City arena subsidy faces new debate
12/06/2013 12:00 AM
10/06/2014 5:02 PM
What is the true cost of Sacramento’s arena project? Can the city handle its share of the bill?
Those are two of the hotly debated questions as the Sacramento arena saga heads into a major week.
STOP, the group seeking a vote on a city subsidy for the new downtown Kings arena, says it will submit petitions to the city clerk on Monday or Tuesday aimed at giving Sacramento residents a say on the June ballot. The group contends the deal is too risky and that the city is grossly understating its costs.
City Treasurer Russ Fehr is expected to counter those claims Tuesday night in a financing update for the Sacramento City Council, offering a detailed analysis that he says shows the city will be able to handle its debt with substantial sums of money to spare in the long run, after several tight years early on.
Fehr said recently he is confident the deal “protects the general fund with layers of security ... the risks are minimal.”
On Thursday, the city Planning Commission will get its first chance to review preliminary plans for an overhaul of downtrodden Downtown Plaza, including possibilities for a hotel, offices, new stores and housing. The massive mixed-use project is being proposed by the Sacramento Kings as part of the team’s agreement with the city to help rebuild the area around the new arena.
The debate over whether the city should press forward with plans to subsidize the project revolves around dollars, cents and semantics: How do you measure the amount the city is putting into the deal?
City officials say they plan to contribute $258 million toward the new arena, and not a penny more. The city will sell bonds to private investors next summer to raise the bulk of its share, and will pay the investors back, over the next 36 years, with parking revenue from the handful of downtown garages the city owns, officials say. The city will not know exactly how much it must borrow, and at what interest rate, until it goes to the bond market.
But critics say their review of Fehr’s numbers tells them the city is getting in over its head, like many homebuyers did on their mortgages in recent years. When 36 years worth of bond payments are added up, the true financing cost is in the $700 million range, they point out, citing the modeling sheet Fehr worked up earlier this year.
“You are borrowing more money than you currently can afford to pay,” said one of the plan’s chief opponents, Craig Powell, founder of the Eye On Sacramento government watchdog group. “This has all the hallmarks of a bad, toxic loan.”
Powell, a leader in the petition drive, said he doesn’t believe there will be enough parking revenue to repay the bonds, and that the city’s backup option, hotel taxes, is not viable. That means the city could be forced to dip into its general fund to satisfy creditors. He’s particular alarmed, he said, by the city’s plans to make interest-only payments for the first eight years, and to borrow extra money to help make some initial debt payments. By doing so, he said, the city has fashioned a deal loaded with heavy debt payments.
Fehr and Assistant City Manager John Dangberg acknowledge the financing plan is complex and creative. But they say the borrowing plan is conservative, and is being vetted by bond experts, bankers, economists and parking consultants.
Fehr said a March “stress test” analysis by his financing team, using conservative assumptions, suggests revenue from the city’s parking garages appear more than sufficient to handle the debt over time, and could ultimately spin off $1.3 billion for the general fund, most of it in the later years of the deal. Fehr said only about 20 percent of expected future parking garage revenue would be needed to make the debt payments.
Fehr said that March analysis showed the city could afford to borrow $304 million, if needed, but that in actuality, the city will probably have to borrow less. “The final numbers could change by tens of millions of dollars,” he said.
Financing plan not unusual
Whatever that number is, the city would forward $212 million to actual arena construction. The rest of the bond proceeds will go for related purposes, including an estimated $6 million for legal fees, $9 million for garage improvements and as much as $43 million for “capitalized interest” – the debt payments in the first few years of the loan. Another $24 million or so would be put into a reserve fund.
Fehr said that funding structure gives the city breathing room to pay off existing debt on the parking garages. Once the old garage debt is erased over the next decade, Fehr said, the city will be able to comfortably make its full principal and interest payments on the arena bond.
He and other city officials say the parking garages are likely to pull in more revenue over time as more people park downtown. They also expect modest increases in parking rates over time. Fehr said conservative estimates show annual parking revenue growing from $26 million next year to $41 million by 2025. He said a fresh analysis to be completed by next spring will take into account parking by arena-goers and should show even more robust revenue growth.
Some of the parking revenue, about $9 million, now goes into the city general fund to pay for basic city services. Ordered by the City Council to keep the general fund “whole,” Fehr’s financing team cobbled together a handful of replacement monies, including a 5 percent ticket surcharge on arena events, and a guaranteed minimum annual $1 million payment by the Kings to the city from arena operations.
To make the arena bonds more attractive to potential investors, city officials plan to offer up millions in annual hotel-tax revenue as a backup source of debt repayment in case parking fees fall short – a scenario they call highly unlikely. City officials acknowledge that some of the hotel revenue is already dedicated to repaying debt on the Sacramento Convention Center. Nonetheless, Fehr and Dangberg said using the hotel money as security should bring lower interest rates.
A California municipal bond expert said the general approach Sacramento is taking is not unusual. Marilyn Cohen, president of Envision Capital Management Inc., a financial management firm in Los Angeles that specializes in bonds, said Sacramento’s plan to make interest-only payments in the early years has been done before by other cities, and is not a red flag. Nor is borrowing extra to help make early-year debt payments.
But using hotel taxes as a backstop, Cohen said, could be problematic. “That certainly is stretching those revenues a little thin,” she said, especially if the economy sinks and hotel tax revenue falters. “There’s no guarantee that that’s a steady revenue stream.”
Cohen said the bonds sound “too speculative” for her to buy, but she believes there will be a clientele. “There is a huge appetite for California paper ... It'll probably fly off the shelves.”
Sacramento-based economic development consultant Micah Weinberg, one of the few outside analysts who have dug into Fehr’s numbers, said he believes the deal will work. Weinberg reviewed the deal at the request of Councilman Steve Hansen. The deal, in the form of a conceptual “term sheet” between the city and the Kings, won council approval 7-2 in March with Hansen voting in favor.
The overall dollar amounts are huge, Weinberg said, but the financing plan “is very thoughtful and solid. If we are going to do this, it seems well designed.”
Critics cite ‘sweeteners’
Despite his criticisms, Powell told The Bee he is not opposed to the city’s borrowing money to invest in an arena deal but that he thinks the subsidy should be lower. If there is a June ballot measure and it passes, he said he hopes that would signal to city officials and the Kings that they should renegotiate the deal.
“It is in their benefit that we don’t create a ticking fiscal time bomb,” he said.
Sacramento attorney Patrick Soluri, who filed a lawsuit challenging the deal, argues that the city has added quiet “sweeteners” that bump the city’s portion of the arena cost higher than advertised. For one, the city has not listed any potential value for six sites it has agreed to turn over to the Kings for the team to install and operate digital signboards.
It also does not list a value for an estimated 2,700 city-owned underground parking spots at the arena site the city will allow the Kings to operate. Critics also question the $38 million value that CBRE, a commercial brokerage company, placed on six properties the city will give the Kings as part of the deal. Those properties include an undeveloped parcel at Eighth and K streets, two lots near the Crocker Art Museum, and 100 acres next to Sleep Train Arena. Critics say the $38 million represents depressed values from earlier this year and that their true value to the Kings is much higher.
City officials say those concerns are overblown. They say the digital sign sites are undeveloped and produce no money for the city. Likewise, the downtown parking spaces are in poor shape, they contend, and will require millions of dollars in fixes and upgrades, to be paid by the Kings. City officials said the six properties being donated were fairly valued.
City officials say it’s also misleading to suggest that Sacramento residents will be the only ones paying for the city’s contribution to the new arena. The financing costs will be borne by people who park in city garages over the next three-plus decades, many of whom aren’t city residents.
“Over 100,000 people come downtown from throughout the region every day and some park in our garages,” Dangberg said. “That provides a regional contribution to the financing.”
Dangberg and Fehr cite other elements of the financing plan that reduce the city’s financial risk. The Kings are on the hook for any construction cost overruns, as well as any downtown infrastructure upgrades needed to build the arena, such as utilities. If the arena becomes obsolete by NBA standards before the 36-year financing deal is done, the Kings would be responsible for paying to upgrade the facility.
The council is expected to cast its final vote on the deal next spring. Councilman Hansen, initially a deal skeptic, says he has been won over, but still hopes to have more public debate about details of the deal before that vote.
“I continue to want to see us probe the assumptions in the term sheet ... and to get public input,” he said. “I want to make sure we do our proper due diligence.”
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