Garage War Could Trigger Indirect Hits Fallout May Damage City’S Image, Finances

FOR THE RECORD: 8-9-2000 Publication incorrect: An article in Sunday’s paper about the impacts of the River Park Square controversy incorrectly referred to Mike Marois as a writer for The Bond Buyer. He no longer writes for that publication.

The fracas over the River Park Square garage has consumed the Spokane City Council, filled the city’s airwaves and absorbed hours of conversation for nearly half a year.

It’s an intensely local issue, pitting the project’s Spokane developers against a new City Council majority of longtime critics of the downtown redevelopment deal.

But while all politics may be local, matters of finance are not. The scrap over the garage has rippled past the borders of Spokane County to Seattle, San Francisco and Wall Street.

Because the city refused to loan funds to support the garage, as required by a 1997 ordinance, Spokane will pay a price in the bond market the next time it issues bonds; the lowering of the city’s credit ratings by Moody’s and Standard & Poor’s ensured that.

It could also cost the city in other, less quantifiable ways, as the image spreads of Spokane as a city paralyzed by one contentious issue.

Local business leaders fear that recruiting companies to Spokane, already a tough task, will become harder as the city is tainted with the negative energy of the garage debate.

Not all business leaders share those concerns, but Tom Matthews, chairman of Avista, is so alarmed that he has offered to personally mediate the dispute. The disagreement over who bears responsibility for the financially struggling garage has led to a flurry of lawsuits between the developer and the city.

The mall’s developer is an affiliate of Cowles Publishing, which also owns The Spokesman-Review.

“It’s not one of those things that gives you a warm and fuzzy feeling,” said Bill Williams Jr., founder and chairman of Telect, which manufactures telecommunications equipment. “No organization runs smoothly, but at least you have enough courtesy that you shut the door before you air your dirty laundry.”

Williams went so far as to compare the distasteful image being projected by Spokane’s controversy to the perception given to North Idaho by the Aryan Nations.

Real estate developer John Stone, who has urged city leaders to focus on recruiting high-tech companies, said the controversy can only hurt those efforts.

“It is a huge problem for Spokane,” Stone said. “For the last 10 years, we have been mocked over in Olympia and Seattle over some of our choices. This is again another quizzical thing for them. They’re saying, `Geez, what are those guys doing?”’

But not everyone is as concerned. Many business people, both local and national, can detect no ill effects from the lingering dispute and say it should have no impact on Spokane’s economy.

Bernard Daines, the founder of technology companies Packet Engines and Worldwide Packets, said he has heard no talk of the garage struggle outside of Spokane.

“We have talked with a fair number of investors, eight or 10 from national firms, and none of them have mentioned it,” Daines said.

That might be different if they were investing in retail projects, Daines said, but for tech investors “the issue is, how does the resolution of this matter affect our business, and I don’t think it does.”

The head of Spokane’s job recruitment agency said he hasn’t heard of any business turning down Spokane because of the dispute.

Nonetheless, “we worry about it,” said Mark Turner, president of the Economic Development Council. “We worry about not getting the calls that we might otherwise get because of negative impressions.”

One conflict won’t make a difference for a company seriously considering Spokane, said Mark Klender, the director of Deloitte & Touche Fantus Consulting, a national site selection firm.

Companies look at a wide range of factors, such as labor availability and costs, when making their relocation decisions, Klender said.

“Most companies will look at the broader context,” he said. “It would take something major and, most likely, directly affecting them for it to make a difference.”

Certain cities do carry a stigma as unfriendly for business, he said.

“There are places like Eugene, Ore., that have images that are built up over years, based on the regulatory climate, based on outright lack of flexibility or desire to recruit certain types of business,” Klender said. “I don’t think Spokane has such a negative image.”

But businesses abhor controversy, said Ross DeVol, director of regional and developmental studies at the Milken Institute, a Los Angeles think tank.

DeVol helped craft the study used by Forbes magazine in its rankings of the best places in America to do business. In 1999, it placed Spokane near the bottom.

Relocating corporations are looking for communities that are eager for businesses to succeed, he said.

“If there isn’t an agreement among community leadership about economic development, it can be viewed as unfriendly,” DeVol said. “If the articles you see in the paper are about developers suing the City Council, it tends to make the city seem business-unfriendly.”

Spokane already has a number of negatives to overcome, DeVol said, given its relative geographic isolation, its lack of a major research university and the bad taste of the Kaiser labor dispute.

“(The controversy) gets added to a list of negatives,” he said. “It reinforces a perspective people have that Spokane isn’t with it. It’s hard to say how important any one is, but cumulatively, they become extremely important.”

The one area where there is no debate about the controversy’s impact is the added cost for the city to borrow money by selling bonds.

The City Council’s decision that it couldn’t loan parking meter revenue to an agency unable to repay it triggered a lowering of the city’s bond rating from Moody’s and Standard & Poor’s, the two main rating agencies.

Credit ratings indicate the financial soundness of a city; the higher the rating, the lower the risk to investors. When Spokane’s rating was lowered, that was a warning to investors that the risk in buying Spokane bonds increased. The result will be a higher cost to borrow money for the city, bond experts say.

“That is a serious problem and one that will cost something and will likely cost something for some period of time,” said Dean Torkelson, an investment banker at Seattle-Northwest Securities, one of the region’s leading public finance firms.

And it doesn’t really matter if the city was justified in its actions, said Dan Gottlieb, a Seattle bond attorney.

The bond market “will take every opportunity to get more money out of a product,” Gottlieb said. “Any excuse is a good excuse. Market participants are not in my opinion interested in digging very far to understand what the circumstances are.”

The cost to Spokane isn’t just an abstract worry, either.

City finance director Richard Cook said the city is considering postponing a Sept. 15 bond issue because of the potential higher costs.

The city routinely sells bonds to offset short-term debt acquired through street-paving projects - projects that the city pays for up front and is later reimbursed through rate increases for residents.

In Cook’s 25 years in the city’s financial department, he cannot recall delaying a bond sale because of increased interest payments.

“We probably haven’t done it before,” Cook said. “Normally, here’s the process, here’s the bond. This time, we’re taking a second look.”

That bond would be for approximately $2.5 million. The city is also considering asking voter approval for a much larger series of bonds to raise $60 million over 10 years as part of a proposed street repair package.

The lowering of the credit rating could add an additional $1.4 million in interest payments, Cook said.

In Spokane’s favor, however, is that demand for municipal bonds from Washington is fairly high, said John Hallacy, managing director for municipal research at Merrill Lynch in New York.

The state of Washington and its various counties, cities and agencies are selling 32 percent fewer bonds this year than last year, Hallacy said. That means the fund managers who are required to hold Washington bonds have fewer choices than in years past and may be willing to pay more for Spokane bonds.

“People will try and extract a penalty (for the lower rating), but the penalty will not be as severe as it may have been because of the market conditions,” Hallacy said.

It’s not clear how long the effect of the rating change will linger.

Mike Marois, who covers the Spokane garage flap for The Bond Buyer, a national daily trade newspaper, said it could take a while to blow over.

“The bond market has a long memory and it remembers controversy and that might affect the pricing of future bonds,” he said.

But others feel that if the dispute is resolved in a timely way and seen as an isolated incident, it may not cast too large a shadow.

“This is embarrassing, it looks bad, but life goes on,” said Phelps McIlvaine, a fund manager at Northwest Investors Trust in Bellingham. “There are no reasons why Spokane can’t sweep this under the rug in two or three years.”