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Commissioner Shellenberger’s Proposal for a True Public/Private Partnership on the Penn Square Redevelopment Project |
| The Penn Square convention center/hotel project has changed radically from a $75 million proposal funded roughly evenly by public and private money, to a
$134 million project funded predominately by public money. This enormous change, increased taxpayer risk and other factors have created division over the latest financing plan for the project. All three County Commissioners are intensely supportive of downtown Lancaster revitalization, as demonstrated by County contributions to the Lancaster baseball stadium and other projects. We need to use state money and add money from the County, City, and private individuals to achieve successful revitalization. We must apply these significant resources in an effective manner, so that we reap substantial public benefits from our investment of public funds. Moreover, just as with the baseball stadium, we need to work collaboratively so we can realize the “power of working together.” The Lancaster baseball stadium is an appropriate analogy. A promise of state funding prompted local planning. However, initial proposals for the stadium location met with opposition and created community division. Indeed, Mayor Smithgall threatened a legal challenge by the City to stop plans at one proposed location. This adverse reaction led project planners to stop, reconsider, and develop a plan that achieved universal public and government support. This open-minded approach and reconsideration after initial problems led to a wonderful solution recently celebrated on Opening Day. If we remain open-minded and continue to search for appropriate solutions, Penn Square revitalization can have the same happy ending. In that spirit, I have given substantial consideration to how my concerns with the current financing proposal can be reconciled to the extent that I could withdraw my opposition to the project. I have five areas of major concern, discussed below with specific steps to address each concern. The initial concern relating to protection of County taxpayers is the most pressing matter for me, because the current plans directly threaten County finances. Although I have concerns beyond these five areas, addressing these items would go a long way towards improving the current financing proposal. Most importantly, these five areas reflect my thoughts on a true public/private partnership to get people working together. Everyone involved desires the best possible result for downtown Lancaster. We need to improve the working relationship among those sharing this common goal. Everyone should agree that if the proposal addressed below can proceed, they will do all in their power to make it happen. Further, everyone should agree that if it cannot proceed, we will all work together for state approval to redirect state grants towards an alternate project or projects designed to provide the maximum public benefit. MAJOR CONCERN NO. 1 – PROTECTION OF COUNTY TAXPAYERS A. Specific Problem: LCCCA has virtually a “blank check” to spend the County’s money to finance the convention center’s operating losses, to the extent of the County’s 2003 guarantee – a total of over $60 million! This extraordinary risk arises because there is no requirement that LCCCA first utilize hotel room tax revenues to satisfy its debt service. Once the convention center is operating – and assuming the County’s guarantee on LCCCA’s current $40 million Citizens Bank loan is transferred to LCCCA’s $40 million of construction bonds – legal documents associated with the County’s 2003 guarantee do not prohibit LCCCA from using hotel room tax receipts to cover its operating losses before paying debt service on its construction bonds. Although LCCCA’s Trustee has the option to require LCCCA to pay debt service first out of hotel room tax revenues before LCCCA pays for its operating losses, the County cannot force the Trustee to take such action. Solution: Link the hotel room tax directly to the convention center bonds, so the hotel tax must be used to pay LCCCA’s bond debt service before it is used to pay LCCCA’s operating expenses. This will add protection for County taxpayers, and provide checks and balances on LCCCA’s spending. Further, by linking the hotel tax directly to the repayment of debt service, it will help achieve LCCCA’s objective of obtaining tax exempt status for its sale of $40 million in construction bonds. B. Specific Problem: Based on current legal documents and County Ordinance No. 45, the 20% portion of the 3.9% hotel tax now allocated to the Pennsylvania Dutch Convention and Visitors Bureau to promote tourism throughout Lancaster County can be diverted to pay LCCCA’s operating expenses even if 80% of the hotel tax is adequate to cover LCCCA’s debt service. That is because County Ordinance No. 45 and the financing documents currently define very broadly the type of “bond default” that could trigger diversion of the 20%. LCCCA’s Trustee currently has some discretion over declaring an event of default, which would determine when the 20% of tax revenues is diverted away from the Visitors Bureau to LCCCA. The County, though, has no control over the actions of LCCCA’s Trustee. Solution: Modify Ordinance No. 45 to redefine a “bond default” that would activate diversion of the PDCVB’s 20% of the hotel room tax to the LCCCA. Have a default occur only where 80% of the hotel tax is insufficient to cover debt service on LCCCA’s $40 million convention center construction bonds. C. Specific Problem: Current legal documents tie the County’s guarantee of over $60 million to the construction of a “headquarters hotel” adjacent to the convention center. Clearly, connecting the County’s guarantee to a hotel greatly benefits Penn Square Partners. However, County taxpayers bear a risk of over $60 million, and PSP in contrast does not bear any risk whatsoever with respect to the convention center, even though PSP benefits from shared space, shared expenses and shared management, and even though the majority partner in PSP benefits as the developer of the convention center project and as the no-bid food and beverage provider to the convention center. Solution: The owners of PSP (High Industries, Lancaster Newspapers and Fulton Bank) should provide a first priority guarantee on LCCCA’s construction bonds, with the County’s current guarantee becoming secondary. This will more appropriately share the allocation between private and public risk on a convention center that benefits PSP, yet still preserve the helpfulness of the County’s guarantee in marketing the bonds and obtaining the lowest possible interest rate for the bonds. MAJOR CONCERN NO. 2 – WASTE OF TAXPAYER FUNDS A. Specific Problem: The LCCCA borrowed $40 million from Citizens Bank in 2003 – unnecessarily and at a cost so far of nearly $700,000 – and with an ongoing taxpayer loss of $18,000 a month. Solution: We cannot fix the $700,000 lost so far, but can stop future losses. The loan should be repaid immediately to stop the loss of $18,000 each month, and a new borrowing undertaken if and when the project is ready to proceed. The County will agree to sign the guarantee when needed, subject to existing limitations and the protections for County taxpayers outlined in this proposal for a true public/private partnership. B. Specific Problem: Based on current legal documents, only $31 million from the LCCCA’s future sale of $40 million in construction bonds will be available to pay for the cost to construct the convention center. This is due to various factors including $2 million allocated to cover the cost of issuing the bonds, $2.6 million allocated for a debt service reserve fund and $3.3 million allocated to capitalized interest during construction. Solution: $650,000 should be an ample amount to cover the cost of issuing the bonds. This saves $1,350,000 from the $2 million currently allocated. Further, as was done with the baseball stadium, substitute a bond insurance policy for the reserve fund, yielding an additional $2.6 million in savings (less the cost of insurance). Also, capitalized interest should be eliminated or substantially reduced because bond debt service is to be paid by the hotel tax (not by convention center operating revenues), yielding an additional $3.3 million in savings. These three steps would reduce by up to $7,250,000 the amount of bonds that need to be sold to finance construction costs of the convention center. C. Specific Problem: The Redevelopment Authority of the City of Lancaster plans to pay PSP $6.8 million for the Watt & Shand building in the near future. This amount substantially exceeds the current fair market value of the property, and includes reimbursement to PSP for costs it has incurred in maintaining the property and developing the project. However, at this point many uncertainties remain whether the project will proceed, including uncertainty whether cost estimates currently being prepared will exceed the project budget. Project planners have not publicly released any information from the Atlanta meeting several weeks ago with the project architect, where unresolved engineering issues and important cost items were to be addressed. Solution: Postpone payment to PSP until it is clear that the project can be constructed based on financing in place and construction bids received. D. Specific Problem: PSP plans to demolish part of the Watt & Shand building and surrounding structures in the near future, yet as discussed above many uncertainties remain and it is unclear whether the project can be built with available finances. Solution: Postpone demolition until it is clear that the project can be constructed based on financing in place and construction bids received. MAJOR CONCERN NO. 3 – THE COMMUNITY MAY NOT GET WHAT IS PROMISED A. Specific Problem: The community has no assurance that the hotel will be designed, constructed, maintained and operated to a quality level intended to achieve a “4-star/4-diamond” facility, as previously promised. Although PSP is correct that independent rating services such as Mobil and AAA assign such rankings, it is clearly within PSP’s control to commit that it will develop and operate the hotel with the intention of achieving such a 4-star/4-diamond rating. Solution: PSP should commit in writing that it intends to take all steps consistent with the goal of achieving a 4-star/4-diamond quality rating for the Lancaster Marriott Hotel, even if PSP must contribute additional equity to cover costs necessary to achieve construction consistent with such quality standards. Alternatively, PSP should clarify whether it will proceed with the project if achieving a 4-star/4-diamond quality standard would require additional private equity contribution. B. Specific Problem: The parking agreement between LCCCA and the Lancaster City Parking Authority contemplates the use of “hunting license parking,” due to an anticipated shortage in parking garage availability for hotel and convention center guests. This apparently means that visitors arriving at the hotel or convention center will be given a placard to put inside their car windshields, and told to “hunt” for an available parking spot at a downtown parking meter. This is hardly a “4-star” experience or one that will encourage bookings at the convention center. Solution: Do not proceed with the project until a viable plan exists for adequate garage parking spaces. C. Specific Problem: Jobs for minority residents of the City have been promised, but not assured. Solution: To the extent it is lawful, PSP and LCCCA should commit to a specified number or percentage of jobs during construction and operation for minority residents of the City. MAJOR CONCERN NO. 4 – IMBALANCE BETWEEN PUBLIC MONEY AND PUBLIC BENEFIT A. Specific Problem: Under the latest financing plan, PSP will have the right to acquire complete ownership of the Marriott Hotel after 20 years by making a final payment of $2,250,000 – an amount far below the projected fair market value of the hotel at that time. Solution: Considering the huge investment of public funds, and to ensure a more equitable use of public funds, the lease purchase agreement between PSP and RACL should provide that PSP may purchase the hotel for fair market value, less (1) PSP’s initial equity contribution toward construction costs, and (2) principal on RACL’s $24 million Lease Revenue Bonds repaid from PSP’s lease payments to RACL. MAJOR CONCERN NO. 5 – INADEQUATE RESPONSE TO LEGITIMATE QUESTIONS A. Specific Problem: Many questions about the project remain unanswered. Solution: Project planners (including PSP) should commit to provide written answers to all remaining pending questions from the County Commissioners, and to cooperate reasonably in answering additional questions as they arise. |