Siren call of economic development: A cautionary tale from Vadnais Heights

Vadnais Heights Sports Center
The Vadnais Heights Sports Center earned only $300,000 in 2011, the first full year of operation. That's about 20 percent of what's owed bondholders.

St. Paul wants a new ballpark. Mankato pines for a civic center and Rochester hopes to expand the one it’s already got. Civic boosters say all these projects will pay for themselves.

But woe betide those who fail to heed the experience of Vadnais Heights, a suburb of some 12,500 souls that sits betwixt Arden Hills and White Bear Lake.  Its involvement in the construction of a sports complex put it on the hook for bond payments it couldn’t meet. And now the town is taking a drubbing from Moody’s and Standard & Poor’s, the two giant bond-rating agencies.

But first, a brief refresher course on municipal finance.

Each year towns and cities petition the state to float bonds to finance civic improvements. If the Legislature says “no,” which it did to the three requests above, local governments have to pay for them on their own.

They have two options. They can increase property taxes or issue bonds, which are repaid from future tax revenues. Because few public officials in the current economic climate dare to boost taxes, municipalities these days opt for bonding.

Usually the money goes for classic public works: schools, roads, bridges and water treatment plants — big items a town needs that it can’t finance in one fell swoop.

Civic centers and sports venues are not exactly necessary public works, however. So instead of issuing tax or general obligation bonds, towns create economic development authorities or other entities, which issue revenue bonds. The income from the civic center or arena goes to pay them off. Twenty, 30 or 40 years down the line, the town will own the thing without ever having spent a dime. (By then, of course, the facility is usually obsolete, but that’s another story.)

One twist

And so it went in Vadnais Heights, except for one twist. The town, according to City Manager Gerry Urban, never had any particular passion to build a sports complex. But in 2009, Mark Bigelbach, a former Vadnais council member, brought the project, along with Community Facilities Partners, a Deephaven nonprofit, to city officials. “They wanted to build a sports complex but they couldn’t get the funding,” says Urban.

Maybe. Everybody seems a little fuzzy on how the deal came about. CFP’s purpose, according to Steve Collins, a marketing and advertising executive and company principal, is to assist towns, colleges, schools and other public entities to build things they want. “We help them assemble the financing, the plans, the architects, the builder and so on.” For its efforts, CFP receives a fee, in this case, says the nonprofit’s counsel, Dan Nelson, $100,000.

Depending on whom you talk to, either the developers or the city’s financial advisers projected that advertising and fees paid by local teams who used the complex would bring in $2.4 million a year, enough to underwrite its operations and make bond payments. In 30 years, the city would own it and pocket any future profits.

So, the town’s economic development authority floated $26 million worth of bonds. The proceeds went to CFP to put up the building. Six months later, in November 2010, a shiny new 200,000-square-foot Vadnais Heights Sports Center opened for business. I haven’t visited, but in photos, it looks pretty spiffy. And it has everything anybody might want in such a building: two regulation hockey rinks, domed soccer fields, batting cages, a 100-meter track, volleyball courts, space for concessions and so on.

Only problem was, revenues were scantier than projected. Obviously, the recession bears some of the blame. But when I asked people what happened, they told conflicting stories, none of which really seemed to explain what happened.

Collins says that Bigelbach, whose company managed the facility, withheld information about accounts. Nelson says that CFP wanted Vadnais Heights to assign management to its parks and recreation department, but the town didn’t want to add to its payroll. An audit concluded that Bigelbach’s company was sloppy. He disputes that any mismanagement or even messiness was involved. In any case, the city fired him a few weeks ago.

Sad fact

Who or what was to blame is at this point irrelevant. The sad fact of the matter is that revenues fell very short. According to a report from Standard & Poor’s, the complex earned only $300,000 in 2011, the first full year of operation. That’s about 20 percent of what’s owed bondholders. Worse, by the terms of the deal, Vadnais Heights is obligated to come up with the remainder.

So the city coughed up $582,000 for its debt service for 2012 and hundreds of thousands more to cover operating expenses. In 2013, Vadnais Heights would owe bondholders $1.6 million, or 36 percent of its 2010 budget. To raise that much money without touching the budget, it would have to hike property taxes by 30 percent. Likely fearing a tar-and-feathering, the City Council voted unanimously to sever its tie to the sports complex and not to pay the revenue bonds.

Only days later, the bond-rating agencies swooped in like avenging angels to smash Vadnais Heights’ credit-worthiness. S & P reduced the rating of the revenue bonds from A- to CC or “highly vulnerable,” a drop of 13steps. (Moody’s didn’t rate those bonds.) That’s understandable since nobody knows if the investors will ever be repaid. But both Moody’s and S & P went the extra mile and downgraded Vadnais Heights’ ordinary general obligation bonds; they went from third best rating to junk status.

Mayor Marc Johannsen did not respond to MinnPost’s requests for comment, but he told Bloomberg News that the credit cuts were “unfair” because the city had always met its obligations.

The city won’t immediately feel the downgrade. Its bonds will simply drop in price enough so that their yields will reflect what the bond-rating agencies believe are their greater risk. The problem comes when Vadnais Heights wants to float new bonds for roads, schools, sewers and other municipal improvements. The interest rate could top 15 percent.

So, all ye supporters of public convention centers, arenas and whatnot — and I’m talking to you too, Vikings fans, with your stadium backed by a dubious stream of electronic pull-tab revenue: beware of municipal projects that supposedly pay for themselves. If something paid for itself, a private business would probably do it.

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Comments (12)

  1. Submitted by Susan McNerney on 09/11/2012 - 09:58 am.

    Given that Blaine has the national sports center

    only a few miles away – with a dozen indoor hockey rinks and so many soccer fields you can’t see the end of them – this kind of development does seem redundant. But it’s also typical of Minnesota’s obsession with sports, and devaluation of other types of public facilities. Why does everything have to be about sports? Don’t we ever do anything else in the suburbs?

  2. Submitted by Thomas Swift on 09/11/2012 - 10:13 am.

    Lesson lost

    Evidently the city fathers in West Saint Paul didn’t read the same memo Marlys did, since they are doubling down on Vadnis Heights’ failure by doing the exact. same. thing.

    They also thought this was a good time to borrow millions to build spiffy new city offices and a storage garage.

  3. Submitted by mark wallek on 09/11/2012 - 10:34 am.

    Wasted on sport

    What is with this investment in sporting facilities? How much more will we waste on these things? It’s not like the nation is getting smarter and healthier from the addition of these money swallowing entities.

  4. Submitted by Charlie Quimby on 09/11/2012 - 11:38 am.

    Irrelevant?

    “Who or what was to blame is at this point irrelevant.”

    Sounds like rent-seeking by a former council member is relevant and so is poor decision-making by a small town council.

    Citizens of other communities and bondholders, beware.

  5. Submitted by Nathan Roisen on 09/11/2012 - 12:41 pm.

    Vikings Stadium

    At least the Vikings stadium bill has a provision in it that puts a tax on sports merchandise to pay for the stadium if (when) the magic pulltab money falls short.

    Anyway, this is good reporting. It would be worth some further digging to find out just how this fiasco ended up happening. I’m sure the VH City Council meeting minutes from that time period are online somewhere and would shed some light the situation.

    I know that many right-wingers have an almost allergic aversion to taxes, but this story illustrates a useful function they serve: a way for a community to assess, by means of the impact on their own finances, whether something is truly necessary.

    Government actions become dangerously unaccountable when the public is sold on the notion that ‘someone else’ will pay for it. ‘Someone else’ almost always serves to lull voters into complacent indifference – as this story illustrates, the bill has to be paid by someone.

  6. Submitted by Philip Freyre on 09/11/2012 - 12:52 pm.

    Listen to Meredith Whitney and Warren Buffet

    In 2010 Meredith Whitney predicted that there would be a string of municipal bond defaults. Her timing was wrong, and the ZIRP (zero interest rate policy) held by The Fed harmed her prediction, however she will be right at some point. Lately, Warren Buffet has jumped on the bandwagon predicting the same:

    http://www.zerohedge.com/news/buffett-joins-team-whitney-sees-muni-pain-ahead-he-unwinds-half-his-bullish-exposure-ahead-time

    In 2012, we have seen defaults in Jefferson County, Alabama, Harrisburg, Pennsylvania, and Stockton, California. While Vadnais Heights is probably a long way off, we should take notice.

  7. Submitted by David Frenkel on 09/11/2012 - 01:55 pm.

    Due dilience

    Too many sports facilities are built for emotional reasons like we need it, it will make our teams a winner, the schools have it, etc. There is very little fiscal due diligence done at any level. At the professional level economists have done studies that sports facilities do not make money and need subsidies. It is very difficult for any sport facility to make money with all the over head they incur and often seasonality that may cause the facility to go dormant for months. Sports facilities are a community amenity and should be viewed as such and knowing the true cost of the facility.

  8. Submitted by Jasmine Snow on 09/11/2012 - 02:25 pm.

    Slap on the hand?

    What is going to happen to Bigelbach? Sounds somewhat related to a con. Aren’t people put in jail for that? and does he not have any morals or ethics? ……he paid is wife 10K…maybe its just a conflict of interest or ” Lets keep it in the family” attitude. I’m already paying over 8K a year in property taxes. We need justice.

  9. Submitted by Tom Weyandt on 09/11/2012 - 04:15 pm.

    Go back to the begining

    I sort of remember that when the land was purchased there was something about the city manager being an executor of the estate of the seller. There were some reports about that in the White Bear Press. I think that person eventually recused himself from one or the other position but it was pretty much a done deal by then. On top of it according to a recent report in the Pioneer Press another official involved in developing the project was hired to manage it.

    If I am correct then the mayor and council from back whenever seem to have gotten too comfortable with the people they knew and there may not have been enough due diligence about the soundness of the project. I know the mayor has moved on but there must be some records going back that can help pinpoint where/when the mistakes are made. If nothing else the townsfolks ought to find out so they can get rid of any of the old timers who may still be around who supported this thing.

  10. Submitted by craig furguson on 09/11/2012 - 04:34 pm.

    Not Schools

    By the way, Vadnais Heights is between SHOREVIEW and White Bear Township. They are part of the White Bear School District, so the city will not have to float bonds for schools. Roads could be an issue though. Vadnais also has a city hall with a limestone block exterior and copper-like roof and a interior vaulted ceiling and wooden beams. They also have two spiffy new fire stations, one with various meeting rooms that seats up to 400. I get to enjoy marveling at these facilities when I drive down county roads F and E to visit Walmart. Luckily they appear to be done building stuff so they can take time to cover the fallout from the Ice Area.

  11. Submitted by Paul Udstrand on 09/12/2012 - 09:41 am.

    Curruption plane and simple.

    Obviously this project was a product of a corrupted city council, why is that so hard to point out? The Vikings stadium was likewise a product of a corrupted state political machine. We have to stop pretending corruption is not a problem in this country. How can anyone conclude that how and why something like this happens is irrelevant?

    And for the record I second, third, and fourth all the comments about this ridiculous obsession with sports.

  12. Submitted by Kenneth Kjer on 09/18/2012 - 12:15 pm.

    Green Bay

    So what is the secret that Green Bay,WI has in making millions each year off of Lambeau Field?

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