Avoiding Oversight

Avoiding the DMC?
Hat tip Erica with a C for the image

Last week, I appeared on Channel 3’s Ralston Report with fellow Councilman Bob Coffin. He had some new information – the City was planning to borrow $50-million to give to our designated stadium developer with “revenue bonds” rather than “general obligation bonds.”

Fortunately, local government finance expert Guy Hobbs volunteers lots of his time for youth soccer programs, and has done so for many years. The City is proposing that we hurt those programs by taking some of our annual parks funding and using it to pay for the stadium, so Guy has been agreeing to offer to educate me as we go.

I already knew the basics – a GO Bond is “backed” by the full faith and credit of the city. If, for some reason, it could not be paid back, the City would be required by law to lay people off in order to free money up to make payments. A Revenue Bond is backed by a specific source of revenue, rather than all sources of revenue, and our full faith and credit.

But Guy is a master of the subtleties. So I asked him what the difference was. Here is his response:

Prior to discussing the significance of the City using revenue bonds versus general obligation revenue bonds, I thought it might be helpful to summarize the public contributions to the funding of this stadium initiative.  From what we understand, the City is proposing to provide the following:

Land                                                  market value?

On and off-site work                          $30 million

Parking garage                                  $20 million

Rent pre-payment                             $25 million

As is shown, this “privately financed” stadium is being supported by public funds in excess of $75 million (plus the land value).  It appears that one of the give-backs to the developer is in the area of the on and off-site commitment from the City (which was previously identified as a $14 million cost, and is now being estimated by City staff as a $30 million cost).  Additionally, the emergence of the parking garage as a project element came about only as a consequence of the stadium and, thus, is directly linked to the stadium.  City staff will have some additional work to do to qualify the rent pre-payment as an appropriate use of bond funds.  It is not an appropriate use as described.

It should also be added that the source of funding that the City will have to bond – whether GO or revenue bonds are issued – is the City’s C-Tax revenue.  As has been mentioned a number of times, the room tax collection commission revenues cannot be pledged as security for the bonds.  Even if these funds are used as a source of repayment, it is the City’s C-Tax revenues that will be at risk should the room tax revenues become unavailable.  Thus it should be made clear that the risk is to general City revenues, not the room tax revenues.

With regard to the suggestion that the City may be contemplating issuing revenue bonds in place of GO revenue bonds, it must be presumed that this is being done to avoid having to take the issue before the Debt Management Commission (DMC).  Since this (Revenu Bonding) is a financially disadvantageous move, avoiding other protocols that might result in a negative outcome for the proponents is all that can explain the logic.  It should be made very clear that there is a significant cost associated with issuing revenue bonds to simply skirt DMC approval.  This cost difference to the public will be estimated below.

Three areas of dis-economies come to mind.

First, revenue bonds do not carry the same credit quality as GO bonds and, thus, will require a higher interest rate and cost to taxpayers.

Second, revenue bonds generally require the funding of a debt service reserve fund (DSRF) – typically one year of principal and interest.  In this case, one year of principal and interest is estimated to be $3 million (as this is the control variable in structuring the debt).

Third, revenue bonds also require coverage of a likely 1.5 times.  This means that the City would actually only be able to commit $2 million of the $3 million in C-Tax revenues to direct debt service.

When taken together, this means that the City would be willing to pay a higher rate of interest to ultimately receive less bond proceeds for the parks and stadium projects.  From a pure financial standpoint, this would be terribly unwise.  The difference in bond proceeds between a 30-year GO revenue issue secured by $3 million per year in C-Tax, and a 30-year revenue bond also secured by $3 million in C-Tax (with the DSRF and coverage at 1.5X) represents the cost of avoiding the DMC and the added cost (in terms of lost value) to the taxpayers.  The project fund deposit for the GO issue would be close to $50 million (we have assumed current rates at the City’s credit plus 100 basis points), which includes a premium structure.  If the same revenue were pledged without the GO and assuming the funding of the DSRF and 1.5x coverage, the project fund deposit would be under $31 million.  Of course, the extra revenue, once coverage is achieved, can be used for other purposes.  If the coverage were discounted, the project fund yield would be $46.3 million (reflecting the cost of funding the DSRF).  In any regard, this clearly shows that with a revenue bond approach, the cost of capital increases and the bond monies available for projects declines significantly.  Again, issuing revenue bonds to avoid DMC is a very costly proposition.

It would be very interesting if someone attempted to describe the removal of the GO backing as a way of reducing City risk, since the C-Tax revenues are general fund revenues.  General tax revenues would, under this scheme, still be at risk.

Guy Hobbs on the new taxpayer-funded stadium

I asked preeminent government finance expert Guy Hobbs, a Ward 2 constituent, for his thoughts on this week’s new plan to give taxpayer funds to the Findley/Cordish group:

Based upon the presentation made by staff at this week’s City Council meeting, it would appear that the following points summarize the revised funding proposal for the proposed soccer stadium:

  • The City will cash-fund on and off-site work for the stadium. Previously an amount of $14 million was identified for this, though it was not a comprehensive accounting for all expected site work. It is expected that this amount will be greater than the $14 million.
  • The City will “pre-pay” the developer for community events to be held in the stadium. The amount identified is $20 to $25 million.
  • The City will share in TIF revenues generated from stadium operations.
  • The City will use $20 million in STAR bond proceeds to fund the building of a parking garage to serve the stadium and other nearby development. The developer will have access to the parking garage for an estimated 90+ events days.
  • The City will use $3 million per year of room tax collection commissions to bond for up to $50.7 million in projects; roughly half of which would be used to fund an estimated five park projects and the remainder to fund “community access” to the stadium.

As I understood the direction from the City Council at a previous meeting, staff and the developer team was to bring back a funding plan for the proposed stadium that does not include the use of public money to fund the construction of the stadium.   The proposal as described above has shifted direct support of stadium construction using public funds, as was previously proposed, to an approach that somewhat less directly supports the construction with public funds. It still, however, commits public funds to support the stadium construction.

It is very clear that the donation or contribution of the land by the City is a use of public resources to enable stadium development. It is also clear that the use of the $14+ million to fund on and off-site costs is a use of public money. Attempts will likely be made to characterize the use of these funds as something akin to “normal costs to promote economic development”. However, these are still very real costs being funded by public monies.

A new element of the proposal is the willingness on the part of the City to build a parking garage to support the stadium. At an estimated 90+ days of use by the stadium, and an estimated cost of $20 million, it can easily be said that the City is funding direct benefit to the stadium of at least one-fourth of the cost of the garage. However, since this project was not identified as necessary until the stadium became the justification, it can be more appropriately characterized as $20 million in contributed capital to the stadium. Bear in mind, too, that parking for the stadium has been a heavily criticized part of the overall plan. This structure – as undersized as it may be for the stadium – is still a necessary part of the overall stadium project (or it is otherwise unworkable). Thus, the public funds spent to build it are contributions to the overall stadium project. Efforts may be made to couch the parking garage as a facility needed for all occupants of Symphony Park. However, it is the stadium that will be the direct beneficiary, and it is the stadium that is the justification for its need.

It should be added that providing use of the parking garage will provide direct financial benefit to the stadium operators, in that the revenue from parking will inure to the stadium. Unless the City plans on charging the stadium for use of the facility, this offers the operators enhanced revenue potential. Thus, the publicly funded parking garage becomes another way of channeling revenue to the stadium.

The most perplexing and concerning element of the new plan is the suggestion that the City will issue bonds to fund not only legitimate park-related capital projects, but will also use bond proceeds to pre-pay rent for the facility. It should be noted here that one of the presentation slides indicates that “cash, (and) some bonds” will be used to fund this community access. However, the only funds that are specifically identified in the presentation are bond proceeds. This leaves the reader to wonder whether, beyond the bond proceeds, there is also intent to fund additional community access with other cash not disclosed in the presentation.

The use of bond funds to pay for community access, or facility rent, is highly questionable. First, the City is already donating land and site preparation dollars to the project and can easily command access to the facility for those contributions alone. Second, using bond proceeds to fund an operating expense – which is what facility rental would normally be – is highly inappropriate and financially imprudent. Bonds are issued to acquire capital assets, and rent is not a capital asset. It would appear that what is really happening here is a contribution of bond proceeds to help construct the project in exchange for “other” considerations. If this is the case, it is identical to the prior proposal to use City bonds to fund a portion of the construction of the stadium and, thus, a direct use of public funds to build the stadium (albeit in a lesser amount).

It is also concerning that the City would dilute the borrowing power of the $3 million in room tax collection commissions by apportioning any of it to the stadium (which seems to be in direction violation of the direction it received from the City Council). If the City is truly committed to parks and other eligible projects (per the room tax interlocal agreement), it would actually maximize the building and refurbishing of parks. Tying up half of the $3 million per year for 30 years to fund the stadium certainly inhibits the City’s ability to deliver parks facilities that are desperately needed.

Interestingly, when the bond funds and the cost of the parking garage are considered together, the City is still contributing $40 to $45 million in public funds to the construction of the stadium project. When the values of the land and site costs are added, the level of public support rises dramatically.

NH Pumpkin Riot: They Clearly Need Pro Sports

One of the sub-discussions about the proposed MLS Stadium promoters want taxpayers to build in downtown Las Vegas is the fact that Las Vegas is the largest Metro area without major professional sports.

On the other hand, no other Metro area boasts of having Celine Dion or Elton John performing for weeks or months at a time. In other words, some places spend more than half the year with nothing to do, aching for spring, while Las Vegas is already the entertainment capital of the world.

Take New Hampshire, for instance, where this weekend featured a drunken riot at a Pumpkin Festival. Here are the details, courtesy of the Christian Science Monitor.


Pro Sports Impact On The Economy

Most academic economists conclude that sports team owners, developers and politicians are wrong when they claim economic benefits for a city due to having professional sports. This group, out of the University of Maryland and published in Regulation Magazine, busts the norm and contends they actually reduce per-capita income for residents. Even though they don’t include soccer in “major sports”, it’s an interesting read.

At yesterday’s City Council meeting, staff reported that there’s nothing new to report since the Council voted two weeks ago to deny public funding for the group proposing that the City build an MLS Stadium in hopes of attracting an MLS team.

The Steven Seagal Soccer Stadium: Hard To Kill

Last May, on a 6-1 vote, the City Council approved a contract modification and extension for Cordish’s Exclusive Negotiating Agreement for a Symphony Park Arena. Here’s the meeting agenda – it is item number 58.

The first interesting document from this meeting is the minutes of the hearing, clickable here. Of particular note is at the top of page 2, end of the first paragraph:

(A city executive) clarified a local media report, in that the financing is already in place and the City Council is not being asked for additional funds.

Now we know this was not true. Maybe it was a lie told to city executives, we’ll never know. But it was important: several Council members mention the absence of public funding in their justifications for voting yes.

Here is the ENA “addendum” itself from that meeting. This is the document the Council voted 6-1 to approve on May 21, 2014. This is the actual contract currently in place between Cordish and the City.

In the first paragraph, briefly note that “Parties” is defined as the City, Cordish and Findley.

On page 3, the agreement reads:

(b)(i) No later than Sept 1, 2014, the New Development Team will submit a final term sheet (“Term Sheet”) for approval by the City Council.

Additional language defines elements of the Term Sheet that must be included – a feasibility analysis demonstrating the economic viability of the project, for example, and a site-specific environmental remediation report.

More on the “Addendum” from May: at the bottom of page 3 and top of page 4 is the most interesting language of all:

If the Term Sheet is not agreed to by the Parties by September 1, 2014 for submittal to City Council or is not approved by City Council if submitted to City Council, then the ENA and this Addendum, including the Extended Term, shall automatically expire and all obligations of the Parties shall automatically terminate.

This was the source of a technical interpretation from the lawyers at the 5:50 mark on our meeting videotape, online here, from September 2, 2014. A plain reading would indicate the deal was dead, since the Term Sheet was submitted to City Council and was not approved. However, the lawyers broke the language down into two parts, separated by an “or”:

1. The Term Sheet must be agreed to by 9/1. At the time, that was true.


2. If it is not approved by City Council if submitted to City Council. This condition was false.

The lawyers said that because the first condition was met, and the second condition was an OR, it didn’t matter that the council did not approve it.  As long as the  City Council could be prevented from voting the Term Sheet down, then the deal could go on forever. (See the video of our Sept. 2 meeting at the 5:52 mark online here.)

So now the advocates are double-flummoxed. It will be interesting to see what the next move is, because by submitting a new Term Sheet whose terms were not agreed to by the Parties until Sept. 25, the first condition is now false as well as the second. Even with the OR, the ENA has now automatically terminated.