Category: Louisville arena

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?

If you like infographics, you’re just going to love this one from ESPN the magazine! Giant blue Rick Pitino monster! Brightly colored geometric shapes! The number “$25,800,000” in really big type! It’s the perfect simulacrum of actual information, equally comprehensible for ages 5 to 55!

There is one interesting tidbit in there, actually, which is that the University of Louisville makes a whole lot of money on basketball, bringing in $42.4 million a year in revenue, and spending $15.5 million on expenses. (None of which, needless to say, go toward paying the athletes that people are actually paying to see.) That’s an annual profit of $26.9 million, or $1.35 million per home game, as portrayed by a giant red circle that brings to mind the diameter of Jupiter.

For the missing piece of the puzzle, we need to turn to Insider Louisville, which notes that the university’s basketball players aren’t the only ones getting the short end of the stick here:

If you’re taxpayer in Jefferson County, you need to keep one thing in mind while you’re looking at the stunning numbers the University of Louisville basketball program puts up on the P&L sheet … you’re subsidizing the program out of your pocket with at least $9.8 million annually, or almost $20 million during the last two years.

It’s actually worse than that, because Louisville’s tax increment financing district — property and sales tax revenues that are being kicked back to pay for the arena — is costing taxpayers an additional $3.5 million last year. (It was actually supposed to be more than that, but tax revenues fell woefully short, leaving the city to make up the difference.) Even if you count that as new revenue the city wouldn’t have gotten without the arena, though, which is arguable (some of it is likely cannibalized from elsewhere in the city), that’s still almost $10 million a year that Louisville residents are handing over to the university so that it can rake in record sports profits. At least it’s a public university, so I guess you can look at this as a back-door way of fighting the trend of reduced higher-education funding? Um, maybe?

There’s some new data on how Louisville’s annual subsidies are propping up the KFC Yum! Center, courtesy of the Louisville Courier-Journal:

The report doesn’t explicitly show how the arena authority pulled together the money to make its two debt payments last year totaling more than $20 million. Some of the money included more than $3 million borrowed from a renovation fund and an increase in Metro Government’s annual contribution to $9.8 million, from $6.5 million.

According to the report, the authority had $26.2 million in operating revenues and other support last year, up from $24.9 million the year before. That is largely [the] result of the additional city money, which made up the biggest chunk of arena revenues.

For those without access to a calculator, that’s fully 37% of the arena’s revenues that came via a check from the city government. And that’s not including the kicked-back property and sales taxes that are costing the city about $2 million a year — which is on the one hand good considering that this tax increment financing was supposed to provide about triple that amount, but on the other hand not so good since the city has to pay the arena bonds regardless, hence the need for the growing operating subsidy.

There’s still hope that AEG, which took over operations of the arena last year, will somehow work some magic that will reduce the building’s losses, but given their work elsewhere, don’t hold your breath. It seems likeliest that Louisville will simply have to learn an expensive lesson: If you’re spending $349 million in taxpayer money on a new arena whose only anchor tenant is a college basketball team, you probably have no hope of ever making your money back. Also: When the vampire squid talks, don’t listen.

Finally some good news about Louisville’s KFC Yum! Center, the college basketball arena that has been hemorrhaging money since TIF revenues started falling massively short three years ago: The chair of the Louisville Arena Authority now says that under a new operations manager, the arena should “show a pretty amazing operating profit this year” and may soon be able to move its bonds out of junk status.

That’s indeed great news, since it means that the beleaguered arena won’t be needing any more annual subsidies from the city to remain afloat, right?

After having to unexpectedly increase the city’s contribution to debt service in this fiscal year, Mayor Greg Fischer’s 2013-14 budget includes a $9.8 million contribution as TIF revenues are again expected to not meet original projections.

Oh. Well, never mind, then. But at least it’s nice that the arena can turn a profit when the city gives it $10 million to subsidize its operations, or something? Hey, I’m trying not to be negative here! Somebody help me out!

And finally in today’s onslaught of holiday reporting, we have the news item that isn’t really news:

It was supposed to be a reliable way to help cover the cost of a new downtown arena: The building’s events would bring throngs of people downtown who would eat, drink and shop nearby. Their sales taxes would be captured to help pay for the KFC Yum! Center.

But the arena hasn’t added as much to tax revenues as expected during its first three years — producing less than one-third of the amount originally projected.

Yep, the KFC Yum! Center TIF district isn’t generating as much incremental tax revenue as expected — just as was the case 11 months ago, and a year and change before that. At least tax receipts are finally up from before the arena was built, but only slightly: a total of $6.4 million over the past three years, a drop in the bucket compared to the city’s $19 million in annual arena debt payments, let alone the $30 million a year that that will rise to in coming years.

The city is now expected to be asked to bail out the arena district as early as next spring. (The Louisville Courier-Journal also speculates that this could increase the pressure to lure an NBA franchise in order to add arena events, which would be a great idea if NBA franchises actually paid significant rent.) Meanwhile, arena authority financial adviser Alexander Rorke told the Courier-Journal that nobody should be hung up on the fact that the TIF was expected to bring in a ton of money and now needs a bailout: “With the feasibility study — that was all great for that time period for what people knew. But I think it’s important that we just realize that was then.” Yeah, that’s what they all say.

Oh god oh god oh god, sometimes the combination of government stupidity and journalistic stupidity is enough to make my head explode. Here’s the headline in yesterday’s Louisville Courier-Journal:

Arena cash may ease crunch: Security sale could bring millions to KFC Yum! Center

And here’s the key section from the accompanying article:

Louisville Arena Authority officials say they are considering selling a package of securities that financial statements show increased in value by $5 million last year.

The authority’s guaranteed investment contracts provide it a fixed rate of return of 4.7 percent a year — more than $740,000. As interest rates on other investments have declined, the arena’s contracts’ underlying value has increased. The securities were worth $22.6 million at the end of last year, up from $17.6 million the year before, according to the arena’s financial statements.

In case you didn’t follow what’s going on here, allow me to explain: The arena authority has found itself with some investments that earn an annual return of 4.7%, which in the Great Recession era is pretty fantastic. So instead of actually collecting that $740,000 a year in interest year after year, it’s going to sell the investments for $22.6 million, pour all that money into the gaping maw of debt that is the KFC Yum! Center, and be left with nothing.

It’s certainly a defensible strategy, given that the authority needs the money now and doesn’t have anyplace else to turn for it. But treating it like a windfall that actually solves any problems is like cheering paying off a stadium by selling a public hospital, or selling off future parking revenues to pay for a new arena, or, for that matter, selling off city services like swimming pools and golf courses to raise quick cash.

In other words, a more honest headline would have read: “Arena authority forced to sell off only worthwhile assets to pay off KFC Yum! Center debt.” I probably should stop expecting honest headlines by now, but I keep hoping that one day…

It turns out it’s not just Louisville’s arena tax district that is running short of money; so is the arena itself:

By all accounts, the KFC Yum! Center has been a spectacular success since it opened in fall 2010, meeting every expectation except one — profitability.

The Kentucky State Fair Board, which manages the building for the Louisville Arena Authority, expects net income of about $500,000 from operations in 2011. That’s far less than the $1.2 million budgeted, and a fraction of the $3.7 million forecast when the project was financed in 2008.

The problem, apparently, is that despite a packed event calendar, operating costs are higher than expected — $9.2 million a year instead of $5 million — which has quickly eaten up the revenue from all those Katy Perry concerts.

Still, turning a $500,000 annual profit isn’t so bad, right? Except that that’s just a $500,000 profit on operations — factor in the $19 million a year in debt payments the public took on to build the KFC Yum! Center, and you have a mammoth loss for taxpayers. And with that tax-increment financing district running short of projections as well, the public is looking at a $7.5 million shortfall in paying off the arena bonds this year and next — something the authority is filling by using surplus funds and raiding a maintenance account. They haven’t had to sell any hospitals yet like up the river in Cincinnati, but the century’s still young.

Hey, remember back in 2010 when it was reported that Louisville’s tax-increment financing district wasn’t actually generating any incremental taxes, and if things didn’t improve the city would need to bail out its stadium fund with general revenues? Well, guess what:

The revenue needed to pay for the 15-month-old arena at Second and Main streets is falling short of expectations, putting the project at risk of failing to cover its debt and having its bonds relegated to “junk” status.

The main culprit is lagging revenue in a special taxing district that forms the foundation of the arena’s financing plan and is supposed to provide the Louisville Arena Authority with more than enough cash to pay its $349 million in bonds.

Arena authority chair Jim Host told the Louisville Courier-Journal that he has no plans to ask the city for money immediately, but did apparently tell city officials that he will ask for as much as an extra $3.3 million a year starting in 2013.

There are already plenty of reasons to be wary of TIFs, among others that much of the “new” tax revenue is actually money that would have been collected somewhere else in your city regardless. But the scariest part for city officials may be their uncertainty — a relatively small shortfall in consumer spending that causes tax proceeds to go down, not up, and in the words of subsidy expert Greg LeRoy, “a liability that was supposed to be taken care of by the TIF is now eating the lunch of the general fund.”

If you read the kind of publications that Goldman Sachs advertises in, you may have noticed some ads from the vampire squid touting its role in helping save Louisville by selling bonds for its new basketball arena. (There’s a Goldman-created video, too.) As the San Francisco Chronicle’s David Sirota picks up the story:

As Goldman’s ad tells it, Louisville’s major problem was its need for a new arena. That’s when the bank swooped in with a “financing strategy” to build the stadium, which then supposedly led to “a vibrant downtown scene, where new businesses are opening (and) existing businesses are expanding.”

The only problem, writes Sirota: “If you do bother to click around the Internet, you’ll inevitably find that the Louisville economic picture is anything but ‘vibrant.’ Today, the city is suffering from an 11 percent unemployment rate and a $22 million budget shortfall.” He also cites the article we mentioned last fall that noted that Louisville’s TIF district wasn’t generating enough tax revenues to pay for the arena construction costs, which would leave the city having to dip into general funds to pay off those Goldman bonds.

And it gets even worse, according to Insider Louisville’s Terry Boyd:

The truth is even weirder: Goldman Sachs fell short of being able to place all the arena bonds.

It was in fact Louisville-based brokerage Hilliard Lyons that saved the day, placing the highest-risk, lowest rated piece of the arena debt.

How do I know? I wrote the story for Business First last year.

Concludes Boyd: “We’ll find out pretty soon if the arena’s revenue will match our collective debt obligation. But one thing is for sure — you can bet Goldman Sachs makes money no matter what happens to tax payers.”

Back in 2000, economic-subsidy expert Greg LeRoy of Good Jobs First said this to me about tax-increment financing, in which new tax money from a development is earmarked to pay off the development’s bond costs:

“TIFs are among the most problematic kinds of subsidies in America today. Right now we’re in the middle of this giant real estate boom, but real estate markets are cyclical. During the crash in real estate values in the early ’90s, some places got caught in the downdraft, and the increment evaporated. And you’ve got a situation where a liability that was supposed to be taken care of by the TIF is now eating the lunch of the general fund.”

From Wednesday’s Louisville Courier-Journal:

Paying for the KFC Yum! Center depends on more people spending money downtown, but the plan to use rising sales tax revenues to cover part of the arena debt failed to produce a single penny last year….

And if sales tax projections continue to lag, Metro Government could have to come up with an extra $3.3 million to cover arena costs as early as 2012….

Without any of the $4.5 million in projected sales tax revenues, the project received just $678,000 worth of tax rebates last year — nearly all of it from property taxes.

Now, the KFC Yum! Center — yes, that really is its name — doesn’t even open until next month, so it’s possible things will look better in coming years. Still, you can’t say Louisville wasn’t warned.