Aquatic Center Looms as Far Worse Fiasco
than Cherry Street Project
What a mess. The $108 million Port Townsend Aquatic Center as proposed to City Council would default in its first year. To calm skeptical taxpayers, numbers are being juggled, massaged and manipulated. Millions of dollars magically disappear from cost entries in order to turn red ink black. Looking closely, one can see there is no money to pay for administration and management during and after construction, thus making the project appear less costly to taxpayers.
But under the pixie dust, above the smoke and mirrors, behind the curtain, the hard, cold reality remains unchanged: economically distressed Jefferson County simply cannot afford something so costly.
Red Ink Turned to Black Ink (Not Quite)
At the same time they were seeking City Council’s endorsement for their proposal, promoters of the aquatic project did not disclose that their calculations showed the aquatic center could default in its first year of operation.
On October 16, 2023, City Council was asked to endorse the proposal from the aquatic center Steering Committee for a $37.1 million aquatic center and county-wide sales tax to pay for it. $22.1 million would be borrowed through a bond supported by sales tax receipts. $5 million, council was told, would be raised by the Jeffco Aquatic Coalition, $5 million from state grants and $5 million from federal grants.
The impressive 30,000 square foot facility being proposed would greet visitors with a high-ceiling, gleaming atrium with expansive glass walls, leading to the natatorium.
Rendering of double-height lobby looking into natatorium and other spaces, from June 16, 2023 Opsis PowerPoint — “Healthier Together Center Feasibility Study” (slide 13)
There swimmers could choose from the cool water 25-yard, 6-lane competition pool (where their form and speed could be judged by those in bleachers built to hold 100 spectators), or they could dip in the warm water of the 3,000 square foot recreation pool, where they could also walk against the artificial current of a “lazy river” feature. Afterwards, they could kick back in the $106,000 whirlpool/spa.
On other occasions, they could rent out the “birthday room” or knock around a ball on the new pickleball courts outside. There would be very nice universal locker rooms, showers, offices, storage space and parking for about 130 vehicles.
“Building Form” from “Healthier Together Center Feasibility Study” (slide 8)
Of course, neither the city nor the county has the money on hand to build this facility. Money must be borrowed — $22.1 million, according to the “final” report.
In our previous reporting, we examined the pro forma upon which the Steering Committee was operating. A pro forma is a projection of annual debt service payments (principal and interest) versus expected revenues from the new county-wide sales tax the committee is proposing. Its purpose is to determine if the bond can be repaid.
The city’s own analysis showed that the project would default its first year. Sales tax revenues would not be adequate to pay the project’s debt. The specter of default loomed even though the pro forma assumed a pollyannish interest rate of 4.5% — something we won’t likely see again for years.
The Steering Committee, City Manager and its Parks and Recreation Strategy Director knew this when they sought City Council’s endorsement of their proposal on October 16. I noticed that in the 316 pages of the Report and its appendices in council’s “packet,” there was no pro forma to show if the project could shoulder the debt load they were proposing. In all those pages not even a cumulative interest amount was stated. That is an important number.
In calculating the actual cost of the project, there’s more to it than just the construction costs. The cost of borrowing money must also be considered. That simple calculation was omitted from the material presented to City Council.
So I asked for it. Carrie Hite (Director of Parks & Recreation Strategy) sent the pro forma to me, accompanied by an email in which she wrote: “You ask some great questions and the pool’s financial viability is something we continue to explore.”
This was October 18, two days after the “Final Report” had been submitted to City Council with a request for their endorsement. I then wrote the article reporting that the city’s own internal analysis showed the aquatic center unable to pay its debts and going into default its very first year.
After that report, city staff and the Steering Committee got to work to come up with a more attractive financial picture.
They made stuff up.
What they did was run several new pro formas at 5.5% interest, since their unrealistic 4.5% rate was so obviously invalid. 5.5% is still a very favorable interest rate for a project like this. As of this writing, investment grade 30-year municipal bonds might merit that rate.
But the bond for the aquatic center could very well not enjoy that coveted rating and would have to offer a higher interest rate. How much higher is difficult to say as each bond would be priced according to its individual risk characteristics, and would not enjoy the benefit of a bond agency’s screening and rating.
Consider this: the bond would be floated by a brand-new Public Facilities District (PFD), with no track record, no assets, no money in the bank, nothing in the way of collateral.
The cost of the proposed aquatic center is so large and squeezed so tightly into the limitations of the county’s tax base there are no reserves. If there is a year when the economy hiccups, if costs shoot up unexpectedly, if something big breaks, if the aquatic center does not see the very optimistic 800% increase in use required the first year of operation — there is no cushion, no way to pay bills and no way to meet debt obligations.
This would be a risky bond for investors.
It would be a revenue bond, which would carry a higher interest rate than a general obligation, levy-guaranteed bond paid with property taxes. As the Municipal Research and Service Center explains, “Revenue bonds are not backed by the full faith and credit of the city, and therefore investors consider them somewhat less secure than general obligation bonds. As a result, the interest rate that bond buyers demand may be higher than those on general obligation bonds.”
It will also likely have to be guaranteed by the city or county. It is highly unlikely that anyone will hand over $22.1 million to an untested group of people with no security for the loan other than a guess at future sales tax receipts. Without the city or county putting their assets behind it, this bond could well be rated as below investment grade. That means creditors would demand to be paid a higher interest rate in exchange for accepting more risk.
Enough for a lightning primer in public finance. Let’s look at how $2.1 million has to disappear to turn red ink black.
In response to another request, Carrie Hite provided the latest pro formas they have been considering. You can open the PDF here.
The first 6 years of red ink from the Aquatic Center’s latest pro forma. Note “$20M Bond” is a typo in the city’s pro forma, which should read “$22.1M Bond, 30 YR, 5.5%”.
Now you see it, now you don’t.
There is no way the proposal submitted to City Council can work. Not at 4.5% interest over 25 years, as we have reported. And definitely not at 5.5% interest, when the deficit would swell to more than $246,000 in the first year!
The Steering Committee looked at stretching out the term of the bond to 30 years in the hope periodic payments would be affordable. That won’t work, either. The first year shortfall would still be more than $120,000, as shown in the image above.
So what they did was reduce the amount of money to be borrowed by $2.1 million, stretch out the term of the loan to 30 years and cross their fingers as they sat back and waited for Excel to do its thing. Voila! There’s enough money to make it work — just barely.
They’ve also played with cutting the amount financed to $17 million so the numbers look better.
But this project will still cost $37.1 million to build. It has not been redesigned. Nothing’s been cut. Where will that $2.1 million or $5.1 million in savings come from?
Manna from Heaven
In the “Final Report” (now you understand why we have put that between quotation marks) the Steering Committee told City Council they hoped to raise $15 million, with $5 million each coming from gifts, state grants and federal grants. Maybe now they will tell officials and taxpayers they are going to raise even more in order to have to borrow less. So where are those extra millions going to come from?
Regarding those state and federal grants, the minutes of Steering Committee meetings, found at the end of the appendices to the Final Report, are vague at best on this subject. “Maybe,” “could,” and “perhaps” are used a lot. The only state grants discussed are for work outside of the pool, like for a gym. But there is no gym in the proposed design. There is no state grant for building a pool mentioned in the minutes.
The federal grants discussed would only be for seismic resiliency, that is, covering the additional cost of building stronger for earthquakes. But minutes also reveal that the cost of adding seismic resiliency has been shown to exceed the extra money grants contributed in previous projects.
So much for the certainty of state and federal grants.
So maybe wealthy, generous people will give not only $5 million, but go as high as $7.1 million, maybe $10.1 million.
You Go First
The Jeffco Aquatic Coalition has shown no evidence it has raised $10,000, let alone $10.1 million for the aquatic center. According to minutes of the steering committee, they want a tax measure on the ballot before they start their capital campaign. So far, not enough money to buy some faucets has been raised from private giving or state and federal grants.
There is definitely a rush to get this on an April 2024 ballot.
They want taxpayers to go first. Raise taxes, start making most things more expensive in Jefferson County — from Amazon purchases to socks to home construction and improvement — and then they will start trying to get the rest of the money.
So what happens if taxpayers across the county agree to pay higher taxes, the taxes kick in, but the rest of the money needed doesn’t come through?
Seriously, what happens?
Umm, Didn’t You Forget Something?
The budget in the Final Report maxes out all possible sales tax revenue. The numbers are so tight there is no debt or operating reserve. As we have reported, we are being told that the operating costs for the proposed PT Aquatic Center will be about 40% lower than the comparable experience of the Shore Aquatic Center in Port Angeles, which sees about $2 million a year in operating expenses.
Hite suggested in The Leader that the difference in operating costs can be explained by the Shore Aquatic Center having four “tanks” or pools — a competition pool with diving area, a spa/whirlpool, a wellness pool and an activity pool with a “lazy river.” Port Townsend’s aquatic center would have only two, she said.
Actually, PT would have three pools: competitive, warm water with the “lazy river” and whirlpool. Both facilities have almost exactly the same square footage. The PT Aquatic Center would have a sauna, as does the Shore facility. One could predict that the design of the PT facility would be more expensive, with its higher roof line and graded slope, than that of the Shore center.
Regardless, having an additional small pool, the wellness pool, is only a difference in construction costs, not operating costs, and certainly does not explain how the PT Aquatic Center could operate on $742,000 less than the Shore center. Most operating costs are labor. As discussed below, the fact that there is no provision for administration and supervision of the PT Aquatic Center may go a long way to explaining why its projected operating costs are so low. If operating costs inch up just a bit, the PT Aquatic Center ship capsizes.
A closer inspection of the feasibility study provides some answers. We can see what’s been carved out so the PT facility will have lower operating costs than its counterpart not far away.
For one thing, the Shore facility has an executive director. He interacts with the board, manages the tax revenues and grants, oversees state-mandated audits and reporting, responds to public records requests, etc. He oversaw the $20 million upgrade and expansion in 2020. He supervises the facilities manager, head lifeguard, maintenance crew — everything from physical plant to hiring and firing to dealing with the public and government agencies. He has support staff to help him in this essential work.
The budget for the proposed “base” PT aquatics center, on the other hand, not only does not provide for an executive director, bookkeeper and other support staff, it does not even provide funding for a facility manager. (See p. 55 of Ballard*King feasibility study).
- Shore’s 2023 financial reports shows $158,500 in salaries for administrative staff. The PT Aquatic Center budget is zero.
- Shore spends $112,000 on its Front Desk supervisor and crew; the PT Aquatic Center is budgeted for only $66,378, with no supervisor.
- Shore’s budget also includes salaries totaling $118,700 for janitorial and maintenance versus the PT Aquatic Center’s budget of only $71,868.
- Shore sees janitorial and maintenance expenses for its new facility at the annual rate of $33,200; the PT Aquatic Center budgets only $18,000.
- Shore has learned its insurance costs $93,900 annually; the PT Aquatic Center budget is only $20,000.
- Shore spends $71,100 on childcare; the PT Aquatic Center budgets nothing for childcare.
- Shore has learned from experience to budget $190,000 for materials needed to maintain and repair its 3-year old facility; the PT Aquatic Center budget is only $18,000.
The unexplained discrepancies go on and on until the PT Aquatic Center is budgeted to operate at about $742,000 less annually than the comparable Shore Aquatic Center.
How can such a large facility be run without anyone in charge?
Answer: local government would provide management and administration and bear the cost.
That is an explicitly stated assumption in the Ballard*King budget. (See p. 46). Accordingly, no costs associated with administration are entered into the aquatic center budget; these costs would be off the books in a local government budget. But neither the city nor county governments are going to manage the aquatic center. The city that is heading over a “fiscal cliff” certainly doesn’t have the money.
It is being suggested that the YMCA will manage the facility. But there is no money anywhere in the budget to pay the YMCA.
And who, pray tell, is going to build the new aquatic center?
Not the city. Not the county. It will be a brand new agency called a Public Facilities District (PFD).
This new agency will have to complete the design, engage architects, engineers, put together bid packages, solicit and analyze bids, negotiate contracts, hire and pay construction costs, inspect and approve work and change orders, seek and manage grants, meet state auditing and reporting requirements, comply with public records and open meetings law, serve the appointed board of the PFD, etc. They will need an office, telephones, copiers and lighting so they can see while they work.
The Port Hadlock sewer project needs a crew of about a dozen people to oversee construction.
There is no money in the budget for anyone to get the new aquatic center built and opened!
Even after construction, the PFD will have legal obligations and work that must be done as a governmental entity. But there’s no money to fund a PFD. None.
As If More Consultants Were Needed — Actually, They Are
The Final Report recognizes the work of seven consultants, including a “public engagement consultant.” Missing from the list is a much more critical consultant: the bond, or financial consultant. It is a wise and common practice for public agencies that will be seeking bond financing to engage the services of a bond consultant, such as Northwest Municipal Advisors, who have worked with local governments and public entities in Jefferson County.
They create pro formas using realistic market rates because they work in the bond market every day. They understand that bond financing is very different from, say, mortgage financing. An amortization schedule for a municipal bond will be quite different than the simple pro formas being considered by the Steering Committee. When it comes time, the bond consultant would be the debtor’s negotiator with lenders.
The bond consultant may arrange the short-term bond anticipation note — the equivalent of a line of credit to be used to keep the project going before the funds from the long-term revenue bond are available. That also has been overlooked in the Steering Committee’s calculations.
The interest that would start being due at the beginning of the project will likely be capitalized and rolled into the principal of the long-term revenue bond, raising the dollar value of the amount financed — another omission from the Steering Committee’s calculations, but something a bond consultant would catch.
Then there will be the bond underwriter who raises the capital for the bond.
State law and IRS regulations require engagement of bond counsel. They provide a professional opinion that everything is legal (to oversimplify matters) and that the bond would qualify as tax-exempt.
All of these people have to get paid. Their compensation will come out of a percentage of bond proceeds, which is accomplished by increasing the principal amount of the bond. Thus, a $22.1 million bond would be increased to, say, $22.5 million or maybe more to cover these fees. Taxpayers effectively borrow money to pay these people, as well as borrowing money to pay capitalized interest. That raises the periodic payments and increases the cumulative interest paid over the term of the bond.
None of this is factored into the calculations underlying the “Final Report” and Recommendation — most likely because the Steering Committee spent money on a “public engagement consultant” instead of a bond consultant. The operating and financing costs are thus seriously understated, as PR to sell this to the public was prioritized over crucial bond expertise
The work is hugely incomplete. There are holes in the budget, with necessary items not budgeted, and hopes and prayers plugging the gaping holes. Taxpayers are being rushed into taking the first leap into the murky waters with city councilors being herded into endorsements without getting a complete picture of how bad this thing is.
Cherry Street Project on Steroids
This really is a mess. It is much, much worse than what we saw with the Cherry Street Project. There are so many parallels with what went wrong with what was also a well-intentioned, but fatally flawed undertaking.
Faulty financials:
The Cherry Street Project was created with “bogus” numbers. The feasibility study for the aquatic center, on which everything must stand, is, frankly, garbage. The community is supposed to bet $108 million on the judgment of a consultant who thinks that Mountain View Pool is in Kala Point and Port Ludlow’s pools are on Bainbridge Island. That consultant, as we just discussed, wrote a budget for the aquatic center that has no one in charge.
Like the “bogus” numbers underlying the Cherry Street Project, the bogus numbers underlying the aquatic center are being ignored in a rush to get this on an April ballot.
No unbiased, non-vested confirmation of feasibility:
The Cherry Street Project was pitched and defended by consultants hoping to land a nice contract to execute the project. The same thing is happening here.
Only those who stand to gain a piece of the action — be it Opsis, the architect, or the YMCA — are presenting this project to the public and decision makers. There has been no independent double-checking of the (shoddy) work of the consultants — except by the volunteer citizen journalists of Port Townsend Free Press.
Rush to approve despite warning signs:
There is a rush to just get the money from taxpayers and figure it all out later. We saw this with the Cherry Street Project when hard, cold numbers spoke failure, but city councilors charged ahead out of a sense of haste and not wanting to get bogged down with details or appear to be a dissenter and nit-picker.
If Cherry Street taught a lesson it is this: it is a lot easier to avoid sliding into a project than it is to get out of one.
We were a voice crying in the wilderness when no one wanted to hear of any problems with the Cherry Street Project. Our analysis — which was always based on the very documents and data available to city council and city staff — proved correct. It was a tragedy that the Cherry Street Project ended in such a costly failure and that it dragged out so long.
City officials say they learned their lesson from that fiasco — but have they really?
Seven years later, chalking up a loss of $2 million, the City of Port Townsend has accepted a bid to tear down the never-rehabbed, asbestos-ridden Cherry Street “demonstration project”. That loss pales in comparison to the $100+ million gamble of the proposed aquatic center.
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For reports on the many other red flags and alarms in the critical feasibility study upon which this shaky edifice is built see:
Drowning in Red Ink: Mountain View Pool and the Proposed Aquatic Center.
Aquatic Center Feasibility Study: It Gets Worse.
The $108,941 Pool Could Default Its First Year.
Related articles:
Mountainview Pool–By the Numbers.
Aquatic Center Beats Out Streets and Core Services in Task Force Report.