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San Diego Pushes Ahead With Convention Center

FEB 9, 2012 9:55pm ET
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LOS ANGELES — San Diego officials are plowing ahead with plans to expand the city’s convention center in a project that will require more than half a billion dollars of bonds.

In a 6-to-2 vote on Jan. 24, the City Council approved the creation of a convention center financing district through which local hotels would pay special taxes covering the bulk of costs for a proposed $520 million convention center.

Two-thirds of hotel owners now need to approve the tax on April 23 for the proposal to move forward. If the hotel owners approve the tax, the council would then need to pass an ordinance in May levying it.

(The proposal calls for expanding the convention center’s floor space by 928,000 square feet, to 2.69 million from 1.76 million, with 225,000 square feet of exhibit space.)

The action followed a debate over whether the city should fit a new football stadium for the San Diego Chargers into the convention center project. The council’s plan is a pure convention center expansion without a football stadium.

The Chargers had pushed a combined plan several months ago. And recently, just a few days before the council’s vote, U-T San Diego, the city’s largest daily newspaper, advocated its own plan for a multi-use project at the site of the 10th Avenue Marine Terminal that would combine an expanded convention center, a new Chargers stadium, a new sports arena and an unnamed civic icon.

In response, Mayor Jerry Sanders’ office issued a statement opposing the paper’s plan: “The city is ready to move forward now on a realistic plan to create thousands of jobs, protect our convention business and increase revenues for neighborhood services. We have to address these important priorities in a responsible way.”

Industry experts told the city that the convention center space needs to be contiguous and that having a separate facility several blocks away, as the Chargers propose, will not work, according to Councilman Todd Gloria, who supports separate stadium and convention center expansion projects.

The site proposed by the National Football League’s Chargers for an $800 million stadium is the city’s bus yards, several blocks away from the convention center. The question of what to do about the Chargers, who have clamored for years to get out of their current Qualcomm Stadium home, remains unresolved.

“The second piece of this is that we largely finance the convention center through the hotel industry, and it is their wish for this to be a contiguous space,” Gloria said.

Under the proposal, the hotels would be assessed a 1% to 3% tax based on their proximity to the convention center, with the closest hotels paying the highest rate. The tax would apply to San Diego hotel properties with at least 30 rooms.

Those taxes are expected to generate $35.7 million annually by 2017, and would pay for the lion’s share of the project. The city and the San Diego Unified Port District would contribute several million dollars a year.

San Diego’s redevelopment agency was originally supposed to contribute $2 million annually, but that won’t be happening now that a recently implemented state law dissolved every redevelopment agency in California.

Gloria said officials were always aware the city might have to pick up that cost.

“We have known that redevelopment funds were an uncertain source of funding for a year now,” Gloria said. “So, the most recent plans didn’t include tax-increment financing. We have a combination of other sources — and it was a modest amount when you take into consideration that it is a half-billion-dollar project.”

The proposal calls for expanding the convention center’s floor space by 928,000 square feet, to 2.69 million from 1.76 million. It includes an increase in contiguous exhibit hall space of up to 225,000 square feet and an increase in meeting room space of 101,500 square feet. It will also add 80,000 square feet of ballroom space.

The draft finance plan calls for the issuance of $330 million of 30-year revenue bonds backed by the special district hotel taxes and port district support payments, said Mary Lewis, the city’s chief financial officer.

The second bond issuance would consist of $212 million of 30-year supplemental lease revenue bonds, leveraging the excess revenue above the actual debt service combined with incremental city hotel bed taxes of up to $3.5 million diverted from the city’s general fund, Lewis said.

According to a staff report, San Diego would be the conduit issuer of the primary bonds, acting under the authority conferred by the district. The supplemental bonds would be issued using a lease revenue bond structure through a joint-powers authority making use of the original convention center property as the subject of the lease. No city assets would have to be used to support the lease revenue bond.

Unlike the primary bond, which is not a debt obligation of the city, the supplemental bond would need to be backed by the general fund credit with the revenue allocated to cover debt service limited to $3.5 million annually from incremental hotel bed taxes.

San Diego has $521 million of outstanding general fund bond obligations, $844.5 million of outstanding water system obligations, and $1.2 billion of outstanding wastewater system obligations, according to the fiscal 2012 budget.

Annual debt service is estimated between $33 million and $42 million over the life of the bonds, according to a report by Temecula, Calif.-based Willdan Financial Services.

The city’s independent budget analyst said San Diego will gain additional hotel bed tax revenue as a result of the expansion of $5.2 million to $9.7 million a year.

In her report, IBA Andrea Tevlin expressed concern that the city’s estimates were well below the $12 million estimated by the firm the city had commissioned to prepare an economic study, Los Angeles-based AECOM, which completed its report on the financial benefits of the project in November 2010.

While the IBA’s estimates are well above the $3.5 million annual maximum San Diego planned to contribute toward bond repayment, Tevlin said significant variances exist between her findings and those of AECOM.

The city anticipates obtaining $35 million of short-term financing in 2013 to cover pre-construction and design costs and the remaining $485 million of long-term bonds in early 2014 to cover construction costs, according to the staff report. The expanded center is expected to open in 2016.

Steve Cushman, who works as a special assistant to the mayor on the financing plan, said he hopes when the city issues the bonds it will receive an enthusiastic response, keeping the interest rates as low as possible.

Market access isn’t something the city takes for granted anymore. San Diego went without public bond market access from 2004 through 2008 in the wake of a pension disclosure scandal that led the Securities and Exchange Commission to sanction it for securities fraud in 2006 and cost the mayor, city manager and many top city financial officials their jobs.

“The [current] mayor has done a wonderful job of bringing fiscal responsibility to the city,” Cushman said. “Seven years ago, the city had a lot of challenges. It has helped to improve the ratings.”

As of June 11, 2011, the city had general obligation bond ratings of A from Standard & Poor’s, AA-minus from Fitch Ratings, and Aa3 from Moody’s Investors Service. Its certificate of participation and lease revenue bond ratings were A-minus from S&P, A-plus from Fitch and A2 from Moody’s. All had stable outlooks.

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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