Officials debate drawbacks of bonds

To back or not to back.

That is the question faced by elected officials across Central Pennsylvania. They are deciding whether taxpayers should be the backstop for debt taken on by some of the region's largest projects.

The projects depend on bonds, which are loans from private investors

But before the deals close, elected officials must decide whether a project's benefits outweigh the risk to taxpayers, who ultimately bear the cost of failure.

"They're tricky decisions for any state or local government to make. I don't think you can say, as a general rule of thumb, that they're always good projects or always bad," said Michael Decker, senior vice president for policy and research at the Bond Market Association. The Virginia-based group represents securities firms and banks in the bond market.

Like young businesses that tap the federal Small Business Administration to back their first loans, new public projects also need an extra hand from government, bond experts said.

"The market generally is not receptive to startup, de novo-type projects. You need some history, or you need some financial guarantor behind it," said Jim Losty, a managing director with Minnesota-based financial firm RBC Dain Rauscher. Losty is advising Harrisburg officials on a $125 million bond issue for the city's incinerator. The debt needs backing from both the city and Dauphin County.

Two other proposed projects in Central Pennsylvania represent bets on the region's future vitality: a convention center in Lancaster and a baseball stadium in York.

For the Lancaster County convention center, the state is expected to kick in $15 million of the total cost. Bonds will pay the remainder of the $55 million price tag.

On Oct. 29, the Lancaster County commissioners agreed to back half of the proposed $40 million in debt. Insurance will cover the other half, officials said.

"Bondholders don't want any risk," said Thomas Beckett, a senior vice president at Fairmount Capital Advisors. The Philadelphia-based firm is advising the Lancaster County Convention Center Authority.

The risk is minimal to taxpayers, too, Beckett said. Before paying on the guarantee, Lancaster officials could raise the county hotel tax that supports the center, which is expected to open in 2006. Officials also could redirect hotel-tax revenue that supports marketing by the Pennsylvania Dutch Convention & Visitors Bureau.

One longtime critic of the center and its financing remained skeptical.

The hall and the tax won't generate enough money to pay off the debt without taxpayer help, argued Peter Chiccarine, coowner of Eden Resort Inn in Manheim Township, Lancaster County. The Eden and 10 other hotels sued unsuccessfully to block the hotel tax.

The center depends on hoteltax revenue of $3.6 million a year to cover both an annual operating deficit of $1.1 million and annual debt service of about $2.5 million. But the levy has never taken in more than $3.1 million, Chiccarine said.

Beckett said the $3.6 million figure applied to 2010 and accounted for growth in overall hotel revenue of 2 percent per year. Earlier debt payments will be smaller than $2.5 million. In the meantime, the authority will exercise flexibility in its spending to ensure deficits don't overwhelm revenue. Officials declined to be specific about how they would cover largerthan-expected deficits.

"I'm pretty confident we won't need the guarantee," Beckett said. Hotel revenue in Lancaster County would have to fall by 50 percent before county subsidies would be needed, Beckett said.

Without the guarantee, the convention center would be able to borrow only $25 million. Investors wouldn't trust it to repay a larger debt, Beckett acknowledged.

"People are a little bit more unwilling to commit on new credits since" the economy soured, terrorists attacked on U.S. soil and accounting scandals wiped out once-profitable companies, Beckett said.

In York County, officials are pondering a proposal for a $12 million baseball stadium on the edge of downtown York. Under a proposal being considered by county commissioners, taxpayers would back 75 percent of the debt.

"I think the risks are minimal. I realty do," said Chris Reilly, president of the York County Commissioners. He supports the county guarantee but is leaving office. A new board will be acting on the bond question. "Obviously, the risk is that the franchise fails and you have an empty stadium that you need to make the bond payments on. I just don't think that's going to happen."

Reilly said he wasn't put off by the York City Recreation Corp.'s default on bond payments for the York City Ice Arena. York city guarantees the $7.3 million debt and may end up paying hundreds of thousands of dollars to cover it. The same nonprofit corporation has been involved in the baseball effort.

Efforts to reach the corporation's chairman, Steve Mitchell, were unsuccessful.

In case of default by the stadium, Reilly said, each resident would have to pay only $5 more each per year in taxes.

Both the stadium and the convention center depend on attracting crowds to relatively neglected areas of Central Pennsylvania. It is a development strategy with some record of success in the region.

Harristown Development Corp. built a hotel in downtown Harrisburg in 1990, at a time when few people roamed the streets. War with Iraq was imminent.

After several years in the red, the hotel began making a profit in the mid 1990s, said Neal West, Harristown's vice president and general counsel. Harristown has reinvested the profits in other downtown projects.

Private investors and bank loans covered the hotel's initial cost, West said. The hotel refinanced its debt in 1993 and issued bonds backed by the city. The hotel has never had to call on the guarantee, West added.

West was unsure whether a convention center or a stadium would do as well as a hotel, at least from an operating perspective.

"I think they're all risky until you get people used to going there and buying the product," West said. Even then, he said, stadiums and convention centers rarely make enough money to cover their expenses.

In the case of a stadium, he said, officials may be tempted to offer subsidies for the sake of keeping the team that plays there.

"Part of it is, what is the community willing to pay for the ammenity?" West said. "My understanding is that most cities end up subsidizing stadiums to some degree."

Residents will react in one of two ways to the idea of government backing, he said. If they envision themselves going to a baseball game or attending a show at the convention center, they will support it. If they think government already spends enough money and don't see themselves using the new facilities, they will oppose it.

"I personally think that's a very narrow, focused reaction. You're not thinking of the bigger picture," West said of the latter camp.

Whatever debts government officials choose to back, picking one project may mean forgoing the next one that comes along, said Decker of the Bond Market Association.

Bondholders and insurers generally set limits on the amount of debt they will let a government carry, Decker said. "Every community faces that restraint," he said.