In Mayor Bill Johnson’s ferry plan, city council would
approve establishing a public authority to take ownership of the ferry in
December, and the state legislature would approve it in early February. The
authority might handle the operation itself, or it might hire a company to do
it.
The authority would be appointed immediately so it could
issue bonds that would pay for the ferry, its start-up costs, and establish a
$4 million cash reserve. And the ferry would begin operation in late April.
(The city’s complete business plan can be accessed at www.ci.rochester.ny.us/)
It’s a breathtakingly tight timetable for the resumption of
a multi-million-dollar venture. Johnson insists that this is the only option
for saving the ferry, and he seems optimistic that a public authority could be
successful.
In discussions over the past week with City, he was firm in his rejection of CATS’ plans for restarting
the service. He was sympathetic, however, to CATS and the unforeseen events
that led to the company’s financial problems: the accident in the New York
Harbor, the engine problems, the federal requirements dealing with truck
transportation, the customs and pilotage fees.
“It can’t be said often enough that they ran out of money,”
said Johnson, “and it’s largely due to a run of bad luck and some changing
circumstances.”
“They were told they could waive Canadian Customs charges,”
said Johnson. “They were told that most trucks and other commercial vehicles
could come aboard without meeting certain federal requirements. And they can
produce letters with people’s signatures on them that actually say this.”
Johnson declined to cite the specific reasons why CATS’
lenders turned down the company’s initial proposal, saying their concerns were
covered by a confidentiality agreement. But, he said, the city had its own
objection to the CATS plan:
1) CATS wanted the city to reinstate the rights to develop
the port area around the ferry terminal to Charlotte Harbor Group, a
development company that shares some partners with CATS. The city initially
awarded Charlotte Harbor Group those development rights, but rescinded them
when CATS suspended ferry operations.
2) During restart negotiations, EFIC requested a $6 million
“credit enhancement” — the senior lender’s attempt to protect its investment
if service was terminated again and the boat had lost value. But no other
lender — including the city — was willing to provide that guarantee.
3) CATS proposals called for the inclusion of Video Lottery
Terminals on the boat and in the Rochester terminal as an additional revenue
stream. But “that’s pie in the sky” said Johnson. “I was in Albany last Monday,
and I was told in no uncertain terms that the speaker of the assembly is absolutely
opposed to the expansion of Video Lottery Terminals.”
“Their deal was too heavily laden with contingencies for our
comfort and for the comfort of the other lenders, including the State of New
York,” said Johnson. “They always want to point the finger at the Australians,
but the State of New York was sitting at the table as well. And it was a
unanimous conclusion, the city, the state, and the Australians, that it was too
risky to try to restructure this deal based on the one proposal they brought in.”
A few days before the city announced its take-over plan,
CATS presented another proposal, this time solely to city officials. It called
for the city to buy the ferry, lease it to CATS, and loan CATS about $8 million
for operating funds, Johnson said.
“From our point of view,” said Johnson, “that doesn’t make
any sense, to essentially turn over the boat to the people who had run it the
first time and to give money to people who hadn’t been able to raise it on
their own.” City officials said no.
So the city announced its own plan, which doesn’t depend on
VLT revenue, includes a scaled-back service during the winter, and allows the
ferry to acquire fuel at a cheaper rate through a contract with New York State.
Here’s an edited version of Johnson’s discussions about the
city’s plan.
‘We’re conservative’
City: Why do you think a public authority can make
a go of this when CATS couldn’t? The authority doesn’t have to make a profit,
but you do need revenue to pay off the bonds.
Johnson: Oh, yeah.
What you will see in the business plan is all our income projections, all the
assumptions we base those projections on. CATS was basing their projections on
about 700,000 to 800,000 passengers. That was, of course, for a full year at
full operation. They were encouraged by the lenders to think about, since they
were going to relaunch in the fall, running it on a more limited schedule in
the winter.
Our assumption builds that in. We’re talking about full
operation from April to October, two round trips a day, seven days a week. From
October to April, we would reduce that operation to one round trip a day, four
days a week, on the assumption that we’ve got to adjust for wintertime travel.
So our numbers are based on us having to carry fewer than 400,000 people. And
we view that as extremely cautious and conservative.
When you analyze CATS’ actual numbers [passengers who rode
the ferry during its short service] and project them out for a full year under
a reduced winter schedule, they could have carried somewhere in the
neighborhood of 600,000 folks. We’ve based this on really conservative
estimates in terms of passenger load as well as commercial freight traffic.
We also have something they probably didn’t have. We’re
building in a significant cash reserve that will help us — particularly in
year one, when we’re projecting a $900,000 loss. We’ll have a $4 million cash
reserve.
That will be part of the financing. An authority can
actually borrow money to create this kind of reserve. City governments can’t do
that.
City: So the money you get through the bonding
will also pay for start-up costs?
Johnson: Start-up
costs, paying down some of the debt in addition to the boat. There are some
maritime liens that have to be paid off. CATS has significant debt. It’s up to
them to disclose what that debt is. It’s impossible for us to retire all that
debt. But we have considerations to take care of what we call the maritime
debt: those things which are essential to the operation of the boat. The
maintenance contracts, the piloting, fuel. And we’re going to pay back the
ticket holders.
We’re not seeking to acquire the company CATS. We’re only
seeking to acquire a boat, which is heavily leveraged. It’s going to be sold
anyway. If CATS chooses not to sell it to us, the senior lenders [EFIC] will go
into court, fight it out with them, get the boat, and sell it.
Our worry is that the way they’ll sell it fast is by
discounting it. And if they can sell it just to recoup their costs — I mean,
there’s $40 million in that boat. They only need to sell it for $33 million to
pay themselves off. That leaves the state and the city as well as every other
unsecured lender having to write off a loss.
Paying the debts
City: What about the debts that aren’t tied
directly to the boat? Is there a chance the people who are owed that money will
demand that CATS doesn’t sell the boat? It’s essentially CATS’ only asset.
Johnson: Those
creditors have no standing. They are unsecured. In other words, the interests
of secured lenders are paramount and the maritime liens are paramount. Then
you’ve got anyone who’s unsecured in a very risky position.
City:But would it even be legal for the board of
CATS to sign the boat over, given the unsecured debts? The board has a
fiduciary responsibility to its lenders.
Johnson: We have
had endless discussion about this. And the fact of the matter is: Here’s a
company with only one tangible asset, the boat. Its value is just about
equivalent to what CATS owes the senior lenders [EFIC]. And it’s highly
unlikely that this boat’s going to be sold for millions of dollars more. As you
look at CATS’ books, the question that has to be determined is: How much
remaining value does the company have? And that becomes tricky.
We hear from some of the unsecured lenders. I have one who
calls me all the time. She called me this morning. She’s a small-business owner
who needs her money. And this is a very troublesome area. But what I have to
keep saying to her is: It was CATS who ran up that loan, not anyone else.
City: Will some of the $40 million go to CATS?
Johnson: No. It
will relieve some of CATS’ debts. We’re still trying to sift through what is
what. That’s why we can’t say at this time what the real number is. We have
been in regular discussions with the staff of CATS, so we were able to come up
with a pretty good understanding of what the level of indebtedness is. But at
this point, it’s not appropriate for me to talk about it. It’s not our company,
and it’s not our responsibility.
City: And CATS is objecting to the city’s
proposal.
Johnson: They
just aren’t there yet. Our hope is that they will get there. And if they don’t,
it’ll be between them and EFIC in court.
City: Who owns the boat: CATS or EFIC?
Johnson: The boat
is mortgaged. It’s the same as an automobile. We have a title on the car, but
we can’t sell it outright because there’s a lien attached to it.
Why public?
City: Was there not enough interest for there to
be any private investment in the ferry?
Johnson: This was
a pretty public process. To my knowledge, there were only three parties who
ever expressed any interest in putting money in this deal. Two of them also had
discussions with CATS. So only they can tell you why — after going through
whatever due diligence they had to go through — they decided not to go
forward with the deal.
City: Does that indicate that this is a risky
venture?
Johnson: I think
what it suggests is that given the amount of debt an investor would have to
assume, and given the terms, they couldn’t see how they could get the money
back quickly or at the profit they needed. All this kind of capital venturing
assumes you’re going to be able to maximize your investment. But again, I’m not
able to say what reasoning went into their decision not to get into a deal.
City: So you don’t feel the city’s announcement
jeopardized the ability to bring private investors to this project.
Johnson: Listen,
I made it very clear to Dominick on Thursday [November 18]: We’re shooting for
a deadline sometime in December to get city council to take action on this.
CATS has until then to go out and put their own deal together. There’s nothing
that precludes that.
And to be perfectly honest, we have no interest in running a
ferry business. We would not discourage anybody in the private sector,
including the current operators, from taking a second look at this deal. That’s
fine with us. And they still have time to walk in and say: It took us a while,
but we got it done. We will gladly step out of the way. But for now, this is
being done out of a matter of necessity, not out of some sense of a mission
that we have to run this ferry service.
Public risk?
City: Will the bonds issued by the public
authority be insured?
Johnson: They may
have to be secured through the full faith and credit of the city of Rochester.
But they would be issued under the name of the authority. We don’t intend yet
to pursue this until that authority is created.
City: If the revenue from the ferry can’t cover
the debt service, who would be at risk? If the public authority doesn’t have
any money, wouldn’t the bondholders expect the city to step up?
Johnson: If we
put the full faith and credit behind it, you’re right. But I think we’re a long
way from getting to that point. And when you look at the 10-year income
projections in the business plan and you see all the assumptions we base them
on…. This is certainly what the bondholders are going to ask: “Can these people
make reasonable assumptions? Is there revenue that will support this expense?”
And I think the answer we will provide to that is a very strong “yes.”
City: Who will be on this public authority?
Johnson: That has
yet to be determined, because we still have to negotiate this authority with
the state legislature. So we don’t know what they’re going to require.
There will be an appointed board. And the question is: Who
will be the appointing authority? Since we are the ones issuing the bonds, and
since we will be probably the ones guaranteeing the bonds, I can’t imagine that
we wouldn’t have anything other than a significant role in the appointing
authority.
Why not RGRTA?
City: From the beginning, the concept was that the
ferry would benefit the entire region, not just the city of Rochester. If
that’s the case, why is the city the only entity getting involved in the
financing of this project? What about the county or RGRTA?
Johnson: The
county has its own major project it’s trying to get financing for: Renaissance
Square. The transit authority is in the same position.
We are in the rare position as a municipality to have
sterling credit. We have the highest credit rating of any municipality in
Upstate New York. That puts us in the position that if we want to put that at
risk, we can put it behind this deal. And you can see in the business plan that
it’s a pretty safe risk. So we don’t need to go out and get other people to
help us with this.
We have plenty of opportunities to go out and get
participation in a lot of other ways that enhance this deal. But it just slows
the process almost to a snail’s pace.
City:Some
critics would say that you pushed for government consolidation when you were
running for county executive. And here, instead of going with RGRTA, you’re
talking about creating yet another authority.
Johnson: Yes, and
I have a pretty solid reason for that. Authorities in this state are under
scrutiny, mainly because they conduct their business shrouded in tremendous
secrecy. By creating a brand-new authority, the state can essentially ensure
more transparency. I think at this point, people are trying to figure out a
fast track. And I think there’s some recognition that trying to tie it to an
existing authority would cause us to lose some of the support we have. This is
a clean deal. And it’s a clean deal because we’re creating a brand new
authority.
City:Members of the local state delegation have
been critical of public authorities. Now you’re asking them to approve the
creation of a new one. How do you expect them to go for that?
Johnson: We’re
trying to construct a body with such limited authority, with a single purpose.
And we’ll create it in an open, transparent way. We’re talking about a fresh
oversight and accountability mechanism that has to be negotiated about who
appoints the board. But I would be certainly sensitive to not putting political
hacks on it and creating all kinds of positions for people to get paid. Our job
here is to get this thing up and going for the public benefit.
Rather than furthering an institution that is rampant with
abuse, I’d set a model for how new authorities should conduct themselves.
Will it float?
City: What exactly is the status of the ferry
right now? It’s still impounded, right?
Johnson: Yeah,
it’s under arrest because of Amerada Hess [the fuel supplier whom, according to
CATS’ Dominick Delucia, CATS owes nearly $370,000].
City: What commitment do you have that EFIC and
the other lenders are going to go along with the city’s plan?
Johnson: Let me
tell you this: I wouldn’t have even raised this plan publicly if I got any
indication at any level — the lenders, the state, the city council…. We have
been quietly discussing this for weeks. And in no way would I proceed without
their reassurances. And the state has $14 million in this deal it’s trying to
rescue.
City: Who was involved in drawing up the city’s
business plan?
Johnson: My
staff: [Commissioner of Environmental Services] Ed Dougherty, [Corporation
Counsel] Linda Kingsley, [Deputy Mayor] Jeff Carlson, [Director of Finance]
Vince Carfagna. We put a team together.
City: How long was the process?
Johnson: It’s
been about a month now.
City: The business plan estimates that the ferry
will break even in its second year of operation. What will happen if it doesn’t
break even?
Johnson: We could
sell the boat and get out of the business.
Look, we have come up with a very conservative business plan
that shows that incomes will be sufficient to pay expenses as well as debt
service. I can’t say for an absolute certainty that this won’t ever require a
public subsidy. But we’ve gone out of our way to construct a plan that will not
need any. And if we exhaust all our reserve in one year, it forces us to take a
second look at the viability of this venture.
This article appears in Nov 24-30, 2004.
