ALLENTOWN, Pa. — Were Billy Joel to sing about Allentown today, you wouldn't hear about closing all the factories down. Rather, he'd warble about cranes in the air, a new arena and filling pension funding gaps.
While still fighting to shake its rust-belt image, Pennsylvania's third-largest city is handing down a different kind of restlessness. In the past year it undertook two major deals, which Mayor Ed Pawlowski says dramatically alter the city's dynamic.
"They're significant game-changers," said Pawlowski, just re-elected to a third four-year term. "Eight years ago, we were an economic failure, headed to the brink of bankruptcy."
Late in 2012, the city sold $224.4 million in bonds to finance the construction of a downtown business district, developed by J.B. Reilly's City Center Lehigh Valley and centered around an 8,500-seat arena six blocks up Hamilton Street from City Hall. Its primary tenant will be the minor-league hockey Lehigh Valley Phantoms.
And in April, faced with a pension liability that could have consumed up to one-third of Allentown's general fund budget by 2015, the city leased its water and sewer system to the quasi-public Lehigh County Authority, which sold $308 million of bonds in July to finance the transaction. Allentown received an upfront payment of $211 million and will get an annual payment of $500,000 beginning in 2016.
They are the co-winners of The Bond Buyer Deal of the Year award for the Northeast region. The Bond Buyer will hold its annual awards banquet in New York on Dec. 5.
This year, Moody's Investors Service and Standard & Poor's revised their outlooks on the city to stable and positive, respectively. "That's nothing insignificant," said Pawlowski, a Democratic candidate for governor in 2014. A year earlier, Moody's downgraded Allentown's general obligation bonds to A3. S&P rates them BBB-plus.
The capital markets also looked favorably on the Lehigh County Authority. Standard & Poor's affirmed its AA rating and stable outlook for the LCA non-city system operations.
Neither deal came easy. "They involved a lot of angst and twists. Both of these projects were totally out of the box," said Pawlowski in an interview at his fifth-floor City Hall office. "Every time a door closed, we looked for a window to open."
The arena project needed special state legislation in 2009 to create a tax district known as the neighborhood improvement zone, or NIZ. Speed bumps that included litigation from surrounding communities, private developers and citizens forced reworkings of the law in 2011 and 2012 before the Allentown Neighborhood Improvement Zone Development Authority, or Anizda, could issue its inaugural $184 million of Series 2012A tax revenue bonds and $40.4 million of Series 2012B taxable bonds.
One objector, local developer Abraham Atiyeh, dropped his case last month after losing before the Commonwealth Court of Pennsylvania. Atiyeh had argued that the city's planning commission improperly granted land development approval for the arena.
PFM managing director Scott Shearer called the arena transaction his hardest ever.
"The deal took all of 2010, all of 2011 and three-quarters of 2012. It probably cratered multiple, multiple, multiple times. But we reached a point where we said damn it, we've got to get it done," said Shearer, who works out of Harrisburg for Philadelphia-based PFM. "We were dealing with all ends of the spectrum. The team owners, the developer, the city, several municipal agencies, each with certain objections. Trying to come to an agreement was extremely challenging."
Under the NIZ, act, certain taxes that qualified businesses pay within the 128-acre zone are pledged as security toward the bonds, as well as any other debt issued for qualified projects within the NIZ.
Citigroup was senior manager while Public Financial Management Inc. was financial advisor. PFM also advised on the water and sewer lease, for which Goldman, Sachs & Co, was lead manager.
The arena is scheduled to open Sept. 1, 2014. The Phantoms, the Philadelphia Flyers' affiliate, play in the American Hockey League, one level below the National Hockey League. The team has been playing in Glens Falls, N.Y., as the Adirondack Phantoms.
Phantoms co-owners and brothers Jim and Rob Brooks, who were born in southern New Jersey and raised in Pittsburgh, are gung-ho on the Lehigh Valley, which is an hour's drive northeast of Philadelphia. The Brookes had long wanted a hockey team and arena.
"We were looking throughout the U.S. to put a facility," said Jim Brooks. "We went from Sarasota, Fla., to Albuquerque, New Mexico, to San Diego to Orange County, Calif., and a lot of places in between," said Jim Brooks.
About eight years ago, according to Brooks, consultants identified the Lehigh Valley -- roughly an hour's drive from Philadelphia -- as ripe for a minor-league arena.
"It was a natural when you check out the demographics. The primary drivers from a facility like this are total population, disposable income and the number of companies with 20 or more employees. This market is great for that."
Comcast-Spectacor president and chief operating officer Peter Luukko notified them the Brookses a few years ago the Phantoms were available because of plans to shutter the Spectrum, their South Philadelphia home where the Flyers once played. The parent club now plays at Wells Fargo Center, which opened next door in the mid-1990s. Comcast-Spectacor demolished the Spectrum in 2009.
"Boy, that was a no-brainer," Jim Brooks said of the purchase. "My brother teased me about saying yes before they mentioned the price."
Regionally, the Brookes looked at sites in Easton and Bethlehem - the latter next to a Sands Casino Resort facility - before zeroing in on Allentown and its 119,000 population.
"What may concern some investors is past economic conditions in the city of Allentown," said David Fiorenza, a Villanova School of Business professor and former chief financial officer of Radnor Township, Pa. "The city has the population to sustain many arts and culture organizations and events, but a minor league [arena] will need some other economic cluster and multiplier effects to build onto any longevity."
Pawlowski touts just that. The mayor expects $1 billion in private-sector development, including a 180-room high-end Marriott Renaissance hotel next to the arena. According to Pawlowski, the NIZ has also inspired several large companies including National Penn Bank, Lehigh Valley Health Network and Lehigh Gas Corp. to relocate within the zone. Other development ranges from a Starbucks to luxury apartments.
"When the mayor came to us about locating downtown, we wanted to make sure there was a plan behind it. A multi-purpose arena can be a great economic driver, but you have to have a plan," Brooks said.
Pennsylvania lawmakers this year enacted a modified zone incentive for other midzied cities, based on Allentown's model. Bethlehem, Chester, Altoona, York, Lancaster, Erie, Wilkes-Barre and Reading will vie for one of two new Community Revitalization and Improvement Zones.
Midsized cities continue to court minor-league teams as economic development tools. Indoor arenas are seen as more viable because of frequent event bookings. Phantoms games, said Brooks, will account for only 40 of the estimated 150 to 200 annual events. By contrast, PPL Park in Chester, the 18,000-seat outdoor home of the Philadelphia Union soccer team, is sparsely used.
More dire examples include state capital Harrisburg, which is under receivership and still on the hook for stadium-related bonds it issued in 2005, when the city owned the Senators baseball team. The city sold the team six years ago. And a pricey Major League Soccer stadium pushed Harrison, N.J.'s bonds to junk ratings.
Allentown, however, established itself as marketable for minor-league baseball. The Lehigh Valley IronPigs, the Philadelphia Phillies' Class AAA affiliate named after the pig iron used in the region's trademark steel manufacturing, has led all of minor league baseball in attendance since Coca-Cola Park opened in 2008. Forbes magazine in 2012 valued the ballclub at $26 million, second among minor leagues in that category.
"As soon as the steel was in the ground, people told me the stadium was going to fail. Now they think it's the greatest thing since sliced bread," said Pawlowski, who is also president of the Pennsylvania Municipal League. "One guy who told me after a power-point presentation that I was full of crap later told me he was glad to see that I was wrong."
Pawlowski, while striking an upbeat tone, admits not all is rosy in Allentown. "We still have pockets of poverty downtown, and we're trying to correct that."
Pawlowski has encountered opposition in both initiatives. "People are skeptical in the city of Allentown. Promises went unfulfilled," he said. On the neighborhood zone project, he said, "One [businessman] told me I was destroying his life, taking away his first born, second born and third born. Then later he told me he loved me because he was in a better location."
During the water- and sewer-lease proposal, city officials and residents went through the emotional gantlet. Final City Council approval in late April, by a 6-1 vote, came near midnight after a heated five-hour meeting.
"The water and sewer lease was a benchmark transaction," said PFM managing director Tim Carden. "When you combine the two [deals,] it sends a very powerful message on behalf of the city."
Pawlowski, as though to prove critics wrong, beckoned a reporter to a bathroom adjacent to his office. He flushed then toilet, ran the sink water and began to laugh.
"See? Everything's working."
