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'Credit card' for PACC? Federal loan application splits council

The U.S. Department of Housing and Urban Development (HUD) Section 108 loan program allows cities to borrow against their Community Development Block Grant (CDBG) funding in order to fund capital projects or economic revitalization efforts. - Courtesy image
The U.S. Department of Housing and Urban Development (HUD) Section 108 loan program allows cities to borrow against their Community Development Block Grant (CDBG) funding in order to fund capital projects or economic revitalization efforts.
— image credit: Courtesy image

With a 4-3 vote, the Federal Way City Council approved moving forward with the application process for the U.S. Department of Housing and Urban Development (HUD) Section 108 loan program.

Section 108 is a specific program that allows cities to borrow against their Community Development Block Grant (CDBG) funding in order to fund capital projects — like the proposed Performing Arts and Conference Center (PACC) — or for economic revitalization efforts.

Using current numbers, what would essentially be a "balloon" payment would be made to the city for approximately $3.03 million, and would be repaid, if the city is the principle borrower, by diverting approximately $150,000 to $200,000 annually from the city's CDBG funds over the term of the loan.

The dissenting votes were Deputy Mayor Jim Ferrell and Councilmembers Susan Honda and Kelly Maloney. All three expressed reservations that the projected $3.03 million total that's possible from the Section 108 program would go toward the PACC, and essentially means the city would pick up extra debt to finance the formative project.

Much of the discussion during the Aug. 6 meeting centered on these concerns. The affirmative voters and Mayor Skip Priest argued that the only thing being voted on was to move forward on the application process for the Section 108 program.

"No decision is being made tonight, in terms of any agreement, and the specifics of the proposal would be presented to the council (at a later date)," Priest said. "Issues...raised, in terms of if it's a loan, and whatever risk there is to the city, and the issue of CDBG being used to repay that loan, and other issues, would be provided to specificity at that time" after the application has been approved and projects could be considered.

Community and Economic Development director Patrick Doherty tried to allay some of the fears regarding approval of the application process.

"To be super, super clear, if the application is approved to move forward, (it is a) request that HUD approve our ability to create this fund," he said. "And then whatever project under that fund would be the second step. Whether that be the PACC or (an economic revitalization project in) Twin Lakes, or another idea in the city center we currently don't have."

Honda said she felt like approving the city's application for the Section 108 program was the council getting ahead of itself.

"We haven't approved this project yet, we haven't gone over the financing for the project yet," she said. "I'm just really concerned this is a step that we're not ready to take at this time."

Ferrell said he saw the issue as though the city were applying for a credit card, and, like Honda, he doesn't feel it's a step that needs to be made at this time.

"This sort of feels like, we know we're not putting it on the credit card, but we're just applying for the credit card right now," he said. "And we're getting the credit card ready. It seems like we're setting up, for ourselves, the ability for debt capacity and then debt maintenance…I do think this is in preparation for taking that credit card out at some point and putting it on the counter, and putting $3 million on it. If you take the credit card out and use the entire $3 million, and use it toward that project, we would be on the hook, and so I am concerned about that, and I'm not convinced we need to open this credit account."

Maloney said she felt, despite the counterarguments presented, that applying for the Section 108 program and the funds it would bring, is all aimed at providing funding for the PACC.

"I do have a big concern, as I've mentioned in the past…about going into debt, any amount of debt, for the Performing Arts and Conference Center," she said. "And this does seem as if it could be positioned to be used for that. If we could disassociate that project (the PACC) from this, I would be happy to vote for it in terms of other projects, but in terms of debt for the PACC, I would be against it."

Councilmember Dini Duclos responded to Maloney, pointing out that the Section 108 program is unique, to say the least, in terms of borrowing and who would have to take on the debt load.

"We are voting to set up a program. It is not necessarily designated for the PACC, it can be made for other operations," she said. "And it is paid back from money that comes from the government. It's not coming out of our operating budget. And I doubt that HUD would get away with eliminating these dollars. Too many states, too many cities, too many governments, too many non-profits, for that matter, get funding through this source. Right now, we're just making the application. We're not committing anything."

Councilmember Jeanne Burbidge echoed Duclos' sentiments, saying the time is right for the city to move on this application process.

"I believe this program offers us a wonderful opportunity…and we are not voting on any particular project tonight," she said. "We will have a full opportunity in the future to decide any particular project that we would want to use this program for. I don't want to see us shoot ourselves in the foot by not taking advantage of this program that makes so much sense for our city and our city's needs."

Facts and links

• Seattle-based developer Lorax Partners estimates that a 700-seat arts center with a 3,000-square-foot conference space could cost about $31.7 million. Preliminary designs include green landscapes and up to 170 parking spots, along with an option to build a hotel.

• In 2010, the city bought the 4-acre site on 20th Avenue South with a state grant worth $5 million. As a condition, the PACC must be built within 10 years, or the city must pay back the money with interest.

• So far, Federal Way's economic development department claims the city has access to nearly $16.3 million for the project, including a recently secured state grant for about $2.3 million. The city hopes to make up the difference with a New Markets Tax Credit worth up to $7 million in a best-case scenario, along with about $6.3 million in best-case scenario fundraising through naming rights and grants.

• The city has promised to build the project without creating debt because the funding plan requires raising the construction money upfront.

• According to the HUD website: "Section 108 loans are not risk-free, however; local governments borrowing funds guaranteed by Section 108 must pledge their current and future CDBG allocations to cover the loan amount as security for the loan."

A 2012 study of the Section 108 Loan Guarantee Program notes: "Though most guaranteed loans are repaid using an income stream from the activity assisted by the loan proceeds, borrowers can use CDBG grant funds (and program income) to repay the loans."

• The city has established a website for the PACC at www.cityoffederalway.com/pacc.

 

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