The two very different ways the Chiefs stadium public funding plan can fail

The Kansas City Star ran an informative article on Sunday on questions still outstanding about the plan to give Kansas City Chiefs owner Clark Hunt $2.8 billion in Kansas state tax money to build a new stadium, (With other tax breaks and financing charges, the total cost to the state would end up more like $4 billion.) “How exactly — or easily — will Kansas generate enough sales tax revenue to pay for the bonds?” ask sports reporter Sam McDowell and government reporter Matthew Kelly. “Will potential investors see them as too risky?”

Opinions, as they will, differ. University of Chicago finance professor Justin Marlowe tells the Star, “I think it’s fair to say that they won’t have any trouble selling these bonds,” but the article also notes that “vocal detractors [are] questioning whether the math will add up to bring the project to fruition.”

To understand the dispute here, let’s take a step back and talk about how bonds work. A government entity — in this case, the state of Kansas — sells bonds to private investors, effectively borrowing the money from these investors and repaying them with interest. One kind of bonds is general revenue bonds, which are repaid with cash from the state treasury, a source that is essentially bottomless unless Kansas declares bankruptcy. The STAR bonds, however, are dedicated tax bonds, meaning the only pool of money they can use to repay bondholders comes from specific tax revenue streams — in this case, increased sales and liquor taxes from within a designated stadium district.

If you’re drawing up a dedicated tax bond, the first trick is to make sure that that pool of tax revenue you’re setting aside to pay bondholders with is actually enough to cover your principal and interest payments. One way to do that is to make the stadium district really, really big: The preliminary sketch covers 293 square miles, including all of Wyandotte County (where Kansas City, Kansas is and where the Chiefs stadium would go) and a large chunk of Johnson County to the south (where the Chiefs practice facility would be built, in the city of Olathe). And the state could still make the district even bigger, which would increase the tax pool that could be used to pay off the bonds.

Another option for bringing in more money is to redefine what “increased” means in “increased sales and liquor taxes.” STAR bonds utilize incremental tax revenues, meaning the state locks in the current amount of taxes being collected in the stadium district, sets that aside to keep going to  the general fund, then allocates any money above that level to be siphoned off for the development project. (The idea behind this is that all the new tax revenues wouldn’t have happened without the development, so it’s free money; we’ll get back to that in a minute.) “Current,” though, could mean 2026, or 2025, or 2015 for all you want — Kansas officials haven’t yet set a baseline for what year they’ll be calculating the increment relative to, and the earlier they go, the more money will be siphoned off.

And there’s yet a third option, which is to throw additional taxes into the pot. STAR bonds are by law only allowed to use sales and liquor taxes, but so far it’s only the state that’s approved kicking in its share of taxes. State officials are also asking Wyandotte County and the cities of Kansas City and Olathe to kick in county and city sales taxes — something that local officials would be crazy to go along with, given that it would just shift costs from the state to the county and cities, but the state is leaning hard on them to do so.

If the amount of revenue collected by an expanded stadium district, a flexible tax baseline, and grabbing local tax revenues isn’t enough, what happens? The bondholders would have no recourse to make the state pay them out of the general fund, so they would end up taking a loss on their investment. That’s a risk, and the way that bond buyers deal with risk is to demand a higher interest rate, something that Marlowe says could end up being a part of the Chiefs deal:

Kansas officials have emphatically said taxpayers won’t be left on the hook if the project fails to live up to expectations. Having no security pledge on the bonds would very likely ratchet up the cost of debt service payments, Marlowe said.

“Investors are going to see the bonds as more risky, and they’re going to price that into the yields that they demand to buy the bonds,” he said.

A higher interest rate means the state would need more money to pay off the bonds — Patrick Tuohey of the Better Cities Project has speculated the rate could be as high as 6% — which means that the state would have to expand the stadium district, reset the baseline, or include more local taxes to pay them off. With that in mind, it’s more likely that the state would just make those adjustments up front, creating a bigger tax revenue pool and calming bondholders’ fears enough that interest rates can be kept to a dull roar.

And if the revenue collected is indeed enough to pay off the bonds, everything is cool, right? If you’re a nervous bondholder-to-be worried about your investment, sure. If you’re a Kansas resident, though, not so much: Siphoning off taxes from a bigger area, from more of the existing tax base, and from more jurisdictions makes it way more likely that you’re eating into tax revenue that has nothing to do with the Chiefs, and which in the absence of a stadium deal would be collected by the state and used to pay for public services. To take this to the most absurd extreme: Kansas could legally expand the stadium district to be the size of the entire state, and set the baseline back to 1861 when Kansas was first admitted to the union — that would thrill bond buyers, but would also effectively mean that the state’s entire budget could be used to pay off Hunt’s stadium bills, despite the fact that Kansas had a functioning economy before the Chiefs arrived.

When people ask “Will the Chiefs stadium pay for itself?” then, it’s really conflating two different questions: Will the amount of tax money Kansas is setting aside be enough to pay off its bonds? and Can the state pay for this without costing Kansas taxpayers money they otherwise could use for schools and roads and whatever? At this point, the answers to those two questions appear to be “sure, maybe, depending” and “hahahahaha LOL no.” They’re both going to be important as the Chiefs stadium deal continues to be negotiated — and make no mistake, there’s still lots of negotiating to go — but it’s important to keep in mind that there are two different ways for a stadium deal to fail, and it can be a success on the bond market and still be disastrous for state residents.