Standard & Poor’s lowered its bond rating for the Louisville’s KFC Yum! Center to junk grade on Friday, which I thought about mentioning at the time but didn’t because this isn’t Field of Bondholders. (Inasmuch as I do like typing “KFC Yum! Center.”) Things are getting more interesting now, though, as Louisville Mayor Greg Fischer is having to fight off charges that the city might end up having to actually default on the arena debt:
“The payment of the bonds is not in question, and it’s not in jeopardy,” Fischer said in an interview Monday.
Moody’s Investors Service and Standard & Poor’s Ratings Services have both downgraded the status of the bonds that are paying off the arena’s construction costs, contending that the arena’s financing plan may not be able to cover the $340 million bond debt…
The downgrade prompted Louisville Metro Councilman Dan Johnson, D-21, to call for a renegotiation of the lease agreement between the Yum! Center’s oversight board, Louisville Arena Authority, and its main tenant, the University of Louisville, which Johnson said would make the arena more profitable and the bonds more stable.
“This report … gives the impression that the arena could default because it may be unable to pay bond debt,” Johnson said.
It’s important to remember here that the KFC Yum! Center itself has been fairly successful, in terms of arena operations: It may not have an anchor sports tenant other than the University of Louisville basketball team, but it’s been a relatively successful concert facility. As we’ve seen before, though, arenas generally have a tough time paying off their construction costs out of operating profits; in Louisville’s case, the bulk of the cost was supposed to be paid off via a tax increment financing district around the arena that diverts new tax revenue to pay for the building’s construction debt, but that money has fallen woefully short, with the city having to kick in an extra $9.8 million last year to make up the difference.
Johnson has called for renegotiating the city’s lease with the U of L to get the city more money — if only by ending the provision that allows the university to black out arena dates before and after its own games — which makes sense seeing the windfall the school gets from its lease. Fischer retorts that the problem isn’t the lease, it’s the TIF district — which also makes sense, albeit in a “we were dumb not to have an actual idea for paying for this” way.
In an indication of just how screwy TIF financing can be, Fischer says that all should be well now that the city approved shrinking the TIF district back in September, which is expected to bring in more money:
The TIF allows the arena to keep a portion of increased tax revenue generated by business the facility helps bring in to the taxing district. But the district boundaries were drawn so large that too little additional tax revenue was generated to pay off the arena debt.
Arena authorities, according to a previous Courier-Journal report, see the downsizing of the TIF district as a move that ultimately will increase revenues from businesses opening in the district, funneling more tax revenue to the arena.
In other words, businesses immediately adjacent to the arena are paying more taxes, but businesses a few blocks away are moving out, making the overall TIF impact closer to a net zero. By ignoring the arena’s impact on the broader area, then, and just focusing on the couple of blocks next to the arena, the city can only count the pluses and not the minuses, and everybody’s happy! Right?