BRADENTON, Fla. — Tennessee’s Metropolitan Government of Nashville and Davidson County tonight is expected to take a final vote on whether to move forward with its largest public works project ever — even though the cost could lead to a rating downgrade.
The proposed project, a $585 million convention center, would require as much as $650 million in bonds including capitalized interest, issuance, and insurance costs.
The debt would be backed by tourism taxes and are expected to be sold in two series. The largest piece — up to $450 million of subordinate revenue bonds — would require a backup pledge to use non-tax revenue from Metro’s general fund if revenues are insufficient in order to enhance the marketability and reduce interest expense, according to city documents.
As Metro finance and tourism committees deliberated the project last Thursday, Fitch Ratings assigned a negative watch to the consolidated government’s $1.6 billion of AA-rated outstanding general obligation debt and to $71 million of AA-minus rated energy system bonds backed by Metro’s commitment to make up debt-service reserve deficiencies.
“The negative rating watch reflects the potential additional fiscal strains of a planned … debt-financed convention center upon an already pressured general fund beset by slim reserve levels, significant long-term liabilities and constrained revenue-raising ability,” said a report by Fitch analyst Barbara Ruth Rosenberg.
Rosenberg added that the convention center debt, backed by a pledge of non-tax general fund revenues, “could result in a minor downward adjustment to the rating” assuming other credit factors remain constant.
Metro carries GO ratings of AA from Standard & Poor’s and Aa2 from Moody’s Investors Service.
The full 40-member Metro council’s final vote tonight follows committee meetings and a public hearing last week in which proponents said the current convention center in downtown Nashville’s entertainment district is not big enough and conventions have been turned away. It has 118,000 square feet of exhibit space and 25 meeting rooms. Despite the poor economy, they said building a new facility would bring badly needed jobs and would eventually bring in new revenue.
The new convention center would be built about a block away from the old one and would have 523,500 square feet of exhibit, ballroom, and meeting space — about three and a half times the event space as the existing venue.
While supporters said the finance plan is structured so that it would be very unlikely that the general fund would ever be tapped to pay debt service, it was a major concern of several council members who predicted that it could leave government short of funding in other areas of the budget and force them to raise property taxes.
“It’s our consensus that it would be next to impossible to sell the bonds without the backup pledge in this interest rate environment,” Metro finance director Richard Riebeling told council committees debating the project last Thursday. “As director of finance I’m concerned about the city’s fiscal well-being. I’m not inclined to take steps putting the city at risk but I believe the way this is structured we are going to achieve the goals” of building at the lowest cost while minimizing risk to the general fund.
Council members opposed have questioned revenue forecasts and asked how the government would make up $14 million of tourist tax revenues now going to other entities that would be diverted to pay convention center debt service. Some expressed concern that the lack of a headquarters hotel — once planned but now postponed due to the cost and lack of private-sector support — will make the new center less profitable.
Council member Emily Evans, who formerly worked in the municipal bond business, said Friday that she is concerned about the financial metrics of the project and its impact on the ability of Metro to finance other projects.
“When you borrow $650 million for an economic development project that improves your tax collections less than 1% — and that is if everything goes right — you are necessarily eliminating borrowing for other more essential city services like roads, sidewalks, schools and parks,” Evans said.
“We will have to do one of two things. We will borrow money for those essential but certainly less glamorous things, watch our rating go down, and our interest cost go up, or we will not borrow money for schools, parks, and roads and we will watch our infrastructure erode.”
Goldman, Sachs & Co. is senior managing underwriter for the convention center plan. First Southwest Co. is financial adviser. Bass, Berry & Sims PLC is bond counsel.
