Soundly defeated in court, three Sacramentans gave up their two-year legal crusade to overturn the city’s subsidy for the new Kings arena Wednesday, enabling the city to move quickly on financing its share of the downtown project.
Two weeks after a Sacramento Superior Court judge emphatically rejected their claims that the city gave the Kings an illegal “secret subsidy” for the arena, the three citizens agreed to dismiss their lawsuit.
The settlement clears the city to contribute its $255 million subsidy to the new Golden 1 Center, 14 months after the City Council approved the deal and nine months after the Kings broke ground at Downtown Plaza.
In return, City Attorney James Sanchez said the city won’t seek to collect its court costs from the three plaintiffs, a neighborhood activist and two retirees. Judge Timothy Frawley ruled the city was eligible to collect those costs, estimated at up to $98,000. The city isn’t eligible to recoup the estimated $2 million it spent on lawyers’ fees.
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City officials say they want to get their money to the Kings as quickly as possible. To that end, they plan to execute a short-term loan with Goldman Sachs & Co. by the end of August. That loan would be converted into a long-term bond offering a few weeks later, probably in September, said City Treasurer Russ Fehr.
“We haven’t been putting up our share and we’re halfway through the construction,” said John Dangberg, assistant city manager. “The plan was for the city to put up the money ... long ago.”
The settlement of the lawsuit is expected to be finalized in court Thursday.
While the city was eager to end the lawsuit, it was clear the plaintiffs were facing an uphill legal battle. While Frawley’s ruling was only a “proposed statement of decision,” and could have been challenged by the plaintiffs, it left little doubt where the judge stood. His 41-page ruling rejected every single claim raised by the plaintiffs and said their case amounted to “nothing more than speculation, based largely on taking statements out of context and assuming facts not in evidence.”
By dropping the case, the plaintiffs have agreed not to challenge Frawley’s proposed decision or appeal to a higher court.
The plaintiffs’ lawyers, Patrick Soluri and Jeffrey Anderson, couldn’t be reached for comment Wednesday.
The Kings started construction on the $507 million arena last October and have spent $216 million so far, according to a city document. Fehr said the project needs the city’s money, and soon.
“The cash-flow needs of the project are so acute, we can’t wait,” Fehr said.
Officials with the Kings declined comment Wednesday.
Settling the case smooths the city’s path considerably. If the plaintiffs hadn’t dropped the case, it would have taken at least two more weeks to complete the short-term Goldman Sachs loan. The city was facing the prospect of then selling the long-term bonds with an appeal pending, which almost certainly would have meant a higher interest rate, Fehr said. “We’d have to pay a premium,” he said.
But because the city is worried about interest rates going up, Fehr said it probably would have swallowed the premium in order to sell the long-term bonds quickly and lock in terms for the next 35 years.
Although municipal bond rates are lower than they were in May 2014, when the City Council approved the financing, they have inched up in recent months. Fehr said the city could have probably saved $1 million a year if it could have sold the arena bonds in February, when other pieces of litigation were resolved and rates were even lower than they are now.
Further increases are likely. The Federal Reserve is expected to hike interest rates in September, said Keith Springer of Springer Financial Advisors in Sacramento. Even an increase as low as a quarter-point “could be a difference of millions” over the life of the bonds, he said.
A document submitted to the City Council in late July, right after Frawley made his ruling, said the city expects to pay $19.3 million in annual debt service. In actuality, Fehr said the debt service could be closer to $18 million to $18.5 million if the city can sell the bonds before the Federal Reserve acts. When the council approved the deal last year, the estimated debt service was $21.9 million a year.
The bond offering represents a mortgage on the city’s parking operations, although about 70 percent of the debt service is expected to come from the Kings through rent and property-tax payments. The remaining 30 percent would be paid through expected increases in city parking revenue.
The city plans to borrow a total of $282 million, although only $212 million of that would be plowed into arena construction. The rest would go for various reserve funds, including a fund to pay the final year’s debt service. City officials said such an arrangement is typical in long-term borrowings.
As for the rest of the $255 million subsidy, the bulk of the $43 million would come from donations of parcels of city-owned land.
In their lawsuit, political activist Isaac Gonzalez and retirees James Cathcart and Julian Camacho said the true value of the city’s subsidy is tens of millions of dollars more. Besides the $255 million, the city gave the Kings control over 3,700 parking spaces at Downtown Plaza and the right to build six digital billboards on city-owned property. The city disclosed the donation but didn’t assign any monetary value to those two assets.
Frawley ruled there was nothing wrong with the arrangement, saying there was no evidence those two assets had significant value to the city. For instance, the city said the parking spaces were worthless because they need millions of dollars in repairs.
The plaintiffs said the Kings sought the additional subsidies to compensate them for overpaying for the team in 2013, when Sacramento was in danger of losing it to Seattle. The judge rejected that claim, too. “The testimony consistently showed that there was no secret subsidy asked for or given,” he said.