Without parking fees, Sacramento may have to cut services to pay Golden 1 Center debt
The coronavirus pandemic has cut so deeply into Sacramento’s revenues that officials may be forced to cut some city services to make payments on bonds used to build the Golden 1 Center.
It’s a scenario that the city insisted was highly unlikely when it agreed to invest in the new arena with the Kings six years ago. If the city uses general fund dollars to help pay off its arena debt, it would take money that otherwise would go for police, street work, parks, libraries, and other basic services.
The city also is facing potential problems on another multi-million dollar bond repayment as the economic shutdown from COVID-19 drains tax dollars: the renovation of the Sacramento Convention Center and the Community Center Theater.
The theater and convention center projects, which are well underway, are being financed largely with hotel occupancy taxes that have plummeted under the nationwide stay-at-home orders. At least two major downtown hotels, the Kimpton Sawyer and the Hyatt Regency, have temporarily closed.
In total, city officials calculate they are losing an estimated $90 million in revenue for the second half of this fiscal year and all of next year as the economy veered downward during the coronavirus pandemic. The city general fund has additional funds on hand, though, from the Measure U sales tax and from current-year savings.
The exact shortfalls on the bond debt are unknown, City Treasurer John Colville said, given the uncertainty over when downtown workers and visitors will return in large numbers, feeding meters, paying for garage parking, and staying at hotels.
But Colville said the city might have to temporarily backstop the Golden 1 bond debt payment with general fund money because of the decline in parking revenue since March.
“There’s an extreme likelihood that we’re going to have to dip into the general fund,” Colville told The Sacramento Bee. “Parking facilities are taking a huge hit beginning early to mid-March.”
No final decisions have been made. Assistant City Manager Leyne Milstein said in an email that it will be up to the City Council to decide how to handle whatever shortfall occurs, based on guidance from the treasurer and city manager’s office.
Backed by future parking revenues, the city borrowed $273 million in September 2015 to cover its share of the construction costs for the $558 million Golden 1 Center, which opened a year later.
This year the city owes $18.4 million on the arena, with $5.3 million budgeted from parking revenue and another $5.4 million from other city sources, including a special reserve fund set up with some of the bond proceeds.
The Kings are supposed to contribute $6.5 million in lease payments and another $1.2 million in tax payments, for a total of $7.7 million — a figure that will grow substantially in future years. Decades from now, the Kings’ lease payments will be big enough to cover practically all of the city’s annual bond payments.
When the deal was being negotiated, critics said the arena project could hurt the general fund. City officials downplayed the danger at the time but acknowledged there was some risk.
“In our projections, it was going to be sort of thin in the first five years,” former City Manager John Shirey said in a recent interview. “Once we got by those first five, six, seven years, it was going to be pretty good. We’re in the thin time right now.”
‘Unprecedented impact on our bottom line’
And COVID-19 is making a mess of the city’s plans.
For one thing, it’s possible the Kings will pay less than the budgeted $6.5 million on its lease this year. They have made quarterly payments totaling $4.9 million so far, but the final payment is uncertain. The lease is based on the team playing the full regular-season schedule of 41 games. The Kings had played 31 games when the NBA suspended the season in March, and the league hasn’t said when or if the season will resume.
“The agreement is based on the use of the building,” Kings spokeswoman Joelle Terry said. The team recently announced it is furloughing one-third of its staff, citing “an unprecedented impact on our bottom line.”
And now it’s unlikely that the meters and garages will generate the $5.3 million expected for this year’s bond payment. The city believes meter revenues have fallen 95 percent and garage revenues 7 percent, according to budget materials submitted to the City Council recently. Colville said he will update the council in the coming months.
Where will the money come from to pay the arena debt?
The city could pull more from the bond reserve fund, which has another $8 million left, but that money is already earmarked for helping repay arena debt in future years.
Colville has said the city could use part of the $89 million it received from Congress in the coronavirus stimulus package. But that money isn’t supposed to be used to plug holes in budgets, it’s not clear if it can go toward bond payments and Mayor Darrell Steinberg has proposed using the federal aid for workforce training, housing the homeless and other purposes.
A big X factor is the economy. The city got some good news this week when Sacramento County health officials said restaurants and stores could reopen. Last week, Gov. Gavin Newsom gave the go-ahead for offices to reopen. The Hyatt expects to open June 7.
But the speed of the economic recovery remains to be seen. Marilyn Cohen, a municipal finance specialist with Envision Capital in Los Angeles, said the arena debt could pose significant problems for the city.
“(If) it’s just a few million, over the next (year) or so, then no panic, they’ll grind through it,” she said. “It may turn out to be fine, but it may be a nail-biter for the next 6-12-18 months.” She said “the city should be held accountable” for the debt problems.
But Tim Gage, former director of California Department of Finance and founder of Blue Sky Consulting Group, an Oakland-based municipal finance consulting firm, said the city can’t be blamed for something as unpredictable as a global pandemic.
“I don’t think that it’s an I-told-you-so type of situation,” Gage said. “Should the city be faulted for not setting up an enormous reserve to protect against this type of event? Most reasonable people would probably say no. The state had a big rainy day fund and it’s getting wiped out.”
For their part, city officials say the scenarios they drew up when selling the bonds covered a wide range of possible financial issues, but no one could have expected the coronavirus pandemic.
“We stress test every bond issuance and a Black Swan event would never meet the criteria of a stress test,” Colville said, using the financial term to describe an unimaginable catastrophe. “It is a statistical anomaly that you really don’t anticipate in the normal course of business.”
Tourism decline imperils convention, theater debt
While parking revenue was used to help pay for the arena, the city is counting on hotel visits to bankroll the facelift of the convention center and community center theater.
Now that debt is turning problematic, too, as visits to downtown Sacramento have plummeted.
The city sold some $350 million in bonds in 2018 to expand the convention center, remodel Memorial Auditorium and rehabilitate and expand the community center theater. Most of the money to pay the annual debt comes from the city’s hotel, or transient occupancy tax. A lesser amount is due from a special district set up by downtown hotel owners to tax themselves to pay for the renovations.
The city now believes that transient occupancy tax revenues will fall by 28 percent in the current fiscal year and 57 percent in the upcoming fiscal year. That’s almost certain to translate into shortfalls in money available to make the bond payments.
Brian Wong, the assistant city treasurer, said the city could plug the gap by pausing certain capital improvement projects.
Another option is the general fund. The convention center and theater bonds aren’t legally backed by the general fund. But Colville said the city might feel obligated to tap the general fund to make good on any shortfall from the occupancy tax and revenue from the special district.
The reason: Defaulting on the debt would make lenders leery of doing business with the city. The city’s AA-minus credit rating could be downgraded. That would make it harder and more expensive for the city to borrow into the future.
“If there’s a shortfall, we don’t want to allow a default because of the credit rating issue, even though legally we wouldn’t have to,” Colville said.
This story was originally published May 21, 2020 at 5:00 AM with the headline "Without parking fees, Sacramento may have to cut services to pay Golden 1 Center debt."