The state’s decision to freeze revenue sharing under the Meals and Rooms Tax could endanger the financing for the Verizon Wireless Arena in Manchester. Last week, Moody’s Investors Services downgraded the bonds used to fund the arena, held by the Manchester Housing and Redevelopment Authority, from Baaa3 to Ba2. The lower rating puts the bonds in “non-investment grade” or “junk bond” status, meaning they have only moderate security of future repayment. Manchester Mayor Frank Guinta notified Governor John Lynch of the decision in a letter on Friday.

Moody’s decision stems from changes in the Meals and Rooms Tax distribution formula adopted in the state budget in June. Guinta writes that the state’s decision to limit revenue sharing funds could lead to another lawsuit against a state budget that has already lost one case in Superior Court and has another pending.

“The City continues to be concerned that the State appreciates the seriousness of the situation to the holders of the bonds and the possible adverse credit rating implications to the State in light of the State’s adjustment to the allocation formula. The City is also concerned about potential legal action following an event of default claiming a failure by the State to deal in good faith with bondholders. The situation requires urgent action by the State.”

The state’s two-year budget, signed into law by Governor Lynch on June 30, 2009, raised the rate of the state Meals and Rooms Tax from 8% to 9%, but froze the amount of revenue shared with cities and towns . The old formula increased the percentage of tax revenues flowing to New Hampshire communities every year until they reached 40% of the tax collected. Manchester received a total of $4.6 million from the Meals and Rooms Tax in FY08. The new law capped the amount going to Manchester at $4.85 million, of which $4.399 million is due to bondholders. Under the state budget, the formula will resume its increase towards 40% in FY12.

“Given state law, regardless of actions taken in HB 2 for the FY10-11 budget, Manchester would have reached the same level of funding because of the drop in Meals and Rooms revenues overall,” said Lynch spokesman Colin Manning. Pointing out that Manchester reserves $455,000 from the Meals and Rooms revenues annually, Manning suggested the city could use those funds to shore up the bonds. “These are difficult times, and as in our state budget, you have to make tough choices. Moody’s raised that this was a risky funding scheme when this was put together, pointing out that Meals and Rooms revenues are not guaranteed to be constant.”

When Manchester voters approved construction of the Manchester Civic Center in 2000, since renamed the Verizon Wireless Arena, they dedicated all but $455,000 of the city’s annual revenues from the Meals and Rooms Tax to pay for it. The city automatically transfers the funds from the state to the Manchester Housing and Redevelopment Authority each year. By freezing the revenue sharing formula before it reached its planned level of 40%, tax revenues will not sufficient to meet the Authority’s bond payments. Moody’s estimates that the Authority will be able to make its full January payment of $3.7 million, but anticipates a shortfall of $85,000 for the July 2010 payment of $681,000, and a total deficit of $14.2 million over the life of the bonds, which still have $43.1 million outstanding.

Ken Edwards is the Assistant Executive Director of the Manchester Housing and Redevelopment Authority. He says the decision to downgrade the Verizon Wireless Arena bonds to junk bond status will not affect his organization. “These are non-recourse bonds, so there is no impact on us,” Edwards explained.

He says in the event of default, the MHRA is not liable to make up the difference in the bond payments, and neither are city taxpayers. Bank of NY Mellon represents the bondholders as Trustee. Spokesman Kevin Heiny says it’s too soon to say how the Trustee would respond to the downgrade, but that any notice to bondholders will be publicly available.

In his February 2009 Budget Address , Governor Lynch proposed eliminating revenue sharing completely for the two-year budget, which would have shifted $160 million from cities and towns over the biennium . In February, Manchester Bond Counsel Robert Beinfield told state officials that ending revenue sharing would threaten the Verizon Wireless Arena bonds. Governor Lynch pulled his support for suspending revenue sharing in March. The final budget limited Meals and Rooms distribution to FY09 levels for the next two years. Guinta believes that decision was short-sighted.

“Obviously we are very concerned about Moody’s recent decision to downgrade the civic center bond rating. This reflects rather negatively upon the State’s decision to underfund the municipal portion of the rooms and meals tax. I have notified the Governor and the State Treasurer of this decision and have asked that they review this matter with the State’s bond counsel,” Guinta added. “Personally I believe that if a State solution is not reached, the State’s own bond rating might be downgraded, potentially costing New Hampshire taxpayers millions of dollars.”

According to Moody’s, neither the city nor the state is legally liable to pay bond holders should the Manchester Housing and Redevelopment Authority fail to do so. The Authority has set up a debt service reserve of over $500,000 as well as a $4.61 million surety bond. But Moody’s notification to Beinfield says that bond holders would have little recourse once those funds are exhausted. Should the Authority draw down the debt service reserve and not replenish it within two interest payment dates, the bonds default, and become immediately due and payable to bond holders.

The State is currently in the middle of two lawsuits stemming from changes in the state budget. In July, Superior Court Judge Kathleen McGuire ruled that the State could not legally transfer $110 million in excess premiums that had been built up by the Joint Underwriting Association, a mutual insurance compact set up by the state for doctors and hospitals who had difficultly finding malpractice insurance. The New Hampshire Supreme Court heard the State’s appeal in October. The New Hampshire Municipal Association plans to file suit shortly against the State’s decision to lower the amount it contributes to municipal pensions from 35% to 25% over the next two years.

Grant Bosse is the Lead Investigative Reporter for the Josiah Bartlett Center for Public Policy. Learn more about the work of this free-market think tank at www.jbartlett.org and at newhampshirewatchdog.org.