Financial experts have raised concerns about Davenport’s plan to use municipal bonds to buy the Rhythm City casino for
$46 million, but Mayor Bill Gluba called the comments ridiculous and uninformed.
Experts speaking to Bloomberg News say borrowing money for something that relies on profits and shrinking the city’s borrowing capacity is a risky endeavor. They point to failed municipal projects such as sports venues and, in particular, an incinerator project in Harrisburg, Pa., that sent that city into bankruptcy.
“The city is putting taxpayers 100 percent on the hook in case this casino doesn’t perform as expected,” Matt Fabian, managing director at Municipal Market Advisors, a Concord, Mass.-based research firm, told Bloomberg News. “It’s hard to believe that taxpayers fully understand the risk they are taking in this transaction.”
Howard Cure, director of municipal bond research at New York-based Evercore Wealth Management LLC, questioned whether it is the right use for city debt, according to the Bloomberg report.
“In an era when budgets from cities and states and the federal government are being scrutinized more as how best they serve their population, this strikes me as going counter to that,” he told Bloomberg.
City officials say they expect the annual repayment for the bonds at $3.5 million, which would be paid for from casino revenue. The Rhythm City’s earnings before interest, taxes, depreciation and amortization in fiscal year 2012 was $10.48 million.
Standard & Poor’s says Davenport’s debt service, about 21 percent of operating expenditures in fiscal year 2011, is “elevated,” Bloomberg reports.
Gluba was emphatic in his response.
“The people quoted know absolutely nothing about Davenport and our staff and how we run the city,” Gluba said. “To compare this to an incinerator is ridiculous.”
Gluba also was quoted in the article that revenue could be used to provide property tax relief and diversify revenue streams and that the city enjoys a lower borrowing rate than private developers. He tried to allay concerns about taking on a private enterprise.
“The state highly regulates this,” Gluba said Thursday. “It is not like buying a Wal-Mart. This is a highly regulated, unique field.”
Davenport is at about 64 percent of its bonding capacity of $307 million. Buying the Rhythm City and other planned bond sales increases the debt capacity to about 85 percent. The city’s bond counsel has said that debt capacity doesn’t stay that high for very long.
“They haven’t had access to our financial reports,” Gluba said. “Our bond counsel says we’re solid.”
The city’s bond counsel, John Burmeister of Public Financial Management, couldn’t be reached for comment Thursday.
Alderman Mike Matson, 8th Ward, has raised concerns about what the casino purchase would do to the city’s debt capacity and voted against the term sheet that started the formal purchase process.
“I was a little concerned about the debt capacity, and some of the people in the article raise those concerns,” Matson said Thursday. “Mayor Gluba made some points, too.
“It is a concern. Now that the council voted for it, I pray it works. Otherwise, we have a problem.”