OLYMPIA —

The state Treasurer's Office is rushing to prevent a publicly owned arena in Wenatchee from defaulting on $42 million in debt, fearing a swift bond-market reaction that could jack up financing costs for other local governments.

The treasurer's proposal would force the public-facilities district that owns the 4,300-seat, multipurpose arena to borrow money from the state and pay it back with local tax dollars.

The deal would require approval by state lawmakers during the first three days of a special legislative session, which starts Nov. 28, because the entire $42 million is due Dec. 1. The special session was called by the governor to deal with a nearly $2 billion shortfall in the state budget.

"The thing that we are most concerned about in our office is ... having a municipal default occur in the state of Washington," Assistant State Treasurer Wolfgang Opitz said.

The last such default in this state, he said, was the Washington Public Power Supply System's $2.25 billion collapse in the 1980s, related to the construction of nuclear-power plants.

The bond market is punishing local governments in other states where defaults have occurred, he said.

"You have to pay a higher interest rate to get a buyer, and sometimes you don't get a buyer at all. This becomes real very fast," he said.

Optiz said a default on the arena, which opened in 2008, could create problems for other public-facility districts and local governments, but he doesn't see it affecting the state's borrowing costs.

Senate Ways and Means Committee Chairman Ed Murray, D-Seattle, was skeptical about the state getting involved, even if local governments must pay the money back.

"I'm very concerned about any state resources ... being used for what basically appears to be a bailout," Murray said, adding it could set a precedent where other local governments turn to the state to pay off debt.

"The risk is, in this ongoing financial crisis, that more of these situations might arise," he said.

Murray said he wants a better handle on local government debt across the state before acting.

Opitz said the Treasurer's Office is not aware of any other local governments in Washington at risk of default.

House Ways and Means Chairman Ross Hunter, D-Medina, said he thinks the Treasurer's Office is taking the right approach, though he noted no legislation has been drafted yet.

"The fundamental issue is, are we doing this just for Wenatchee, or are we doing it for the whole state? I think we are doing it for the whole state," he said.

The state Auditor's Office released a report in 2010 and another one this year that found the Greater Wenatchee Regional Events Center Public Facilities District didn't have enough money to pay off its debt.

Nine local governments, including the city of Wenatchee, formed the district to oversee construction and operation of the arena, according to the audit.

In 2008, the district issued three bond-anticipation notes worth about $42 million to pay for the facility. The notes are basically short-term financing issued with the expectation it will be paid off later with long-term bonds.

The bonds were never issued, at least in part because the arena didn't make as much money as anticipated, Opitz said. But there were other factors as well, and the district only made interest payments on the debt. Now the entire $42 million is due Dec. 1.

The Treasurer's Office is developing a proposal to pay off the debt using money from a state-managed account that collects the local portion of the sales and use tax from throughout the state, then sends it out to local governments.

When the account was first set up in 1970, one month of tax collections was accumulated before any money went out. So there's always a "float" in the account of at least $100 million to $200 million, Opitz said. The loan would come from that extra balance.

To repay the loan, the Treasurer's Office would take part of the sales and use taxes that normally would go to the local governments that created the public-facilities district. And the state would charge an interest rate that's much higher than the bond market is charging.

The mayor's office in Wenatchee referred calls to the city attorney, Steve Smith.

Smith said he had not been told of the treasurer's proposal yet. But after it was described in an interview, he said, "What I don't like about that is it reduces our current stream of revenue, which would be painful for us and all the other jurisdictions.

"These other jurisdictions are not going to be pleased with this scenario," he said. "Ouch."

Smith said the district does have the option to ask local voters to increase the sales tax enough to issue long-term bonds that would pay off the debt. Such a move, he said, would require approval by all the local governments that make up the district, something they've been unwilling to do.

Optiz acknowledged the difficulty of getting the plan through the Legislature before the Dec. 1 deadline.

"I've described it as running uphill against the wind on ice. Maybe in the rain," he said. But he added: "I think this is what needs to be proposed. I think it's what needs to be done."

Andrew Garber: 360-236-8266 or agarber@seattletimes.com