Kent City Council delays ShoWare Center loan agreement decision

A decision by the Kent City Council about whether to call a ShoWare Center $18 million debt a loan or a subsidy won’t be made until at least March.

The council voted 7-0 on Tuesday night to defer any change to a loan agreement to call $18 million of city payments to the Public Facilities District (PFD) debt service a loan or a subsidy. The city set up the PFD through the state to help build the $84.5 million city-owned arena.

City staff recommended the change in the loan agreement with the PFD after a recent state Auditor’s Office preliminary report found the financial statements misrepresented the loan because the PFD cannot generate enough money to repay the loan to the city. City officials set up the repayment counting on the ShoWare Center to make money but the $84.5 million arena has lost more than $3 million since it opened in 2009.

“Since 2009 we’ve paid $22 million in debt service on ShoWare Center and the city has contributed $18 million or about 82 percent,” City Finance Director Aaron BeMiller said to the council. “Over the next several years the debt service will increase the next 15 or 20 years and the Public Facilities District’s revenues we believe will remain more or less flat.”

The PFD brings in about $700,000 per year in revenue through a state sales tax rebate program. City officials created the PFD in 2007 and issued $63.3 million debt for construction of the arena. The city and PFD signed a loan agreement that stated any city monies contributed toward PFD debt service is a loan to be repaid with interest.

“Staff is asking for this council to change the language of the agreement from a loan to a subsidy,” BeMiller said. “One of the tenants of generally accepted accounting principles is a loan payment made with no expectation of repayment is not a loan and shouldn’t be treated as a loan on our financials.”

Councilman Dennis Higgins asked city staff prior to the vote about the impact of delaying a decision.

“What it means is that the city’s and PFD’s 2014 financial statements will need to report it on both sides of the ledger,” City Chief Administrative Officer Derek Matheson said. “So for example on the city’s books as a loan due but also a doubtful account. And on the PFD’s books as a loan payable but not likely to pay. You would decide in 2015 how to handle the 2015 statements.”

Higgins then asked if the delay could put the city’s bond rating at risk.

“Were we to go through a bond rating that certainly is a question that we would be asked and we would have to answer,” Matheson said. “Whether it would put our rating at risk I can’t say for the bond agencies.”

Higgins said he would like to eventually see the language changed.

“If any bond agencies were to look at the books I’d prefer they’d see a budget that reflects reality over a fantasy,” Higgins said about the PFD’s lack of ability to repay the loan.

Councilman Jim Berrios supported to delay a decision.

“Six years ago we sold this as it’s going to be a moneymaker,” Berrios said. “We’re six years down the road saying it’s never going to be a moneymaker. I’m not willing to give up. I’m not willing to say that even if we ever get to a point where it’s making money that we wouldn’t be willing to pay back some of that loan.”

Councilman Bill Boyce agreed with Berrios.

“I think we really need to try, pay $10 a month or something, you’ve got to show some type of obligation,” Boyce said. “I’m not at a point where we can say it’s OK to write this debt off. I have a hard time with that.”

Council President Dana Ralph offered up a final comment prior to the vote.

“ShoWare is a building that is here and is an asset to the city there’s absolutely no question about that,” Ralph said. “We just need to be responsible about how it’s paid for and how our budget and books reflect that. I’m not comfortable with changing the language at this point to a subsidy.

“This contract was put in place originally for a reason. It’s not something we’ve been talking about for the last five years. It’s come to light because of the audit finding. I believe it deserves additional attention and I’m comfortable with the notation on the budget that we are acknowledging we don’t anticipate this money coming in so it’s not making our budget projections any better than they are but it’s also calling out the reality this debt is out there.”

In a separate issue, the council agreed last month to use extra reserve monies in the city’s general fund budget to pay off the ShoWare Center’s operating debt of $2.7 million.