The city is being hurt by its need to cover facility's bond debt.
Vadnais Heights taxpayers might take a hit no matter how the City Council resolves financial problems with the beleaguered Vadnais Sports Center after a report this week downgraded the city's credit rating.
Council members either can continue to cover the arena's revenue shortfalls, or they can vote to default on bonds issued for the $26 million arena. Some city leaders heralded the sports center in 2010 as a solution for a blighted property near the city's border with White Bear Lake, but skeptics warned against opening an ice arena while others across the metro area were struggling for cash.
This week, Standard & Poor's dropped Vadnais Heights' long-term credit rating and placed it on negative credit watch, largely because of the center's inability to generate enough money to cover debt during its first two years.
Standard & Poor's, which issues credit ratings for the debt of public and private corporations and entities, dropped the city's debt rating from AA-minus to A-minus and its general obligation debt rating from AA to A.
A lower credit rating means the city would have to pay more to borrow money.
According to the agency's report, debt payments on the lease revenue bonds -- those used to build the center -- will be $1.6 million in 2013. That is 36 percent of the city's $4.5 million general operating budget. If the city chooses to appropriate money, that "could put pressure on city operations," and without improving sports center operations it would be challenged to find the money without "significantly increasing its property tax levy," the report said.
"This is a prime example of government run amok," said resident Gail Martz. "Houses are being foreclosed left and right, and you want to raise property taxes? How many homeowners who still have homes will be in jeopardy? This is not too big to let it fail. My husband's business failed, but I am not going to go tax the neighborhood."
As the overseer of the center, the city is obligated to pay for any shortfalls. So far the city has given three loans totaling $830,100 to help the arena at 1490 E. County Road E make its bond payments and pay its bills. But the city hasn't decided if it will continue to fill the gap.
"We view the poor operating performance of the sports facility as a negative credit factor because net revenues are insufficient to cover annual debt service," Standard & Poors said. "And because the city has not affirmed that it is willing to continue to annually appropriate funds to fully cover debt service through the maturity of the bonds on Feb. 1, 2041, as it originally indicated it would do when the bonds were issued in 2010."
The report comes after the City Council recently approved a $655,000 loan to allow the sports center to make its $582,000 bond payment due Aug. 1. It also comes as the council is having a difficult time getting accurate forecasts to determine if the arena can generate enough revenue to cover its future debt service, or whether the city should default on the bonds and get out of the arena business altogether.
"If you don't appropriate, they will take you down again," said Kathy Aho of Springsted Inc., a St. Paul company that is providing financial advice to the city.
The city must declare its intention by Sept. 2.
"This is the beginning of the funeral," said Council Member Joe Murphy during a Wednesday workshop session.
A 2010 city audit found the arena suffered from "significant deficiencies in internal control over financial reporting" and lax record-keeping.
On Wednesday, council members expressed exasperation over a lack of information they say they need to decide what to do next. They have pressed city officials and the sports center's management company, led by Chief Operating Officer Mark Bigelbach, for details of revenue tied to past and current contracts, along with revenue projections for 2013 and beyond.
Council members on Wednesday said Bigelbach, who was invited to Wednesday's meeting but did not attend, assured them that $2.3 million in contracts had been signed for the center's first full year of operation, but records show the contracts added up to only $1.5 million.
"I think we got hoodwinked," said Council Member Lynn Kapaun. "I want to know what we have going forward if we are going to stay in this."
Tim Harlow 651-925-5039 Twitter: @timstrib