BRADENTON, Fla. — The consolidated Metropolitan Government of Nashville and Davidson County is reviewing a finance plan to build a new $585 million convention center. But the idea is controversial because most of the debt for the project would be backed by a general fund pledge of non-ad valorem revenue.
Some of Metro's 40 council members are also concerned the plan now excludes a proposed hotel that was to be located adjacent to the new center in Nashville that some consultants consider essential to its success.
The Music City Center has been a major initiative for Metro Mayor Karl Dean.
The new facility would provide more than double the exhibition space of the consolidated government's current convention center — 350,000 square feet. The existing center, with 118,675 square feet of exhibition space, is too small to make Nashville competitive for larger conventions and meetings, according to supporters of a new facility.
The current finance plan calls for about $627 million of debt to be sold by the Convention Center Authority, a new entity created by Metro that also would be a new credit in the bond market.
The plan calls for selling the debt with maturities out to 2044 in two tranches — $201 million of Series A senior bonds and $426 million of Series B subordinated bonds. Build America Bonds are expected to be used and bond insurance obtained, according to the project financing plan unveiled Dec. 3 by Goldman, Sachs & Co., the senior managing underwriter.
First Southwest Co. is Metro's financial adviser. Bass, Berry & Sims PLC is bond counsel.
All the debt will be secured by a basket of revenue sources that includes a 3% tax on hotels; a $2 per night surcharge on occupied hotel rooms; a $2 tax on all taxi cabs, limousines, shuttle buses, and other contracted vehicles leaving Nashville Airport; a 1% tax on all vehicles, trucks, and trailer rentals or leases for five or fewer days; the redirection of 5.5% state and 2.25% local sales tax receipts generated at the convention center campus; and a percentage of the state and local sales taxes collected in a Tourism Development Zone surrounding the proposed convention center development.
The $201 million of Series A bonds would carry a senior-lien pledge of revenues and be sized to provide two times coverage of maximum annual debt service with the goal of receiving a rating in the mid-A category. The $426 million of Series B bonds would be subordinate with 1.07 times coverage, and would need a non-tax general fund backup pledge designed to elicit a rating in the high-A category or better.
The Metro council plans to hold a public hearing Jan. 11 and to vote on the finance plan Jan. 19. The bonds are expected to price in February.
But the general fund backup pledge has aroused controversy, as has the mayor's recent decision not to go forward with a companion hotel project at this time.
Dean told Metro officials recently that he would seek private financing for a hotel instead of public funding.
He also said the convention center should move forward because it would capitalize on current low construction costs and create jobs.
"Even though it is non-tax revenue, if we have to use that backup pledge to pay debt service, that means less money will be available for other services," said council member Emily Evans, who formerly worked for several municipal bond underwriting firms. "To make up the difference we have to raise additional fees or property taxes."
But a spokesperson for the mayor said the project would pay for itself and no general fund revenue would be needed. The spokesperson emphasized that Metro has an independent feasibility study that shows revenue projections would cover debt service.
"There are so many safeguards in place, such as a reserve fund, and then the city would use a loan … to cover shortages," the spokesperson said, adding that the general fund pledge would help obtain a better rating and lower interest costs.
However, Evans has questioned some of the revenue projections and other studies that serve as the basis for the finance plan. And she said there is deepening concern about whether the project will be successful without a hotel.
"I do have a concern that a project of the size of the proposed convention center might impact our debt capacity and our rating," Evans said.
"Rating policy suggests that any bonds issued that need a backup pledge will be included in our overall government debt unless and until that debt is freestanding for three years," she said. "That may mean three years without the necessary access to the capital markets for essential projects."
Evans also noted Metro used reserve funds for several years to balance the budget and pointed out a recent charter amendment limits the council's ability to raise taxes.
Some of those issues have been discussed by rating agencies. The Metro government's general obligation rating is AA from Fitch Ratings and Standard & Poor's and Aa2 from Moody's Investors Service.
In September, Standard & Poor's revised its outlook for Metro to stable from negative, saying that while its reserves were still somewhat thin for the rating level, management had taken measures to reverse recent declines and control expenditure growth.
The report did not mention if the change in outlook considered the backup pledge for the proposed convention center.
Fitch in 2007 downgraded Metro's GO debt to AA from AA-plus and assigned a negative outlook because of reduced financial reserves and the effect of the charter referendum that now limits the government's ability to raise taxes.
At the end of fiscal 2009 on June 30, Metro had an estimated $2.34 billion of outstanding GO bonds and notes with maturities through 2043, including principal and interest, according to financial statements.