Buyback strategy could put city in control
Bondholders would be out of legal battle and allow city to leverage settlements
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Mike Prager
Staff writer

Settling the protracted legal battle over River Park Square could come down to a leap of faith by the Spokane City Council on Monday.

Mayor Jim West and staff are asking the council for authority to sell $39 million in limited tax general obligation bonds.

They hope to use that money to leverage settlements among the parties involved in a federal securities lawsuit over the mall's parking garage.

West's strategy begins with the city offering to buy back bonds sold in 1998 to finance the garage. Those bonds are now in default and the subject of a fraud trial set to begin April 19.

Buying back the garage bonds would put the city in the driver's seat. The city would seek to become the plaintiff, and from there, could press negotiations with other defendants.

"Thirty-nine million isn't going to be the final number" paid by the city, West said. "Other people are going to participate in this, one way or another."

West and his administration believe their proposal presents the best opportunity yet to break a four-year logjam over settlement.

He has some reasons to be optimistic.

City officials and at least one former council member said $11million has already been offered by other defendants in the bond fraud trial.

That would peg the city's downside risk at $28 million now, even before trial.

City officials said they believe they could eventually lower the city's portion of the buyout to $18 million through a combination of settlements or judgments.

But top officials said they need authority for the $39 million bond issue so they can offer a buyout of existing garage bonds before trial starts in 15 days.

West needs five yes votes from the seven-member council to pass the emergency bond ordinance.

"There are still a lot of questions," said Councilman Bob Apple. "I don't know at this point."

Councilman Brad Stark said he's been getting a positive reaction to the proposal from constituents. "I'm in favor of the move," he said.

Councilwoman Mary Verner, who was appointed last month, said she finds the case daunting and complex.

"If we had the crystal ball," she said, "it certainly would be easier...."

Settlement scenario

To reassure Verner and other council members, West's team has laid out a plan which they believe can resolve the case.

According to top city officials, the scenario works like this:

• The city would offer to use the $39 million to buy back $31 million in garage bonds issued through a nonprofit foundation in 1998. The buyback would go to repay the original face value plus back interest, unpaid attorney fees and federal taxes due on some bonds. Concessions would be sought from bondholders.

• By repaying bondholders, the city would improve its standing in the municipal credit market, lowering the city's future borrowing costs.

• In taking over bondholder claims against other parties, the city could begin negotiating settlements with the mall developer, a parking consultant, the bond underwriter, bond lawyers, the foundation and others.

• At trial, the city would acknowledge its role in the default before a jury, and then ask the jury to apportion judgment among defendants who had not by then settled.

• Officials hope the city's switch from defendant to plaintiff will increase willingness among other defendants to resolve their legal liabilities away from a jury.

River Park Square is owned by development companies affiliated to Cowles Publishing Co., which owns The Spokesman-Review.

A lawyer for the mall acknowledged the city's emerging legal strategy in a statement issued last week.

Attorney Ladd Leavens said his client, the mall developer, is preparing for trial but remains open to "sound business solutions" to the dispute.

The lead lawyer for garage bondholders has indicated that his clients want a full reimbursement for their investments.

Underperformance of the garage has cut into payments on the bonds and caused their market value to decline. The insurer of the bonds has intervened as a plaintiff.

Former Mayor John Talbott, a longtime critic of the garage deal, said he believes the city would be better off taking its case to court rather than selling new bonds.

He said the city charter requires a public vote before issuing bond debt for capital projects.

"They are skirting the spirit and intent," Talbott said of the charter requirement.

However, city lawyers said the charter doesn't apply in this case because garage settlement is a legal matter, plus there isn't time to accomplish a vote before trial. An emergency ordinance is not subject to voter approval.

Lawyer and former Councilman Steve Eugster said, "The bondholders, any way you look at it, are going to have to be paid."

Running the garage

Bond financing is one of three pieces of the garage deal that are broken.

The city also needs solutions to shortfalls in the operations of the garage and in payments on a community development loan taken out by the developer for construction.

Under the settlement scenario at City Hall, the city would pay the operating debt and past due ground rent of $7.4 million owed to the developer.

In turn, the city proposes that the developer make good on future shortfalls in the HUD loan and use some of the cash from the city to pay down garage debt.

Currently the garage loses $2.3million a year because costs tied to the existing bonds consume all of the revenue from parking receipts.

City officials said a city takeover would reverse that performance. Instead of losing $2.4 million a year, the garage could earn $660,000, they said.

This would largely occur because debt load can be shifted to other defendants and the general fund.

There would also be reductions in property taxes and interest costs.

In the trade-off, the city's general fund would be obligated to pay between $1.3 million and $1.9 million a year for 25 years in interest and principal depending on the amount of money contributed through settlements or judgments.

The general fund, in turn, would be relieved of two substantial obligations associated with the garage.

The $1 million being spent annually on outside legal counsel would be saved. Also, the city could regain use of its parking meter revenue of $1.8 million for other needs, West said.

Currently, parking meter revenue is sealed in a reserve account pending settlement of the garage case.

The parking meter money was pledged by the City Council in 1997 as a backup to garage performance.

Garage operations currently are $7.4 million in the red, while the parking meter reserve has $7.2 million.

Courts have previously ruled the city must loan the parking meter money to the mall owner, and the mall owner has gone after the city for reneging on that commitment.

At the same time, a publicly funded community development loan, which was granted to the mall owner to help pay for mall construction, has fallen into arrears.

The loan came through a U.S. Department of Housing and Urban Development program with City Council approval.

A portion of those loan payments were to be derived from garage receipts. The developer has pointed out that city refusal to loan parking meter money is one cause of the shortfall in HUD loan payments.

For now, the shortfall is being covered by the city's federal Community Development Block Grant funds for low-income neighborhoods.

West said last week he'd be willing to seek foreclosure on the Nordstrom building if the developer was unwilling to come to settlement. But that would make the city an owner in the retail side of the mall.

"I don't think they (the developer) really want us to be their partner," he said. "It hasn't worked out yet."

Here's another issue: ground rent could be subject to renegotiation once the original bonds are retired, city officials said.

Plan reviewed

The proposed bond issue before the council would include $16 million in tax-exempt bonds and $23 million in bonds subject to federal income tax to be redeemed over 25 years.

Short-term bonds with interest rates as low as 2 percent would be redeemed from settlements or judgments. Longer maturities at 5percent interest would also be in the mix. The average rate would be well below that being paid on existing garage bonds.

The city has been advised to sell taxable bonds because of a preliminary determination by the Internal Revenue Service that part of the garage financing went to private purposes and is subject to federal taxation.

About $1 million of the bond issue would be spent to repair maintenance problems recently discovered at the garage, said Gavin Cooley, the city's chief financial officer.

Cooley is one of the architects of the West strategy, which is being reviewed by at least one additional outside legal expert.

If the council doesn't approve the bond ordinance, the city could be left with no option but to go to trial as a co-defendant with the developer and others in the bond fraud case.

West said, "I'm willing to risk it with the jury."

Then he added, "So was Martha Stewart."