SAN FRANCISCO — An eastern Washington public facilities district that defaulted on $42 million of notes last month is scrambling for ways to pay investors.

The state Supreme Court on Tuesday held a hearing about whether to allow the city of Wenatchee to issue bonds to pay off the Greater Wenatchee Regional Events Center Public Facilities District’s defaulted bond anticipation notes.

The city hopes the court will overturn a decision made last fall by a lower court that dashed its attempt to issue bonds to pay off the debt. The court said it 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.

If the court rules against Wenatchee, the district may ask voters to raise the local sales tax by 0.2% to 8.3% in April, an action that must be approved by all nine member municipalities, to help pay off the notes.

“It seems so far [investors are] being patient because we do have options being explored,” said the district’s lawyer, Peter Fraley. “The goal of the district remains to pay the revenue and sales tax notes in whole as part of a new issuance.”

The district, which was formed in 2006 to build and operate the Toyota Town Center arena in Wenatchee, defaulted on $42 million of bond anticipation notes on Dec. 1 after failed rescue attempts by the city and the state.

The facilities district includes two counties and eight other municipalities, but Wenatchee, with a population of 30,000, is its largest city.

So far, Fraley said, no one has filed a suit against the district seeking payment for the notes.

Bankruptcy has been discussed, but the district has so far refrained from hiring an attorney to take up the matter, according to Fraley.

The district hired Ipreo last month to help identify noteholders. So far it has identified 75% of them, including Central Washington University, Douglas and Franklin counties in Washington, and Eugene, Ore.

The district issued the Bans to help fund the 4,300-seat arena, which has been a financial disaster since it opened in 2008. That year, it issued three series of notes:  $5 million of limited sales-tax Bans, and $5.5 million and $31 million of revenue and special-tax Bans.

The district has been remitting the collected sales tax that backs the Bans to investors each month.

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 been struggling with its own financial problems.

Fraley said the district’s operating deficit in its 2011 budget was almost solely due to legal fees, which have also weighed heavily on Wenatchee.

The city and the district are also dealing with an investigation by the Securities and Exchange Commission due to the default. The SEC has asked the city to voluntarily produce several different types of information, including anything tied to the event center’s finances and Ban issuance.

The state has also been trying to help find a solution.

Just before the default, 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.

However, the effort faltered in the face of opposition worried about setting a “bailout” precedent.

After the Wenatchee arena default, Standard & Poor’s downgraded the short-term rating on debt issued by the district to D from SP-3.

The rating agency also downgraded the city’s long-term and underlying rating to BBB from A-minus because of its legal obligations to the district’s debt.

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