Independent Feasibility Review for the Skagit Regional Public Facility District Project — Department of Commerce (April 29, 2020)
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Summary
A Washington State Department of Commerce transmittal letter to Governor Jay Inslee dated April 29, 2020, submitting under RCW 35.57.025 the Financial Feasibility Review of Skagit Regional Public Facilities District Improvements to McIntyre Hall Performing Arts & Conference Center, prepared by E. D. Hovee & Company, LLC and dated March 20, 2020. The review describes planned improvements costing $4.5 million, funded largely by new bonds with a par amount of $3.4 million, within a cumulative $13.085 million debt cap. It tests three sales tax revenue scenarios and concludes that all three cover debt service, while only the trended scenario also covers reserves and operating expenses. It notes that its estimates pre-date the March 2020 intensification of the COVID-19 pandemic. A report addendum lists documents reviewed and a bond debt service schedule.
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“Independent Feasibility Review for the Skagit Regional Public Facility District Project — Department of Commerce (April 29, 2020).”
Original at app.leg.wa.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/2020-final-srpfd-improvement-feasibility-review-merged-d1e2bf05-6ea9-4f54-a/
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STATE OF WASHINGTON
DEPARTMENT OF COMMERCE
1011 Plum Street SE PO Box 42525 Olympia, Washington 98504-2525 (360) 725-4000
April 29, 2020
Honorable Jay Inslee
Washington State Governor
PO Box 40002
Olympia, WA 98504-0002
Dear Governor Inslee:
In accordance with RCW 35.57.025(1), the Department of Commerce is electronically submitting the final
independent feasibility review for the Skagit Regional Public Facility District project. This review is available at:
Report: https://www.commerce.wa.gov/wp-content/uploads/2020/04/SRPFD-Improvement-Feasibility-Review-
Final-3-20-20.pdf
Addendum: https://www.commerce.wa.gov/wp-content/uploads/2020/04/SRPFD-Improvement-Feasibility-
Addendum-Finalt-4-28-20.pdf
Commerce’s primary role in this process is to contract for an independent review to provide objective and timely
analysis of the financial feasibility of the proposed project. The statute further directs Commerce to make the
review public upon its completion and submit it to participating local governments, state elected officials and the
Legislature.
We hope this review is helpful to the Skagit PFD and participating governments in informing decisions about
their project.
Sincerely,
Mark Barkley
Assistant Director, Local Government Division
cc: Duane Davidson, Washington State Treasurer
Pat McCarthy, Washington State Auditor
Marc Estvold, Project Manager, Skagit Regional Public Facilities District
Trisha Logue, Skagit County
Cindy Aden, Washington State Library
FINANCIAL FEASIBILITY REVIEW
OF SKAGIT REGIONAL PUBLIC
FACILITIES DISTRICT IMPROVEMENTS
TO MCINTYRE HALL PERFORMING
ARTS & CONFERENCE CENTER
Prepared for:
Washington State
Department of Commerce
March 20, 2020
E. D. Hovee & Company, LLC
Economic and Development Services
FINANCIAL FEASIBILITY REVIEW
OF SKAGIT REGIONAL PUBLIC
FACILITIES DISTRICT IMPROVEMENTS
TO McINTYRE HALL
PERFORMING ARTS
& CONFERENCE CENTER
Prepared for:
Washington State Department of Commerce
1011 Plum Street SE
PO Box 42525
Olympia, WA 98504-2525
(360) 725-4000
Prepared by:
E. D. Hovee & Company, LLC
PO Box 225
2408 Main Street
Vancouver, Washington 98666
(360) 696-9870
March 20, 2020
Note: Cover exterior photo is courtesy of the Hutteball + Oremus Architecture
AT-A-GLANCE SUMMARY
The Skagit Regional Public Facilities District (SRPFD or District) is planning to improve the 700-seat
McIntyre Hall Performing Arts & Conference Center in Mount Vernon, Washington, at a cost of
$4.5 million, funded in large part by issuance of an estimated $4.0 million in net bond proceeds – with
face value (par amount) of new bonds at $3.4 million.
In accordance with state statute, the economic and development consulting firm E. D. Hovee &
Company, LLC, has prepared this independent feasibility review for the Washington Department of
Commerce on behalf of the District. Key findings of this report follow.
SRPFD Institutional Arrangements. Institutional arrangements of importance to the 2001 initial
formation and subsequent ongoing sustainability of the SRPFD include the original charter for the
District as amended, interlocal agreements with five participating Skagit County municipalities, ground
lease with Skagit Valley College and Management Agreement with Skagit County (much of which has
now been superseded by a 2013 Interlocal Agreement). In 2001, the SRPFD board also put in place a
state-rebated 0.033% sales-and-use tax that has been used to support debt repayment plus a portion of
operating and other facility-related expenses.
As a countywide regional public facilities district involving Skagit County, Skagit Valley College (SVC) and
five municipalities, the governance and funding of SRPFD functions represent a reasonably complex
intergovernmental framework supported by appropriate documentation. Planned improvements are
expected to require prior updating of some agreements – most notably the Interlocal Agreement with
Skagit County and a Ground Lease with SVC.
Improvement Cost and Funding. Initially completed in 2004, the Performing Arts & Conference
Center (PACC) was funded at a cost of about $18 million, just over half of which was from issuance of
bonded debt. Current improvements are anticipated to include replacement of the damaged exterior of
the theater (at a cost of $2.5 million), renovation and addition to the facility’s commercial kitchen ($1.7
million), and additional smaller improvements (budgeted at up to $300,000) as funding allows.
Initial 2003 Bonds were issued at a par amount of $9.685 million. Planned 2020 Bonds are proposed to
be issued with a par amount of $3.400 million. When combined, they should equal $13.085 million. The
total amount of existing debt (much of which has been repaid) and new debt should total a cumulative
$13.085 million debt cap (or maximum) agreed to by participating jurisdictions in conjunction with initial
District formation and initial PACC construction. Existing debt was refinanced in 2013 by Skagit County at
a savings in annual debt payments which will end in 2026 when bonds are fully retired.
Planned new debt will be issued in 2020 with repayment starting at the end of this year and extending
through 2041. Total annual debt service payments (on both bonds) are estimated to be more than
$771,000 in 2020, increasing to $1.002 million in 2026, then dropping with retirement of the 2013 bond
to payments ranging from $325,500 to $350,000 per year from 2027 to 2041.
The 2020 Bonds, as Skagit County Limited Tax General Obligations (LTGO) commitments, could be repaid
from any legally available source of the County. The PFD's obligation to the County relies solely on
District sales tax credit and associated reserves.
Debt Repayment Capacity. Since the primary source of debt repayment available to SRPFD has
been the 0.033% sales tax credit rebated to the District, the key question addressed with this review is:
Will District sales tax revenues prove adequate to pay both existing and added debt through the
period of debt repayment?
E.D. Hovee & Company, LLC for the Washington State Department of Commerce:
Financial Feasibility Review for SRPFD Improvements to McIntyre Hall Performing Arts & Conference Center ♦ Page i
From 2004 (as the first full year of sales tax collections) to 2019, sales-and-use tax revenues have
increased by an average of 3.3% per year to $1.14 million, as of 2019. To date, the only time over which
revenues have declined was from 2008-10 (during the Great Recession). Over this three-year period,
annual sales tax receipts to the District declined by nearly 24%.
This review has considered the implications of three alternative potential revenue scenarios going
forward: a trended scenario by which sales tax revenues continue to increase at 3.3% per year, a flat
revenue scenario with revenues stalling out at 2020 budgeted levels and a recession scenario similar to
what occurred in 2008-10 (hypothetically repeated from 2024-26). Two primary conclusions emerge
from this review:
• All three scenarios provide adequate sales-and-use tax revenue to meet debt service
requirements each year through the period of debt repayment. This assumes that sales tax
revenues are prioritized to repay the debt even if shortfalls in funding to cover reserves,
operating and/or other facility expenses are created as a result.
• Recognizing that sales tax revenues also have been used to cover operating expenses (for
example, budgeted at $395,000 for 2020) plus reserve requirements, this review also concludes
that only the trended scenario covers debt plus reserve and operating expenses but that the
other scenarios could fall short of full funding capacity in 2026-27 with flat revenue or from
2024 to beyond 2028 with the recession scenario.
Project Risks and Mitigation. As illustrated by the following chart, three potential categories of
project risk are identified with this review – institutional, construction and debt repayment. Also listed
are potential options that might be considered to mitigate these risks.
Type of Risk Potential Sources of Risk Potential Options for Mitigation
Institutional risk – for • Need to amend/extend SVC • Short term – extend the ground lease
multiple public entities & Skagit County agreements with SVC & interlocal with Skagit County
involved with the PFD • Unclear responsibility to • Long term – plan the transition for
and need to update remedy potential future future PACC funding/management when
interjurisdictional roles funding shortfalls all debt is retired as planned in 2041
Improvement cost & • Construction cost inflation
funding risk – if • Use of existing contingency set-asides
• Unforeseen construction
improvement costs
issues and/or schedule delay • Deferral of smaller improvements
exceed $4.5 million or
funding terms are less • Bond funding does not • Add local funds or reduce project scope
favorable than expected materialize as planned
Debt repayment • Potential economic • Prioritize debt repayment as per existing
capacity risk – as with downturn before 2026 Interlocal agreement
increased cost, impacting reserve buffer • Clarify backstop responsibilities for
economic downturn • Temporary inability to fully reserves & operating expense support
and/or debt coverage fund both debt & operating • Increase reserves &/or restructure debt
requirement obligations service with flatter repayment schedule
These risks may be addressed with District and interlocal action – with initial steps taken as appropriate
prior to planned issuance of new debt in 2020 and/or as future conditions warrant. For the scenarios
considered, there would appear to be reasonable options for measures that can be taken to assure debt
repayment over the term of the new bonded debt as currently planned.
E.D. Hovee & Company, LLC for the Washington State Department of Commerce:
Financial Feasibility Review for SRPFD Improvements to McIntyre Hall Performing Arts & Conference Center ♦ Page ii
Added Report Note. It is important to note that the financial estimates provided in this report pre-
date the March 2020 intensification of the coronavirus (COVID-19) pandemic nationally and in
Washington state, especially in the face of economic effects now being experienced. As of the date of this
draft, the short and long-term financial and economic effects nationally and regionally have yet to be
determined in any readily quantifiable manner. Depending on the severity and duration of these effects,
it is possible that the financial capacity of the District could be affected in a manner not previously
anticipated.
E.D. Hovee & Company, LLC for the Washington State Department of Commerce:
Financial Feasibility Review for SRPFD Improvements to McIntyre Hall Performing Arts & Conference Center ♦ Page iii
Table of Contents
AT-A-GLANCE SUMMARY i
I. INTRODUCTION 1
Purpose of Independent Feasibility Review 1
State of Washington Role and Statutory Authority 1
SRPFD Facilities 2
Analysis Approach 3
II. SRPFD INSTITUTIONAL ARRANGEMENTS 5
Interlocal Agreements and Authorizations 5
Sales Tax Funding Authorization 10
Institutional Arrangements Summarized 10
III. IMPROVEMENT COST AND FUNDING 12
Sources and Uses of Funds 12
Improvement Budget Detail 13
Capital Funding Detail 13
Schedule and Management Considerations 16
IV. DEBT REPAYMENT CAPACITY 17
PFD Sales Tax Revenue History 17
PFD Revenue Capacity to Support Debt 18
V. PROJECT RISKS AND MITIGATION 25
Institutional Arrangements 25
Improvement Cost and Funding 27
Debt Repayment Capacity 28
APPENDIX A. PREPARER PROFILE 30
APPENDIX B. DOCUMENTS REVIEWED 31
APPENDIX C. STATEMENT OF IRMA COMPLIANCE 32
APPENDIX D. McINTYRE HALL FLOOR PLANS 33
END NOTES 35
E.D. Hovee & Company, LLC for the Washington State Department of Commerce:
Financial Feasibility Review for SRPFD Improvements to McIntyre Hall Performing Arts & Conference Center
I. INTRODUCTION
The Skagit Regional Public Facilities District (SRPFD or District) is planning to improve the 700-
seat McIntyre Hall Performing Arts Center in Mount Vernon at a total cost estimated at $4.5
million. Of this amount, $4.0 million is anticipated to be funded with limited tax general
obligation (LTGO) bonds issued by Skagit County – with repayment to be made by the District. 1
PURPOSE OF INDEPENDENT FEASIBILITY REVIEW
The economic and development consulting firm E. D. Hovee & Company, LLC, has been retained
by the Washington State Department of Commerce (Commerce) to conduct an “independent
feasibility review” for Commerce on behalf of the District, pursuant to RCW 35.57.025.
The purpose of the review is to examine the potential costs and the adequacy of revenues or
expected revenues to meet the costs that are proposed to be incurred by the District. As
directed by state statute, the preparer of this report is to exercise independent professional
judgment in conducting the financial feasibility review.
STATE OF WASHINGTON ROLE AND STATUTORY AUTHORITY
As enacted by the 2012 Washington State Legislature, RCW 35.57.025 reads as follows:
(1) An independent financial feasibility review under this section is required to be
performed prior to any of the following events:
(a) The formation of a public facilities district under this chapter;
(b) The issuance of any indebtedness, excluding the issuance of obligations to refund
or replace such indebtedness, by a public facilities district under this chapter; or
(c) The long-term lease, purchase, or development of a facility under RCW 35.57.020.
(2) The independent financial feasibility review required by this section must be
conducted by the department of commerce through the municipal research and services
center under RCW 43.110.030 or under a contract with another entity under the
authority of RCW 43.110.080. The review must examine the potential costs to be
incurred by the public facility [facilities] district and the adequacy of revenues or
expected revenues to meet those costs. The cost of the independent financial feasibility
review must be borne by the public facility [facilities] district or the local government
proposing to form a public facility [facilities] district.
(3) The independent financial feasibility review, upon completion, must be a public
document and must be submitted to the governor, the state treasurer, the state
auditor, the public facility [facilities] district and participating local political subdivisions,
and appropriate committees of the legislature.
This evaluation is being prepared pursuant to sections (1)(b)-(c) of the above noted statute.
E.D. Hovee & Company, LLC for the Washington State Department of Commerce:
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SRPFD FACILITIES
The Skagit Regional Public Facilities District (SRPFD) was created in 2001 for the sole purpose of
funding, constructing, owning, operating and maintaining a performing arts and conference
center (PACC). Entities participating in District formation included Skagit County together with
the incorporated municipalities of Anacortes, Burlington, La Conner, Mount Vernon and Sedro-
Woolley. The center is located on property leased from Skagit Valley College in Mount Vernon.
Current Performing Arts & Conference Center Facilities
As noted, the McIntyre Hall Performing Arts & Conference Center is located on the campus of
Skagit Valley College (SVC). Construction began in March 2003 and the completed facility
opened Nov. 13, 2004 – with “A Wonderful Life” as the first production in December 2004.
McIntyre Hall serves the Skagit Valley with a 700-seat theater, conference room and support
facilities, including catering, marketing, technical support, event planning and ticketing.
The facility has served as home
to community arts organizations, Exterior and Interior Images of McIntyre Hall
including Fidalgo Youth
Symphony, Lyric Light Opera,
META Performing Arts, Mount
Vernon School District,
Northwest Ballet Theater, Skagit
Opera, Skagit Symphony, Skagit
Valley Academy of Dance, Skagit
Valley Chorale and Theater Arts
Guild. 2
Constructed at a cost of about
$18 million, facility funding was
provided about as follows:
• $9 million+ in bonds
(47% of the project total)
• $6 million (35%) as a
McIntyre Foundation gift
• $3 million (18%) through
a Building Campaign with
funding from individuals,
businesses, grants and in-
kind contributions.
Source: Photo images courtesy of Hutteball + Oremus Architecture.
See Appendix D for facility floor plans.
E.D. Hovee & Company, LLC for the Washington State Department of Commerce:
Financial Feasibility Review for SRPFD Improvements to McIntyre Hall Performing Arts & Conference Center ♦ Page 2
Improvement Plan
McIntyre Hall is SRPFD’s only regional center facility, constructed with the proceeds of its
original bond issue in 2003 and completed in 2004. Now just over 15 years since project
completion, the District has determined that the facility is in need of improvements and
upgrading to remain viable and attractive as a continuing regional arts center going forward.
The planned project consists of two major elements and several smaller maintenance/safety
upgrades:
• The first element is proposed to involve replacement of the exterior envelope siding
on the building. The current building siding is stucco. Even though the siding was
installed to meet industry standards in 2003, there have been leaking problems
throughout the building since opening day. The current planned project includes
removal of the existing stucco siding; removal and replacement of wet/damaged
gypsum wall board and insulation exposed by stucco removal; and the installation of a
full-weather barrier, new Cereclad siding and flashings.
• The second major element of this project is planned to include the renovation and
addition to the commercial kitchen in the building. The current kitchen was designed
as a warming/ serving kitchen. With this renovation and expansion, up to 300 meals will
be able to be prepared and served on time, greatly expanding the use of the Conference
Center and improving quality and safety.
• An optional third element would be to undertake additional smaller improvements, as
funding allows. SRPFD is considering re-carpeting the conference center, long-term
HVAC equipment maintenance requirements and the installation of a hydraulic
orchestra pit lift. As noted, these projects are the next level of priority and will be
queued up for implementation as funds are available – whether with the 2020 program
of improvements or subsequently.
ANALYSIS APPROACH
This analysis has been prepared for Commerce by the independent economic and development
consulting firm E. D. Hovee & Company, LLC (E. D. Hovee). 3 A brief profile of the firm as report
preparer appears in Appendix A.
Documents Reviewed
A listing of documents reviewed as part of this independent feasibility study appears in
Appendix B to this report. Included are documents as initially provided by Commerce and
SRPFD at the outset of this assignment together with other materials obtained during the
course of this review.
No additional independent document research has been conducted for this assignment, outside
of materials provided via Commerce, information already available to E. D. Hovee and any
E.D. Hovee & Company, LLC for the Washington State Department of Commerce:
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added information provided as a result of follow-up with Commerce and the SRPFD. The
assistance of Commerce and the District with provision of background information, follow-up to
questions and review of draft report documentation is greatly appreciated.
Methodology Overview
A major focus of this report is to review the project’s capital cost and related documentation.
This is followed by a review of the sources and adequacy of revenues to meet debt service
requirements.
Also reviewed is the adequacy of existing agreements related to capital and operating funding
between the SRPFD and its funding and operating partners. Both the debt financing and overall
feasibility reviews are accompanied by consideration of project debt and operating risks.
Review of project risks is accompanied by discussion of measures that might be considered for
mitigation, as for added financial backstop arrangements, as appropriate.
Recent Coronavirus Disease Outbreak and Economic Effects
It is important to note that the financial estimates provided in this report pre-date the March
2020 intensification of the coronavirus (COVID-19) pandemic nationally and in Washington
state, especially in the face of economic effects now being experienced. As of the date of this
draft, the short and long-term financial and economic effects nationally and regionally have yet
to be determined in any readily quantifiable manner. Depending on the severity and duration of
these effects, it is possible that the financial capacity of the District could be affected in a
manner not previously anticipated.
Report Organization
The remainder of this report is organized to cover the following topics:
• SRPFD Institutional arrangements – including a review of interlocal agreements and
authorizations, sales tax funding authorization, and summary of institutional
arrangements
• Improvement cost and funding – including sources and uses of funds, improvement
budget and funding detail, and schedule and management arrangements
• Debt repayment capacity – addressing feasibility of issuing new indebtedness in the
context of District revenue and capacity to support new debt together with ongoing
operating expenses
• Project risks and mitigation – associated with institutional, improvement cost/funding
and debt repayment capacity
Included with the report are four appendices: a profile of E. D. Hovee & Company, LLC, as
project preparer; a list of reviewed documents; statement of independent registered municipal
advisor (IRMA) compliance; and illustration of the current floor plan of McIntyre Hall.
E.D. Hovee & Company, LLC for the Washington State Department of Commerce:
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II. SRPFD INSTITUTIONAL ARRANGEMENTS
Within the state of Washington, public facility districts can be created by a city, county, or
combination of cities and/or counties. SRPFD was created by Skagit County and currently
operates as a countywide regional district – involving interlocal agreements between Skagit
County and five municipalities within the county (four cities and one town).
This portion of the independent feasibility report is intended to review the institutional
arrangements that have been pivotal to the organization and operation of the District to date,
including potential refinements to these arrangements as might be needed for further facility
improvements as currently planned. Also considered are capital and operating funding
responsibilities as consistent with local institutional arrangements and availability of sales-and-
use tax funding credited back to local jurisdictions by the state of Washington.
INTERLOCAL AGREEMENTS AND AUTHORIZATIONS
Institutional arrangements of importance to the initial formation and ongoing sustainability of
the SRPFD include the original charter for the District as amended, interlocal agreements with
five participating Skagit County municipalities, ground lease with Skagit Valley College and
Management Agreement — much of which has now been superseded by a 2013 Interlocal
Agreement with Skagit County. Each of these is briefly described, in turn.
SRPFD Charter and Amendments
Documents made available for this review have included the original charter (including County
resolution forming the District); amendments from 2002, 2003 and 2004; and County
resolutions from 2008 and 2009 regarding the District’s board composition.
Initial SRPFD Charter. By resolution 18364 dated Aug. 14, 2001, the Skagit County Board of
County Commissioners formed the Skagit Regional Public Facilities District as a municipal
corporation and independent taxing district to:
“… acquire, construct, own, remodel, maintain, equip, reequip, repair, finance and
operate (either directly or by contract) a Performing Arts & Conference Center (“PAC”)
consisting of the following components (all of which shall be included if and to the
extent of available funds): a proscenium stage together with fly tower and orchestra pit,
with seating (estimated capacity of 700) in opera house configuration and one or two
balconies and related lobby space and additional space for a conference facility on
property to be leased from the College, including necessary parking.”
Additional features of the charter included provisions for:
• Use of sales tax and additional revenue for the District’s corporate purposes.
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• All liabilities of the District to be satisfied exclusively from the assets and credit of the
District.
• Application of sales tax or other revenue to be expended for the payment of debt
service and then for the services, projects and activities authorized by the Charter.
• Contracting authority of the District limited to the lesser of $13.085 million or the bond
proceeds plus donation on deposit plus other contributed funds.
• No authorization for the District to impose other taxes available to PFDs by state statute
without prior approval by the Board of County Commissioners.
• Provision for the charter to be amended only with County Commissioner approval,
whether in response to a resolution passed by the District’s Board of Directors or on the
initiative of the County.
• Provision for future potential dissolution of the District whether by the initiative of the
District or County – but requiring approval by the County, with provision for discharge of
remaining responsibilities including property disposition.
SRPRD Charter Amendments. Since its initial adoption in 2001, the Charter of the District
has been amended on several occasions as follows:
• Skagit County Resolution R20020048, amending the charter to add city approval prior to
PFD voted sales tax imposition and limitation of bonding or other debt to no more than
$13.085 million, adopted Feb. 19, 2002.
• Skagit County Resolution R20030101, amending additional provisions of the original
charter and approving an initial Interlocal Agreement, adopted March 24, 2003.
• Skagit County Resolution R20040143, as 3rd amendment to the charter – further
clarifying that the maximum amount of funding is to include bond proceeds and
donations on deposit plus other contributed funds plus added future tax revenues
sources including interest income, adopted April 26, 2004.
• Skagit County Resolution R20080258, acknowledging the composition of the current
Public Facilities District board and redefining the position designations and term
expiration dates of the board members, adopted May 27, 2008.
• Skagit County Resolution R20090274, further redefining the position designations and
term expiration dates of the Board positions, Jun. 29, 2009.
The most significant component of these amendments has been to clarify the application of the
$13.085 million maximum amount. In effect, this represents a fixed cumulative debt funding
maximum not expected to be exceeded with planned inclusion of the new 2020 bonded
amount. Other funding sources are outside of this $13.085 cumulative bonded debt limit.
Municipal Interlocal Agreements
As of Dec. 31, 2001, five interlocal agreements (ILAs) were completed by Skagit County with the
cities of Anacortes, Burlington, Mount Vernon and Sedro-Woolley, and with the Town of La
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Conner – each detailing the jurisdiction’s participation in the Skagit Regional PFD. In each case,
the five cities have agreed that they will not form a separate PFD that would impose the 0.033%
tax, in support of the county-wide regional district.
The only incorporated jurisdictions in without ILAs are the smaller communities of Concrete,
Hamilton and Lyman. While there are no specific agreements with these jurisdictions, all of
Skagit County is part of the District as the boundaries of the District are coterminous with Skagit
County.
Similar agreements were made with each participating jurisdiction – all located within the
boundaries of SRPFD as coextensive with the county. The agreements stipulate that each
jurisdiction will not create its own PFD if that would involve a reduction to the sales tax of the
regional District – so long as general obligation bonds of the District remain outstanding. In the
agreement with Sedro-Woolley, an added provision was made that, in any event, the
commitment to not form a separate local PFD is currently for no more than 25 years after the
first sales tax was initially collected (or through 2026).
For Anacortes, an added provision was that District debt not exceed $13.085 million. Another
added provision was made regarding potential future funding allocation in the event that a city-
specific PFD was to be formed, but this provision appears to be of no current effect.
Skagit Valley College Ground Lease
In September 2002, SRPFD entered into a ground lease with the Washington State Board for
Community and Technical Colleges and the Board of Trustees of Skagit Valley College. By this
agreement, SRPFD agreed to lease property on the site of the SVC campus for construction and
operation of a Performing Arts & Conference Center (PACC).
The term of the lease is for 30 years, with an annual lease payment to be made of $1 per year.
The lease was conditioned on the District beginning construction of the center by Dec. 31,
2003, so that the District would receive 0.033% state sales-and-use tax funding. The lease also
referenced a separate Management Agreement between SRPFD and SVC, whereby the college
would agree to undertake management responsibilities for the PACC, once completed.
SRPFD is responsible for subsequent modifications, alterations and additions to the PACC
facility, subject to SVC approval for projects of over $10,000 in cost. At the end of the lease, the
property reverts to SVC with the anticipation that the PACC will continue to be operated by the
College, though no formal SVC commitment has been made to date. If requested by SVC as per
the terms of the ground lease, the District would be responsible for removing modifications,
alterations, additions, or improvements and restoring the premises to their prior condition.
With the proposed new bond financing extended via added bond payments through 2041, the
ground lease agreement with SVC will need to be extended to cover at least this new time
period of additional bond repayment. This extended lease will also require review with the
E.D. Hovee & Company, LLC for the Washington State Department of Commerce:
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Washington State Office of the Attorney General. This process is underway and the lease
extension is expected to be approved by the State by about the end of March 2020.
Management Agreement and Amendments
On Sept. 2, 2002, SRPFD entered into an agreement for PACC Management Services with the
Skagit Performing Arts Council (SPAC) and Skagit Valley College (SVC). The agreement has been
subsequently amended.
Initial Agreement. With this agreement, SVC committed to assume facility management
services upon PACC occupancy for a 30-year term or until the facility and premises would revert
to the College. Management services were defined to include responsibility for staffing,
scheduling/rental activities, rental rates and booking policy, payment of all operating expenses,
marketing, and cooperation with user groups. SVC also agreed to manage the PACC as a Four-
Wall House, meaning that users of the facility would be responsible for all aspects of their
production or use, and promotion of their productions or use and for the sale of tickets and
associated activities.
As a separate 501(c)(3) non-profit corporation, SPAC committed to engage in annual fund-
raising efforts to support the operations and maintenance of the PACC for the benefit of the
performing arts in Skagit County.
The 2002 Management Agreement included specific provisions for priority uses of sales tax
revenues and all SRPFD revenues. These priorities have been subsequently modified by a 2013
Interlocal Agreement between SRPFD and Skagit County, as described below.
Amendments. The Management Agreement has been subsequently amended, as follows:
• By an Amendment of June 2004 to a prior Memorandum of Understanding dated Jan.
16, 2003, the SRFPD, SVC, Skagit Valley Foundation, and the M.J. McIntyre and Shirley
McIntyre Charitable Foundation, SVC agreed to provide specific support services, office
space and personnel to the Foundation and Capital Campaign. Also agreed was that, in
the event professional fund-raising expertise is required by the PFD, SVC has agreed to
work with the PFD to locate and fund that expertise.
• A proposed First Amendment to the agreement considered in 2008 was predicated on
SPAC relinquishment of all rights and duties together with revisions to financial,
scheduling and rental policy provisions of the initial Management Agreement. However,
the SRPFD indicates that there is no record of this amendment being approved. 4
• A Second Amendment was formally approved by SRPFD, SVC and SPAC over the June-
July period of 2018, acknowledging the removal of SPAC from the Management
Agreement and providing for amended language of the agreement related to financial,
scheduling and rental policy provisions.
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Skagit County Interlocal Agreement
By Interlocal Agreement dated Feb. 1, 2013, between Skagit County and the SRPFD, it was
agreed that 2003 SRPFD issued limited sales tax obligation bonds would be refunded with a
new issue by Skagit County to achieve a debt service savings to the District. By this agreement
and associated bond resolution, the District agreed to dedicate sufficient revenues to pay the
debt service on the County’s 2013 refunding bonds. Skagit County irrevocably pledged its “full
faith, credit and resources” to bond repayment. In effect, the County is serving as a financial
backstop in the event that future District sales tax revenues and designated reserves prove
inadequate to fully cover debt service, whether temporarily or of longer-term duration.
The agreement terminates upon repayment of existing and future debt. It provides for some re-
statement of payment priorities involving the Sales Tax and Revenue Stabilization Accounts.
Sales Tax Account. Payment priorities for the Sales Tax Account maintained by the Skagit
County Treasurer’s office and funded by District sales-and-use tax revenue listed by this new
interlocal agreement are:
First, to make deposits to the Interest Account for payment of 2013 bonds and any
future Additional bonds.
Second, to make deposits into a Principal Account for payment of principal for the same
bonds.
Third, to pay District Operating Expenses (not including the operating expenses of SVC
as facility operator).
Fourth, to make required deposits to a Revenue Stabilization Account (to cover the
required debt service for each upcoming calendar year).
Fifth, to fund the Operating Reserve Account (at a minimum of one-half of operating
reserves for each budget year or at least $20,000 per year).
Sixth, to fund a Capital Reserve Account (set at an amount of at least one-half of the
amount budgeted each year for Capital Reserves as defined in the Management
Agreement).
Seventh, to make necessary additions, betterments, improvement and repairs to or
extension and replacement of the PACC, or for any other lawful District purposes.
District Revenue Account. This is a second account of the District maintained in the office
of the County Treasurer – from the proceeds of interest earnings on fundraising and surplus
revenues. For so long as there is outstanding bonded indebtedness, District revenues can be
used only for the following purposes and in the following order of priority:
First, to pay PACC/SVC operating expenses to the extent not covered by other sources.
Second, to make required deposits to the Interest Account.
Third, to make required deposits to the Principal Account.
Fourth, to pay PFD Operating Expenses.
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Fifth, to fund the Operating Reserve Account.
Sixth, to fund the Capital Reserve Account.
Seventh, to make other expenditures as for facility improvements, reimbursement of
operators including SVC for operating deficits or other lawful District purposes.
SRPFD expects to request an amendment or affirmation for continuance of its 2013 Interlocal
Agreement with Skagit County before the issuance of additional bonds by the County. It is
contemplated that the District will be responsible for payment of the debt service of the 2020
County Bond. Bond issuance is currently planned to be completed in the first half of 2020.
SRPFD has asked Skagit County to issue the 2020 Bonds for the benefit of the SRPFD and the
Project. As a condition to such issuance, it is understood that the County is requiring an
amendment to or re-affirmation of the 2013 Interlocal Agreement (ILA) that will extend the
commitments and obligations to both the 2013 and 2020 Bonds.
While the County agreed to issue the 2020 Bonds on behalf of the SRPFD, the parties intend
and have agreed that the debt service is to be paid by revenue from the PFD's sales tax
collection. Such commitment is being secured by a Revenue Stabilization Account, to better
assure that funds will be available for bond payments even in the event of annual revenue
shortfalls.
SALES TAX FUNDING AUTHORIZATION
Pivotal to the funding capacity of the SRPFD and PACC capital cost has been the availability of
the 0.033% portion of sales tax collections county-wide – covering all of incorporated and
unincorporated Skagit County. As authorized by RCW 82.14.390, the District by Resolution 01-1
dated Sep. 5, 2001, took action to impose a 0.033% sales-and-use tax as was then available to
PFDs for capital projects statewide.
Consistent with the term of state funding available at the time, the District resolution provided
that the tax will expire when the bonds for the construction of the PAC are retired, but no more
than 25 years after the tax is first collected. As the Legislature has since extended funding
period by 15 years, amendment or similar affirmation of this authorization through the 2041
time period will be in order prior to planned issuance of additional 2020 bonding.
INSTITUTIONAL ARRANGEMENTS SUMMARIZED
To summarize, as a regional public facilities district with interlocal agreements involving Skagit
County, Skagit Valley College and five municipalities, the governance and funding of SRPFD
functions represent a reasonably complex intergovernmental framework – but supported by
appropriate documentation:
• The initial 2001 SRPFD Charter clearly limits the District to be involved in just one
regional center project – the funding, construction and operation of a Performing Arts &
Conference Center. The District has fairly broad capabilities consistent with those of
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other PFDs statewide but with a locally agreed restriction to no taxes except the 0.033%
sales-and-use tax rebate coupled with a charter restriction to no more than $13.085
million of cumulative bonded indebtedness.
• As a regional PFD chartered by Skagit County, the SRPFD operates via
intergovernmental agreements involving five of the incorporated municipalities in Skagit
County. With caveats as noted for Sedro-Woolley and Anacortes, these agreements
essentially assure that no new local PFD which would be reliant on the 0.033% sales tax
credit can be formed prior to debt repayment. These cities have no obligation under the
ILAs or other agreement other than not to form a separate PFD that imposes a sales tax.
• Also in 2001, SRPFD enacted the 0.033% sales tax based on the Charter and
intergovernmental agreements. The sales tax can be collected until bonds for PACC
construction are retired, but no later than 25 years (subsequently extended to 40 years)
after the time when the tax was first imposed.
• By a 2002 Ground Lease with Skagit Valley College, the District is leasing the site on
which the PACC has now been constructed. Upon expiration of the lease in 30 years (or
later if the lease is extended), the property will revert to the College together with any
building or other improvements placed on the site by SRPFD.
• Also in 2002, SRPFD entered into a Management Agreement with SVC and the non-
profit Skagit Performing Arts Council (SPAC). Under this agreement, the College agreed
to provide management services to the PACC for 30 years or until the facility reverts to
the College. SPAC agreed to provide fund raising services for the College. By amendment
formally approved in 2018, SPAC was removed from the Management Agreement.
• Most recently, SRPFD entered into a 2013 Interlocal Agreement with Skagit County,
enabling the County to refund the 2003 SRPRD bonds with a new issue by the County at
a savings in debt service payments but with the continued obligation of SRPFD to pledge
tax collections to make required bond payments. This agreement also restated some
payment priority provisions of the earlier Management Agreement but continued
provisions for top priority uses of the Sales Tax Account to pay interest and principal on
bonded indebtedness. The Interlocal Agreement terminates upon repayment of existing
and future bonds.
Due to legislative extension of PFD sales tax availability by the Washington State Legislature for
another 15 years beyond the initial 25-year term, there is now the opportunity to incur new
indebtedness with repayment terms extended to 2041. This would appear to require
amendment of the SRPFD tax resolution, ground lease extension with SVC, and amendment or
affirmation for continuation of the current Interlocal Agreement with Skagit County until 2041
or when the new bond issue is fully repaid. Consideration might also be given to formal
extension of the Interlocal Agreement with Sedro-Woolley beyond 2026 to assure that a new
competing local PFD reliant on the sales tax credit is not formed prior to the 2041 repayment
period now anticipated for the new bonds.
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III. IMPROVEMENT COST AND FUNDING
As stipulated by RCW 36.100.025 (2), the independent review must examine the potential costs
to be incurred by the public facility facilities district and the adequacy of revenues or expected
revenues to meet those costs. This section of the report addresses:
• Sources and uses of funds – as a summary overview of project capital requirements.
• Improvement budget detail – including hard construction costs plus associated indirect
or soft costs for the project as estimated for the District.
• Capital funding detail – focused on sources of funds for the improvement project.
• Schedule and management considerations – from design to construction and
subsequent continuing operations.
Each of these topics is considered, in turn.
SOURCES AND USES OF FUNDS
Anticipated sources and uses of funds are summarized by the following chart. As noted, project
costs (or uses of funds) are estimated at $4.5 million – balanced by an equal amount of funding
from sources as identified. Net proceeds of new bonds are estimated at $4.0 million with the
face value (or par amount) of new bonds at $3.4 million.
Sources and Uses of Funding for McIntyre Hall Improvements
Estimated
Description Comments
Amount
Sources of Funds
Par amount of County bonds, plus
Net Bond Proceeds $4,000,000 original issue premium, less
insurance costs - to be repaid by PFD
Skagit Valley College $200,000 Participation in kitchen expansion
Cash Contribution $300,000 From PFD cash on hand
Total Estimated Sources $4,500,000
Uses of Funds
Exterior Envelope Project* $2,500,000 Replacment of exterior siding
Kitchen Renovation & Expansion* $1,700,000 Commercial kitchen renovation
Miscellaneous Projects $300,000 Under review as funds allow
Total Estimated Uses $4,500,000
* Note: Portion of design paid in 2019; balance for construction to be paid in 2020.
Note that uses of funds approximate but do not precisely match estimated costs as detailed on the next page,
which could reduce the amount available for miscellaneous projects.
Source: SRPFD.
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Of the project budget, an estimated 56% of cost is anticipated to be associated with the
replacement of the building’s exterior envelope, 38% is for the kitchen renovation, with less
than 7% (as remaining available) for other miscellaneous improvements, as described below. Of
the anticipated sources of funds, 89% represents net proceeds from Skagit County bonding, 4%
from Skagit County and 7% as a cash contribution from SRPFD.
IMPROVEMENT BUDGET DETAIL
Provided below is additional detail regarding the estimation of project costs associated with the
exterior envelope, kitchen renovation/expansion and potential miscellaneous projects.
Exterior Envelope Project
In an effort to attract as many bidders as possible in an extremely active construction market,
SRPFD chose to bid the project in November of 2019, hoping to attract bidders before they are
booked up for the summer of 2020. The District indicates it was fortunate to receive four
qualified bids and have signed a Letter of Intent to Award with Good News Group Construction.
This early award will also give the contractor time to get long lead items ordered (as with the
Cereclad siding) to get underway by May 2020.
Including the low bid from Good News Group Construction, the District indicates that it has an
overall project budget of $2.55 million. This project budget includes Architectural and
Engineering, Washington State Sales Tax (WSST), 25% contingency (set high due to unknowns
related to potential water damage), testing and inspections, project management, and all other
project related soft costs.
Kitchen Renovation and Expansion
The overall budget for the kitchen portion of this project has been estimated at $1.7 million to
$1.8 million, including construction, WSST, Contingency, Architectural and Engineering, testing
and inspection, project management, and all other project related soft costs.
Miscellaneous Projects
In addition to these two major undertakings, the PFD is also looking into re-carpeting the
conference center, long-term HVAC equipment maintenance requirements and the installation
of a hydraulic orchestra pit lift. These projects are the next level of priority and will be queued
up for implementation as funds are available – whether in 2020 or subsequently.
CAPITAL FUNDING DETAIL
As part of this independent feasibility review, the District has provided information regarding
existing bonded indebtedness, new bonded debt and combined debt repayment schedule.
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Existing Bonded Indebtedness
SRPFD is responsible for debt service on the County’s 2013 limited tax, general obligation
(LTGO) bonds, which were issued to refund the PFD’s original 2003 bonds. The repayment of
this existing debt is expected to continue through to December 2026.
New Bonded Debt
SRPFD has requested that Skagit County issue bonds on its behalf. As with the 2013 County
LTGO bonds, the proposed 2020 County Bonds would be governed by the 2013 Interlocal
Agreement (as will be affirmed or amended prior to issuance of 2020 bonds). The District does
not have any other identified outstanding debt obligations.
The first scheduled payment on the planned new bonds would occur Dec. 1, 2020. Annual bond
payments would be made thereafter, with the last bond payment planned for Dec. 1, 2041.
If the 2020 Bonds are sold in a public sale, a draft disclosure statement and related information
will be provided to the rating agency, when available, later in the transaction. As noted, the
proposed financing will consist of LTGO bonds issued by Skagit County.
With this financing structure, holders will not have a claim on PFD resources. Rather, under the
Interlocal Agreement (as might be amended), the County will require that the District utilize its
tax collections to pay debt service. As a result, disclosure documentation is not expected to say
much directly about the District, other than describing the uses of bond proceeds.
Combined Debt Repayment Schedule
As detailed by the bond repayment schedule on the following page:
• Payments to retire what remains of existing debt are set at close to $648,500 for 2020,
increasing each year to over $832,300 in 2026 when the last payment is made.
• The first December 2020 payment on the new 2020 bonds is estimated to be just under
$88,900, increasing to $170,000 for each of the following years of 2021-26, then further
increasing to between about $325,250 to $330,000 in subsequent years (with the
amount depending on the year) through to debt retirement in 2041.
• Existing and new debt results in combined aggregate debt service payments that start
at over $771,350 in 2020, increasing to a peak payment of just over $1.002 million in
2026, then dropping to the $325,250 to $330,000 range in each of the subsequent
years. Peak payment occurs in 2026, as that is the last year for payment on the earlier
2013 bonds.
• Also noted is that the 2013 County LTGO Bonds (issued to refund the original SRPFD
Bonds) may themselves be redeemed or refinanced at any time beginning Dec. 1, 2022.
From the perspective of the District’s financial planning, 2026 represents the year with the
maximum anticipated debt service payment obligation. If funding is adequate to get through
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that period with a reserve surplus, meeting debt obligations in subsequent years should be
much more readily achieved.
Bond Repayment Schedule – Existing and New Debt as Proposed
AGGREGATE DEBT SERVICE
Skagit County
Limited Tax General Obligation Bonds, 2020
Preliminary – AA MMD as of 12/2/19 plus 0.5%
Period 2020 Bonds Existing Debt Aggregate
Ending Debt Service Service Debt Service
12/1/2020 $86,888.89 $684,468.76 $771,357.65
12/1/2021 $170,000.00 $703,118.76 $873,118.76
12/1/2022 $170,000.00 $729,918.76 $899,918.76
12/1/2023 $170,000.00 $754,718.76 $924,718.76
12/1/2024 $170,000.00 $782,518.76 $952,518.76
12/1/2025 $170,000.00 $807,818.76 $977,818.76
12/1/2026 $170,000.00 $832,318.76 $1,002,318.76
12/1/2027 $330,000.00 -- $330,000.00
12/1/2028 $327,000.00 -- $327,000.00
12/1/2029 $328,750.00 -- $328,750.00
12/1/2030 $330,000.00 -- $330,000.00
12/1/2031 $325,750.00 -- $325,750.00
12/1/2032 $326,250.00 -- $326,250.00
12/1/2033 $326,250.00 -- $326,250.00
12/1/2034 $325,750.00 -- $325,750.00
12/1/2035 $329,750.00 -- $329,750.00
12/1/2036 $328,000.00 -- $328,000.00
12/1/2037 $325,750.00 -- $325,750.00
12/1/2038 $328,000.00 -- $328,000.00
12/1/2039 $329,500.00 -- $329,500.00
12/1/2040 $325,250.00 -- $325,250.00
12/1/2041 $325,500.00 -- $325,500.00
Totals $6,018,388.89 $5,294,881.32 $11,313,270.21
Note MMD is the Municipal Market Data rate for its general obligation yield debt.
Source: Public Financial Management (PFM).
Preliminary as of December 2, 2019.
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SCHEDULE AND MANAGEMENT CONSIDERATIONS
In addition to project financing, critical components of project implementation involve schedule
and management considerations.
Project Schedule
The financing timeline is in the process of being developed with a more detailed draft timeline
to be provided at a later date. The District’s preliminary schedule includes affirmation or
amendment of the County/District interlocal in the first quarter of 2020 followed by the
adoption of a County Bond resolution in late March and issuance of bonds later in the spring
(i.e., May 2020). This timeline is subject to change at any point and for any reason up to the
date of sale. The entire transaction is subject to adoption of a bond resolution by the Board of
County Commissioners. 5
As the construction schedule planned for the exterior portion of this project is weather
sensitive, the complete removal and replacement of building siding is intended to be completed
over the period of late spring, summer and early fall – with work scheduled to start May 1,
2020. McIntyre Hall is not scheduled for any events from July through the end of 2020 as
construction work is underway.
The kitchen renovation/expansion is currently in the design phase and is scheduled to be bid in
March 2020. Construction is estimated to take 7 to 8 months and is also scheduled to start in
late spring 2020, running concurrently with the exterior envelope improvements.
As noted, the District expects to request an amendment of its Interlocal Agreement with the
County (last amended in 2013), as well as an extension of the ground lease with Skagit Valley
College. Both processes are underway and expected to be completed in the first half of 2020,
prior to the issuance of bonds.
Project Management
By the terms of the existing 2001 SRPFD Charter, the District is authorized to contract for the
construction and the equipping of the PACC. By the terms of the initial 2002 ground lease with
Skagit Valley College, the District (as Ground Lessee) agreed to undertake at its sole expense,
with the construction of improvements to be in accordance with SVC development standards.
It is assumed with this review that overall responsibility for 2020 planned improvements will
remain with SRPFD as overall project manager. In this capacity, the District will manage specific
contractors – including a District provided Letter of Intent to award the construction bid for
exterior work with Good News Group Construction. This authorization is expected to be
continued by extension of the SRPFD ground lease, anticipated to occur before bond issuance.
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IV. DEBT REPAYMENT CAPACITY
The feasibility of issuing new bonded debt is dependent on demonstrating adequacy of
resources to replace the existing debt and also to finance PACC expansion. As has been the case
to date for the SRPFD, the primary source of debt repayment has been the 0.033% sales-and-
use tax credit rebated to the District – although County Bonds can draw from multiple sources
of repayment in addition to District tax credit revenues if needed.
Consequently, a key question addressed with this review is: Will SRPFD sales tax revenues
prove adequate to pay both existing and added debt through the period of debt repayment?
This review of debt repayment capacity starts with a history of this tax revenue source together
with discussion of uses to which this and other incidental SRPFD revenues are allocated. This is
followed by consideration of repayment capacity with base case and alternative scenarios (or
stress test conditions) of current and on-going tax revenue resources.
PFD SALES TAX REVENUE HISTORY
As illustrated by the following graph, sales tax revenues to the District have increased from just
under $700,000 in 2004 (the first full year of collections) to over $1.14 million as of 2019. On
average, revenues have increased by about $29,500 per year (as shown by the dashed trend
line). When considered on the basis of a compound average growth rate, sales tax receipts have
increased by about 3.3% per year over this 15-year time period.
SRPFD Annual Sales and Use Tax Revenues (2003-19)
$1,200,000
$1,000,000
$800,000 Actual
$600,000 Trended
$400,000
$200,000
--
* Note: Revenues were collected only 8 months of 2003 with District start-up. Source: SRPFD.
To date, the only time over which revenues have declined was from 2008-10. Over this three
year period, sales tax receipts dropped by nearly 24%. As of 2010, annual sales tax revenues to
the District were more than $211,000 below what they had been three years earlier in 2007.
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Conversely, strong revenue performance has pushed total revenues above the long-term trend
in the last three years from 2017-19. However, it is noted that after two strong revenue growth
years of 7.8% and 10.6% in 2017 and 2018, respectively, sales tax revenue growth slowed to a
2.2% increase in 2019. Further erosion of sales tax revenues is possible in 2020, due to economic
effects of the coronavirus, the duration and extent of which have yet to be determined.
Going forward, a key question addressed with this feasibility review is with the implications of a
potential future downturn in the economy and associated capacity to address debt. This is a
question to which this review now turns.
PFD REVENUE CAPACITY TO SUPPORT DEBT
For SRPFD, primary reliance for repayment of bonded indebtedness is placed on annual funding
from sales-and-use tax revenues. This is tempered by two countervailing considerations:
• In the event that sales tax revenues alone were to prove inadequate to make debt
service payments in any particular year, the District would have the option of drawing
on other revenue resources – including use of funding balances (from excess revenues
in prior years), interest on accumulated savings, grants and donations (as available).
• Conversely, based on past and current practice, SRPFD has applied sales tax revenues to
not only pay for debt service but also to support other expenses. These expenses
include payments for administration and operations (including repair/maintenance and
SVC operating deficit support), construction/improvement projects, and payments to
reserve accounts.
While these other expenses represent lower priorities for use of sales tax funds than debt
service, they nonetheless constitute continuing potential claims against District resources even
in years when sales tax revenues alone might prove inadequate to cover both debt and non-
debt expense items. Consequently, it is useful to consider the bigger picture representing all
budgeted revenues and expenses of the District, required reserves and related contingencies in
the event of temporarily curtailed sales tax revenues.
Budgeted Revenues and Expenditures
Line item budgeted revenues and expenses for each of the years 2005-20 are as detailed for the
years 2005-20 by the chart on the following page. When considered over this full 15-16 year
historical period, budgeted revenues have averaged $1.35 million per year (and as much as up
to $1.5 million as of 2019). 6
However, this figure includes some revenues from sources that have been received periodically
– not every year – as with donations and bond proceeds and use of fund balance, which is an
accumulation of past year (rather than current year) budget surpluses. If these items are
excluded, the core recurring budgeted revenue streams of sales/use tax and interest has
averaged just under $845,000 per year from 2005-20 – of which tax revenues represent 98%
and interest earnings 2%.
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SRPFD Budgeted Income-Expense Detail (2005-20) Source: SRPFD as compiled by E. D. Hovee
Revenue/Expense Line Item 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenue
Us e of Fund Ba l a nce $50,000 $750,000 $256,263 $188,255 $117,900 $494,900 $267,000 $150,000 $16,350 -- -- -- -- -- $411,970 $815,146
Sa l es a nd Us e Ta x $600,000 $720,000 $800,000 $935,400 $780,000 $696,000 $672,000 $696,000 $750,000 $792,000 $816,000 $870,000 $900,000 $1,008,000 $1,080,000 $1,140,000
Interes t $5,000 $5,000 $50,000 $45,000 $45,000 $10,000 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $3,000 $18,000 $20,000 $40,000
Dona ti ons $350,000 $100,000 $30,000 -- -- -- -- -- -- -- -- -- -- -- --
G.O. Bonds -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- $3,600,000
Sta te Gra nt for the Arts $350,000 -- -- -- -- -- -- -- -- -- -- -- -- -- --
Ska gi t Va l l ey Col l ege Dona ti on to
-- -- -- -- -- -- -- -- -- -- -- -- -- -- -- $200,000
Ki tchen Project
Total Revenue $1,355,000 $1,575,000 $1,136,263 $1,168,655 $942,900 $1,200,900 $941,500 $848,500 $768,850 $794,500 $818,500 $872,500 $903,000 $1,026,000 $1,511,970 $5,795,146
Expenditures
Debt Service
Redempti on of Long Term Debt $125,000 $145,000 $188,131 $185,000 $205,000 $230,000 $255,000 $280,000 $310,000 $335,000 $204,719 $395,000 $435,000 $470,000 $505,000 $545,000
Interes t on Long Term Debt $382,025 $379,525 $353,132 $372,140 $367,050 $360,900 $353,425 $344,500 $334,700 $214,769 $370,000 $193,619 $181,769 $168,719 $154,619 $266,496
Total Debt Service $507,025 $524,525 $541,263 $557,140 $572,050 $590,900 $608,425 $624,500 $644,700 $549,769 $574,719 $588,619 $616,769 $638,719 $659,619 $811,496
Administration $50,000 $50,000 $50,000 $50,000 $50,000 $50,000 $30,075 $30,925 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $40,000 $40,000
PFD Extens i on Project -- -- -- -- -- -- -- -- -- -- -- -- -- $50,000 -- --
Total Admin Operations $50,000 $50,000 $50,000 $50,000 $50,000 $50,000 $30,075 $30,925 $30,000 $30,000 $30,000 $30,000 $30,000 $80,000 $40,000 $40,000
Operations
Event Support Techni ci a n -- $65,000 -- -- -- -- -- -- -- -- -- -- -- -- -- --
Opera ti on Defi ci t Support -- -- $140,000 $60,515 $67,000 -- $150,000 $75,000 $10,000 $50,000 $50,000 $75,000 $75,000 $150,000 $150,000 $150,000
Fa ci l i ty Renova ti ons ,
Ma i ntena nce & Repa i r Pl a nni ng -- -- -- -- -- -- -- -- -- -- -- -- -- -- $500,000 $100,000
a nd Des i gn
Ins ura nce -- $35,000 $35,000 $35,000 $35,000 $35,000 $32,000 $32,000 $35,000 $30,000 $30,000 $30,000 $31,000 $32,000 $37,500 $55,000
Repa i r & Ma i ntena nce -- -- -- -- -- -- -- -- -- $29,781 $27,381 $45,731 $53,281 $104,381 $50,000 $50,000
Mi s cel l a neous Support -- $10,000 $20,000 $20,000 $20,000 $25,000 -- -- -- $50,000 $62,500 $75,000 $75,000 -- -- --
Total Operations -- $110,000 $195,000 $115,515 $122,000 $60,000 $182,000 $107,000 $45,000 $159,781 $169,881 $225,731 $234,281 $286,381 $737,500 $355,000
Fund Raising $15,000 $20,000 $25,000 $30,000 $30,000 $30,000 $30,000 -- -- -- -- -- -- -- -- --
Construction
Bui l di ngs - Exteri or Envel ope
$100,000 $100,000 $65,000 $150,000 $50,000 $450,000 $55,000 $50,000 -- -- -- -- -- -- -- $2,550,000
Renova ti on
Bui l di ngs - Other Improvements $40,000 $40,000 -- -- $20,000 $20,000 -- -- -- -- -- -- -- $1,800,000
Ma chi nery & Equi pment $452,975 $500,000 $100,000 $150,000 $100,000 -- -- -- $30,000 $30,000 $30,000 -- -- -- $50,000 $50,000
Total Capital $552,975 $600,000 $205,000 $340,000 $150,000 $450,000 $75,000 $70,000 $30,000 $30,000 $30,000 -- -- -- $50,000 $4,400,000
Start up cost short fall SVC payment
$120,000 $147,000 -- -- -- -- -- -- -- -- -- -- -- -- -- --
(Commencement Deficit)
Endi ng Fund Ba l a nce
$50,000 $63,475 $120,000 $60,000 -- -- -- -- -- -- -- -- -- -- -- --
(Ma i ntena nce Res erve)
Ma i ntena nce Res erve $60,000 $60,000 -- -- -- -- -- -- -- -- -- -- -- -- -- --
Cha nge i n Revenue Sta bi l i za ti on
-- -- $15,000 $16,000 $18,850 $20,000 $16,000 $16,075 $19,150 $24,950 $13,900 $28,150 $21,950 $20,900 $24,851 $188,650
Account
Tota l End Fund Ba l a nce $110,000 $123,475 $135,000 $76,000 $18,850 $20,000 $16,000 $16,075 $19,150 $24,950 $13,900 $28,150 $21,950 $20,900 $24,851 $188,650
Total Expenditures $1,355,000 $1,575,000 $1,151,263 $1,168,655 $942,900 $1,200,900 $941,500 $848,500 $768,850 $794,500 $818,500 $872,500 $903,000 $1,026,000 $1,511,970 $5,795,146
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Over this 2005-20 period, SRPFD budgeted expenses have averaged $1.35 million per year,
balancing revenues. Of this amount, debt service payments have averaged just over $600,000
per year, with other expenses averaging $753,000 per year. Some of these non-debt expenses
are fully or partially discretionary – as for building improvements, equipment, fundraising, or
contributions to reserve accounts. There are also some expenses – such as start-up costs
incurred in early years of operation – that are not expected to be experienced on a recurring
basis.
However, much of the funding for administration and operations – together averaging about
$236,000 per year – is less discretionary, generally needing to be paid when incurred. These
include expenditures for:
• SRPFD Administration – averaging $42,000 per year (including funding in 2018 for the
PFD extension project).
• Insurance – averaging less than $32,500 but budgeted for 2020 at $55,000.
• Repair and Maintenance – averaging $22,000 per year since 2005 but increasing in
recent years as the facility ages to $50,000 in each of the last two years (2019-20).
• Less regular but periodic expenditures for facility renovations, event support technician
and (unspecified) miscellaneous support – which together have averaged $64,000 per
year (albeit with considerable year-to-year variation).
• Operating deficit support – averaging $86,000 per year including $150,000 each of the
last three years and paid to SVC to help cover operating deficits of McIntyre Hall.
Of these items, District administration, insurance, and some basic repair and maintenance can
be expected to be the most pivotal, regularly recurring expense needs – together totaling a
2020 budget figure of $145,000.
Annual capital expenditures are more discretionary and, in the near term, most likely affected
by improvements anticipated with the planned 2020 new bond issue. Payments to SVC also are
not a required obligation of the SRPFD as PACC operations are the responsibility of SVC. District
payments that have been made to support PACC operations are discretionary and could be
reduced or deferred in years when income is not sufficient to provide this support – as occurred
previously in 2005, 2006 and 2010.
Reserves
All required reserves are described in the 2013 PFD-County Interlocal Agreement. As noted,
these reserve accounts include a revenue stabilization account, operating reserve account and
capital reserve account. Based on SRPFD provided information, current balances as of year-end
2018 and then as of Oct. 31, 2019, all equal or exceed required amounts, summarized as
follows:
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SRPFD Allocated Financial Reserve Balances
Required Amount Account Status
Reserve Account Comments
EOY 2018 10/31/2019 EOY 2018 10/31/2019
Amount set by agreement
Revenue Stabilization $659,619 $684,469 $659,619 $684,482
with Skagit County
Minimum of $20,000 by
Operating Reserve $20,000 $20,000 $20,000 $23,631
agreement with County
Amount set by SRPFD
Capital Reserve $600,000 $600,000 $600,000 $632,140
Board
Total Reserves $1,279,619 $1,304,469 $1,279,619 $1,340,252
Source: SRPFD.
The amount of the Revenue Stabilization reserve account is as determined by the 2013
Interlocal Agreement between the SRPFD and Skagit County. The amount to be paid is set equal
to the next year’s payment of bonded debt service (both principal and interest). This amount
varies annually, depending on the scheduled debt service for the upcoming year.
The District makes deposits (or causes the Treasurer to deposit) into the Revenue Stabilization
Account on a semiannual basis (in approximately equal amounts on May 15 and Nov. 15 of each
year) – so that the balance as of Dec. 31 of each year equals to the Required Debt Service for
the upcoming calendar year. 7 This amount will increase with added bond payments.
By the terms of the Interlocal Agreement, the SRPFD board can set the operating reserve at
between $20,000 and $60,000. The District’s board has complete discretion in setting the
amount of the Capital Reserve.
Reserve accounts are typically swept each year, so that any excess reserve funds are
transferred to other accounts as needed or to unreserved net cash and investment accounts.
Contingencies for Unexpected Revenue Decline
A question of importance to this independent feasibility review is: What would be the
consequences of an unexpected revenue decline on financial reserves and ability to make
debt service payments?
This question is addressed with consideration of three potential sales tax revenue and
associated SRPFD budget scenarios:
• Trended Scenario – where sales-and-use tax revenues are forecast to increase by an
average of 3.3% per year (the same as the average compound rate from 2004-19).
• Flat Revenue Scenario – a more conservative forecast assuming that sales-and-use tax
revenues stall out at the $1.14 million amount as budgeted for 2020.
• Recession Scenario – assuming that Skagit County were to experience a recession of the
severity realized from 2007-10, when tax revenues to SRPFD declined by nearly 24%.
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Because the effects of these sales-and-use tax scenarios also depend on other line items in the
SRPFD budget, this review evaluates potential implications for unrestricted SRPFD reserves in
the context of a complete but hypothetical line item budget as portrayed below. The chart
details outputs of these three scenarios when projected to 2026 (the year of highest expected
debt service) in comparison with 2019 and 2020. The recession scenario assumes that revenues
begin to decline starting in 2022, continuing through 2024, with subsequent recovery as
experienced during and subsequent to the sales-and-use tax revenue experience of 2008-10.
SRPFD Allocated Financial Reserve Balances by Revenue Scenario
Budgeted 2026 Scenarios
Revenue/Expense Line Item
2019 2020 Trended Flat Revenue Recession
Net Cash & Investments (beginning of year)
Reserve Accounts
Revenue Stabilization Account $659,619 $811,496 $1,002,319 $1,002,319 $1,002,319
Operating Reserve $20,000 $20,000 $20,000 $20,000 $20,000
Capital Reserve $600,000 $600,000 $600,000 $600,000 $600,000
Total Reserved $1,279,619 $1,431,496 $1,622,319 $1,622,319 $1,622,319
Unreserved Cash & Investments $841,631 $566,319 $436,452 ($163,272) ($973,456)
Total Net Cash & Investments $2,121,250 $1,997,815 $2,058,771 $1,459,047 $648,863
Revenues*
Sales & Use Tax $1,141,807 $1,140,000 $1,387,378 $1,140,000 $977,076
Interest $20,000 $40,000 $40,000 $40,000 $40,000
Total Revenues $1,161,807 $1,180,000 $1,427,378 $1,180,000 $1,017,076
Expenditures*
Debt Service $659,619 $811,496 $1,002,319 $1,002,319 $1,002,319
Operating Expenses
Administration $40,000 $40,000 $40,000 $40,000 $40,000
Operating Deficit Support $150,000 $150,000 $150,000 $150,000 $150,000
Facility Renovations $500,000 $100,000 $100,000 $100,000 $100,000
Indsurance $37,500 $55,000 $55,000 $55,000 $55,000
Repair & Maintenance $50,000 $50,000 $50,000 $50,000 $50,000
Subtotal Operating Expenses $777,500 $395,000 $395,000 $395,000 $395,000
Total Expenses $1,437,119 $1,206,496 $1,397,319 $1,397,319 $1,397,319
Surplus / (Deficit)
Before Application of Reserves ($275,312) ($26,496) $30,059 ($217,319) ($380,243)
Increment to Revenue Stabilization $151,877 $61,623 $24,500 $24,500 $24,500
Application of Excess Reserves $123,435 ($35,127) ($54,559) $192,819 $355,743
After Application of Reserves -- -- -- -- --
* Notes: 2019 sales-and-use tax revenues are as received, all other 2019-20 revenue/expense information are per
SRPFD budgets. The recession scenario assumes a recession starting in 2022, with revenue declines through 2024.
Sources: SRPFD for 2019-20, E. D. Hovee for 2026. Prepared as of Feb. 2020.
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With all 2026 scenarios, interest revenues and operating expenses are set equal to the 2020
SRPFD budget. Debt service is as per the December 2019 preliminary estimate by PFM.
Surplus/deficit information is shown prior to application of reserves with subsequent line items
indicating the extent to which reserves are applied to meet revenue stabilization requirements
or as offsets to unreserved cash and investments for the subsequent budget year (in years with
funding deficits). 8
The major difference in assumptions between the trended scenario and subsequent two stress
test scenarios is with prospective sales-and-use tax revenue:
• With the trended scenario, sales-and-use tax revenues continue to increase by an
average of 3.3% per year, going from about a projected $1.14 million in 2019 and 2020
to nearly $1.39 million by 2026. However, this approximately $247,000 increase in
annual tax revenue is not adequate to fully offset a roughly $343,000 increase in annual
debt service payments from 2019 to 2026.
If current operating expenditures are maintained as is, bridging this funding gap would
require some draw down of unreserved cash and investments – from a balance of
$842,000 as of early 2019 to about $436,000 by 2026. With debt payments substantially
reduced after 2026, reserves would again start to increase fairly rapidly. Throughout this
period, there would be more than ample income coupled with reserves to pay both debt
and other on-going obligations of the District.
• If tax revenue growth stalls out as was nearly the case from 2018-19 and future
revenues are projected forward at an even $1.14 million each year to fund the added
debt service together with continuation of existing operating allocations, the outlook
becomes more problematic. With this flat revenue scenario, SRPFD could run at a
deficit every year through 2026 (requiring funding support from unencumbered cash
and investment accounts).
The financial drain could be substantial enough that unreserved cash and investments
would shrink to a deficit position by 2025-26 – requiring either curtailment of some non-
debt expenses or temporary infusion of funding support from other sources. However,
financial recovery would occur relatively quickly with the District coming back to
positive cash flow by 2028 as bond payments are substantially reduced from 2027
through to full bond repayment in 2041.
• A 2022-24 recession on the order of the Great Recession would have substantially
greater impact on SRPFD funding capacity. Cash flow (before application of
unencumbered reserves) would be negative every year through 2026. An anticipated
cumulative infusion of as much as $973,000 would be required by 2026, peaking out at
required support of $1.35 million by 2027 – after which SRPFD could relatively quickly
recover financially in subsequent years.
As with the flat revenue scenario, this shortfall could be covered by reductions in
operating expenses, capital expenditures and/or dedicated reserves deposit together
with other temporary funding support. Also possible would be restructuring of existing
E.D. Hovee & Company, LLC for the Washington State Department of Commerce:
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2013 bonds, which are callable beginning Dec. 1, 2022. The size of the funding gap to be
covered would be much greater with an extreme recession scenario than with the flat
revenue stress test scenario.
How these three hypothetical scenarios might play out year-by-year is illustrated by the
following graph. Shown is the amount of unreserved cash and investments funded (or
unfunded) from 2019 to 2028. Negative amounts indicate a cumulative deficit situation
requiring either SRPFD non-debt expense reductions or supplemental funding support from
currently identified or other potential sources.
SRPFD Unreserved Cash and Investment Balance by Scenario (2019-28)
$1,500,000
$1,000,000
$500,000
--
($500,000)
($1,000,000)
($1,500,000)
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Trended Flat Revenue Recession
Note: Balances are estimated as of the first of each year. Assumed with the recession scenario is an economic
downturn extending from 2022-24.
Source: SRPFD data for 2019-20 with 2028 scenario projections by E. D. Hovee. Prepared as of Feb. 2020.
As the graph indicates, the trended scenario shows minimal adverse impact to SRPFD’s capacity
to fund debt repayment, committed reserves and full operations through 2027 – followed by
potentially substantially gains to fund balances in subsequent years after the 2013 bond is
retired. The flat revenue scenario is associated with inadequate reserves extending over a
short time period of about 2026-27, then quickly rebounding to a positive net balance by 2028.
With the recession scenario, the time period of inadequate financial reserves extends longer
(from 2024 to beyond 2028) and the amount of supplemental funding support is potentially
considerably greater. Also noted is that the timing of a recession will make a difference because
the downturn occurs quickly while the recovery might take more time and is also affected by
debt reduction not occurring with this scenario until 2027.
A 2022-24 recession results in a maximum cumulative balance shortfall of about $1.35 million.
An earlier 2021-23 recession increases the potential shortfall to $1.45 million. And a later 2024-
26 recession would reduce the maximum shortfall to less than $1 million. Options for how such
shortfalls might be addressed are covered by the next and last section of this report.
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V. PROJECT RISKS AND MITIGATION
Reviewed with this final section of the financial feasibility report are risks related to
institutional arrangements, improvement cost and funding, and debt repayment capacity. Each
of these potential risks is considered, in turn, together with potential options for risk mitigation.
INSTITUTIONAL ARRANGEMENTS
The SRPFD Charter, interlocal agreements with participating cities, Skagit Valley College ground
lease, management agreement and interlocal agreement with Skagit County, as amended, have
served their purposes well. These institutional arrangements were instrumental to successful
District formation, facility construction and ensuing operations, including changes over time.
The existing arrangements anticipated neither additional bonded indebtedness after initial
construction nor the extension of state shared sales-and-use tax funding by an added 15 years.
Nor did they fully specify how on-going operations and contingencies would be continued once
state sales tax funding sunsets (now expected by 2041).
The combination of extended sales tax funding coupled with the need to address on-going
maintenance and sustainability of a mature facility suggest several issues that might be useful
to address – some before issuance of new bonded indebtedness and others prior to 2041
fulfillment of existing and planned debt repayment. Issues to be considered could include all or
some combination of the following:
• Termination of the SRPFD’s existing SVC ground lease with the District, which would
appear to expire at the end of 2033 – but will need to be extended to cover at least the
added period through to new debt repayment at the end of 2041.
• Termination of Sedro-Woolley’s obligation to not form a separate local PFD reliant on
the 0.033% sales tax beyond 25 years (or 2026) rather than continuing through the full
period of any added bond indebtedness. Withdrawal of this payment is viewed as
unlikely and, if it did occur, would not be of substantial significance to overall District
funding capacity since the withdrawal would occur after the peak year of bonded debt
payments. 9
• The $13.085 million bonded debt limitation for the District – which will be brought to
this maximum limit with the par amount of the new bond. This means that there likely
will be no flexibility for added bond financing in the event that major building issues or
new arts and conference related opportunities arise, pending renegotiation of existing
interlocal agreements. However, this would not preclude refinancing of the 2013 bond.
• Absence of a clearly identified fund-raising organization similar to the function that the
Skagit Performing Arts Council was intended to perform in the early years of PACC
operation. While these functions have been assumed in part by SVC, the Skagit Valley
Foundation and McIntyre Charitable Foundation, there appears to be no primary
organization (or arts champion) identified as the lead entity for future capital or
E.D. Hovee & Company, LLC for the Washington State Department of Commerce:
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operational fund-raising – an item that potentially becomes of more significance once
sales tax funding support is terminated.
• The 2002 Management agreement prioritized payment of Sales Tax Account funds, first
to interest on debt, second to principal payments, third to reserve accounts, fourth to
PFD operating expenses and then fifth through ninth for other purposes. The 2013
Skagit County Interlocal Agreement maintained much of this prioritization but with
some restatement of payment priorities. Most notably, the 2013 agreement placed
payment of District operating expenses as third priority, higher than what is now fourth
priority with payments to the Revenue Stabilization Account.
Skagit County does not have any contractual or other obligation to fund shortfalls
except for what is needed to cover any portion of debt service not supported by District
sales tax receipts and reserves. Any decision by the County to go beyond debt service
funding support would be entirely at the County’s discretion. However, if District
revenues also fell short temporarily of full funding for SRPFD operating revenues and/or
Revenue Stabilization Account payments, the need could arise to consider temporary
funding arrangements between the District and County or other sources.
• More generally, while the waterfall or payment priorities for distribution of sales tax
revenues are specified by the Interlocal Agreement with Skagit County, there is no clear
statement of which entities would have primary backstop responsibility for payment of
specific priority payments in the event of sales tax funding shortfalls for non-debt
related District expenses. In addition to the question regarding payment of SRPFD
operating expenses, there appears to be no clear up-front understanding as to ultimate
backstop responsibilities for payments (or temporary payment deferrals) related to the
Operating Reserve Account, Capital Reserve Account and other typical District
expenditures, including possible need for continued SVC operating deficit support.
Options for Mitigation. Potential options to resolve or mitigate these risks can be
differentiated between short and long-term measures:
• Short-term, the most immediate priority lies with the extension of the PACC ground
lease with SVC to 2041. This is an action already anticipated by the District and required
by the County to be completed as a condition for issuance of the 2020 bonds. If the
Interlocal Agreement with Skagit County is modified to meet bonding requirements, this
might also be a good time to review the payment priority for the Revenue Stabilization
Account versus operating expenses and to more clearly articulate ultimate backstop
payment responsibilities for each of priorities 1-7 in the event of future sales tax funding
shortfalls. 10 Revised agreements could include clear stipulation of SVC responsibility to
cover on-going PACC operations if discretionary District payments for facility operating
support were to be temporarily or permanently suspended in the future.
• Longer term and after improvements with the new bonding are successfully completed,
it could be worthwhile to begin more active transition planning for long-term PACC
funding and management responsibilities once all debt is retired in 2041. Earlier
transition planning was suspended when the Legislature extended sales tax funding by
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15 years. A resumption of this planning initiative at some point in advance of 2041
appears appropriate with new bond funding for improvements that will become the full
property of SVC upon debt retirement and extended lease expiration.
A potential contingency is that the Washington State Legislature could again elect to
further extend the sales tax window – as recently occurred. It also appears likely that
the District will have excess reserve funds after 2027 that could be used to establish a
long-term sinking fund for facility maintenance and improvements post-2041. In any
event, the District, SVC, County and all participating cities might be better prepared for
these future contingencies by getting an early start on the details of eventual facility
transition and on-going sustainability.
IMPROVEMENT COST AND FUNDING
Risks associated with improvement costs and associated project funding are essentially two-
fold:
• First is the risk that improvement costs could exceed the $4.5 million figure currently
budgeted. This is particularly problematic during the current period of high demand for
contractors, together with escalating costs of many construction materials. Costs could
also increase if unforeseen issues or delays arise or with inflation if the project schedule
were to be substantially delayed – whether for reasons of local discretion or factors
beyond the control of project participants.
• Second is a risk that project funding does not materialize as currently planned. The
greatest risk would be with project bonding if the project could not be underwritten and
funded at the $4 million level for added bond indebtedness as now planned, if interest
rates were to increase, or if repayment terms and schedule are altered.
Options for Mitigation. While real, these risks should be manageable to the extent that
compensating decisions can be made quickly in the event of unforeseen adverse conditions:
• SRPFD has already hedged against the risk of construction cost overrun by including a
relatively healthy contingency allowance – notably of 25% for the exterior envelope
project. Also, $300,000 (6.7%) of the project budget has been allocated for
miscellaneous projects which can be eliminated or deferred if necessary to avoid cost
overruns. This risk is also reduced if construction is able to get underway relatively
quickly – by May 2020, as currently planned. The loss of theater revenues from July to
the end of the year (including any potential schedule delays) is one that should be of
lesser consequence for the District as SVC is responsible for facility operating expenses.
• With respect to debt financing, the risk of a substantial interest rate increase is
minimized if bonds can be issued as planned in late spring 2020 – as the Federal Reserve
appears committed to stable interest rates for the near term, including a recent rate
reduction. If any issue were to arise that would result in debt service payments higher
than currently anticipated (especially in the period through 2026), consideration could
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be given to increasing local contributions or to reducing project cost as with removal or
deferral of smaller optional improvements to a level that allows for the project to
proceed. 11
DEBT REPAYMENT CAPACITY
Risk of funding adequacy to repay current and planned new debt can be considered from two
perspectives – repayment of bonded debt and total District financial obligations:
• There should be more than adequate funding capacity to repay debt – if viewed from
the standpoint of debt repayment as the pre-eminent financial obligation of the District.
In 2020, the first year of added debt, SRPFD projected revenues of $1.18 million is 1.45
times the estimated new scheduled debt obligation of about $811,500. This excess
coverage holds even in 2026 when the currently planned debt service payment reaches
over $1 million.
Projected District revenues exceed this amount under all three scenarios considered –
whether trended or with the two stress test scenarios of flat revenues or recession.
However, in the case of a recession scenario (similar to the Great Recession of just over
a decade ago), the surplus drops to less than $15,000. A surplus situation could drop to
deficit if the recession were to start earlier than with the 2022 date that has been
hypothetically assumed with the recession scenario.
Conversely, with the trended scenario, the outlook appears to be much more favorable.
Projected 2026 revenues of $1.4 million would be 1.42 times the 2026 debt service
amount.
• The District’s financial capacity is potentially more challenged if considered in the
context of both debt and non-debt expenditures. This is potentially the case even this
current year, when debt and operating expenses of a budgeted $1.2 million are
projected to exceed budgeted revenues by about an estimated $26,500. As previously
noted, a 2020 deficit could be amply covered by unrestricted cash and investment
reserves of an estimated $566,000.
However, the financial challenge is magnified in subsequent years. Only with the
trended scenario would District revenues exceed expenses – albeit by a relatively thin
margin of just over $30,000 in 2026. With both the flat revenue and recession scenarios,
year 2026 income would fall short of expenses by an estimated $217,000 (flat revenue
scenario) to $380,000 (recession scenario). Unreserved cash and investments also would
be negative – by an amount of nearly $1 million with the recession scenario.
Bottom line, if all goes well and sales tax revenues continue to increase as in recent years, there
will be a reasonable financial cushion even in a year (2026) with a high debt service payment.
However, in a flat or down economy, the District should be able to pay its debt obligation based
on the scenarios considered but possibly would not be able to fully fund its other typical year
operating, reserve and related expenses.
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Options for Mitigation. Consistent with the two types of debt repayment risk as outlined
above, there are three sets of mitigation measures that might be considered:
• Because 2026 sales tax revenues should be adequate to cover principal and interest
payments for the scenarios that have been considered with this review, the current
payment priorities as agreed to by the PFD and County should prove adequate – though
potentially barely so in a major recession similar to that of 2007-10. However, the
District could be challenged to also maintain the Revenue Stabilization Account at levels
agreed to by the County and District. This might be addressed by temporarily foregoing
any un-fundable portion stabilization payment as with: a) County consideration to
subsidize the unfunded amount; and/or b) agreement by the District to bring the
stabilization account back to agreed-to levels and repay any temporary subsidy by the
County as quickly as subsequent year funds make this possible.
• More challenging might be the question of how to mitigate for potential financial
shortfalls that affect both reserve and operating expense payment capacity on a
combined basis. As previously noted, one item for possible review is whether the
District and County continue to prioritize SRPFD administrative operating expense over
the Revenue Stabilization Account. Second would be decisions as to how to prioritize
responsibilities and/or temporary reductions in payments to operating and capital
reserves vis-à-vis other operating expenses, repair and maintenance, and operating
deficit support. With memorialization of this prioritization between the parties, it should
be possible to identify a strategy that can preserve net cash and investments even in the
event of a major economic downturn.
• Another alternative would be to increase the amount of the revenue stabilization
account at least through 2026 and/or re-structure the debt service payment schedule
to avoid or dampen the rapid escalation in payments as currently planned through the
mid-2020s. By spreading a higher proportion of payments to the 2030-41 period, there
would be more financial cushion with generally increasing sale tax revenues to avoid a
near term economic shock. For example, if warranted, debt restructuring could be
considered after December 1, 2022 with the optional redemption and/or refinancing of
the outstanding 2013 bonds with a resulting more extended repayment schedule.
As appropriate, measures to better assure debt repayment capacity through potential future
adverse economic conditions could be taken prior to debt issuance as planned for 2020 and/or
deferred to be addressed on an as-needed basis, as future conditions warrant. For the scenarios
considered, with continued appropriate SRPFD and County oversight, there would appear to be
reasonable options for measures that can be taken to assure debt repayment over the term of
the new bonded debt as currently planned.
As noted in this report, the economic conditions and the financial estimates provided with this
review pre-date and do not take into account potential effects of the coronavirus pandemic.
Depending on the as-yet unknown severity and duration of these effects, it is possible that the
financial capacity of the District could be affected in a manner not previously anticipated.
E.D. Hovee & Company, LLC for the Washington State Department of Commerce:
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APPENDIX A. PREPARER PROFILE
This independent feasibility review has been conducted on behalf of the Washington State
Department of Commerce for the Skagit Public Facilities District by the economic and
development consulting firm E. D. Hovee & Company, LLC (E. D. Hovee).
Since 1984, E. D. Hovee has provided consulting services for a wide range of public agency, non-
profit and private clients primarily, though not exclusively, in the Pacific Northwest states of
Washington, Oregon and Idaho. Assignments conducted have included market and feasibility
studies, economic impact analyses, due diligence reviews and strategic business development
planning – covering a diverse set of industrial, commercial, residential, cultural, tourism-
destination and related major capital investment projects.
E. D. Hovee has extensive experience working for Washington state-based PFDs, together with
specific experience in evaluating convention, arts, sports and related event facilities both in and
outside the state of Washington. Representative project assignments have included:
• November 2019 completion of a Financial Feasibility Review of Yakima Convention
Center Expansion, a project of the Yakima Regional Public Facilities District.
• October 2017 submittal of a Spokane Public Facilities District INB Performing Arts Center
Independent Financial Feasibility Review for a $22 million renovation, since completed.
• Prior completion of the February 2013 Spokane Public Facilities District Independent
Financial Review on behalf of the Washington State Department of Commerce for
capital funding of the then planned Spokane Convention Center (SCC) expansion,
followed by May 2013 submittal of an operating budget review for the SCC.
• November 2015 review of land acquisition and financing feasibility for expansion of the
Washington State Convention Center in Seattle on behalf of the state’s Department of
Commerce, followed by a 2018 Phase 2 review evaluation of facility build-out.
• Other assignments on behalf of Washington State PFDs including potential regional
center projects for the Tri-Cities (two-county) PFD, economic restructuring of the
Wenatchee hotel-motel tourism funding for marketing and event/conference facilities,
Vancouver Hilton Hotel and conference center, Clark County amphitheater, Cowlitz
County expo/conference center, and lease extension for the Seattle Mariners stadium.
• Non-PFD related event facility assessments for the Oregon Convention Center, Portland
Expo Center, Walla Walla Marcus Whitman Hotel feasibility, Skamania Lodge market
analysis and development proposal, Oregon Trail Interpretive Center, Portland Center
Stage/Armory Theater due diligence review, and Eola Hills Conference Center market
feasibility (Salem, OR).
• Other market and financial due diligence assignments include WSU campus building
reuse and North Foothills brownfield site redevelopment (Spokane), business case for
the 2016 USATF/IAAF indoor world track and field championships in Portland, feasibility
evaluation for a Vancouver/Clark County minor league and multi-use baseball stadium.
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APPENDIX B. DOCUMENTS REVIEWED
Documents reviewed as part of this independent feasibility evaluation of the Convention Center
expansion project for the Washington State Department of Commerce and Skagit Regional
Public Facilities District (SRPFD) include the following:
• Cities of Anacortes, Skagit, Selah and Union Gap and Town of La Conner, Interlocal
Cooperation Agreement(s) to Form a Public Facilities District, 2001.
• E. D. Hovee & Company, LLC, Washington State Convention Center Expansion: Build-Out
& Operating Feasibility, as prepared for the Washington State Department of
Commerce, May 24, 2018.
• McIntyre Hall Performing Arts & Conference Center, web site: www.mcintyrehall.org
• S&P Global Ratings, Summary: Skagit, Washington; General Obligation, March 21, 2017.
• Skagit County Resolution No 18364 “forming the Skagit Regional Public Facilities District
pursuant to RCW 31.100.010 (with Exhibit A Charter of the Skagit Regional Public
Facilities District), August 14, 2001. Note: subsequent amendments were made in 2002,
2003, 2004, 2008 and 2009.
• Skagit County and SRPFD, Interlocal Agreement, February 1, 2013.
• Skagit Valley College and SRPFD, Ground Lease … for Skagit Regional Performing Arts &
Conference Center Project, September 2002.
• SRPFD - Marc L Estvold, Executive Project Director, Declaration, December 2019 (stating
1st Amendment was never approved and 2nd Amendment was approved July 2, 2018).
• SRPFD with Skagit Valley College and Skagit Performing Arts Council (SPAC), Agreement
for Performing Arts & Conference Center for Management Services, September 9, 2002.
Note: subsequently amended 2008 (not adopted) and 2018 (adopted).
• SRPFD and ALSC Architects, Exterior Renderings and McIntyre Floor Plans.
• SRPFD and Skagit County, Interlocal Agreement, February 1, 2013.
• SRPFD, 2020 Adopted Budget, November 14, 2019.
• SRPFD, Construction Schedule & Estimated Construction Costs, worksheet files,
December 2019.
• SRPFD, Income-Expense historical data and projections and sales tax revenues (various
worksheet files), December 2019-January 2020.
• SRPFD, Information Request Related to Skagit Regional Public Facilities District, PFD
Response, December 4, 2019.
• SRPFD, Limited Tax General Obligation Bonds 2020 (Preliminary – AA MMD as of
12/2/19 plus 0.5%), December 3, 2019.
• SRPFD, A Resolution of the Board of Directors … Taking Action with Respect to the Sales
and Use Tax…” Resolution No. 01-01, 2001.
• SRPFD, Unaudited Annual Financial Reports, covering the years 2012-18.
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APPENDIX C. STATEMENT OF IRMA COMPLIANCE
E.D. Hovee & Company, LLC for the Washington State Department of Commerce:
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APPENDIX D. McINTYRE HALL FLOOR PLANS
E.D. Hovee & Company, LLC for the Washington State Department of Commerce:
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E.D. Hovee & Company, LLC for the Washington State Department of Commerce:
Financial Feasibility Review for SRPFD Improvements to McIntyre Hall Performing Arts & Conference Center ♦ Page 34
END NOTES
1
Throughout this report, the following terms and abbreviations are used interchangeably:
SRPFD and District – abbreviated terms for the Skagit Regional Public Facilities District
SVC – Skagit Valley College
SPAC – Skagit Performing Arts Council
Sales Tax – Sales-and-use tax
PACC – Performing Arts and Conference Center
2
Information regarding the McIntyre Hall facility is drawn primarily from the web site: www.mcintyrehall.org.
3
Information for this independent financial review has been obtained from sources generally deemed to be
reliable. However, E. D. Hovee does not guarantee the accuracy of information provided by third party
sources, and information is subject to change without notice. Financial information in this report pre-dates
Mar. 2020. Observations and findings made with this report are those of E. D. Hovee. They should not be
construed as representing the opinion of other parties prior to express approval, whether in whole or in part.
4
By written declaration of December 17, 2019 of Marc Estvold, SRPFD Executive Project Director, a statement
has been provided that the “proposed First Amendment was never approved or executed and therefore does
not apply.”
5
Based on input from PFM, It is likely that the new 2020 Bonds might have a standard 10-year call feature. It is
possible that a shorter call feature (i.e. 7-8 years) might also be considered, if deemed to be of value to SRFPD.
6
This review is focused on budget rather than actual revenue/expense information as more line item detail is
available with annually approved SRPFD budgets. It is noted that sales/use tax revenues have generally
exceeded budget figures – by about 7% over the time period of 2005-18. Over this time period, there are only
the three years of 2008-10 when actual receipts came in below projection. This indicates a generally
conservative approach to District budgeting, but with the risk of overestimating during a recessionary period.
7
As of this report, SRPFD indicates that the reserve stabilization amount for 2021 is already set aside.
8
With the three stress test scenarios considered, it is noted that positive application of excess reserves means
that the unreserved amount for the following year is reduced. A negative application means that unreserved
amounts in the following year can be increased as a result of excess cash flow in the prior year.
9
Under current state law, any new PFD would not be eligible for the 0.033% state sales tax credit but would
have to look for other allowed (including potential voted) sources of funding. Any potentially competing PFD
with a claim on the 0.033% sales tax credit would likely require a change in state enabling legislation.
10
Consideration also might be given to extend the term of Sedro-Woolley payments to the retirement of all
District debt, consistent with the terms of other jurisdiction-specific interlocal agreements. However, this is
not a significant item as new PFD formation is not currently anticipated and as this jurisdiction’s contributions
do not materially affect total sales tax revenues to the District.
11
As part of this review, there has been discussion as to whether other credit enhancements would be required
beyond what is already anticipated. SRPFD has indicated that other provisions as for debt service coverage or
higher reserves have not been requested and are not anticipated to be required by either the County or
financial underwriters.
E.D. Hovee & Company, LLC for the Washington State Department of Commerce:
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FINANCIAL FEASIBILITY REVIEW
OF SKAGIT REGIONAL PUBLIC
FACILITIES DISTRICT IMPROVEMENTS
TO MCINTYRE HALL PERFORMING
ARTS & CONFERENCE CENTER:
REPORT ADDENDUM
Prepared for:
Washington State
Department of Commerce
April 28, 2020
E. D. Hovee & Company, LLC
Economic and Development Services
FINANCIAL FEASIBILITY REVIEW
OF SKAGIT REGIONAL PUBLIC
FACILITIES DISTRICT IMPROVEMENTS
TO McINTYRE HALL
PERFORMING ARTS
& CONFERENCE CENTER:
REPORT ADDENDUM
Prepared for:
Washington State Department of Commerce
1011 Plum Street SE
PO Box 42525
Olympia, WA 98504-2525
(360) 725-4000
Prepared by:
E. D. Hovee & Company, LLC
PO Box 225
2408 Main Street
Vancouver, Washington 98666
(360) 696-9870
April 28, 2020
Note: Cover exterior photo is courtesy of the Hutteball + Oremus Architecture
AT-A-GLANCE SUMMARY
This Report Addendum is intended to serve as a supplement to the Financial Feasibility Review of Skagit
Regional Public Facilities District Improvements to McIntyre Hall Performing Arts & Conference Center
report prepared for the Washington State Department of Commerce in consultation with the Skagit
Regional Public Facilities District (SRPFD or District).
The primary purpose of this Report Addendum is to address the question of revenue adequacy in the
face of an unprecedented pandemic-related economic and associated sales tax revenue downturn. As
identified by the full feasibility report, the short- and long-term financial and economic effects nationally
and regionally cannot as yet be fully determined in any readily quantifiable manner. What follows is an
abbreviated summary of key observations regarding feasibility with this supplemental Addendum.
Supplemental Information. This Addendum has been based on review of new information including:
• A now completed amended interlocal agreement between Skagit County and the District –
together with supporting agency resolutions whereby Skagit County has “pledged its full faith
and credit” to make debt payments as scheduled in the event of District sales tax shortfalls.
• SRPFD stress test analysis – reflects potential sharp reductions of sales tax revenue in 2020, as
reviewed by the District board and followed by re-affirmation of plans to proceed.
• Skagit County funding capacity – based on reviews of a bond purchase agreement with North
Cascades Bank, non-voted Skagit County bonding capacity, most recent bond rating, historical
experience during the most recent economic downturn, and current sales tax funding outlook.
Feasibility Considerations. The following considerations are noted as pertinent to assessing SRPFD
and Skagit County commitment and capacity to repay current and planned new bonded indebtedness:
• With an amended interlocal agreement, it is understood that, while SRPFD has the obligation to
provide sales tax revenues and reserves for debt repayment, Skagit County is issuing the bond
with the explicit stipulation that “If there are shortfalls in PFD revenue, the County remains
committed to pay the debt service on the bonds.”
• Skagit County has conducted its own stress test analysis involving an even steeper and longer
lasting reduction in sales tax revenues than assumed by the District. In the event of a shortfall,
the County could either make up the difference from General Fund sources and/or refinance
2013 bonds in 2022 with a more extended payment term.
• Skagit County also has ample non-voted bonding capacity, has been rated by Moody’s as having
Aa3 investment grade and low credit risk bond rating, and has demonstrated resilience in the
face of the Great Recession while maintaining a General Fund surplus.
Of all these considerations, by far the most important is Skagit County’s pledge of its full faith and credit
to the bond placement with North Cascades Bank and the stated acknowledgement of the County’s
obligation to pay the debt service. It is understood that both the contractor and bank commitments to
proceed are predicated on project commencement by May 1, 2020.
Based on these considerations and assuming the continuation of Skagit County governmental services
even through times of national and regional economic crisis, this Report Addendum provides evidence
of demonstrated institutional commitment coupled with capacity of current and expected revenues,
whether from sales tax or other sources, to meet anticipated project costs.
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Table of Contents
AT-A-GLANCE SUMMARY i
I. ADDENDUM INTRODUCTION 1
Addressing Changing Circumstances 1
Addendum Purposes 2
Addendum Organization 2
II. SUPPLEMENTAL DOCUMENTATION 3
Amended Interlocal Agreement 3
PFD Stress Test Analysis 4
Skagit County Funding Capacity 6
III. FEASIBILITY CONSIDERATIONS 12
APPENDIX A. ADDED DOCUMENTS REVIEWED 14
APPENDIX B. SKAGIT COUNTY LETTER (APRIL 21) 15
APPENDIX C. BOND DEBT SERVICE SCHEDULE 18
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I. ADDENDUM INTRODUCTION
On March 20, 2020, a fourth and final draft report addressing the Financial Feasibility Review of
Skagit Regional Public Facilities District Improvements to McIntyre Hall Performing Arts &
Conference Center was submitted to the Washington State Department of Commerce
(Commerce) for agency review. This full feasibility report was prepared in consultation with the
Skagit County Regional Public Facilities District (SRPFD or District) by the economic and
development consulting firm E. D. Hovee & Company, LLC.
The feasibility review addressed plans of SRPFD to improve the 700-seat McIntyre Hall
Performing Arts Center in Mount Vernon at a total cost estimated at $4.5 million. Of this
amount, $4.0 million is anticipated to be funded with limited tax general obligation (LTGO)
bonds issued by Skagit County – with repayment to be made by the District.
ADDRESSING CHANGING CIRCUMSTANCES
Due to previously unforeseen and rapidly changing medical and economic circumstances
related to the current COVID-19 pandemic, the March 20 independent feasibility review report
was accompanied by the following statement:
It is important to note that the financial estimates provided in this report pre-date the
March 2020 intensification of the coronavirus (COVID-19) pandemic nationally and in
Washington state, especially in the face of economic effects now being experienced. As
of the date of this draft, the short and long-term financial and economic effects
nationally and regionally have yet to be determined in any readily quantifiable manner.
Depending on the severity and duration of these effects, it is possible that the financial
capacity of the District could be affected in a manner not previously anticipated.
Subsequently, questions have been raised in discussions between Commerce and the Office of
Financial Management (OFM) as to whether, in the face of changing circumstances, the
feasibility report adequately addressed the statutory requirements of RCW 35.57.025.
Specifically in question is the requirement that the review address “the adequacy of revenues
or expected revenues to meet these (project) costs.”
As highlighted by the March full feasibility report, the need for a rapid conclusion is further
reinforced by the requirement for SRPFD to complete bond financing and authorize
construction to get underway by May 1, 2020. The project was bid to start on May 1. The
District advises that if that start date cannot be met, it will lose its ability to hold the project
price to the current budget which could affect feasibility of proceeding. The District indicates
that it is required to purchase new siding secured by the contractor even if construction work
does not proceed as scheduled. The District’s current bond commitment from North Cascades
Bank is also conditioned on a closing date of May 1.
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ADDENDUM PURPOSES
The primary purpose of this Report Addendum is to address the question of revenue adequacy
in the face of an unprecedented economic and associated tax revenue downturn. As identified
with the full feasibility report, the short- and long-term financial and economic effects both
nationally and regionally cannot as yet be fully determined in any readily quantifiable manner.
Consequently, the approach taken with this addendum review is somewhat different than that
of the full feasibility review which was based on more stable economic trends and conditions
pre-dating the pandemic. Rather than serve as a detailed technical review, this addendum
focuses instead on providing supplemental information as has been compiled by the public
agencies – SRPFD and Skagit County – that have a direct financial stake in the successful
development, funding and operation of the planned facility improvements. This includes
additional financial review and due diligence that each organization has conducted on its own
over the course of the last several weeks.
This supplemental information has been provided in response to questions and requests posed
to SRPFD and Skagit County. Their assistance in providing this information is gratefully
acknowledged.
As an independent review, this Report Addendum aims to comment on the adequacy of
information received as a reasonable basis for proceeding with the project as previously and
currently planned.
ADDENDUM ORGANIZATION
The remainder of this Report Addendum is organized to cover the following topics:
• Supplemental information – as provided by SRPFD and Skagit County
• Feasibility considerations – based on information provided in the context of an
uncertain economic and revenue environment likely extending through 2020 and
possibly beyond
Three appendices are provided with this report – a list of additional documents reviewed, the
full text of a letter from Skagit County to Commerce dated April 21, 2020, and the bond debt
service schedule.
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II. SUPPLEMENTAL DOCUMENTATION
Topics covered based on supplemental materials provided include:
• Amended interlocal agreement between SRPFD and Skagit County
• SRPFD stress test analysis
• Skagit County funding capacity
AMENDED INTERLOCAL AGREEMENT
Since 2013, debt funding and repayment arrangements for McIntyre Hall facilities have been
governed by an Interlocal Agreement between Skagit County and the SRPFD. The full
independent feasibility review report addressed the need for this agreement to be amended or
affirmed for continuation through 2041 or when the new planned bond is fully repaid.
A First Amendment to the Interlocal Agreement between the County and District dated March
1, 2020 was fully executed as of March 30. The amendment stipulates that the planned 2020
bonds will be Additional Bonds per the provisions of the 2013 agreement.
Resolution # R20200048 of the Skagit County Board of Commissioners, adopted March 24,
authorized the sale of limited tax general obligation (LTGO) bonds in the aggregate principal
amount of $3.4 million for the purpose of financing capital improvements to be undertaken by
the District. While the bonds are supported by sales and use tax revenues imposed and
collected by the District, the resolution provides for the annual levy of taxes, if necessary, by
the County to pay the principal and interest on the bonds.
More specifically stated by the resolution (and to be included with a bond purchase contract or
official statement) is the commitment that:
The County hereby irrevocably covenants and agrees with the owner of this bond that it
will include in its annual budget and levy taxes annually, within and as a part of the tax
levy permitted to counties without a vote of the electorate, upon all the property
subject to taxation in amounts sufficient, together with other revenues and money
legally available therefor, to pay the principal of and interest on this bond as the same
shall become due. The full faith, credit and resources of the County are hereby
irrevocably pledged for the annual levy and collection of such taxes and the prompt
payment of such principal and interest.
Also attached to the First Amendment is Resolution No. 20-02, earlier approved by the SRPFD
Board of Directors on March 18. This resolution requested County issuance of LTGO bonds,
provided District approval of the First Amendment and also authorized the execution of an
amendment to the existing ground lease with Skagit Valley College (through the State Board for
Community and Technical Colleges). The resolution also provides a written commitment of the
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District to use proceeds of its sales and use tax pay all debt service related to bonds issued by
the County.
The effect of the First Amendment to the Interlocal Agreement is to continue the obligation of
the SRPFD to pledge its sales and use tax revenues to the County as the primary (if not only)
source of bonded debt repayment. In the event of a temporary or prolonged shortfall in sales
tax funding, the First Amendment also commits the County to fill the gap or shortfall from any
or all of its available funding resources so that all debt obligations will be fully paid as
scheduled. Based on email correspondence from Skagit County, the anticipated source of
funding (if needed to pay any shortfall in SRPFD sales tax revenues) is to be the County’s
General Fund.
PFD STRESS TEST ANALYSIS
As the first and primary source of debt repayment, the question raised with the full feasibility
report and this Addendum is the capacity of the District to repay the bonded indebtedness
through to debt retirement in 2041. The feasibility report presented three alternative sales-
and-use tax projections – trended, flat revenue, and recession scenarios. The base economic
information for all scenarios was from revenue experience through 2019 – prior to emergence
of the economic shock now being posed due to the COVID-19 pandemic in the U.S. and globally.
All three scenarios were associated with adequate revenue to meet debt service requirements
each year through the period of debt repayment. However, only the trended scenario that was
predicated on continued sales tax revenue growth averaging 3.3% per year could also be
assured of funding debt plus reserve and operating expenses as have typically been incurred.
The other two scenarios could fall short of full funding capacity in 2026-27 with flat revenue or
from 2024 to possibly beyond 2028 with the recession scenario.
The pandemic presents a new and unanticipated challenge with substantial potential
reductions in sales tax revenue earlier than previously expected. Due to the suddenness of
economic contraction and timing lags in receipt of sales tax revenue, any short-term forecast
scenario at this point in time should be viewed as being subject to a considerable range of
variability.
The Washington State Department of Revenue provides updated local tax distribution data – as
for sales-and-use tax – on a monthly basis. At this time, the most recent month of data is for
March 2020. However, this March data generally is based on January 2020 returns due in
February 2020. Consequently, data that reflects downward sales activity taking hold in March
and April in line with increasing unemployment is not yet available.
Despite these limitations and subsequent to the March full feasibility report, Skagit County and
the SRPFD have again reviewed revenue and expense projections in light of changed
circumstances to assess the District’s ability to make payments on current obligations as well as
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the proposed new loan. The District has been assisted in this effort by its financial advisor PFM
and legal counsel K&L Gates.
The following chart presents a short-term sales tax revenue scenario that has been prepared by
SRPFD staff and shared with District board members. The scenario shows sales tax revenues
potentially dropping to as low as 25% of 2019 levels for three months, then ramping back
slowly over the remainder of 2020 closer to normal (or to 75% of 2019 levels by the end of
2020).
SRPFD Short-Term Sales Tax Revenue Scenario
Source: SRPFD, provided as of April 2020.
This analysis is accepted as provided without further review at this time by E. D. Hovee.
The figure of $426,416.08 covers the period for the last 9 months of the year. The first three
months are included at 100% of prior year totals. Consequently, the 12-month projection would
be $702,913.40. This would appear to be 35% - 38% below 2019 receipts – depending on
whether earlier SRPFD or more recent County revenue data is used.
Based on email correspondence, the District has indicated that even with decreased revenues
associated with this scenario, the District will be able to meet its financial obligations including
payments on the existing 2013 bond, the new loan and reserves. This scenario also indicates
that the District can do this without the need to utilize existing reserves.
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If revenues prove to be worse than outlined by this scenario, there is a longer-term fallback
capability for the County to refinance its 2013 bond in 2022. As noted by the full feasibility
report, the 2013 bond is currently scheduled to be paid off in 2026. If refinanced, the bond
could be amortized through to 2041, thereby decreasing monthly debt service payments.
Based on these considerations and per email correspondence with the SRPFD, it is understood
that the District board met on March 18 and April 15 and both times concluded that it
remained committed to move forward with the project.
While this short-term scenario is accepted as provided, this independent feasibility review is
not intended to provide further critique or validation as to forecast reliability due to lack of
relevant actual sales tax data at this time. Rather, the approach taken with the remainder of
this Report Addendum is to focus on back-stop capacity of Skagit County in the event that
District revenues prove to be inadequate to fully fund current and planned new debt service,
whether of short- or longer-term duration.
SKAGIT COUNTY FUNDING CAPACITY
As noted in the full feasibility review, it is Skagit County that is taking out the loan (issuing the
debt) on the District’s behalf and is ultimately responsible for repayment. As the District has
noted in email correspondence, the County takes what is essentially a backstop position
seriously as it is the County’s credit and resources that are at potential risk.
As a result, it is understood that the County has also re-examined the District’s ability to make
required payment and has prepared its own scenarios of projected SRPFD sales tax revenues.
To assist in this effort, Skagit County has also retained a consultant experienced with public
entity bond financing locally and statewide.
A statement of the County’s commitment and pledge of “its full faith and credit” to repayment
of the bond together with added documentation is provided by a letter dated April 21 to
Commerce from Trisha Logue, Skagit County Administrator. This letter and additional
documentation have been provided for consideration with this Report Addendum based on
request from Commerce and this independent reviewer.
The following topics summarize the documentation provided and reviewed in the context of
County capacity to support any gap in sales tax shortfalls if and when needed:
• Documentation of bond purchase contract – with North Cascades Bank
• Review of non-voted bonding capacity – including remaining amount available
• Most recent County bond rating – by Moody’s in 2016
• Historical experience in economic downturn – with the Great Recession of 2007-09
• Current financial outlook – focused specifically on SRPFD sales tax funding capacity
Each of these topics is briefly considered, in turn.
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Loan Documentation
By letter dated April 17, 2020 to the Skagit County Administrator, North Cascades Bank has
provided a bond purchase contract specifying terms and conditions for purchasing a qualified
tax-exempt LTGO bond of Skagit County at private placement at a par amount of $3.4 million.
The par amount of the bond will bear interest at 5.00% per annum; purchase will be made at a
yield to maturity estimated at 2.9455% subject to conditions noted with the purchase contract.
Term of the bond is to December 1, 2041 with bond payments made semi-annually on June 1
and December 1. Closing date is set for May 1 beyond which the purchase contract will
terminate without notice, unless extended in writing by the bank.
The County is to provide the bank with its annual financial report together with other
information that the bank may reasonably request from time to time. As security, the purchase
contract stipulates that:
The Bond shall be a limited tax general obligation of the County. The County irrevocably
covenants and agrees that it will include in its annual budget and levy taxes annually,
within and as a part of the tax levy permitted to counties without a vote of the
electorate, upon all the property subject to taxation in amounts sufficient, together with
other revenues and money legally available therefor, to pay the principal of and interest
on the Bond as the same shall become due. The full faith, credit and resources of the
County are hereby irrevocably pledged for the annual levy and collection of such taxes
and the prompt payment of such principal and interest.
This requirement of the bank as bond purchaser in combination with a similar commitment in
the amended Interlocal Agreement (which includes attached resolutions) demonstrates that
the planned bond of $3.4 million will be repaid under any reasonable circumstance short of
County insolvency. Repayment capacity is as assured as reasonably possible based on current
and past County financial management practices as further described below.
Non-Voted Bonding Capacity
Skagit County has provided documentation of its total taxable valuation together with voted
and non-voted indebtedness covering the period of 2009-2019, summarized as follows:
• As of 2019, assessed value of Skagit County is just under $21.2 billion.
• Total debt capacity including voted and non-voted debt is set at 2.5% of total assessed
value – in an amount of nearly $529 million as of 2019.
• Of most relevance to this review is the non-voted debt limit set at 1.5% of total assessed
value – in an amount of $317 million as of 2019. Remaining debt capacity is $282 million
(with only 11% of the net debt that is applicable to the limit committed to date).
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• From 2009-13, non-voted debt utilized between less than 4% to about 8% of the
capacity limitation, then increased to 28.5% in 2014 before dropping back to a 2019
level of 11%.
In effect, Skagit County currently has ample non-voted capacity to assure repayment of some
portion or all of the $3.4 million bond in the event of inadequate SRPFD sales tax revenues.
Bond Rating
The most recent bond rating for Skagit County occurred in 2016 with Moody’s issuance of an
Aa3 rating in connection with a LTGO refunding bond of $7.54 million. As defined by Moody’s,
obligations that are rated as Aa are investment grade, judged to be of high quality and very low
credit risk.
The Aa3 rating was cited as reflecting Skagit County’s sizeable tax base, average wealth levels,
satisfactory financial operations that lag the median nationally, and modest debt profile.
Credit strengths cited were the County’s sizable and stable tax base, solid financial operating
history, and modest debt burden. Additional positive factors noted were healthy liquidity,
relatively low debt burden, and strong county management.
Credit challenges noted included some modest concentration risk in the ten largest taxpayers
and significant long-term liabilities in enterprise funding (as for the solid waste, drainage utility,
and jail funds). Skagit Count was also compared with its neighboring metro counties to the
south – Snohomish with a somewhat higher Aa2 rating and Seattle rated Aaa.
Specifically noted by Moody’s was the mix of revenue sources supporting the county’s General
Fund – with property taxes at 49%, followed by retail sales-and-use tax at 17% and
intergovernmental revenues at 16%. Heavy reliance on sales tax is noted as a source of volatility
for the state, less so for counties that are less reliant on this revenue source.
Operating fund reserves were equal to a healthy 31% of operating revenues. Combined debt
service on all bonds was nearly 13% of General Fund revenues, but all with identified
repayment sources not impacting the General Fund.
Taken together, these factors are positive for added modest County debt funding (if needed) as
with the SRPFD project, further reinforced by ample non-voted debt capacity (as described
above).
Historical Experience
While the economic effects of the current COVID-19 pandemic are likely to play out differently
than those of the Great Recession, this prior experience is nonetheless of note as one potential
indicator of Skagit County’s economic and financial resilience. The experience of the Great
Recession has also served as the basis for a recession scenario as one of three alternate sales
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tax revenue projections considered in the full feasibility review – albeit hypothetically assumed
to happen later than the current downturn.
The Skagit County letter attached as Appendix B references this experience, noting that:
“… the County successfully managed through the recession of 2008-2009. While we
made expense and service reductions that were at times painful, we met all obligations
and retained a strong General Fund balance that exceeded our target as evidenced in
our financial statements. At the same time, despite a 25% reduction in sales tax revenue
over 3 years, the PFD was able to make all debt service payments without ever drawing
on its RSA (revenue stabilization account) or other reserves.”
As part of this Report Addendum, Skagit County revenues have been reviewed over the period
of 2006-18 – leading into and then subsequent to the Great Recession. Information is drawn
from the Annual Financial Reports of the Washington State Auditor’s Office and from
Comprehensive Annual Financial Reports of Skagit County. Revenues of both the General Fund
and all County funds are considered with this review. In addition to the General Fund, all funds
include the County’s Mental Health Fund, County Road Fund, and Other Governmental Funds.
General Fund revenues are of primary interest since Skagit County’s General Fund is indicated
by the County as being the source of backstopping any shortfall in SRPFD sales tax revenues.
The more encompassing “all funds” trends are also of note, especially as both property and
sales tax revenues are apportioned between funds in varied proportions from year-to-year.
Skagit County General Fund & All Fund Revenues (2006-18)
$70,000,000 $140,000,000
$60,000,000 $120,000,000
General Fund Revenues
$50,000,000 $100,000,000
All Fund Revenues
$40,000,000 $80,000,000
$30,000,000 $60,000,000
$20,000,000 $40,000,000
$10,000,000 $20,000,000
$0 $0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Sales and Use Taxes Property Taxes Other Revenues All Funds
Sources: Washington State Auditor’s Office and Comprehensive Annual Financial Reports of Skagit County.
Revenues from all funds available to Skagit County are more than double what is allocated to
the General Fund. While General Fund revenues have increased at a somewhat slower rate
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than for all funds, the cyclical patterns are roughly comparable. Both General Fund and all fund
revenues appear to rise and fall at similar times.
Other observations from this review are noted as follows:
• Overall, General Fund revenues to Skagit County have increased from $45.7 million in
2006 to $57.3 million in 2018 – equating to a compound growth rate of 1.9% per year.
Revenues across all funds have increased somewhat more rapidly – by 2.8% annually.
• Both within the General Fund and across all funds, revenue growth has generally
outpaced expense growth – resulting in increasing fund balances through 2018. Skagit
County’s General Fund balance has increased from just over $5 million in 2006 to nearly
$20 million as of 2018. The balance across all funds has increased from just under $40
million to over $76 million.
• Across all funds, sales-and-use tax allocations have increased more rapidly overall than
property tax revenues – at annual rates of 4.1% and 3.7%, respectively. Within the
General Fund, the reverse situation is noted. Other revenue sources have increased
more slowly than from sales and property tax sources (actually declining somewhat
within the General Fund).
• As noted by the Moody’s bond rating, sales tax revenues tend to be more volatile than is
the case for property taxes. Sales tax receipts declined across three consecutive years
from 2008-10 – dropping by 25% for the General Fund over these three years and by 21
% for all funds combined. During this same time period, property tax revenues
continued to increase each year.
• With revenue declines experienced for sales tax and other revenues, Skagit County
made expenditure reductions – with the largest cut of 10-11% experienced in 2010
across both the General Fund and for all funds combined.
• Starting in 2014, the General Fund has had little to no exposure to debt service
payments. Across all funds, debt service accounts for just 3% of expenditures as of 2018.
• Despite the economic turmoil from 2008-10, the General Fund has experienced an end
of year surplus every year from 2006-18. A deficit of over $9 million was realized across
all funds in 2009 – with lesser deficits of $1.0 and $1.6 million noted for 2013 and 2014,
respectively.
• Coming out of the recession, a strong rebound in sales tax revenue was experienced in
2011. Strong performances are also noted for 2015 and 2018 – especially for the
General Fund (with an 18.6% year-over-year increase noted in 2018).
• Overall, both the General Fund and all funds are more reliant on property and sales
taxes in 2018 as compared with 2006, less reliant on other revenues. Within the General
Fund, property taxes have increased from 38% to 46% of total revenues, with sales tax
revenues increasing more modestly from 18% to 20%.
Taken together, this review indicates that Skagit County has demonstrated substantial financial
resiliency through the last economic downturn – despite the most serious declines noted for
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sales-and-use tax. Coming into the current economic crisis, sales tax revenues again can be
expected to be most adversely affected, though to a degree and over a time period as yet not
readily determined.
If the experience of the last recession is repeated, revenues other than property and sales tax
also will be adversely affected. With no more than 20% dependence on sales tax going in, Skagit
County will be less vulnerable than would otherwise be the case – provided that property tax
collections are maintained throughout the current downturn and that operating expenditures
can be pared as needed – giving priority to debt repayment which has been a modest
proportion of all County expenditures in recent years.
Current Financial Outlook
In its letter of April 21 to Commerce, Skagit County has provided a 10-year projection of SRPFD
sales tax revenues reflecting COVID-19 pandemic conditions over a period of reduced revenues
extending to 2025. The assumptions are different and more conservative than those made by
SRPFD which have focused only on the current 2020 calendar year.
With the Skagit County scenario, sales-and-use tax revenues are assumed to be only 50% of
2019 base revenues in 2020, increasing to 65% in 2021, 80% in 2022, 90% in 2023, 95% in 2024,
and back to 100% by 2025. With this scenario, the combination of existing and proposed new
debt payments would exceed sales tax revenues each year from 2020-23. However, the
shortfall in current sales tax revenues would be offset by the revenue stabilization account and
debt reserve without the need for County General Fund support.
However, this scenario comes within $29,000 of requiring the County to provide supplemental
funding to make required debt service payments. In effect, if the revenue impacts prove to be
any more adverse than applied with the County scenario, some form of County backstop
support likely would be required.
One other observation is noted from the County’s analysis. The most important factor affecting
sales tax adequacy to fully fund debt repayment is not so much the severity of the current and
immediate 2020 impact but, rather, the time period and pace by which subsequent economic
and revenue recovery occurs. A recession of short duration will be much more sustainable with
sales tax revenues than a period of prolonged economic contraction.
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III. FEASIBILITY CONSIDERATIONS
As noted at the outset, the primary purpose of this Report Addendum has been to address the
question of revenue adequacy in the face of a potentially unprecedented economic and
associated tax revenue downturn. As an independent review, this addendum comments on the
adequacy of information previously and more recently provided as a reasonable basis for
proceeding with the SRPFD project as planned.
To summarize, the following considerations are noted as pertinent to assessing SRPFD and
Skagit County commitment and capacity to repay current and planned new bonded
indebtedness:
• As documented by the full independent feasibility review, the institutional capacity for
funding, development and operation of the SRPFD’s McIntyre Hall Performing Arts &
Conference Center has been in place starting with formation of the District in 2001 and
with interlocal arrangements subsequently modified as project circumstances have
changed. Since completion of the full feasibility report, an amended interlocal
agreement has been approved by Skagit County and the District.
• With this amended interlocal and supporting resolutions, Skagit County has “pledged its
full faith and credit” to make debt payments as scheduled in the event of District sales
tax shortfalls. An amended ground lease with Skagit Valley College has also been
approved by the District Board, subject to state board confirmation.
• As indicated by the full feasibility review report in March 2020, it was becoming clear
that the COVID-19 pandemic could affect the capacity of the District to repay current
and planned debt in a manner not previously anticipated. Subsequently, both the
District and Skagit County have conducted further due diligence to assess potential
impacts on financial feasibility for the proposed project.
• Both analyses indicate that the District has adequate revenue together with reserves to
make initial payments this year. Skagit County also has evaluated longer term
implications with a scenario reflecting a near term sharp sales tax revenue decline with
potentially slow return to 2019 revenues extending from 2020 to 2025. Even with this
scenario, District revenues and reserves could prove adequate without the need for
Skagit County funding support.
• However, if revenues fall short of what is assumed by the Skagit County scenario
provided with this Report Addendum, the combination of District revenues and reserves
would likely prove inadequate to fully cover debt payments by 2023 (or earlier if the
recession were to involve a more severe downturn than indicated by the County’s
funding scenario). In this event Skagit County could be required to provide backstop
funding support from its General Fund. Alternatively, if the shortfall does not emerge
until after 2021, the shortfall might be addressed by refunding of the current 2013 bond
in 2022.
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• Based on additional information provided by Skagit County (including the letter
attached as Appendix B), the following additional factors are noted as supporting Skagit
County’s capacity for repayment:
North Cascades Bank has provided a bond purchase contract for execution by
May 1 involving repayment provisions consistent with prior projections.
Skagit County has more than ample non-voted bonding capacity to readily cover
some portion or all of the new bonded indebtedness, if necessary.
County capacity is also supported by a prior Moody’s bond rating (in 2016) of
Aa3 investment grade, judged to be of high quality and very low credit risk.
Skagit County has demonstrated resilience in the face of prior economic
downturn, most recently exemplified by the Great Recession which adversely
affected County revenues from 2008-10 but with the General Fund maintaining
an operating surplus throughout.
Of all these considerations, by far the most important is Skagit County’s pledge of its full faith
and credit to the bond placement with North Cascades Bank and the stated acknowledgement
of the County’s obligation to pay the debt service. This is further reinforced in the statement
provided by the County’s letter of April 21 to Commerce that: “If there are shortfalls in PFD
revenue, the County remains committed to pay the debt service on the bonds.”
Based on these considerations and assuming the continuation of Skagit County governmental
services even through times of national and regional economic crisis, this Report Addendum
provides evidence of demonstrated institutional commitment coupled with capacity of current
and expected revenues, whether from sales tax or other sources, to meet anticipated project
costs.
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APPENDIX A. ADDED DOCUMENTS REVIEWED
In addition to documents cited by the full feasibility review report, the following additional
documents have been reviewed with this Report Addendum:
• Moody’s Investors Service, Skagit County, WA New Issue – Moody’s Aa3 to Skagit
County, WA’s LTGO bonds, Credit Opinion, May 24, 2016.
• North Cascades Bank, Bond Purchase Contract (Revised), April 17, 2020.
• Skagit County and SRPFD, First Amendment to Interlocal Agreement C20120043, dated
March 1, 2020 (and fully executed March 30, 2020).
• Skagit County, Comprehensive Annual Financial Report, report documents covering the
years 2010-18.
• Skagit County, Voted and Non-Voted Indebtedness Chart, 2009-19 (provided as
worksheet file).
• Trisha Logue, Skagit County Administrator, letter to Angie Hong – Washington State
Department of Commerce, April 21, 2020.
• Washington State Auditor’s Office, Financial Statements and Federal Single Audit
Report: Skagit County, reports covering the years 2006-09.
Separate from and in addition to these documents, Commerce and this independent feasibility
reviewer have been involved in telephone consultation and e-mail exchanges which also have
provided additional information including cross-checking as useful for documentation provided
with this Report Addendum.
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APPENDIX B. SKAGIT COUNTY LETTER (APRIL 21)
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E.D. Hovee & Company, LLC for the Washington State Department of Commerce:
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APPENDIX C. BOND DEBT SERVICE SCHEDULE
The following debt service schedule as provided by SRPFD on April 24, 2020 is from the closing
document with North Cascades Bank. Annual payments reflect minor variations from what is
provided in the full feasibility report and in information as provided in this Report Addendum
from Skagit County.
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