The City of Rapid City currently enjoys a AA credit rating. This rating is given to cities such as ours for historically demonstrating responsible bonding/borrowing/repayment for projects historically. Cities in South Dakota do not get bank loans, they sell bonds through an underwriter in order to create funding. There are generally two types of bonds to be used in this scenario:
Revenue Bonds: The City sells bonds through an underwriter to create funding for a project. The City is responsible for paying the principal and interest to the bond holders through a trustee (usually 1st National Bank). If the City fails to pay the bonds, the bond holders sue the City.
Certificates of Participation
Certificates of Participation (COPs): The City sells bonds through an underwriter to create funding for a project. The City is responsible to pay the principal and interest through a lease agreement with a trustee (usually 1st National Bank). The trustee is responsible for paying the principal and interest to the bond holders. The trustee in this case is regarded as a lessor and the City is a lessee. If the City fails to make the payment, the project, in this case the arena, becomes the property of the Trustee. Similar to a person securing a bank loan for a car or a home and then failing to make payment. There is a repossession or foreclosure.
It is important to note that certificates of participation were used to fund, in part, the original Civic Center campus. Also, the state of South Dakota uses only certificates of participation when bonding is necessary for large projects. This is a legitimate and necessary funding mechanism and is not a “scheme” as two of the former mayors, Alan Hanks and Jim Shaw fondly referred to it. More importantly, the City has the ability to fund the entire project through cash down payment and revenue bonds. The decision of what bond types to use has not been made, and will not be made until it’s time to access the funds.
In 1972, voters approved a one-half cent sales tax to be used to build the Civic Center complex. At that time, the fund generated less than $1 million annually. When the Civic Center was paid off, the tax reverted to the citizens. Former Mayor Ed McLaughlin put the issue back on the ballot and Rapid City voters approved reinstating the tax in 1992. The new version of the ½ cent tax became known as the vision 2012 fund. In 1995, this fund generated $3.5 million annually. In 2017 the Vision Fund generated $12.8 million.
In March 2015 voters denied the City’s attempt to build a new 19,000 seat arena for $180 million in construction costs. There was no alternative plan at the time. In January 2016 the Civic Center Resolution Task Force was formed and charged with investigating options for moving forward with the Barnett Arena ADA compliance and marketability issues. Approximately one year later, the task force submitted their findings to the Mayor’s Office. We then put the findings into a presentation and began engaging the public on this important issue.
The funding mechanism consists of using just over 50% of the annual Vision Fund revenue collection. An annual bond (debt) payment of $6 million was chosen because it’s affordable and allows us to continue to fund important community projects with the other half of the fund. It also provides an important barrier in the event of a major recession.
Since early 2016, and in anticipation of an upcoming large expense, the City has been able to save $25 million in vision funds. The new arena being proposed will cost $130 million, and will include a 20% down payment. The City seeks to sell bonds through an underwriter for a maximum of $110 million in bond proceeds and will be paid over an anticipated 30 year period at $6 million annually.
One of the common concerns heard from citizens, is that the City should be putting this money into road repairs rather than a new arena. For perspective, please understand this:
- The City’s annual operating budget is approximately $166 million.
- The City will spend $180 million (same cost of the arena principal and interest financing) on roads and infrastructure over the next 6.5 years
Over the 30-year financing period, the City will make payments on the new arena, but it will also spend $1.16 billion on streets and infrastructure. The City has a need and responsibility to balance its interests, just like we all do. Putting all the money into one priority at the expense of other priorities is no way to live, no way to do business and no way to run a city government. Your city council understands this and I understand it. Not everyone can be made happy.
The Civic Center and other attractions bring outside money into our economy; without outside money, the economy cannot grow. This plan has never been pitched as the economic “magic pill” but it is an important plan for the long term well-being of the Civic Center, which is an important cog in the local economic wheel.
Also important to note: there will be no new taxes required to fund the arena or the ongoing Street and infrastructure expenses.