San Diego’s plan to borrow up to $299 million for its share of the Padres ballpark may sound excessive to some, but it isn’t surprising to municipal finance experts.
“If the goal is to raise $225 million for the project, it would be typical to sell about $300 million in bonds,” said Bill Huck, managing director for the San Diego office of Stone & Youngberg, LLC, a San Francisco-based investment banking firm specializing in municipal bonds.
The city needs to obtain $225 million as its part of the memorandum of understanding (MOU) negotiated between the city and Padres to construct the ballpark in the East Village section of Downtown. The agreement was approved by nearly 60 percent of voters in November 1998.
Rick Ashburn, a former investment banker specializing in municipal bonds, said the city’s plan for borrowing about $299 million “sounds well within the ballpark of reasonableness to me.”
Ashburn, a member of a private sector committee to the California Debt and Investment Advisory Commission, said the biggest factors in the borrowing costs are the interest rate assigned by the rating agencies, and the money needed to be set aside for initial payments on the bonds and for a reserve fund.
“To pay for a $225 million project that takes two to three years to build, you have to borrow about $299 million,” Ashburn said.
According to the ballpark MOU, the city would obtain the $225 million by issuing a tax-exempt municipal bonds. The costs associated with issuing the bonds has spurred a signature-gathering campaign and a lawsuit by ballpark opponents claiming the memorandum of understanding was violated, and voters were deceived.
Former city councilman Bruce Henderson said the MOU contains no mention of the city’s plan to borrow anything more than $225 million for its share of the ballpark. He said if the city needs a higher amount, the MOU requires a public vote on the matter.
City officials disagree, saying the agreement clearly states the city’s intention to borrow the funds for its contribution. The borrowing costs were not included because they were not known at the time, officials say.
Fluctuating Estimates
In other city documents and reports, the city did provide some estimated annual bond payments, based on several scenarios. The most publicized estimate for the annual debt service on the bonds was $20.7 million for a 30-year term. That scenario used an interest rate of 6.25 percent, and a total bond issue of $273 million.
Yet city staffers now say the amount may rise because of interest rate hikes and increased costs involved with issuing bonds, such as consulting fees, legal expenses, printing of prospecti, and bond insurance. Last month, the City Council approved a maximum issuance of $299 million in bonds.
City staffers say it’s doubtful the city will need the maximum, but are required to plan for “a worst-case scenario.”
“We expect to come in way under ($299 million) but we won’t know what that is until the bonds are actually priced, and what interest rates are,” said Mary Vattimo, the city’s deputy director of financial services.
Vattimo said it is impossible to give a range on the issue because of the uncertainty of several factors, including the interest rate assigned by the bond underwriter, the amount required for a reserve fund, and how much to allocate for another fund needed to pay interest during the ballpark’s construction.
While the Federal Reserve Board may raise the benchmark short-term interest rate next month, the city’s debt is a long-term bond and may not be affected by the hike.
But if the Fed boosts rates several times, it could increase the interest rate assigned to the city’s bonds, and the overall cost of borrowing, Ashburn said.
Depending on the credit quality of the city or district issuing the debt, municipal rates were recently averaging about 6.5 percent, he said.
Percentages Count
Fluctuation of just a quarter-point or a half-point can make an enormous difference in the cost of borrowing, said Bill Kelly, the chief financial officer for San Diego County.
“A half a percentage point change on about $299 million in bonds turns out to be $1.2 million a year,” Kelly said. The amount is locked in for the 30-year term of the bonds.
In addition to the city’s contribution, other financial sources for constructing the ballpark are $50 million from Centre City Development Corp.; $21 million from the San Diego Unified Port District; and $115 million from the Padres.
Last month, the Padres boosted their commitment to the project by more than $20 million, the cost for building two parking garages. The Padres also reaffirmed it would pay for an estimated $17.5 million construction cost overrun.
