Kansas City struggles with bond payments

Sunday, January 18, 2009 | 6:03 p.m. CST

KANSAS CITY — Kansas City could face a budget-crippling $36 million bond payment if it can't restructure its debt by April.

The city is looking to renegotiate the terms covering $180 million in city-backed bonds that were used to build the Power & Light District, an entertainment project that has brought restaurants, bars and shopping downtown.

The struggles on Wall Street have turned municipal bonds such as those used for the Power & Light District "toxic," forcing local governments across the country to potentially pay much more in interest.

In Kansas City's case, the higher price comes due in April and would certainly damage a city budget already needing layoffs, tax hikes and salary freezes to stay balanced.

"No one ever dreamed the market would do what it did," said Jeffrey Yates, the Kansas City finance director.

When the city sold the bonds, it sought to make them more attractive to investors by obtaining insurance from a major bond insurer and credit enhancement from an Irish bank. But credit ratings for both dropped dramatically last year amid the collapse of the mortgage and lending markets.

That caused the bondholders to lose most of the protection on their investments and led to a spike of the variable interest rates on the bonds, which change weekly.

Also, the bond agreement requires the city to restore the credit protection on the bonds by April or pay them off in just five years, leading to the much larger annual payment of $36 million.

"We had some credit repair we needed to do," Yates said, "as far as uncoupling the city's relationship with some toxic variable rate debt on this project ... These credit repairs are the most important thing in our portfolio."

City officials said they're confident that they can restructure the bonds. But it won't be cheap, costing several million additional dollars over several years. The payment for next year — assuming a restructuring — is $7.2 million, or $3 million more than the previous estimate.

But the alternative is worse: Not only would the city have to pay back the bonds faster, ratings agencies could downgrade the city's credit rating, making borrowing money for other projects more expensive.

The district's bond problems have contributed to credit rating agencies Moody's and Fitch rating Kansas City's debt outlook as "negative," putting its high-quality "Aa" rating in danger.

"We're recognizing the real cost of this debt," said Mayor Mark Funkhouser, who said he and other City Council members were briefed on the problems last month. "It's like someone getting an adjustable-rate mortgage for more house than they can afford."

Funkhouser, City Manager Wayne Cauthen and council Finance and Audit Committee Chairwoman Deb Hermann said the city will try converting the variable-rate debt to a fixed interest rate.

Yates, on the other hand, envisions swapping the bonds for other instruments that would avoid the $36 million payment this year and hopes that credit markets loosen up enough to refinance later for a fixed interest rate.

Those added costs will increase taxpayers' exposure to make up shortfalls if the Power & Light District doesn't perform as well as expected.

Officials said the problems reflect the turmoil in the markets, not the performance of the district developed by Baltimore-based Cordish Co.

Funkhouser, the former city auditor, said the original bond structure that former Mayor Kay Barnes put together for the district was too complicated and risky to taxpayers.

"We should have gone for very conservative fixed-rate debt from the beginning," he said. "There's obvious risk here ... We're going to pay a premium to back ourselves out of that risk."

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