CHICAGO — Hamilton County, Ohio, last week sold its public-safety hospital for $15 million in an effort to plug a chronic shortfall in the fund that runs the county’s two main sports stadiums.

The move comes two weeks before the county is required to make a promised property-tax rebate that the deficit-ridden stadium fund can no longer cover.

Investors who hold some of the $558 million of bonds that financed the two stadiums are considered protected, however, as the debt features a gross-revenue pledge that elevates debt service payments above all other obligations, including operating costs. 

Bondholders are also shielded by a legal structure that requires Ohio to deliver all of Hamilton County’s sales tax revenue directly to the bond trustee, which then releases the remainder back to the county.

The hospital sale is expected to cover nearly all of the fund’s deficit for 2012. But debt service is set to jump nearly 50% starting in 2013, and the county does not yet have a plan to address the increase.

The county, which includes Cincinnati, floated $674 million of bonds in 1998 and 2000 to finance construction of Great American Field and Paul Brown Stadium, where Major League Baseball’s Cincinnati Reds and the National Football League’s Cincinnati Bengals play, respectively. 

To raise money for the stadiums, voters in 1996 approved a half-cent sales tax increase. As part of its campaign, the county promised an annual property tax rebate if the measure passed.

Despite years of strong growth — an average of 7.6% over the 30-year life of the tax before 2000 — the sales tax has tumbled since the bond issue. The now rosey-looking 3% annual increase that was part of the original bond projections has given way to a 0.2% increase between 2000 and 2010. That has meant a years-long shortfall in the stadium fund.

“It’s simply that the sales tax did not grow the way we thought it would,” said Karen McFarland, the county’s debt manager. “We had a really strong track record of good growth that was used back in the planning days of 1996 and 1997. It was a very conservative number at that time, confirmed by bankers, rating agencies, and everyone. It just didn’t happen.”

Last Thursday, the County Commission finalized the sale of Drake Hospital to the University of Cincinnati, which has already been operating the facility, for $15 million. The move will allow the county to cover an upcoming property tax rebate due to taxpayers. The commissioners also voted to take $1.4 million out of the rainy-day fund to cover the payment.

The sale will cover 2012 stadium fund expenses only. “2012 is taken care of by the sale of the hospital,” said county budget supervisor Jim Cundiff. “But there are some challenges ahead in 2013.”

One challenge is a scheduled increase in debt service payments starting in 2013, which will jump from $26.3 million in 2012 to $38.7 million in 2013.

Bondholders still don’t need to worry, McFarland said. “The whole 100% of the half-percent [sales tax] is pledged to the debt service, so if we now take in $38 million, the whole thing goes to debt service and cannot be used for anything else,” she said.

The county pledges all of the half-cent sales tax revenue to cover the stadium debt, though in practice it devotes 30% to finance the annual property tax rollback.

In addition to debt service and the property tax rollback, the fund covers stadium operations, capital projects, and payments in lieu of taxes for the stadiums to the Cincinnati City School District.

Moody’s Investors Service late last year put the county’s Aa2 general obligation rating on watch list for possible downgrade, warning that the rollback is pressuring the general fund, and that the sale of Drake will mean the loss of $1.2 million of lease revenue for the general fund.

But the rating agency has maintained its A1 rating on the sales- tax-backed stadium bonds, noting the gross revenue pledge, healthy coverage levels, and flow of funds directly to the bond trustee before releasing the rest of the revenue to the county.

Standard & Poor’s rates the stadium bonds AAA and has no rating on the county’s GOs. Analyst Helen Samuelson said the debt’s senior-lien pledge is a key rating driver.

Fitch Ratings downgraded the sales tax-backed bonds to A-plus from AA in November 2009.

Hamilton County has a 6.5% sales tax, of which 5.5% goes to Ohio, 0.5% to the stadium fund, and 0.5% to the county general fund. Since 2006, voters have twice defeated efforts to raise the sales tax.

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