SAN FRANCISCO — The Securities and Exchange Commission is investigating the Greater Wenatchee Regional Events Center Public Facilities District in Washington after it defaulted on $42 million of notes.
The SEC said it is conducting a “confidential, informal investigation” and asked the city of Wenatchee to voluntarily produce 14 different types of documents related to the district since January 2004 by the end of the month, according to the letter it sent to the city on Dec. 7.
“We have gotten [the SEC letter] and we are looking at it and we intended to comply voluntarily and do the best we can to respond to it,” said Wenatchee city attorney Steve Smith. “We knew [an investigation] was a possibility but we really didn’t have any forewarning. Any time you have a bond default like this, it is a possibility.”
The facilities district, which was formed to build and operate the Toyota Town Center arena in Wenatchee, defaulted on $42 million of bond anticipation notes after failed rescue attempts by the city and the state. It has no way on its own to cover the debt.
In the letter, SEC enforcement division attorney Monique Winkler asked for documents tied to the district’s legal and financial advisors and ones related to events center consultants C.H. Johnson Consulting and Global Entertainment Corp. The commission also wants to see information linked to the district’s note issuance as well as the city bond-related documents.
Piper Jaffray & Co. was the underwriter for the 2008 issuance of the notes while K&L Gates LLP was the note counsel. The SEC asked to see any requests for proposals, contracts, or anything tied to advice from legal or financial advisors.
The PFD issued the Bans to help fund construction of the 4,300-seat arena, a financial disaster since its opening in 2008. That year, it issued three series — $5 million of limited sales tax Bans, and $5.5 million and $31 million of revenue and special tax Bans.
The notes have required $2.2 million of annual interest payments. The center had only been able to contribute part of the annual payments using sales tax revenues, leaving the rest of the cost to the city, which has had its own fiscal problems.
Additionally, the SEC asked for all documents related to the feasibility of the events center, anything tied to revenue and tax projections, and any communication from the Internal Revenue Service.
City officials have said the firm hired to help build and operate the center, Global Entertainment Corp., made unrealistic revenue projections. The district ultimately fired GEC, took over operations, and hired a general manager. Then revenues improved enough to at least cover operations.
GEC has run into questions about its involvement with other small arenas around the county that failed to perform up to expectations.
Smith has said the city expects claims related to the default to filter beyond just the district.
The public facilities district, created in 2006 to develop the arena, includes two counties and eight other municipalities, but Wenatchee, with a population of 30,000, is its largest city.
Wenatchee had explored issuing long-term bonds to help the district pay off the notes, but a Superior Court judge ruled in September that the bonds would put the city over its debt limit. The city had a contingency loan agreement with the district to help cover debt service on the notes.
Last month, Washington Treasurer James McIntire helped craft a rescue bill in the Legislature in a bid to keep the contagion of a default from spreading to other state credits. But it ran into opposition partly concerned about setting a bad precedent with what some termed a “bailout.”
The legislation would have had to have been pushed through and signed by Gov. Chris Gregoire in only three days during the start of an emergency session called by the governor to tackle Washington’s deficit.
State officials had been trying to avoid dredging up memories of the Washington Public Power Supply System’s $2.25 billion default on tax-exempt debt in the 1980s. The WPPSS — derisively nicknamed “Whoops” — debacle haunted the state’s ratings for years.
At issuance in 2008, the notes carried Standard & Poor’s ratings of SP-1 and SP1-plus, and they remained in the SP-1 category as late as April 2011.
After the Wenatchee arena default, Standard & Poor’s downgraded the short-term rating on debt issued by a public facilities district to D from SP-3.
The rating agency also downgraded the long-term and underlying rating on the city of Wenatchee to BBB from A-minus because of its legal obligations to the district’s debt.
Standard & Poor’s analyst Chris Morgan said the downgrade is a result of the city’s failure to help the district retire the Bans, “despite agreeing to execute a contingent loan agreement to make a full faith and credit pledge to provide loans to the district, if needed, to cover the principal and interest payments.”