Steamboat Springs The city's advisory committee for redevelopment at the base of the Steamboat Ski Area will recommend that the city immediately begin exploring the option of borrowing up to $30 million this year because of a volatile bond market.
The city's Urban Renewal Authority would borrow the money through the issuance of municipal bonds. It would use about a third of the $30 million to pay off bonds issued in 2007. The rest would be used to pay for public improvement projects near the base area. Within its base area boundaries, the URA receives property and sales taxes above a base amount to repay the bonds it issues to finance projects, such as the new Ski Time Square roundabout and a planned public promenade at the ski base.
The URA's next bond issue originally was scheduled for 2009, but at Friday's meeting of the Urban Redevelopment Area Advisory Council the city's bond consultant said the city should figure out whether it makes sense to bond earlier.
"My recommendation is that we get it figured out sooner rather than later," said Alan Matlosz, senior vice president of investment bankers George K. Baum & Co. "Like yesterday."
At a Feb. 8 URAAC meeting, Assistant Finance Director Bob Litzau also discussed moving up the bond issue to take advantage of low interest rates. But the municipal bond market has changed drastically since then. Matlosz's advice was based not on a desire to lock in low interest rates, but a need to act quickly due to limited demand for municipal bonds.
While the Federal Reserve has been cutting its core interest rate, other factors have led to a shaky bond market. The city's existing URA bonds have a variable interest rate, reset weekly. At the time Litzau floated the idea of moving the bond issue up, the interest rate on the URA's bonds was 1.25 percent. Since then, it has gone as high as 3.02 percent and is now at 2.12 percent.
"The rates are bouncing all over the place," Litzau said.
The Wall Street Journal reported March 13 that bulging supply could lead to prolonged uncertainty for the municipal bond market. The demise of several bond insurers also is contributing to the volatility, Matlosz said.
"There is no bond insurance," Matlosz said. "Last year, everyone was happy in the bond world. Now, they're not so happy."
There used to be as many as seven reliable bond insurers in the U.S., Matlosz said, before the subprime mortgage fallout that triggered the decline in the overall national economy took down several bond insurers that also were backing pools of mortgages. Now, Matlosz said there are "only two insurers that bring any value."
The decline in competition has allowed these insurers to raise their rates and only do select deals.
The URA's bonds are not secured by a bond insurer but by a letter of credit from Wells Fargo. But the situation in the bond insurance markets has led many others to turn to letters of credit, creating the same heightened demand and higher costs for that form of security.
Matlosz said the interest rate for a letter of credit has risen from .28 percent to .75 percent. He also said some banks have experienced such high demand that they already have issued an entire year's worth of letters of credit in the first three months of 2008. All of this leads to Matlosz's recommendation that the city get itself in line for bond security before it's too late.
URAAC member Bill Jameson said it is critical for the city to get a letter of credit nailed down while investigating whether to issue bonds this year.
Some members expressed concern, however, about the URA's ability to honor increased bond repayments. Litzau noted that developers plan to demolish Ski Time Square and Thunderhead Lodge this year, eliminating a source of sales tax revenue and decreasing property tax payments.
"I still have a concern from the payback standpoint for where our revenue stream is going to be with Ski Time Square coming down," Litzau said. "That's a big chunk that goes toward repayment."
But Steamboat Ski and Resort Corp. President Chris Diamond said such fears might be overblown.
"There's going to be shifts to other operations in the area," he said. Slopeside Grill owner "Chris Corna is going to have a hell of a year."
If the URA ends up going forward with a bond issue, it may be able to add items cut from its construction and design schedule for this summer because of budget shortfalls.
On Thursday, Litzau said the volatile municipal bond market is not having any direct effects on any other city finances. The URA's bonds are the city's only variable rate bonds, Litzau said, and the city does not have any major capital projects that it would need to bond for in the immediate future.
"As the city looks at future capital projects : then it can have an impact," Litzau said. "But we don't have any planned at this time, so it's not something we have to deal with immediately."