SAN FRANCISCO - Spokane, Wash., could be in the market by the end of this month with interim financing for the settlement of a lawsuit over the default of $31.5 million of parking garage bonds.
Gavin Cooley, Spokane's chief financial officer, said Friday the city would sell six-month bond anticipation notes in order to raise funds to pay off the institutional and retail investors, as well as a bond insurer, who sued after the Spokane Downtown Foundation defaulted on the debt.
Earlier this month the Spokane City Council approved selling up to $39 million of long-term, limited tax general obligation bonds to settle with the litigants, paying them 100 cents on the dollar. The cost of taking out the $31.5 million in lease-backed parking garage bonds has been estimated at $34 million, including the face value of the debt, attorneys fees, and unpaid interest costs.
Last Monday, the council approved the terms of the settlement and amended the ordinance to permit the interim financing.
Cooley said the city is now seeking to extract settlements from the other parties named in the lawsuit, including the underwriter of the bonds, Prudential Securities -- now part of Wachovia Securities -- and the bond counsel, Preston Gates & Ellis. In the settlement terms approved last week, the city came to terms with a consultant also named in the litigation that made the parking garage revenue estimates, Walker Parking Consultants Inc., which agreed to pay the city $1.5 million.
Additional settlements will be used to pay off part of the Bans, reducing the amount of long-term, tax limited GO bonds the city sells. "As the settlements come in we'll reduce the Ban, and then we will go out with the remaining amount," Cooley said.
He added that the long-term bonds would likely be a mix of tax-exempt and taxable debt, which will be determined by the Internal Revenue Service's treatment of the city's purchase of the garage from the Spokane Downtown Foundation. In a preliminary ruling, the IRS said three years ago that the garage debt should be treated as taxable.
The foundation sold the $31.5 million in revenue bonds in 1998 to finance a parking garage connected to the city's River Park Square mall. A lease between the foundation and Spokane's Parking Public Development Authority backed the bonds, while the city pledged parking meter revenue to the operations and maintenance of the garage.
After the garage revenues failed to meet projections, the foundation defaulted on the debt and the city refused until now to step in and take over. That refusal had a negative impact on the city's bond rating.
Institutional investors such as Vanguard Group and Nuveen Investments, along with retail investors represented by trustee U.S. Bank, and Radian Asset Assurance Inc., sued to recover their investments, naming, among others, the city, the mall developers who developed the garage, and the underwriting team.
The case had been scheduled to go to trial in federal court in Washington but last week the presiding judge, U.S. District Judge Edward Shea, postponed it in light of the developments between the city and the bondholders. Cooley pointed out that the case might never go to trial if the city succeeds in settling with all of the other parties the litigants named.
If it does go to trial, the city, as opposed to the bondholders who have settled, would be the litigant against any remaining defendants. The federal judge also has to approve the settlement between the city and the bondholders, which would clear the way for the investors to receive their money.
Gary Ceriani, a lawyer who represents several institutional bondholders, said the investors were "pleased the city has recognized the need to pay the bonds. It's been a long haul to get from point A to point B."
He said the city had also agreed to indemnify the bondholders against a possible IRS ruling that the bonds were not truly tax-exempt.
Laurel Siddoway, the city's attorney in the River Park Square litigation, said the IRS has not issued any letter or notice of adverse determination, Siddoway said. "There's also been no resolution yet. It's not been closed."
