RENO, Nev. — As a group of lawyers and engineers review how much it will cost Reno to dig a 2.1-mile train trench through downtown, city finance officials are scrambling to finalize an intricate funding package five years in the making, the Reno Gazette-Journal reports.
The complex series of deals has come down to balancing two multi-million dollar borrowing plans on the head of a pin, as lawyers for trench opponents gather to keep it from happening. A series of lawsuits filed last month have the potential of stopping the financing package in its tracks.
“This is probably the largest project that the city of Reno has undertaken,” said City Manager Charles McNeely. “And it has not been an easy one to do. One, because of the financing. We’ve had to pull together so many elements.
“I’m surprised sometimes that we have gotten this far. But I’m still optimistic.”
Through a variety of sources, the city has identified a total of $264.8 million to fund the $231 million project. Revenue includes grant money, property tax from a special downtown assessment district, lease revenue and construction contributions from Union Pacific Railroad, investment earnings and $1 million from a street maintenance bond.
Reno now has about $8 million in the bank, after spending $13.5 million as of May 1. To date, the city has collected $18.1 million in sales taxes since April 1, 1999 and $3.4 million in room taxes since Jan. 1, 1999.
But the city’s complicated financing package will fall apart if the city doesn’t make a $115 million bond sale and collect a $50.5 million federal loan — both of which are threatened by a citizen group’s lawsuit.
Washoe District Judge James Hardesty is expected to rule this week on whether the Reno City Council’s approval of the bond sale interferes with a citizen initiative petition that could put the project to a citywide vote Sept. 3.
The city won’t know exactly how much trench construction will cost until an evaluation committee recommends one of three contractors’ proposals to the city council on June 25. The council can only accept or reject the recommended proposal and cannot choose one of the proposals not recommended by the committee.
If the design-build price is beyond the city’s $231 million budget — of which the city has already spent or obligated $18.6 million — the trench dies.
The $165 million generated by the federal loan and bond sale should be enough to complete the project, protecting the city’s general fund if the smaller pieces of the puzzle do not fall into place, finance director Andy Green said.
Already, the city’s investment income estimates have dropped 46 percent, to $5.3 million from $9.9 million, because of lower interest rates, Green said.
“If you issue more bonds up front, you will have a cushion on the grants and investment earnings,” he said. “If we get the bond issue, it won’t make any difference if we don’t get the grants.”
By far, the largest and most important pieces of the financing package are the $115 million bond sale and the $50.5 million federal loan — both backed by sales and room taxes. The two are inextricably linked.
In order to draw the federal loan, the U.S. Department of Transportation must first approve the details of the bond sale. And in order to sell the bonds, the city’s bond insurer requires that the federal loan first be approved.
“The two are married,” Green said. “Without the federal loan, the project is dead.”
The city cleared one major hurdle last week, when the U.S. Federal Highway Administrator gave final approval of the loan. Now, only the lawsuits stand in the way of the bond sale, Green said.
Orchestrating the two approvals proved a challenge for city officials. Days before the city council was set to give initial approval to the bond sale, the city’s original bond insurer dropped the project because of requirements demanded by the Department of Transportation.
City staff scrambled to find a new insurer, resulting in a $2 million premium increase — double the original price.
That bumped the cost for selling the bonds to $8 million, a figure attacked by trench critic and mayoral candidate Mike Robinson. He said the issuance costs outpace costs on similarly-sized bond sales from across the nation.
“The underlying problem is the city is paying exorbitant insurance costs and exorbitant underwriting fees to Goldman, Sachs (& Co.),” he said. “What’s really going on here is we are getting ripped off as a city.
“Everything the city has done is to enmesh us in this project so far we can’t turn back.”
The $8 million fees are 7 percent of the total bond proceeds. By comparison, a $108 million bond sale to build a downtown events center and expand the National Bowling Center, cost the city $2.7 million or 2.5 percent of the proceeds in borrowing costs.
Green said the $8 million figure is appropriate for such a complicated deal.
The bond sale and federal loan have been attacked by Citizens for a Public Train Trench Vote, which filed suit to stop the city from borrowing the money. The city had planned to start selling the bonds May 22, but its underwriter has refused to begin the process until the suit is resolved.
The city will use a combination of sales and room taxes to pay back the debt, which carries a 40-year term. Green said preliminary estimates indicate the city will earn a total of $668.6 million in sales tax revenue and $76.5 million in room tax revenue over 40 years.
The total debt service is expected to cost $445 million.
But Green said the city should have it paid off within 22 years — at a cost of $349 million — by applying excess tax revenue to the principal.
In 1997, when the state legislature authorized the Washoe County Commission to raise the sales tax rate by one-eighth cent, it required the city to prove at least half of the project costs would be funded by non-tax sources.
Two years later, Sen. Bill Raggio drafted a bill allowing the city to use a 1 percent room tax as part of its 50 percent match. That bill ratified the city’s funding package — presented to the county commissioners deciding the sales tax increase — that included other funding sources for 50 percent of the cost.
According to a Reno Gazette-Journal analysis of the city’s current financing plan, however, sales tax could be used for 54 percent to 63 percent of project costs.
Green, who began as finance director one year ago, said he was unaware of the 50 percent requirement and hasn’t considered it while putting together the bond sale and loan agreement.
He said he could not provide a breakdown of how much sales tax and how much room tax will be used to pay off the debt. Instead, the two revenue streams are lumped together. By city estimates, however, the sales tax accounts for 89.7 percent of the revenue stream — indicating $144 million in sales tax will be used to fund project costs, excluding interest.
All other revenue streams combined equal $121 million — including the $59 million estimated Union Pacific contribution. If the city only uses $22 million of the UP contribution for the project — the $17 million construction costs and a $5 million loan backed by lease revenue — that number drops to $84 million.
McNeely said the city was not required to meet the 50 percent match throughout the life of the project.
“That was the initial test you had to meet,” McNeely said. “I just don’t think the legislation required us to keep that throughout the project.”
A group of downtown business owners had sued the county, alleging the imposition of the sales tax was invalid because the city did not meet that 50 percent match. The suit was dismissed. Before they could appeal, Raggio’s legislation was introduced and passed.
That legislation ratified the commission’s imposition of the sales tax, ending the possibility of any future litigation on the 50 percent match issue, the city’s bond counsel Kendra Follett of Swendseid & Stern said. Since the 50 percent match was only required for the commission to impose the sales tax and because the legislation ratified the commission’s decision, the city could now fund the project solely with sales tax revenue if it wanted, Follett said.
“The test was only with respect to the imposition of the sales tax,” Follett said. “That doesn’t need to be renewed monthly.”
The so-called $60 million Union Pacific contribution has been most attacked by project critics. Per the agreement, the railroad will pay for $17 million of specific construction costs. That figure may change depending on how much UP’s construction responsibilities actually cost.
The railroad also will turn over leased properties along the track estimated to earn $34 million over 35 years. And the city will acquire unleased land valued by city officials at $3 million and air rights worth an estimated $5 million.
The total: $59 million. During the negotiation process, the city and the railroad agreed on the value of land. But an independent appraisal has never been completed on the properties, leading critics to question their actual worth.
The city hired an appraiser to evaluate the land’s value, but the appraiser and the railroad could not agree on the methodology used and the evaluation was never formalized. That appraiser valued all of the land at $31.8 million.
Robinson contends the railroad used a 4 percent compounding formula to figure the lease revenue over 35 years and disagrees that lease income will grow that much.
“A very sophisticated formula was used to arrive at that figure,” he said. “The value today would be what can they sell the land for and how much can they borrow against it. That’s about $14 million.”
A breakdown of the city’s finance plan shows it will rely on the lease income for a $5 million federal loan.
“What they haven’t taken into account is any land value will amortize into $5 million in a blink of an eye,” Green said.
In the past three years, $3.95 million in lease income has been collected in an escrow account the city will assume when construction begins.
But as the city launches the project’s four-year construction schedule, it will lose lease income as businesses are forced to close. Public Works Director Steve Varela estimates the city will lose between $200,000 and $300,000 during the construction schedule.
Even if the UP contribution does add up to $59 million as the city estimates, under the current financing structure it is only using $22 million of the revenue to finance the project. That includes the $17 million construction contribution and a $5 million loan backed by the lease revenue. The city won’t collect on the $5 million loan for several years, Green said.
Green said he sees the remaining Union Pacific income as “money in the bank” for later project costs.