Capping a financial journey that began years ago, Sacramento city officials completed a $272.9 million bond sale Thursday to finance the public’s share of the Kings’ new arena.
The bond sale, essentially a mortgage on the city’s parking operations, cements the financing for the $507 million Golden 1 Center once and for all. To be repaid over 35 years, the bonds replace a short-term loan the city executed in mid-August, when the Kings needed the city’s money quickly to avoid a potential cash shortage and loan default.
City Treasurer Russ Fehr said the bonds will carry a 5.67 percent interest rate, roughly in line with forecasts from a month ago. He said the annual debt service will come to $18 million. The Kings will pay an estimated two-thirds of the debt service through lease payments and property taxes generated by the new arena. The building broke ground last fall and is set to open in October 2016.
“I’m feeling pretty good,” Fehr said from the New York offices of Goldman Sachs & Co., lead underwriter of the bond sale. “I think we got ourselves a good deal.”
Fehr said he and Assistant City Manager John Dangberg have been in New York since Monday, meeting with bond traders, hedge-fund managers and other potential buyers. He said MacKay Shields, a bond-investment manager owned by New York Life Insurance Co., bought the single largest chunk of the bonds: $75 million. Interest on the bonds is taxable to the investors.
The city will repay the debt with future revenues from the city’s parking meters and garages. City officials expect to raise the rates on some downtown parking meters by as much as 50 cents an hour, perhaps as early as this fall, although officials have said the rate hikes would have taken place regardless of the arena debt.
Of the bond proceeds, approximately $220 million will be plugged into arena construction; the rest will go into debt reserves and various bond-issuance costs.
The $220 million represents the vast majority of the city’s $255 million subsidy. The rest consists of land parcels being donated to the Kings, and other resources.
In a last-minute change, Fehr said the bond sale was broken into multiple parts. Big institutional investors purchased a total of $250.6 million in bonds that mature in 35 years. So-called retail investors, mainly individuals, bought the remaining bonds. The retail bonds consist of six different issues, maturing at various times between 2018 and 2023. Fehr said individual investors tend to favor shorter maturities.
The city wanted to complete the bond sale in February but was delayed by a citizens’ lawsuit alleging the city was giving the Kings a “secret subsidy” worth tens of millions of additional dollars. A judge rejected the suit earlier in July following a two-week trial.
In the meantime, the Kings’ owners were facing a potential cash shortage, having borrowed enough to pay for about half of the arena project. The Kings also could have been declared in technical default on their loan if the city didn’t get its financing done by Sept. 1.
Although officials said the Kings’ owners almost certainly would have found a way to keep construction on track, the city took out a short-term loan in mid-August and began contributing cash to the project a week later.
All told, the delay proved costly. Fehr has said the city could have issued the bonds at around 5 percent back in February, yielding savings of as much as $1 million a year.
Nonetheless, the $18 million in annual debt service is still about $4 million less than what Fehr forecast in May 2014, when the City Council approved the development deal with the Kings.
The treasurer noted that in 2011, when the city first began negotiating an arena deal with the Kings’ prior owners, the Maloofs, the city contemplated selling its parking operations outright to private investors to finance the project. But Fehr rejected that plan, saying he didn’t want private interests controlling the city’s garages and meters and making a huge windfall from rate hikes.
“That was a bad, bad, bad idea,” Fehr said. The city opted instead for a simple borrowing plan that keeps the parking assets in the city’s hands.