FINN'S CHALLENGES: City Finances, Hotel Debt, P.O.W.E.R. Fund Legacy Loom

City Betting Bottom Dollar Sun Will Come Out Tomorrow Under New Manager

March 10, 2014
By: Dave Rogers

The sun will come out tomorrow, bet your bottom dollar there's tomorrow, goes the song.

Richard Finn marches into office St. Patrick's Day, March 17, 2014, as city manager of one of the most historic towns in Michigan.

And, one of the most economically fragile cities, as many post-industrial Rust Belt communities.

If Finn joins the St. Patrick's Day Parade, as promised on March 16, (if the snow melts enough to allow crowds to gather on the curbside) he will be marching to an uncertain but hopeful destiny.

The City Commission voted 7-2 to bet their bottom dollar and give the experienced, but expensive, Finn a chance to "save the city," after responding positively to a passionate plea by Mayor Chris Shannon.

Finn's basic salary of $115,000 a year is $25,000 above that paid to former manager Robert Belleman, now an employee of Saginaw County.

Finn faces a financial crazy quilt of municipal woes, a status not exclusive to Bay City.

But under his leadership and entrepreneurial pizazz from the business community the city may be poised to overcome the difficulties and charge into the future with new attractions and new residents lured by the glitter of a new development, Uptown at RiversEdge.

Shaped by the ambitious brothers Shaheen, Dr. Samuel and Peter, of SSP Associates, Saginaw, buildings on the 45-acre Uptown site are rising fast on a former industrial brownfield on the banks of the Saginaw River.

The development is anchored by a Dow Corning Corporation office building said to be headquarters for 400-500 employees, along with a new Chemical Bank and a surgical center for McLaren Health Care and 20 residential condominiums.

The amount of unfunded liabilities, pension and retiree health care obligations to former city workers, in Bay City is not as overwhelming as that of many Michigan towns, a sagacious longtime local political observer privately told MyBayCity.com.

Ted Roelofs, former Bay City Times reporter, writing in Bridge Magazine of the Center for Michigan in 2011, listed Bay City's unfunded liabilities at $144 million.

"A Michigan State University study finds that cities across Michigan face a mountain of so-called legacy debt that will burden them for years," wrote Roelofs, commenting:

"Compounding the pain, communities have faced drops in property tax revenue, manufacturing jobs and population along with a $5 billion plunge in state revenue sharing over the past decade."

Detroit, ($5 billion) Flint ($1.1 billion) and Saginaw ($311 million) all top Bay City, which makes No. 10 on the list of top 10 towns on the unfunding liabilities list.

Roelofs describes the municipal dilemma as: "The 10 cities with the highest potential homeowner tax burden. Many cities are not fully paying for the legacy costs to come. The "Potential Homeowner Tax Burden" is the annual additional property tax that an owner of a $100,000 home would have to pay to fully cover the coming legacy cost burden in each community."

Bay City's legacy cost is rated at just over $1,000 per homeowner, with Mt. Clemens tops at $4,600.

The MSU study was updated in 2014 by authors Eric Scorsone and Nicolette Bateson, CPA. It states: "In fact, municipalities were not required to measure OPEB (other post employment benefits, such as health care) until an accounting standard was issued in 2004 with implementation beginning in 2007. Now that local governments have calculated OPEB, many local officials are faced with the overwhelming reality of a massive commitment. This issue becomes especially challenging when the liability is owed to those who are currently retired.

"A review of Michigan cities facing severe fiscal stress revealed that each was confronted with a significant unfunded OPEB liability."

Our Bay City Sage is confident the business activity generated by the DoubleTree Hotel-Bay City Riverfront, will eventually produce enough revenue to pay off the $4 million loan from the P.O.W.E.R. Fund of former city manager Jim Palenick.

The hotel was opened in 2002 mostly paid for with a $15.45 million tax-exempt bond and $8.9 million in U.S. Department of Housing and Urban Development grants.

Several other smaller loans and grants, including a $640,000 Great Lakes Center Foundation grant, were used to fund the project's total cost of $34.6 million.

The bonds are due in April 2022. City officials estimated the hotel still owes about $22 million.

The success or failure of the DoubleTree experiment may be determined during Finn's tenure with the city. The hotel was developed under the nonprofit ownership model by Garfield Traub Development LLC. So far the hotel has generated a high volume of business, but because of the large debt has not been able to retire the bonds.

"The City of Bay City will serve as the sole beneficiary of all profits under the ownership model," the firm stated in a news release at the time of the opening.

However, the city recently launched into a new development: Uptown at RiversEdge, that will include a Courtyard by Marriott Hotel and Conference Center. The amount of business generated by the new development is crucial to the success of two hotel/conference centers in downtown Bay City, financial experts observe.

"We introduced the nonprofit ownership model to the City as a way to build the only full-service hotel and conference center in the region without extending the City's general credit," said Tony Traub, principal of Garfield Traub.

"The City will be the single beneficiary of all profit plus the residual value of the hotel. As the beneficiary of the hotel, the City's limited support is truly an investment, rather than a subsidy to a private owner/developer as originally contemplated."

Garfield Traub also worked closely with the City and the design and construction team during the pre-construction phase to ensure that the design and program were consistent with the City's expectations and the operator's brand standards. The new development will serve to accelerate the economic growth of the central business district and riverfront, Traub said.

"With the Doubletree, the City of Bay City is moving to the next level. This is the only full service hotel and convention center north of the metropolitan Detroit area," said Robert Belleman, then city manager.

"As other economic development efforts continue in the area, we can point to the success of the center as the beginning. The community as a whole is very excited. Previously, we had made several attempts to execute this through the private sector, but the only way the City could be successful was through this model."

"Although lodging capital markets conditions did make conventional financing unfeasible, Garfield Traub was able to show the City how to finance the hotel through the establishment of a nonprofit ownership corporation, separate and distinct from the City," said Traub. "Because of the issuance of non-recourse tax-exempt revenue bonds, the City's general credit and taxing authority were not required. The financing will be repaid out of revenues generated by the facilities."

With Garfield Traub's assistance, the City identified and positioned nearly $20 million in federal, state and local grants, low-interest and no- interest subordinated loans and other incentives to pledge to the development.

The remainder of the development costs was financed by $15,455,000 of tax- exempt hotel revenue bonds. The bonds are non-recourse to the City, and in September 2002 were successfully placed, the first non-rated hotel revenue bonds placed since the tragedies of 9/11.

The nonprofit ownership model will ensure that the facilities are constantly maintained and updated to guarantee the best possible experience for hotel guests and conference center visitors year after year, according to Traub.

Belleman was quoted as saying no repayment of the P.O.W.E.R. Fund's $4 million loan was expected since part of the agreement was that about $15.45 million in bonds for the construction took precedence over the city's loan.

The P.O.W.E.R. fund was eliminated in 2007 with its balance of more than $2 million used to pay for infrastructure improvements at Uptown.

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