore said.

If the bond market weakened, the difference could raise the interest rate five to 10 basis points, or between .05 and .10 percent, he said.

Either the city or the developers could improve the rating slightly by purchasing insurance for the bonds. Such a policy would pay the investors on schedule if the parking garage isn’t built or the project goes into default.

That would lower the interest rates, and, over the life of the project, save some money. But the insurance costs about $700,000.

If that is added to the $31 million for the bonds and paid off over 20 years, the savings might not be that great, Moore said.

Talbott said he believes the developers should pay the insurance.

Swinton said the developers already have placed $1.5 million into an escrow account to cover other costs until the garage is finished and starts generating the funds to pay off the bonds. The savings from the insurance wouldn’t justify placing an extra $700,000 in escrow, he said.

Colliton said he’s comfortable with the bonds being uninsured, and suspects Talbott’s statement is a sign the mayor is struggling with the realization the project will proceed.

“I think John is caught between some promises he made in the campaign and the reality of being the mayor,” Colliton said.