The question of risk to city and county taxpayers under proposed financing plans for a downtown hotel and conference center continues to dominate discussion of the project, as city and county leaders near deadlines to approve the redevelopment.
The latest draft memorandum of understanding — MOU for short — for the project proposes that the city and county use tax-increment financing, or TIF, to fund a combined $5 million of the $84 million project cost. Under a TIF arrangement, an entity issues bonds that are repaid through the increase in property taxes generated by the redevelopment.
Project partners and financial experts have emphasized the lack of taxpayer risk as a key selling point for this type of financing.
The agreement, as drafted, also allows for a “similar financing mechanism” in place of a TIF. One alternative, however, would put the city’s and county’s bond ratings and borrowing abilities on the line if the project fails to produce adequate revenue.
A zero-risk option
Katie Barkdoll, the city budget director, on Wednesday provided details of the TIF funding amid calls for explanation from the Board of Aldermen. Wednesday’s discussion was the city’s second round of review of the new memorandum, which is slated for a vote at a public hearing on Thursday.
The city would issue $2.2 million in TIF bonds to help fund the public components of the project, according to the draft agreement. If the revenue falls short of the amount needed to repay the debt, the investors who bought the bonds will be on the line, Barkdoll said.
Unlike other bonds the city issues for capital projects, the TIF bonds will not receive a financial-grade rating, such as AAA Aaa etc., and will not be backed by the full faith and credit of the city, she explained in an interview after the Wednesday meeting. Failure to pay back the bonds will not hurt the city’s bond rating or its ability to borrow money for other projects.
The same holds true for the county, which is expected to contribute $2.8 million in TIF funds.
The project’s revenue, instead of the city or county’s full faith and credit, serves as the bond backing. Without a financial-grade rating, the bonds may as a result have a higher interest rate, Barkdoll said.
Those who buy non-rated municipal bonds are often local investors familiar with the story behind the bonds, according to a guide to non-rated municipal bonds available online through Piper Jaffray & Co., a national investment bank and asset management firm with offices in Baltimore.
These bonds often have less liquidity, meaning investors are unlikely to sell them before maturity, because these investors take time to learn the story and associated risks before investing, the guide stated.
Richard Griffin, the city’s economic development director, on Wednesday touted TIFs as a “widely accepted, very effective” public financing mechanism. In a phone interview before the meeting, though, he also suggested an alternative bonding plan via the Maryland Department of Housing and Community Development.
The department, through its Local Government Infrastructure Financing, issues bonds on behalf of municipalities and counties to finance projects that “serve the community at large,” according to the program website. It’s intended as a cost-effective way to finance public service capital projects, the website stated.
Griffin framed the possibility of an alternative to a TIF as a way to ensure the best financial standing for the city and county. He likened bonding process to buying a house.
“You want to shop around for the best rates,” he said.
But Barkdoll said she would not recommend using DHCD-issued bonds instead of a TIF, at least from a purely financial perspective.
“You’re going from a situation of zero risk to the taxpayers to risk to the taxpayers,” she said.
The state-issued bonds, unlike a TIF, would be rated and backed by the full faith and credit of the city and county. If the project failed to generate the anticipated revenue needed to pay back the bonds, the city’s and county’s bond ratings and borrowing abilities could both take a hit, she said.
However, the chance of this happening is low, she noted.
Griffin said he could not comment on the specific financial advantages or disadvantages of each type of bonding, but said the final decision would lie with city, county and project financial advisers.
Current project plans call for a 200-room hotel with 24,000 square feet of conference center space with on-site parking and other infrastructure improvements at the site of the old Frederick News-Post building.
The property at 200 and 212 E. Patrick St. is currently owned by a business entity formed by members of the Randall family. The Randall family also owns the parent company of The Frederick News-Post.