So bleak was the financial situation at the Greater Tacoma Convention Trade Center in March 2009 that manager David Bobo wrote to his supervisor, Mike Combs, saying “answers need to be found before it reaches crisis proportions in less than two years.”
So bad was communication between Bobo and Tacoma City Hall that three months later he wrote Combs to say that the issue had not been confirmed, denied or otherwise addressed by the city’s finance department.
“If we are wrong, just tell us we are wrong,” Bobo said. “If we are not wrong and the situation is not being addressed, I have an obligation to our staff and clients to begin preparing for the cessation of operations.”
He told Combs, then director of facilties for the city, “It seems we are only a few short months away from this situation getting very ugly.”
Three years later, that ugliness is about to find daylight.
The City Council likely will be asked next year to take a yet-to-be determined amount of money from the general fund to supplement the cost of operations at the 8-year-old convention center in downtown Tacoma.
The convention center is funded by three primary sources – revenue from meetings and conventions plus contributions from a hotel-motel tax and a 0.033 percent cut of the state sales tax collected in parts of Pierce County. The center is not expected to produce a profit, but neither did projections have the city providing money from the general fund.
These revenue sources had been expected to cover the cost of operations and, with a supplement from a city parking fund, to cover the scheduled redemption of a $32 million convention center bond issue.
But when the three revenue streams went slack, primarily because of the recent recession, and when city officials went to the parking fund – they found that funds had been used for other projects.
A draw on the general fund would come at a time when the city faces a projected deficit of some $22 million in 2013 and $24 million in 2014 – deficits that already have led to cuts in jobs and programs.
“The finance department is making a projection,” city spokesman Rob McNair-Huff said in March. “In 2013 … the general fund will have to support operations.”
Beyond that, the city isn’t saying much. On March 8 The News Tribune requested documents related to specific expenditures from the parking fund in 2004-2010. The city has yet to fully answer the request. Some figures have been provided, but they are not correlated to specific accounts.
The decisions that led to the convention center’s financial problems – specifically the use of the parking fund – came during the six-year tenure of City Manager Eric Anderson. He left the job in July after the City Council declined to renew his contract and paid him severance pay to leave early.
Anderson has not returned calls for comment.
His successor, T.C. Broadnax, said earlier this month, concerning the impact of the parking fund deficit on the general fund: “I think it’s another budget challenge we face. The main focus has to be with working with the council to resolve the general fund budget. The budget process will be open and we will engage the community. There will be clarity and opportunities for them to ask the appropriate questions and receive the appropriate answers about where every dollar has gone.”
This early in his tenure at City Hall, Broadnax said he is not yet familiar with the details of the convention center situation.
But City Councilman Jake Fey, who is familiar with the situation, called it “unfortunate.”
“The big disappointment was that there weren’t reserves,” he said. “The reserves were moved.”
And there could be more ugliness ahead for the city.
Mark Rapozo of the State Auditor’s Office is investigating the city’s obligation to repay a 2004 convention center revenue bond issue of $32 million.
At best, Rapozo could find that revenues, expenditures and accounts related to the convention center were properly earned and distributed. At worst, he could discover money was mishandled, which could lead to possible legal penalties against those responsible.
Simply put: Funds that some officials expected would be stored in reserve against hard times were spent on other city projects. Oversight was loose. Questions went – and continue to be – unanswered.
When it opened in 2004, the convention center took Tacoma into the larger leagues of hosting regional gatherings.
Where once the city could welcome trade shows and conventions to the University of Puget Sound Fieldhouse or the Winthrop Hotel – and later to the Bicentennial Pavilion or the Tacoma Dome arena – now it could compete with centers in Spokane, Yakima, Portland, Boise and other Northwest cities.
Juli Wilkerson, then head of the city’s economic development office, boasted in 2001, as the idea of a center began to percolate, that it would create an annual $55 million in economic juice.
It was one of those numbers economic development professionals use that never can be confirmed.
Multiply the number of expected guests by the amount of money they might be expected to spend – on such things as rooms, meals, tips, rental cars, parking, gasoline, souvenirs and museum admissions – and then proudly welcome a new age of civic prosperity.
The goal was to attract “heads and beds,” out-of towners who came to Pierce County to attend conventions, trade shows and meetings. They would spend new money, and that money would generate tax revenue and create jobs.
Convention centers typically find it difficult to make a profit themselves.
The consulting group CSL reported to the city in March that among 25 comparable convention centers nationwide, all but two lost money in 2011. The average loss was $1.48 million during the most recently completed fiscal year, where the Tacoma facility showed a loss of $2.08 million.
So why build a convention center if it may not make money?
“It drives tax revenue as well as business,” said Vickie Howarden, president and CEO of the Texas-based International Association of Venue Managers.
The center attracts visitors who otherwise wouldn’t come to Tacoma, Mayor Marilyn Strickland said.
“It’s an anchor, and it’s a significant landmark,” she said. “I want people to view the convention center as an asset. The ability to say we have a convention center – I think it gives you the position as a city that is worth visiting.”
At a cost of more than $80 million to build, the convention center was paid for in part by the $32 million bond issue, the proceeds of which would go to construction of the center and improvements to the city’s parking facilities..
The bonds would be repaid and the center maintained using money collected from three sources: convention center revenues, a hotel-motel tax and a 0.033 percent slice of the state sales tax as collected in Tacoma, Fife, Lakewood, University Place and unincorporated Pierce County.
If those funds fell short, a backup would include revenue from the city’s parking system. After deducting the cost of parking operations, that fund would be available to make those bond repayments.
On paper, all was well.
Until it wasn’t.
Problems started early.
Between 2004 and 2009, revenues from the three designated sources totaled about $48.8 million and expenses were about $63.3 million.
In 2008 and 2009, revenue from the sales tax fell nearly $500,000 behind projections, primarily because of the recession.
Parking revenues fell below expectations every year between 2004 and 2009, according to figures provided by the city. Actual parking revenues in 2004 fell $512,000 below city projections. By 2009, parking revenues were $1.4 million less than originally pledged to the bond repayment.
Contributions from the hotel-motel tax – $3.9 million in 2004 – fell to $1.2 million the next year but later rebounded to range between $2.8 million in 2010 and $4.9 million in 2007.
Convention center operating revenues of $2.6 million in 2008 fell to $2.19 million in 2009 and $1.7 million in 2010.
The convention center was not selling enough dates to cover expenses. The sales tax had been reduced as consumers stopped spending money thanks to the economy. Other sources of income had become unpredictable.
And when Bobo’s warning about financial problems at the convention center finally were addressed – when it came time to use the reserves in the parking fund – those reserves weren’t available.
The money wasn’t there.
According to a 2009 memo – from a bond rating service to City Manager Eric Anderson and Bob Biles of the finance department – when the convention center opened in 2004, “the city had built up a $19.3 million operating reserve to subsidize convention center operations in the early years after $10 million was used for construction.”
Former finance director Steve Marcotte said in an interview that he believes some of the reserves were spent on South Park Plaza, a mixed-use parking-office-retail development project in downtown Tacoma. That facility, now called Pacific Plaza, opened in 2009..
He said he believes the current threat to the general fund derives from using money for purposes other than preserving the convention center reserves.
The problem was, he believes, that in the years after construction some of the money was spent on other city projects.
Although the question has been asked, the city finance department has yet to officially detail the use of the funds.
The bottom line, said Marcotte, now retired, was “somehow magic money was provided. Well, it wasn’t magic. It was just a depletion of the parking reserves.”
There had been money held in reserve, he said. And then the money was gone.
Who decided to spend those funds rather than keep them in reserve?
“Fiduciary responsibility for parking revenue/use rests with the city manager,” Jeff Litchfield of the finance department said in an email earlier this year.
Officials knew the city could not meet its obligations to the convention center without the parking reserves, Bobo, the convention center’s manager, said in a recent interview.
“I don’t think there was some sinister plot,” he said. “It seemed to me that the people who were doing it were doing it to pay legitimate bills, but again, you’ve borrowed a lot of money and you’ve also told people how you were going to pay it back, and suddenly you’re not paying attention to that. We asked them to put it back.”
They did not put it back.
By 2009, the financial situation was such that the convention center might be forced to close, Bobo said in his email to Combs, his supervisor and the director of public facilities. “The funds are not going into the reserve and it is diminishing at a rapid rate,” he stated. “(The finance department is) aware of this situation but I thought you should be as well.”
He said he heard nothing in return.
“Since we sounded the alarm, no one from (the finance department) addressed our concerns,” Bobo said in a recent interview. “They wanted me to shut up, basically. I wasn’t high enough up on the pecking order. I’m ringing the bell, but I’m not on anybody’s radar. It was crickets.”
Combs, recently retired, said, “If it had been up to me, I would have looked (earlier) at what we were facing. It would have been more fiscally responsible to take care of that debt earlier.”
Combs said he did ask in a meeting with senior staff, including Anderson, the city manager, where the parking revenues were being spent. The answer, as he recalls: “Various city projects.”
“I wasn’t surprised the money was used,” he said. “I was surprised that it wasn’t returned.”
MISTAKES, QUESTIONS, SOLUTIONS
On March 20, Jeff Litchfield of the city’s finance department, writing for department director Bob Biles, reported to the city clerk that previous calculations related to the parking system and the convention center bonds “submitted from 2005 to 2010 were in error.”
Without specifying the errors, Litchfield included in his letter a revised set of figures that net parking revenues between 2005 and 2011 ranged from a low of $2.13 million in 2010 to a high of $2.7 million in 2007.
If Bobo noted a deficit in the convention center’s bottom line – all revenues minus total expenses – of $4.5 million in 2007, and again of $3.1 million in 2009, so did some members of the Public Facilities Board have questions.
The district board, which oversees the 0.033 cut from the state sales tax, has no legal means to enforce any changes or conduct any investigation.
Still, there were questions.
At the annual PFD board meeting in 2009, Tim Farrell asked how the facility was performing against requirements of the bond.
He was told only that the city, in case of trouble, “will have to make up the shortfall.”
“We kept asking if we should do more, then watching the money go from there to there,” Farrell said.
Frustrated at this fecklessness, he acknowledges that the board has neither the power nor the authority to act.
In 2010, board member Tammy Blount asked for financial details concerning any impact on the city’s general fund.
She said recently that she received no answer.
Actually, someone did know the answers. In a December 2009 memo from Karen Ribble, director of Fitch Ratings – the bond rating service – to Bob Biles of the city’s finance department, she notes a draft press release that states “…recent projections indicate the convention center may require temporary and/or permanent general fund operational support well in excess of original expectations.”
And so, by 2010, the promises by convention center proponents that the bonds would easily be repaid had gone sour. Earlier expectations that the general fund would be safe had faded.
Tacoma officials did have an answer for dealing with how to get money to cover the convention center costs and avoid an approaching default.
They would refinance the 2004 bonds.
“The concept of refinancing the bonds began in 2010 as a way to manage cash flows during the economic downturn,” said Jeff Litchfield of the city’s finance department. “At the time of refinancing, it was projected the economy would begin its recovery within the next three years.”
Though one City Council member described the refinancing plan as simply “kicking the can down the road,” raising $5 million in new bonds would cover the costs of bonds maturing in 2010, 2011 and 2012.
That would mean added debt, but the extra borrowed funds would enable the city, in the short term, to pay less than initially planned to retire the bonds.
The added debt would be repaid after 2012, adding to the annual debt service.
Rather than an expected annual debt service of just over $5 million, by 2015 the cost would rise above $6 million. Only after 2020 would the annual cost begin to dip back toward the originally planned debt service – which would fall to above $4 million in 2025. The total debt extends through 2036.
There is no guarantee that parking revenues and the sales tax revenues will be sufficient to repay the bonds as projected, which could mean, given the vagaries of the economy, that a further supplement will be required.
Despite the potential problems, the City Council approved the three-year bond refinancing in 2010.
As it turned out, refinancing the bonds “makes the budget situation we’re in that much more problematic,” said Jake Fey, a city councilman known as a close reader of the city’s budget. “I think it was glossed over lightly.”
Transferring parking revenues to other projects “sounds like a money-snatch,” he said.
“In this form of government you have to rely on the ethics and competence and professionalism of the city manager,” he continued.
Fey said Bobo’s email should have sounded an alarm three years ago.
“That a city employee was crying for help – that doesn’t surprise me. I guess it’s unfortunate it doesn’t surprise me,” he said.
Should the City Council have seen this problem coming?
“It would be unfair to say the City Council was negligent,” Fey said. “If he (the city manager) does a transfer, how am I supposed to know? How could you possibly be expected to watch all of these things?”
Councilman Ryan Mello said he has asked for detailed information on all the city’s funds.
“The mystery you’re trying to solve,” he said, “is the epitome of the way a lot of information has been handled and the cause of lots of other mysteries – and that’s one of the reasons Eric Anderson is no longer city manager.”
Councilman Joe Lonergan called the upcoming pinch on the city’s general fund to cover the convention center’s costs “alligator jaws.”
“We’re going to have to get into the details,” he said. “We’ve been looking at the big picture.”
Someone else already is looking at the details.
Rapozo, Tacoma-based program manager with the State Auditor’s Office, met with employees at the city’s finance department a few weeks ago to begin reviewing bond covenants.
“We’re pulling the bond statement and the covenants and we’re going to look at compliance with the covenants,” he said. “If they specifically call for a parking reserve fund, we will be auditing to ensure that that fund was created and was being managed or maintained in accordance with those covenants.”
The state auditor has no enforcement authority, but can issue its findings to other authorities.
“This is a sensitive matter,” he said. “We’ve had a conversation with other folks. Right now, I don’t have a lot to look at. We’ll be looking deeper.”
He said he expects the results of his audit will be available in November.
C.R. Roberts: 253-597-8535/ firstname.lastname@example.org