Audit says UP ‘at risk,' but city says it's refinancing debt

University Place officials are poised to refinance a $12.4 million debt payment due on the city’s Town Center mixed-use project about a year ahead of schedule.

They began working on the refinancing plan months ago, well before a critical state audit finding was released last week. The audit highlighted concerns about the December 2013 payment and other issues that auditors say put the city “at risk of not meeting its financial obligations.”

UP staff will seek City Council approval on Oct. 15 to break the massive debt payment into smaller installments over 25 years. If approved, the bond sale would take place in November.

“I don’t know of anyone that has expressed a lot of angst over it, so I would be surprised if it didn’t pass, probably unanimously, I hope,” Mayor Ken Grassi said.

University Place’s big debt and ailing general fund comprise much of the state audit, which examined the city’s financial footing in 2011. The audit noted the city lacked the ability to make the 2013 debt payment and raised concern about its low general fund balance.

“In the past several years, the city’s overall financial condition has declined,” according to the audit finding.

By the end of 2011, UP’s general fund balance was down to $9,349 – compared to $587,584 at the end of 2010 and $4,034,602 at the end of 2009.

UP officials are upset about the audit finding. They characterize it as essentially moot because it stemmed from an examination of last year’s books as they were taking steps to stabilize their finances and pay down the debt.

“If there are questions, we already have the answers because we’ve been answering them since 2009, and we’ll be happy to answer them again,” City Attorney Steve Victor said.

Mindy Chambers, spokeswoman for the state auditor’s office, said the UP finding was issued because the debt payment is drawing near and there’s no guarantee the city will be able to refinance. Auditors look at what’s in front of them, not what’s planned out in the future, she explained.

“It became sort of a bigger issue because of (the debt payment),” she said.

Eric Faison, the city’s assistant city manager for administrative services, said officials have been advised there should be no problem refinancing.

“The underwriters assure us it’s fine,” he said.

But the plan will extend the Town Center debt timeline by three years at a time when the city is at its debt limit and can’t borrow more money without voter approval.

And the proposal is based on the hard reality that UP has yet to make a dent in the principal on the Town Center debt coming due. Within the last two years, the city considered paying $4 million and refinancing the rest, but officials said lagging tax revenues prevented them from stashing enough cash. In total, the city still owed at the beginning of the year more than $47 million on bonds sold to develop the Town Center project, buy the existing city hall, and make street and other capital improvements.

The staff’s latest plan would mark the second time the city has refinanced the money it borrowed to buy the Town Center properties and buy out leases of sitting tenants. The city secured the line of credit in 2003 and converted it to short-term financing four years later.

While the city has been making interest-only payments of about $706,000 a year, the entire principal is due by Dec. 1, 2013. That $12.4 million sum nearly equals what the city is budgeted to spend this year to provide basic services to its residents, according to its adopted 2012 budget.

City officials say refinancing early makes sense as interest rates are favorable, and moving ahead now eliminates any market uncertainty.

“We know from history, they (interest rates) can’t stay this low forever,” the mayor said.

The city is paying an average of 5.7 percent now on the Town Center debt and estimates refinancing would lower the rate to an average of 4.3 percent. With the refinancing, the city would reduce interest payments each year, but total payments would increase because it would start paying down the principal.

The city estimates annual interest and principal payments following refinancing would be $875,000; the exact payment won’t be known until the bonds are sold.

At the same time, the city will take advantage of lower interest rates by refinancing $1.8 million it owes on another project: the development of Cirque Park. That is expected to lower the annual payments from $239,000 to $211,000. The Cirque Park debt would be retired in nine years.

The state audit again brings fresh attention to University Place’s ongoing financial challenges.

In December, Moody’s downgraded the city’s credit rating and slapped it with a negative outlook, meaning there’s potential for another downgrade later. (Three months earlier, another major rating agency, Standard and Poor’s, looked at some of the same information and retained the city’s credit rating).

The Wall Street Journal published a story later that month about UP that portrays it as the poster child for how the nation’s financial woes have hit home in many U.S. cities.

The city will need to be re-rated by one of the rating agencies before the proposed bond sale.

The audit finding released last week recommended the city formalize a plan to address its financial condition and monitor it closely for compliance.

In its response, the city noted it’s already following a plan to stabilize its budget and pay down its debt. It noted it laid off about one-third of its workforce heading into 2010.

The low general fund balances stemmed from a total $6 million cash payment the city made over three years toward its civic and library building and repayment of a $1 million loan it took out to balance the 2010 budget.

Looking ahead, the city told auditors it should have “substantial” balances in its general fund through 2017 because its large capital projects are largely complete.

In addition, the city is looking to sell some surplus Town Center properties to recoup its public investment. The private development on the properties is intended to grow the city’s tax base and provide a central gathering place for the bedroom community of more than 31,000 people.

Chambers, the auditor’s office spokeswoman, said many cities in the state are distressed financially due to debt and because revenue is not keeping up with expenses.

Earlier this week, Tacoma’s city manager unveiled a proposed two-year budget that would shed 217 jobs to help close a projected $63 million shortfall in its general fund.

“(University Place) is not alone in having financial issues,” Chambers said.