Chula Vista and Gaylord Entertainment deal falls apart

$25 million a year debt service.

The convention center deal between Chula Vista and Nashville's Gaylord Entertainment has apparently collapsed. People are wringing their hands. They should be clapping their hands. Chula Vista and the Port could not afford the heavily subsidized proposal that was on the table. Gaylord couldn't afford to ante up its portion either: it has lost $167 million in the last three years, has continued losing money this year, and is loaded with debt. Its hotel business -- the overwhelming bulk of the company -- is softening.

Now there is talk that the deal will be revived. That's too bad, because if this costly subsidized deal were shelved, downtown San Diego's convention center and hotels wouldn't be losing business to Chula Vista.

On July 6, the company wrote a letter to Chula Vista officials, saying it was backing out because of intransigence of the San Diego Building and Construction Trades Council, which demanded that only union contractors and subcontractors be allowed to participate. This would have added $50 million to $75 million to the project's cost, according to Gaylord, which also feared environmental lawsuits. Had the company done its homework, it would have known that labor and environmental problems are normal costs of doing business in California.

The City and the company had been negotiating for a year. Gaylord wanted to build a hotel with 2000 rooms and 400,000 square feet of convention space that would be marketed greatly to organizations that want to keep their convention and attendees under one roof. Gaylord operates such facilities in the Nashville, Orlando, and Dallas markets and is building one in Prince George's County, Maryland, to serve the nation's capital. These hotels constitute 96 percent of Gaylord's business. The Grand Ole Opry and related enterprises make up the rest.

"I looked at the Gaylord letter of intent, and it was pretty clear to me that it was a risky project for [Chula Vista]," says Scott Barnett, president and founder of TaxpayersAdvocate.org. Chula Vista and/or the Port were looking into the sale of $308 million in bonds to subsidize the deal. "The Port or City or both would have to come up with $25 million a year to cover the debt service. To get $25 million out of the project, you have to have $2.5 billion worth of new, private development."

Gaylord planned to put $750 million-plus into the project. With the public sector putting in a bit more than $300 million, "The Gaylord hotel project would only have generated $7 million to $7.5 million of tax increment," says Barnett. "So that means that the other $18 million of debt service had to come from other sources such as sales tax, hotel tax, or $1.5 billion of private bayfront development."

And Chula Vista is in over its head already. Last October, Barnett issued a report titled "Chula Vista -- The Looming Fiscal Crisis." Among many things, the study pointed out that the City's revenues have soared the past four years, but spending has risen even more rapidly. The inevitable result: deficits. The bureaucracy has burgeoned, and the average management salary in October was $131,400. The pension debt tripled over two years, and the City's debt zoomed by $143 million in five years.

In the ten fiscal years ended in 2005, Chula Vista's revenues jumped from $98.1 million to $233 million, but spending increased more rapidly, from $108.7 million to $256 million. In the four years ended last year, the City ran a deficit of $21 million, reducing general fund emergency reserves to balance the budget. By the end of last year, the emergency reserves were down to 6 percent of expenditures; the city council's target reserve policy is 8 percent.

The City has increased its debt by $143 million in the past half-decade. It's now up to $190 million. Chula Vista has added 256 employees since 2001 and boosted bureaucracy pay and benefits. The City has $13 million in pension obligation bonds that it first floated in 1994. Such bonds are poison, because they don't go to building a bridge or a school or something that would make the economy more productive but simply shift an obligation onto future generations.

Gaylord is not much better off. Largely because it has lost money heavily in four of its last six years, "Earnings are insufficient to cover fixed charges by $104.2 million," the company confessed in its 2006 report to the Securities and Exchange Commission. That's more than double the insufficiency in 2005. (Fixed charges are costs that remain the same regardless of the extent of use. Rent and property insurance are often examples.) The company admits it has "a significant amount of debt," and when any amount of principal is due, Gaylord may not have the cash to pony up. The company has $874 million of long-term debt; that's $120 million higher than last year, and it dwarfs the $808 million of equity, or the value of stockholders' investment. Because of the high debt, the company is restricted from paying dividends, making acquisitions, and incurring further debt.

In late May and early June, Gaylord sold $366 million of its assets. It intends to pour the proceeds into its hotel business -- but not in Chula Vista. Realistically, it should think about paying off some of that debt.

In the first quarter of this year, Gaylord's net income plunged 74 percent to $3.5 million. Occupancy at the hotels dropped because of a decline in group meetings. Morningstar, which rates companies and mutual funds, gives Gaylord's financial position a grade of F. The company's profitability gets a grade of D.

Mark S. Basham of Standard & Poor's says the company will lose another $5.5 million this year. He was counting on the Washington D.C. facility and the Chula Vista project to boost earnings until 2012. Now that looks shaky. The company gets the lowest ranking (1) out of Standard & Poor's fair-value ranking of 1 to 5.

When government entities can't afford to dish out a subsidy and a private sector entity can't afford to plunk in its share, it's time to call the deal off.

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