When the Vadnais Heights City Council began talking about building a hockey arena and athletic center five years ago, the northern Ramsey County suburb of 12,000 was on a roll in its efforts to transform itself from a sleepy rural village to bustling suburb.
A City Center plan sparked growth along County Road E, where a new six-lane bridge over Interstate 35E brought traffic.
A new city hall followed, replacing a Depression-era building and paid for with savings, and an events center called Vadnais Heights Commons opened in 2011.
When discussions turned to prospects for a hockey arena and sports center, nonprofit Deephaven-based Community Facilities Partners offered an almost irresistible financial plan: The city could issue bonds to pay for the sports center and turn back ownership of it to the nonprofit, with the city acting as “master leaseholder.”
Revenue from the sports center, projected at $2.3 million annually, would cover the cost of debt service.
That estimate was based on 1.3 million spectators and participants using the sports center each year. But both figures proved wildly optimistic, and audits would later show questionable monitoring and management.
The fallout will likely be felt by bondholders who probably will recoup little if anything on their initial $26.5 million investment.
The arena, still owned by Community Facilities Partners, is on the market with an asking price of $13 million.
But it could go for as little as $8 million, said Ray Giannini, first vice president of investments for Marcus & Millichap Real Estate Investment Services, the firm marketing the arena.
Vadnais Heights has spent $5.5 million — equivalent to its entire annual budget — to help pay the bills before defaulting on the bonds.
The city’s bond credit rating plummeted to near junk status, and a prominent conservative website put Vadnais Heights on its “worry list” of cities in danger of following Detroit’s lead toward bankruptcy.
Kevin Watson, who has been Vadnais Heights’ city manager for five months, the situation wasn’t quite that dire.
“Being on that list is unfortunate and scares people unnecessarily,” he said. “The sports center was a project that did not come to fruition as planned. The city was in legal bounds to opt out of the agreement, and that is what they chose to do.”
Though Vadnais Heights will not likely recoup any of the money it put into the sports center, Watson described city finances as healthy and said it was working to rebuild its credit rating and community trust. The city is current on two other bond projects and this year paid off bonds for the County Road E bridge.
Municipal bonds are usually considered the safest form of investment, because the debt sold by a city is repaid over time with the reliable revenue of taxpayer dollars. Returns are more modest, but so is the risk.
But the arrangement used to pay for the sports center was a “conduit” type of municipal bond financing, by which a city issues debt on behalf of a nonprofit. Instead of the debt being backed by tax funds, it’s backed by expected revenue from the project.