Whatever Happened To Town Lake Park?
(Hint: It’s About the Money)
by Larry Akers
Friends of the Parks of Austin Stakeholder Representative
Town Lake Park Community Project
Visitors might enjoy a visit to Auditorium Shores or Butler Park (collectively Town Lake Park) and not appreciate how far short the park falls from what was envisioned in its creation. They might not guess how the funding authorized by the voters of Austin to construct the park had been hijacked. Without referring to the Master Plan and the accompanying finance plan adopted by City Council in July 1999, they might not recognize that the park is only half funded and half built.
So what went wrong? Why, 12 years later, have only 24 acres of the 54 acre park been developed? Within even those 24 acres, why is the centerpiece Alliance Children’s Garden adjacent to the Daugherty Arts Center undeveloped? Why have many other features of the redeveloped area been omitted, so that only one corner of the site is attractive for use? And why have pedestrian safety measures adopted by the City been ignored in implementation? Where is the world class park the voters taxed themselves to pay for and meticulously planned?
The short answer is that unbeknownst to the public and even the City Council, the Convention Center Department absconded with the funding the voters authorized for construction of the park. Using it to underwrite the operations and maintenance of the Palmer Events Center, a purpose not authorized by the voters, the Department made itself so flush with cash that it has filled the pockets of its managers and employees with nearly $5 million of unearned take-home pay.
This report delves into the background of this failure to deliver by the City. The executive summary has links to sections of the report presenting a full explanation of its points. The sections have links to many supporting City documents, which are also indexed at the end of the report.
In October, 1998, City of Austin voters authorized creation of a tax on local car rentals to fund construction of the Town Lake Community Park Project. The project consisted of a new Palmer Events Center (PEC) and a 54-acre park redevelopment, with a parking garage to serve both as well as the new Long Center for the Performing Arts. In Spring 1999, project stakeholders and nationally recognized professionals guided creation of a master plan for the project. In May-July, 1999, stakeholders and City Council accepted the master plan, along with a financing plan developed by Assistant City Manager Jim Smith, that would fund complete build-out of the finished project by 2007. The finance plan allowed construction funding for the PEC to exceed the City’s bonding authority, and for park development to be completed in four phases on a schedule accelerated thanks to an inter-department borrowing line of credit of up to $6 million. It was a brilliant start.
But in October 1999, City staff presented to Council the bond covenants, the contract governing the bond sale, that redefined the project and the financing authorized by voters and by Council, undermining the recently adopted Jim Smith finance plan. The covenants specified a car rental tax funds dispersal “waterfall” such that any operations and maintenance (O&M) shortfall for the PEC would take complete priority over any park construction funding. A City Councilmember reported that staff presentation of the covenants made no mention of rental tax dollars being redirected to O&M, and the covenants were adopted on consent without discussion. Jim Smith’s August 2000 financial update to Council, either in ignorance or unlikely deception, insisted that the park financing was on track and might even be accelerated, even though its underpinnings had been destroyed. Council appeared to remain uninformed of the waterfall until Spring 2002. The stakeholders who had brought the project successfully to the City and had been given a formal oversight role were not informed at all until mid-2003. Though the ballot language had only specified that the rental tax would fund construction, Staff had redefined the word “construction” to include operations and maintenance in perpetuity, and had reduced even the designation of park construction to “any other legal purpose” under state law.
The financial impact of the waterfall scheme on the park project was devastating. Phase II was delayed twice, for nearly three and a half years, resulting in a nearly $4 million cost in lost park features and donations. Phases III and IV were removed from the financial plan altogether, with staff citing insufficient funding.
The Convention Center Department enriched its employees personally with the windfall from the car rental tax redirection. The waterfall allowed the Convention Center Deparment, which had historically funded events center operations shortfalls from the hotel/motel bed tax, to free the bed tax revenue for other purposes. With much of their windfall, they created a “Gainsharing Bonus Program” for their employees, which from 2001-2010 sent nearly $5 million home as bonus pay, those benefitting most being the director and officers who put the waterfall in place and directed its cash flows. The bonuses were essentially unearned, having been justified in large part by the bogus performance reviews that Department Director Bob Hodge created and for which he was fired and nearly indicted. No other City department had ever had such a bonus pay program.
Project stakeholders pushed for correction of the structural financial problem caused by the waterfall. When the Gainsharing Bonus program was exposed by project stakeholders privately to City Council along with complaints about the waterfall scheme, the City quickly offered $7 million to “finish” the park. Though welcome, this offering failed to correct the structural issues with venue finance, and it was insufficient to realize the park as designed in the Master Plan.
Stakeholders also pressed the issue with City management. In Fall 2007, Assistant City Manager Rudy Garza pledged to stakeholders to formulate a plan to wean the Convention Center Department from the car rental tax. Garza also initiated a revisitation of the master plan in public workshops, with his apparent intent being to establishing that $7 million would be sufficient to meet the public’s vision for the park. When those workshops started to produce a refined vision, essentially consistent with the original master plan, that carried an estimated price tag of $21 million, the revisitation process was abruptly halted.
Garza’s promise had come to nothing, so stakeholders escalated their complaints. City Manager Marc Ott, confronted with the issues and with Garza’s failure to deliver, responded not with a plan of action, but rather with a legal defense of the City’s use of the rental tax money for PEC O&M. He failed to respond to any of the points raised about transparent governance, faithful execution of voter will, or failure to implement Council direction of the Jim Smith financial agreement and park development plan.
In February, 2011, the City declared that the $7 million allocated by the City’s Chief Financial Officer for Phase III construction no longer existed, having been quietly spent almost entirely by the Convention Center Department. City Management began proposing that the remainder of park construction could be funded via the planned 2012 bond election, without considering that the public, having already taxed themselves to fully pay for the park, might resist taxing themselves to pay for it again after the City redirected the original construction funds to an unauthorized purpose.
There is plenty of time and car rental tax revenue within the venue project’s life, though the cost of delay has been steep. Adjusted for standard construction inflation measures, the delayed and undelivered funding for the park as of the end of 2010 the City remains over $12.3 million short of meeting its funding commitments under the Jim Smith plan. More than $3 million in additional construction purchasing power was lost due to the 2002-2006 delay. The City also recently declined a $1 million donation that would have enhanced the park’s water feature on the north side of the PEC. Still, the car rental tax revenue stream could easily allow recovery from all these shortfalls. From its inception in 1999, the car rental tax has generated nearly $37 million more than necessary to cover bond debt service, enough to have fully funded the complete park and the PEC overrun with millions to spare.
Putting park construction back on its originally authorized path to completion will require the City to honor its original ballot authorization that states the car rental tax was authorized exclusively for “construction” of the PEC and the park. The Convention Center Department will need to fund its operations from revenues and other sources. The precedent for this other source is the hotel/motel bed tax, which has been redirected to other purposes including padding paychecks through the Gainsharing Bonus Program. Ultimately the fiscal direction of the Town Lake Park Community Project can be restored and the park project fully realized as envisioned in its master plan and subsequent refinement.
A Good Start
In the summer of 1999, there was every reason for excitement about the City’s construction of a long-awaited great Central Park on the south shore of Town Lake. The land use logjam that had kept the parkland between Town Lake, South First Street, Barton Springs Road, and Lee Barton Drive locked in unsightly surface parking and semi-decrepit uses had finally been broken. Voters had supported two 1998 ballot propositions put together by a formalized stakeholder group to allow Palmer Auditorium to be renovated into the Long Center for the Performing Arts, a new Palmer Public Events Center and a shared parking garage to be built adjacently. 54 acres of the surrounding parkland tract would be redeveloped into a great cultural and recreational green space park with stunning views of downtown and Lady Bird Lake (then named Town Lake). An open public process, guided by public stakeholders and the City, would direct the project. A world class park was in the making.
The propositions provided a financing mechanism, a 5% tax on car rentals in the City, to fund the construction of the PEC, park, and garage. An extraordinarily inclusive public master planning process had produced a site plan sketch and ultimately a Master Plan that cemented many tough compromises and represented consensus among all the stakeholders in the development and the community. The Master Plan was formally adopted by City Council in July, 1999, along with a financing plan that would allow a first rate events center and garage to be built promptly. The financing plan included phased funding for park construction that would completely develop the park in accordance with the visionary $24.5 million Master Plan by 2007. The City would finally have the fine centerpiece of its green necklace of parkland along Town Lake, realizing the vision of the 1980’s initiative mounted by the Town Lake Park Alliance and an army of supporters in what may have been the city’s defining polical struggle of the 1980’s.
As conceived when the enabling Proposition 11 was brought to ballot in November, 1998, the new Palmer Events Center and parking garage would be constructed at a cost of $40 million and be financed with 30-year revenue bonds backed by a car rental tax authorized by the voters and dedicated solely to the construction of the Town Lake Park Community Project venue. The venue project would include the events center sited within a 54-acre green space, uniting with adjacent parkland to create a central city oasis. A parking garage to serve the PEC, the Long Center for the Performing Arts, and the park. The Proposition 11 ballot language and the supporting text published by the City comprised the entire formal description of the project provided to the voters by the City, establishing the agreement by which the voters agreed to tax themselves. By state law governing such venue projects, the rental tax could be used for no other purpose and could not fund any project or program outside the 54 acres of the venue.
The Stakeholder Group, Master Plan, and Financial Plan
Chaos had reigned during the months leading up to the 1998 charter election, as proposals from the Mayor’s office, City staff, and downtown interests for accommodating the arts groups’ request for Palmer seemed almost designed to pit interested parties against each other. As the deadline for formulating a ballot authorization approached, core stakeholders together stepped outside the City-guided process and came to a basic agreement on how a coordinated project would be conceived and financed. The agreement was formalized under a Memorandum of Understanding. City Council accepted the stakeholder guidance, and all parties carried the ballot propositions to electoral success. City Council had been so impressed by the stakeholder effort that in the wake of the election, the City formalized the stakeholder group and charged it with directing the venue’s master planning process, selecting contractors, and overseeing the project development. The resulting Master Plan created a site plan and facility and park designs sufficient to establish construction budgets of $46.9 million (subsequently increased to $48.3 million) for the Palmer Events Center (PEC) and parking garage, and $24.5 million for the park development. This $24.5 million was expressed in terms of phased expenditures as the site was redeveloped.
The Jim Smith Financial Plan
The $48.3 million figure and the pace at which excess revenues would be available for park construction both presented immediate quandaries. The project’s bonding authority of $40 million was insufficient to complete the PEC and garage construction, the cost having grown as the desired size of the facility grew during master planning. The City was under extreme pressure from the major performing arts groups, collectively Arts Center Stage, to vacate Palmer Auditorium in time for the groups to renovate the hall and move into their new performance venue ahead of the University of Texas’ eviction of the groups from the Bass Concert Hall. Furthermore, the revenue projections for the car rental tax, while easily sufficient to fund the entire development over 30 years, were such that the park development could only be completed by 2013 if funded as rental tax revenue became available. Since the park was to integrally support activities of both the Long Center and the Palmer Events Center (PEC), this timeline was judged unacceptable by all parties.
In May, 1999, Assistant City Manager Jim Smith created a proposal to the stakeholders that could resolve these timing issues. The project would allow $6.9 million of additional immediate funding for PEC construction, funded from redirected car rental tax revenues that would have otherwise funded early park construction. This would allow the facilities to be built on time and as desired, including exhibit space that was substantially larger than originally envisioned. Then, to compensate the park development for this initially unavailable revenue, the City would institute an inter-fund borrowing capability for the venue, essentially establishing a line of credit of up to $6 million against funds held by other City departments. This would initially support the “park” landscape construction immediately around the PEC and garage and the design of the second phase of the park, between the PEC and railroad tracks and south of Riverside Drive. The interfund borrowing would be repaid by incoming rental tax revenues, and the line of credit would remain available, so that the rest of the park could be constructed in phases. The plan had the City committing to park construction funding of $18.5 million in phases, all by 2007. The remainder of the proposed construction budget would be funded by donations, which from the very beginning were envisioned to underwrite part of the park’s development. The entire park development, a full realization of the Master Plan, would be completed in 2007, though the pace of donations might dictate when certain finishing items would be put in place. Explicit in this financial proposal was that “streetscape improvements of $6M called for the master plan are not included” in this financial plan, the assumption being that the street improvements, being separate from the venue, would require funding from standard public works sources. The City’s $18.5 million would be devoted entirely to parkland enhancements.
All parties agreed to this financial plan. Though 2007 was still a greater deferment than any would have liked, the reality of limited bonding authority and prudent borrowing limited the project’s financial capability beyond that point. Furthermore, actually executing the site preparation, engineering, design, and redevelopment of the entire park site would likely take nearly as long, even if complete funding were immediately available. 2007 was a reasonable expectation for completion, and all major forseeable issues had been apparently resolved. Smith described the plan in a memorandum to City Council in July, 1999, and City Council subsequently adopted the agreement. (Page 2 of this posting) (Page 3)
The Heart of the Problem: The Bond Covenants and Funding “Waterfall”
What no one in the public knew, including City Council, stakeholders, and relevant City board and commission members, is that this financial plan was quietly demolished less than three months later. Convention Center Department and Finance Department staff met with bond counsel to formulate, the bond covenants, the contract for financing the PEC construction. The covenants established several Special funds and specified a prioritized list of disbursement targets for the car rental tax revenue which have come to be known as the funding “waterfall”:
- pay the debt service on the $40 million bonds
- fund a debt service reserve, essentially a surety bond, or a kind of
insurance policy that could be called on to cover the debt service
payments in case normal revenues could not do so
- fund a $1 million Repair and Replacement account to cover repairs to
the facility, for example replacing worn out seating
- fund an Operating Account and operating reserve to cover the operations
and maintenance of the PEC
- “any lawful purpose under the Act and as authorized by the election
held November 3, 1998”.
The bombshell in this scheme is item #4, the commitment to underwrite the operating loss of the PEC and garage with car rental tax revenues.
The PEC was expected to operate at a loss. Most public events centers, including the old Palmer Auditorium, operate at a loss, as their charters favor serving the public by hosting affordable events over making a profit. Historically, the Palmer Auditorium operating loss was covered by the City’s bed tax revenues, which from the early 1980’s through the mid-1990’s amounted to a subsidy for Palmer of approximately $1 million annually (in CPI-adjusted current-value dollars), according to City Convention Center Department financial documents from 1982-1995.
In none of the extensive communication from City staff to the public, the stakeholders, and City Council had there been any suggestion this would not continue to be the case. The May 1999 financial scheme formulated by Assistant City Manager Jim Smith assumed that all rental tax revenues in excess of the debt service would be devoted to construction. In the Proposition 11 ballot and supporting language, “construction” was specified as the sole target the voters were authorizing for car rental tax revenue expenditure. In defiance of common language use, the bond covenants assumed a definition of “construction” that includes the operation and maintenance of the facility in perpetuity.
To fully appreciate the clandestine nature of this action requires several observations.
- The community stakeholder group that had been charged with overseeing the venue development had to that time been intimately involved with virtually every aspect of the project, including outreach and community input, scoping, budget, program analysis, traffic analysis, selection of contractors, design (both in the large and in architectural and landscape detail), phasing, and conflict resolution. No aspect of the project had proceeded without stakeholder input and review. Yet the stakeholders were not consulted at all regarding the funding waterfall or the redirection of funds to operations, and shockingly, were not even informed of the waterfall scheme or the fact that rental tax revenues were underwriting Palmer O&M until almost four years later, in June 2003. The occasion for finally conveying that information was subsequent to the Convention Center financial officer’s announcement that Phases III and IV of the park development were being completely withdrawn from the venue’s financial plan.
- City Council operated under the same assumption as the stakeholders that the car rental tax revenues, as stated in the City’s ballot and supporting language, would fund park and facility construction, not operations and maintenance. The staff briefing for City Council regarding the bond covenants and accompanying ordinance did not readch the level of detail of describing the funding waterfall. Staff did not mention that the rental tax would be funding operations and maintenance. Any reasonable reading of the ballot and the bond covenants would have concluded that the covenants represented a signficant policy change from the ballot direction, a change that under state law would require at least a public hearing. The Councilmembers, being familiar with the project, knew that no discussion of funding O&M from the rental tax had ever been conducted or publicly vetted.
- The bond ordinance was adopted on consent by City Council on October 28, 1999 without any discussion on the dias whatsoever, there being no apparent cause for material debate.
There was no reason for anyone involved with the project, including the City Council, to suspect that such a revision of the voter’s authorization would or could be made. Yet when the funding waterfall was slipped into the covenants, the entire financial structure underlying the commitment to fund park construction was subverted. O&M funding was given complete priority over park construction. Park construction was not even mentioned by name, only alluded to as “any lawful purpose”.
As it turned out, there would be no need to consider what other expenditures might be considered “lawful purposes” and take precedence, for the O&M costs consumed virtually all the available revenues. As the interfund borrowing funds were sufficient to cover the Phase I “park” construction of landscaping around the PEC and garage and the design contract for the Phase II development, nothing seemed amiss for almost four years. The Convention Center Department Financial Officers, having been given fiscal control of the venue project, apparently did not consider themselves accountable to either the Parks Department or the stakeholders overseeing the venue project, for they did not share the financial reports that would have shown the revenue disbursals and the emerging reality of revenue starvation for the park.
Nothing of the funding waterfall came to public light until May, 2003, when the Convention Center Department financial officer announced to stakeholders that Phases III and IV of the park development had been removed from the financial plan for the venue project. Venue revenues could only foreseeably support the completion of Phase II, the area west of the PEC now labelled Butler Park. This announcement was met with anger and disbelief. How could the revenue stream that would so easily support the May, 1999 financial agreement have been so wrong? The numbers made no sense. Only then was the funding waterfall revealed. The revenue was more or less as projected, though depressed a bit by the temporary post-9/11 business lull, but it had been surrepticiously diverted from park construction to the Convention Center Department’s operations and maintenance funding of the Palmer Events Center.
The determination to abort Phases III and IV had been made by a new acting Assistant City Manager over the project, John Stephens, and relayed to City Council in a memorandum. Stephens was moving into this job after serving as the City’s Director of Financial Services. Stephens boldly (and incorrectly) asserted that with completion of Phase II, “the City will have more than fullfilled its commitment to stakeholders in this project, because it will have spent $2.2 million for the construction of phase two that was intended to have come from donations.” How this $2.2 million in Phase II would somehow cover the City’s $11.1 million commitment to Phases III and IV of the project is a deduction Stephens chose not to explain.
Further evidence that City Council was unaware of the waterfall appears in a John Stephens memo to Council in March, 2002, in which he notes an inquiry from Council earlier that month about the priorities for distribution of the rental car tax. The clear indication is that two and a half years after the bond covenants were adopted, City Council still had not been informed of the flow of funds.
Even Assistant City Manager Jim Smith may have been unaware of the waterfall, even after it was enacted. Smith’s venue project update memorandum in August, 2000 gives every indication that the financing plan for park construction was intact and on pace and might even be “accelerated somewhat” through further donations or rental tax revenue increases. Yet the waterfall had already thoroughly undercut the feasibility of Smith’s financial plan. The diversion of funds would have made Smith’s claims unsupportable.
If City staff had been comfortable with the propriety of their bond covenant scheme, why was it withheld from virtually everyone outside the Convention Center Department and the Financial Services Department with any interest in the project?
Fiscal Impact of the Funding Waterfall
Over time, the cumulative effect of this diversion was disastrous for the park project. A snapshot of the venue project financials shows that from the beginning of the project through fiscal year 2007-2008, the car rental tax generated $49.882 million in revenue. Debt service on the Palmer bonds consumed $26.055 million of this, and the repair and replacement reserve (a dubious beneficiary of rental tax funds, since it was more an operating reserve rather than a capital reserve) consumed another $1 million. The PEC’s expenses through 2007-2008 were $26.999 million, and its event-related revenue totalled $14.664 million, giving the PEC an operating deficit of $12.335 million. By the Jim Smith 1999 agreement and by what the voters approvated, $22.827 million should have been available for construction, more than enough to complete the City’s pledge of construction funding for the park on its original schedule. But only $10.8 million had been spent (belatedly, the delay itself resulting millions in lost purchasing power). The rest had been diverted to PEC operations.
This trend continues to the present. A more recent financial statement shows that the PEC’s operating deficit for 2008-09 through 2010-11 was $5.515 million, while the car rental tax collections less bond debt service payments was over $10.242 million. Debt payments have been reduced substantially from 2009 forward, since some of the refinanced bonds were paid off completely that year. Overall, since the rental tax was instituted, it has generated $36.898 million more than needed to meet bond payments, twice what the City’s commitment to park construction funding, yet barely half the park construction funds have been provided.
The City’s hotel bed tax had underwritten the operations and maintenance of the City’s former public events facility, Palmer Auditorium, for many years. Throughout the 1980’s and early 1990’s, the bed tax fully supported Palmer Auditorium’s operating loss at an average of approximately $1 million per year (adjusted by the CPI to current dollar value). (Supporting City financial documents for this period are collected here.) After 1995, City balance sheets and revenue summaries lumped Palmer’s operations with the Convention Center, making it impossible to determine Palmer’s operating loss or underwriting revenue stream.
Bed tax revenues continued to rise through the 2000 decade to a level of $12-14 million annually, not counting a distinct venue allocation of approximately $6 million, demonstrating an enhanced capability for underwriting events center operations. Had the bed tax underwritten the PEC’s operations as it had for Palmer Auditorium, the PEC’s remaining operating deficit would have been negligible, and the car rental tax could have fully funded the park construction as designed in the venue Master Plan and to the level and schedule specified in the 1999 Jim Smith financial plan agreement with the stakeholders, voters, and City Council, with many millions of dollars to spare.
But behind closed doors, hidden from project stakeholders and the public and without forthcoming disclosure to City Council, the Convention Center Department had redirected virtually all the car rental tax funds above debt service away from what was required by ballot (construction of the events center, garage, and park), using it instead to fund operations and maintenance of the PEC.
By 2003, more than half the park development had been completely struck from the venue’s financial plan, and the only part of the “park” that had been completed was the landscaping and driveways immediately adjacent to the events center. The Austin American-Statesman was running full page spreads and banner editorials announcing that the leadership of the Downtown Austin Alliance was endorsing abandonment of the notion of a central park and instead leasing the land out for commercial development. This was an even more radical proposal than architect Sinclair Black’s 1983 proposal for a public/private convention center/hotel/office/condo/retail project on the site. (Black’s idea had so enraged the public that an uprising led by an ad hoc group, Town Lake Park Alliance, resulted in a proposition defeat of the convention center proposal at the polls by a 2-1 majority, a subsequent replacement of a majority of sitting Councilmembers by new ones supporting park dedication and development, and a broad-based planning initiative that determined that all the City waterfront lands should be developed as a unified park, with adjoining private lands subjected to development ordinances to protect the integrity of the green belt. All these ideas were enacted as ordinances and eventually provided a framework for the venue project.)
The Convention Center Gainsharing Bonus Program
A remarkable discovery of municipal corruption relating to the venue project was uncovered in April, 2007.
Having offloaded the bed tax’s burden of financing events center operations onto the rental car tax, the Convention Center Department was now flush with the full benefit of the bed tax revenues. Immediately, they began an unprecedented “bonus” program in which they paid themselves substantial salary bonuses every year. Called “gainsharing” bonuses, these were paid out supposedly as performance bonuses in recognition of the department’s ability to exceed its revenue-generating goals. In fact, they were taking an approximately $400,000 slice off their car rental tax windfall every year and stuffing it in their pockets as take-home pay. Convention Center Director Bob Hodge had been fired and nearly indicted for creating scandalously bogus performance reviews to make the department look good. Those reviews helped justify taking home personal gifts funded by the redirection of funds that the voters had dedicated specifically to park construction.
From the Gainsharing program’s inception in 1999 (the year in which the car rental tax was initiated) through 2008, the Convention Center Department directed by one accounting $3,772,691.91 and by another accounting $3,657,335,49 of tax revenues into employee bonuses. Convention Center Department Director Bob Hodge took home $70,503.13 in addition to his salary. Larry Anderson, the Convention Department’s Financial Officer in charge of the Town Lake Park Community Project, received $46,979.92. No one benefitted more than the senior department managers who put the bond convenants and Gainsharing program in place and have managed the department’s cash flow.
No other City department has ever had a bonus program like this, which raises questions of pay equity with respect to all other City departments. But then, it is likely that no City department has ever been able to redirect another department’s voter-authorized construction revenues to its own purposes. It was a simple shell game, using only one shell to shift the budget obligations of operating an events center from one historically granted revenue stream, the bed tax, to another, the car rental tax, freeing the money to disappear into department workers’ personal pockets. What enabled the sleight of hand was the secretly instituted funding waterfall scheme.
Incredibly, after the program was revealed, it accelerated, even through the financially stressed years of 2009 and 2010 ($556,283.96 and $665,414.56 in bonuses respectively). In the current economic downturn, as in previous ones, City jobs are being eliminated in virtually every other department, while the Convention Center continues padding its paychecks at a record pace.
Toby Futrell’s 3-Year Delay of Phase II
In 2002, City Manager Toby Futrell had, over the strenuous objections of stakeholders and after excellent Phase II park construction bids had been received, postponed Phase II construction from 2002 until 2005. The Phase II bids, including virtually all the proposed add items, had come in safely under budget, thanks to the post-9/11 lull in the construction industry. But Futrell returned the bids without consulting either stakeholders or City Council, claiming that if the park were built, there would be insufficient funding in the parks budget to maintain the park until 2005. At the time, stakeholders were still ignorant that the Convention Center Department was using venue revenue to fund O&M for other parts of the project. But they objected that deferring Phase II construction for three years would cost far more in additional construction expense than would be saved on interim maintenance.
This fear turned out to be true. Three years later, bids for park construction came in $2.4 million higher than in 2002, despite the removal of over $1 million in work from the package. This explains why only one corner of the Phase II tract was sufficiently developed to attract visitors. Furthermore, by deferring construction, the City walked away from a $450,000 donation that had been pledged by the Junior League of Austin to fund complete installation of artwork and interactive features in the Children’s Garden area south of the Liz Carpenter Fountain. Less than a half million in maintenance money was saved over the three years, and that amount could have been reduced by placing the park on an austere use and maintenance schedule. Futrell’s decision cost the project over $3.5 million and deprived the public of three years of enjoyment of its new park.
By the time the funding “waterfall” was finally revealed to the public in Summer 2003, the stakeholders were becoming sensitive to the possibility that the park development could be shelved entirely. The City was still promising to fund Phase II construction in 2005. Stakeholders, though protesting the delays, decided not to press the issue of the redirection of the car rental tax jus yet, for fear that if they backed the Convention Center Department into a corner, it would use its considerable influence to rally the business community against ever building Town Lake Park. The stakeholders decided to wait until the first significant piece of the park was on the ground, so that the public could begin to appreciate the potential value of its new central park on the lake.
The excess revenues that were being swept into the Convention Center’s Gainsharing Bonus Program and gifted to employees would have been more than adequate to fund the maintenance program for the Phase II park development that Ms. Futrell insisted the City could not possibly afford. Her judgement apparently was that it was worth over $3 million of lost opportunity cost, nearly a half million in donated funding, and three years of public enjoyment of our park to maintain the payments of bonuses to Convention Center employees.
The Leslie Browder Offering
After completion of the Phase II effort now called Butler Park, stakeholders began pushing City Council to fix the structural financial problem caused for the venue by the waterfall scheme. At least 23 meetings have been held with various Councilmembers since 2005. (Five from 2007 are noted in this summary letter. During one of these meetings with Councilmember Betty Dunkerley in October 2007, the explanation of the impact of the waterfall scheme and an expose of the Gainsharing Bonus Program prompted the Councilmember to summon the City’s Chief Financial Officer Leslie Browder immediately into the meeting.
Some three weeks later, Ms. Browder issued a memorandum announcing the City would make $7 million immediately available for the next phase of park construction. (This memorandum was subsequently updated to partially correct its misstatement regarding the lack of donations to the project. Although the City of Austin has maintained no consolidated accounting of park donations, cash and in-kind donations as of April, 2011 total well over $1 million, $1.45 million has been explicitly declined by the City, and another $1 million prospect was essentially chased off when certain park elements were named without consideration to a pending donor.)
While stakeholders were cheered that some of the money previously stripped from park construction had reappeared, the sudden timing of the offering was an unmistakable signal that at least some in the City management structure were embarassed by the funding revelations. The Browder memo indicated that these funds would be used to “finish” the park development, though that level of funding could never realize anything resembling the Master Plan or approach the City’s commitment in the Jim Smith financial plan. The structural problem with venue financing, rooted in the waterfall scheme, still existed and had not been addressed.
The Appeal to City Management for Resolution
Hopes for some resolution rose when Toby Futrell was succeeded as City Manager by Marc Ott, who came to the city with transparent governance as one of his philosophical banners. When it became apparent by 2007 that City Council would not act on its own, stakeholders began talking directly to the City Manager’s Office, culminating in a meeting in November 2007 with Assistant City Manager Rudy Garza and Convention Center Department Director Mark Tester. The waterfall and the Gainsharing Bonus program were discussed in detail, and stakeholders made clear their rationale for thinking the waterfall was illegal. Garza pledged to develop a plan to wean the Convention Center Department and PEC from the car rental tax O&M revenue.
Garza, aware of the new $7 million infusion, was keen to leverage that work into an update of the park Master Plan via a series of public meetings. The City and TBG Partners, the landscape architecture firm that had designed Phases I and II and which had been contracted to design this new phase, were instructed to conduct a series of public workshops to update the plan. Garza’s clear desire was that the public would come to understand the park project could be satisfactorily completed with the $7 million (of which only about two thirds would be devoted to actual construction, the rest to design, City overhead, and contingency), despite the offering being far short of the City’s original commitment to the park.
During the winter and spring of 2007-2008, the City and TBG Partners conducted three workshops in which finish-out goals, design concepts, and site plan options were discussed. By the third such meeting, it was clear that the public’s vision for completion of the park was still in tune with the original Master Plan. Time and changing circumstances allowed refinement of the plan for the area between Phase II and the Lady Bird Lake. It was clear that the public could see no way to satisfactorily finish the park on the proposed $7 million. An estimated price tag for the new working concept design was around $22 million, roughly what remained to be spent on the Phases III and IV of the original financial/development plan, given adjustments for inflation, plus remaining expected donations. Essentially a refined, updated version of the original design concept was emerging from these workshops, and the required budget was remarkably consistent with the 1999 Master Plan-driven financial plan.
Without explanation from Rudy Garza’s office, the revisitation of the Master Plan was terminated as it neared completion.
The Marc Ott Position
A year passed without any action from the City Manager’s office to reform the project’s financial structure. Stakeholders, frustrated by Rudy Garza’s failure to deliver on his promise, escalated their case directly to Marc Ott. Ott’s response was studiously narrow and on strictly legal grounds. He pointed out that state law allows venue funds to be used for O&M, that outside legal counsel found the ballot language to be compliant with state law, and that the funding waterfall was consistent with the bond covenant ordinance.
The stakeholders are in complete agreement with all three points, but those three points glaringly evade the principal questions. Though state law allows venue funds to be used for O&M, the opinions establishing that point were rulings on ballot language that specifically included O&M in the public authorization. The Proposition 11 ballot authorizing the venue project specifically did not include any such expenditure, but rather “construction” only. The definition of “construction” does not include “operations and maintenance” in any reasonable interpretation of the English language. The ballot language no more authorized the use of the car rental tax for O&M than it authorized construction of a sports arena, amusement park, race track, or any of a number of other notions that would be legal under the governing state law. Had the intent of the ballot been to add O&M funding to the financial authorization, it would have appeared there. Had the operating assumption been that the venue revenue stream would absorb the burden previously carried by the bed tax, the Jim Smith financial plan would have been inconceivable. By no stretch could the projected cash flows have supported it.
Ott did not answer the question that stakeholders clearly asked: Can venue funds be expended on something outside the scope of the ballot authorization? As for the funding waterfall being consistent with Ordinance No. 991028-88, the City’s bond covenant ordinance, of course it is. That very ordinance defined the funding waterfall. The City Manager’s circular reasoning does not address whether the bond covenant ordinance was consistent with Proposition 11. Financially, the ballot authorized one project; the bond covenants defined another, quite different one. But in his circumscribed response, Ott chose not to address this disparity. Nor did he offer any response to the questions around the Gainsharing Bonus program. Yet the City Manager had decided that the status quo was the legal, right, and proper course for the City to pursue.
The question of whether the City can redefine the target for a cash stream authorized by public ballot is one that bears on all City bond proposals. Given the City Manager’s explicit approval of such action in this case, a thorough exploration of the extent to which the City has re-targeted voter-authorized bonds over the years would be appropriate, and such a finding should provide guidance to voters in future bond elections.
Browder Offering Revisited — The Money Vanishes
Progress toward the next phase of park construction came in fits and starts. The public process to scope the effort was aborted by the City when public input reasserted the goals and scope of the original master plan, but with elaboration on the area around and north of Riverside Drive. Concept development was started, stopped, re-started, stopped again, and restarted under new project management at PARD. A public input process was repeatedly delayed.
In late February, 2011, word began to emerge that the $7 million that Chief Financial Officer Leslie Browder had committed to the project in December 2007 was gone. The money had been spent elsewhere. The City has failed to timely respond to an Open Records request for an accounting of the funds, though Convention Center Department officers have privately stated that they spent the money within their department. Since the revenue stream funding the commitment was the venue’s car rental tax, and since this revenue is managed by the Convention Center Department, a clear accounting of the revenues and expenditures should readily appear on the department’s balance sheet.
Current Funding vs. Funding Promised in the 1999 Financial Plan
A preliminary and incomplete computation of the difference between the park construction funding pledged by the City in the 1999 Jim Smith agreement and the funding actually delivered to date shows the City has failed its commitment to date by over $12.2 million in 2011-valued dollars. In truth, this meets only the letter of the agreement. The City’s refusal of donations and the costs and losses the City incurred by arbitrarily delaying the project have significantly further increased the shortfall.
This $12.2M cost is computed by applying the PCUBCON, the United States Department of Labor standard measure of inflation/deflation on inputs to construction projects, the measure most appropriate to civil construction projects like Town Lake Park. For each year of the project, park construction funds pledged in the 1999 agreement that were not actually supplied in the pledged year are multiplied by the index out to the year when the funds were finally supplied, or out to 2011 for funds not yet supplied at all. The base amounts for this computation are approximate, since requests for exact funding figures for Phase II construction have been pending for five months. The number used was the amount authorized by City Council as of the acceptance of the second 2006 Phase II rebid. Subsequently, some amount of supplementary funding was granted. However, a significant portion of the Phase II contracts funding was spent on transportation items that were neither within the physical bounds of the venue project nor related in any way to the design and goals of the park. Until precise breakdowns are available, this should only be considered a conservative working estimate. As of this writing, requests for this breakdown from the City have languished for five months.
The real truth of the cost of fiscal misappropriation is worse than these computations suggest. The PCUBCON inadequately reflects the actual costs of delaying Phase II construction for 4 years, due mainly to the extreme whipsawing of local construction costs in the 2002 recession and subsequent building boom in the city. The actual bid price for the project in 2006 was $2.4M higher than the bids that had been submitted in 2002. To achieve those bids, the City had to drop approximately $1 million in construction items from the package. Furthermore, the City did not need to cover the cost of the excavation work that was donated by Ranger Excavation (primarily the digging of the detention pond and construction of the Observation Hill), an amount that had been originally bid at $700,000. Adding the cost of walking away from the Junior League’s substantial donation, the total cost of Toby Futrell’s decision to delay Phase II likely cost the project over $4.5 million while saving the Parks budget $500,000 or less in maintenance costs. The deficit figure should likely also be bumped by an additional $1,000,000 to compensate for a donation by the Bloch Foundation which the City refused to accept.
Remarkably, the operating deficit of the PEC through 2008, $12.335M, an amount that was covered by the car rental tax, almost exactly matches the shortfall of funds delivered to the park. Had those park construction funds been delivered on time (and inflation costs therefore not incurred), there would have been approximately enough additional money available to supplement the City bed tax underwriting to fully cover the PEC operating deficit. Had the full rental tax cash flow (after bond payments) been made available to the park project as originally intended, by 2008, $22.827M would have been available for park construction, enough to complete a very well appointed version of the park.
The Way Back
Fortunately, the venue revenue funding by the car rental tax will continue to flow at least until the PEC bonds are retired in 2029. If the revenues are channelled as originally designed, this leaves ample time to fund complete build-out of the park in a delayed, but reasonable timeframe. The City is bound by covenant and common sense to support the operations and maintenance of the PEC, to protect its own investment and that of the bondholders, but the funding to do so must come from other sources. The historical precedent of funding Palmer Auditorium’s operating deficit from bed tax revenues is time-tested, and reverting to this scheme should be sufficient to absorb the deficit. Any further shortfall could likely be covered by managing the facility with an eye to greater revenue.
The car rental tax should be completely devoted to construction of the venue, as directed in Proposition 11. This means using it exclusively to make bond payments and maintaining its debt reserve, and then funding park construction. The revenue stream will amply support full build-out. Construction can be accelerated ahead of the arrival of revenues by use of the inter-fund borrowing capability already in place. In light of the Gainsharing Bonus Program abuses, the current balance of the interfund borrowing line of credit should be reduced to zero so that a new injection of construction funds may occur. The car rental tax revenue stream should be re-examined to determine whether the inter-fund borrowing limit can be raised, which would enable the City to further accelerate construction.
City management and City Council under guidance from the voters and stakeholders had it right with the adoption of Proposition 11 and the subsequent financial plan formulated by Jim Smith in May-July, 1999. There is no reason that a return to this foundation will not enable the complete realization of the dream of a great city park at the heart of the Lady Bird Lake Corridor.
In summary, the financial plan formulated by Assistant City Manager Jim Smith and approved by stakeholders in May 1999 and by City Council in July of that year was fiscally sound and embodied the wishes of all project stakeholders and elected public officials. Had the agreement been honored, the park would have been funded sufficiently to implement its full development on the agreed upon schedule, with completion of the final phase in 2007. However, the surreptitious formulation and stealth passage of the bond covenants undermined this financial plan. The “funding waterfall” instituted in the PEC bond covenants, which was hidden when presented in summary to City Council, has left the park construction budget with a current shortfall of approximately $12.2 million relative to the City’s funding commitment. Furthermore, several million dollars more have been wasted by bad timing (over the objections of stakeholders) and the refusal to accept donations. The diversion of car rental tax revenues into Convention Center Department operations and maintenance left that department so flush with cash that it sent nearly $5 million home in its employees’ pockets, with the senior managers responsible for overseeing the venue project finances benefitting most.
As a result, we have a partially built park, its features not integrated and only partially implemented even in its developed areas. Plans to finish and knit the park together having several times been suddenly aborted. The taxes which the citizens of Austin levied on themselves to construct the park have been diverted to fund the Convention Center Department operations and to individually enrich its employees with unearned bonuses. City Management has refused to correct the financial direction of the project, only defending its actions on narrowest and incomplete legal grounds and ignoring questions of propriety and public trust. By its actions, the same City Management has expressed its intention not to deliver the “great central park” on the lake that was envisioned in the 1980’s by the Town Lake Park Alliance, recommended in the SRI economic development plan for the City, developed in concept in the Town Lake Comprehensive Plan and the Waterfront Overlay District, and developed in detail in the 1999 Town Lake Park Community Project Master Plan.
But by returning to the root concepts and original financial plan for the project, the City can recover from a decade of fiscal misdirection. The park and its cultural facilities can become the world-class centerpiece of the Lady Bird Lake Corridor that the City envisioned and the voters elected to pay for.
Index of Referenced Documents
Proposition 11 Ballot Language and Supporting Text Published by the City
Local Government Code, Chapter 334, State Law
Governing Venue Projects
Stakeholder Group Memorandum of Understanding
Site Plan Sketch from Master Plan Design Charettes
Complete Town Lake Park Master Plan
Jim Smith May 1999 Financing Plan Memo
Jim Smith May 1999 Financing Plan Phased Park Construction Spreadsheet
Jim Smith Memorandum to City Council, July, 1999
Staff Recommendation for City Council Action on Resolution 19990729-30, page 1
Staff Recommendation for City Council Action on Resolution 19990729-30, page 2
Staff Recommendation for City Council Action on Resolution 19990729-30, page 3
City Council Resolution 19990729-30, formally adopting Master Plan and Jim Smith Financing Proposal
Town Lake Community Park Project Venue Bond Covenants: Special Funds and Waterfall
Town Lake Community Park Project Venue Bond Covenants: Prioritized List of Disbursement Targets (the “waterfall”)
Jim Smith’s August 2000 Venue Project Update Memorandum to City Council
Town Lake Park Phases III and IV Area Sketch
John Stephens January 2003 Memorandum to City Council, Announcing Cancellation of Park Phases III and IV
John Stephens March 2002 Memorandum to City Council Explaining Funding Waterfall
Spreadsheet Snapshot of Venue Project Financials to April 2007
Spreadsheet Snapshot of Venue Project Financials to March 2011
Summary of Palmer Auditorium Operating Losses and Bed Tax Underwriting 1982-1995
City of Austin — Palmer Auditorium and Bed Tax Financials
Sinclair Black’s 1983 Proposal to Lease the Subject Tract to Private Development
Convention Center Department Gainsharing Bonus Program Summary
Convention Center Department Gainsharing Bonus Program Complete Accounting by Year and by Employee 1999-2008
Convention Center Department Gainsharing Bonus Program Complete Accounting by Year and by Employee 2009-2010
Stakeholder Summary Note to Council on Financing, December 2007
Leslie Browder December 2007 Memorandum to Council on Authorization of $7 Million of Phase III
Leslie Browder Supplement to 2007 Memrandum Recognizing Some Project Donations
Marc Ott’s Response to Stakeholder Questions on Venue Financing
Fulbright and Jaworski Legal Opinion on Venue Financing
PCUBCON Construction Inflation Index Data, 2008