New Sacramento arena relies on city parking fees – plus lots of cash from Kings

Welcome to Golden 1 Center. That’ll be $18.3 million, please.

That’s how much the city of Sacramento will pay each year to help fund the Kings’ new $556 million downtown arena, set to open Oct. 4. Put another way, it’s the average annual debt service on the bonds the city sold last fall to pay for its contribution to Golden 1 – a financial burden that won’t expire until 2050. While the city has valued its arena subsidy at $255 million, its total principal and interest payments will total nearly $626 million by the time the bonds are finally paid off.

As daunting as the math seems, city officials say Sacramento can handle the debt with room to spare, and without dipping into its general fund.

For one thing, the Kings will be responsible for more than 60 percent of the city’s debt payments, by contributing millions each year in lease payments and property taxes on the arena. That’s on top of the $301 million cash contribution the team already put into construction.

As for the city’s share, officials say they’re confident Sacramento can pull more than enough new money from its parking meters and garages – the other main pillar of the financing plan – to make the project pencil out. Higher hourly rates and an aggressive parking “modernization” program, coupled with parking revenue from Kings games and other events at Golden 1, are expected to produce plenty of cash to cover the city’s share of the debt repayment.

“I feel comfortable we’re on track to hit these targets,” said Assistant City Manager John Dangberg, who has led the city’s efforts on development of the arena. “In fact, I personally believe we’re going to do better than that, because of all of the other growth that we have in the downtown.”

The arena bonds are essentially a mortgage on the city’s parking operations, a lucrative business that generates millions for the city’s general fund. But with so much money coming from the Kings, increased parking revenue only has to support about 10 percent of the debt, according to the city’s latest cash flow projections. About twice as much money will come from dollars that will get freed up when existing debt on city parking garages comes off the books several years from now.

“The perception is that we’re raising rates to pay for the arena,” Dangberg said. The reality, he said, is a good deal more complicated, involving lots of money from the Kings and a smaller amount from the city.

The City Council approved the subsidy in May 2014, capping nearly two decades of false starts, failed negotiations and aborted agreements in the Kings’ quest to replace Sleep Train Arena, a facility the NBA deemed outdated and inadequate. A common thread ran through the negotiations: how to pay for the public subsidy demanded by Kings owners?

A proposed sales tax increase was shot down by voters in 2006. While negotiating a 2012 deal with the Kings’ previous owners, the Maloofs, the city briefly considered selling its lucrative parking operations outright to raise cash. That idea died amid fears that the investors would aggressively jack up parking rates, like they’ve done in Chicago and other cities that have privatized parking assets.

In 2013, the city decided to keep the meters and garages while issuing bonds backed by parking revenue. A tentative deal was struck with the group that eventually bought the team from the Maloofs, establishing an arena profit-sharing plan to help the city repay the debt. If the Kings did well financially, the city would get more money.

By the time the team had changed hands and a definitive deal was made, in 2014, the profit-sharing arrangement had given way to guaranteed lease payments on the arena. The new Kings owners, led by Vivek Ranadive, have agreed to pay the city, which owns the building, $6.5 million a year for the first four years. Then the payments will start growing with inflation.

In 2050, the last year of the city’s bond obligation, Dangberg said the Kings will pay the city at least $16.7 million. That by itself will be nearly enough to cover that year’s debt payment.

Marilyn Cohen of Envision Capital Management Inc., a municipal-finance firm in El Segundo, said it appears the city has done a good job of limiting its financial risk. The comparatively heavy contribution from the Kings to the debt repayment puts Sacramento in a better position than most cities that have subsidized sports arenas, Cohen said.

“They’ve got a lot of skin in this game,” said Cohen, referring to the Kings. “That’s what people want; that’s really good news. ... This is pretty damn secure.”

The subsidy has been controversial nevertheless. A taxpayer group gathered enough signatures to force a public vote, but the signatures were thrown out in court because the petitions were improperly worded. Some of the same taxpayers sued the city, charging that Mayor Kevin Johnson and others had engineered a “secret subsidy” that put the total value of the city’s contribution well above the official $255 million figure. They lost, but the litigation kept the city from issuing its arena bonds for several months and led to higher borrowing costs because interest rates rose in the meantime.

Weeks before the arena opens, the subsidy still rankles some Sacramentans. Craig Powell, leader of the Eye on Sacramento watchdog group, acknowledged the debt plan “will probably work.” But he was quick to add, “There is a real risk it won’t.” He has derisively referred to the city’s parking meters as “arena pay stations.”

The financing structure is somewhat complicated. Last fall the city issued $272 million in bonds. About $48 million of the proceeds were deposited in special reserve funds to repay a portion of the debt. Additional millions went for bond expenses.

That left $212 million cash to contribute to the arena project. Along with some land donations and other considerations, the total added up to a $255 million subsidy.

As is typical with a long-term IOU, the city ultimately will pay out far more in interest and principal than it borrowed: a total of $625.6 million by the time the debt is retired in 2050. But with that $48 million already set aside for debt payments, Dangberg said, the true burden facing the city over the next three and a half decades is figuring out how to repay the remaining $577.7 million. That works out to an average of $18.3 million a year.

Dangberg said he’s certain the task can be accomplished. Not only can the city shoulder the debt payments, he said so much money will be flowing into the system that the city won’t even come close to raiding the money – millions of dollars a year – that currently flow into the general fund from parking operations.

Most of the debt repayment will come from the Kings themselves. The team’s lease payments on the arena will come to a minimum of $354 million over the life of the bonds. Along with property tax payments the Kings are expected to make from the arena, the team’s total contribution is expected to hit 61 percent of the sum the city needs to pay bondholders.

The city’s parking operations will have to shoulder nearly a third of the debt, about $193 million, over the life of the loan.

The burden placed on parking revenue will vary over the years. The city has established an additional reserve account, seeded with $6 million in hotel occupancy tax revenue, to help pay debt in the first few years, when the city’s share of revenue from the arena will be at its lowest.

In 2021, the cash flow situation becomes considerably easier. That year, the Kings’ lease payment will jump from $6.5 million to $7.5 million. It will continue growing at a minimum of 3 percent annually.

Also in 2021, an old loan on a city parking garage gets paid off. That will free up $4.2 million a year, a figure that will grow in future years as other debts come off the books. Those “liberated” dollars from the old parking debts will eventually total $131 million, or roughly two-thirds of the $193 million that the city needs from its parking operation to repay the arena debt.

The rest, about $62 million, will have to come from new income generated by the garages and meters over the next 35 years.

That’s a relatively small sum, Dangberg argues, saying the city should have little trouble meeting that threshold.

Why is he so confident? For years the city treated its parking operation as a kind of sleeping giant. Lately it’s been aggressively acting to change that, embarking on a modernization campaign that Dangberg said would have been implemented with or without an arena project to finance.

Millions have been invested in recent years on “smart meters” and other technological upgrades designed to make parking more convenient for motorists – and more profitable for the city.

Also, last year the city raised meter rates 50 cents an hour. Earlier this month free parking in the evening ended; motorists now have to feed downtown meters until 10 p.m. and many midtown meters until 8 p.m. People who park at meters for at least three hours within three blocks of Golden 1 on major event nights will pay a premium flat rate of $18.75. The city is also beginning to install meters in some midtown neighborhoods that previously had free parking.

City officials said their efforts are starting to pay off. In fiscal 2014-15, the parking operation generated a $4.6 million profit on revenue of $31.1 million. In 2015-16, the profit increased to $5.7 million as revenue grew to $34.8 million. In the current fiscal year, which includes the arena’s inaugural year, profit is expected to jump to $9.2 million on revenue of $40.5 million.

That would represent a doubling of profit in just two years. Is the demand there to justify such a projection? Dangberg pointed to the early success of SacPark, the city’s new digital parking reservation system. The system lets motorists reserve spots in advance on arena event nights at several city-owned and private garages within a few blocks of Golden 1.

In SacPark’s first two weeks, when it was available only to Kings season ticket holders, the system pulled in nearly $1 million.

While most of the reservations were made at privately owned garages, Dangberg said, the two-week stretch shows the robustness of the market. All of the reservations were made at just 1,600 different parking spaces. Most nights, the city anticipates 6,500 cars will park downtown for Golden 1 events. That suggests a lot of new money flowing into the city’s coffers.

“We’re confident we’re going to get there,” Dangberg said.

Dale Kasler: 916-321-1066, @dakasler

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