The Ballpark Debt That Keeps on Giving
Last week the local news media was broadcasting what many “crazies” had been predicting for a while now that the ballpark debacle was once again going to cost more. The interest rate the city was initially offering wasn’t enough to entice buyers in the municipal bond market, therefore the city needed to raise the interest rates to entice buyers. This interest adjustment is raising the price tag by another $17 million.
As the discussion raged online, I asked myself, how are revenue bonds floated? So I took a quick online crash course on the bond market. By no means does this make me knowledgeable on the complexities of the bond markets but it gives me a little more information about the process.
I came across a Bloomberg article titled; “In Stadium Building Spree, U.S. Taxpayers Lose $4 Billion” by Aaron Kuriloff and Daniel Preston dated September 5, 2012. Interestingly, the city entered into a lease agreement with MountainStar Sports Group, LLC., shortly after this article was published. MountainStar and the city signed their agreement on October 11, 2012.
The article describes how the Dallas Cowboy’s stadium in Arlington is being paid for by every US taxpayer in the nation. Say what? Every taxpayer in the nation is funding the Dallas Cowboy’s playground?
The article explains how the City of Arlington used “tax-free borrowing” to build the stadium. The “subsidy”, as the article describes it explains that the money does not go directly to Jerry Jones; rather it lowers the cost of financing for building the stadium, thus making the Dallas Cowboys the “highest revenue” generating team in the NFL.
The article goes on to quote Arlington attorney James Runzheimer, who led the opposition against public borrowing for the stadium, as stating that the borrowing is “part of the corruption of the federal tax system”.
In a previous blog post I explained how the deal that the Foster-Hunt horde have in place is a money-making scam because their only major expense is the purchase of the team. After that, all ongoing expenses such as team salaries and equipment are paid for by the team’s affiliate. Now that they have scammed the taxpayers’ of the community they get a stadium built for them make millions more at the expense of the needs of the city..
According to the article, tax exemptions on interest paid by municipal bonds “cost the U.S. Treasury $146 million a year”. The Bloomberg reporters estimate that since 1986, tax “subsidies to bondholders will total $4 billion”. The article adds that this type of financing has been used by 21 NFL teams. This has helped “double the value of sports franchises since 2000”, the article states.
Because of this practice, the article adds that in 1986, Congress tried to “bar cities and states from building stadiums with tax breaks”, because the tax breaks were originally meant for roads and other city infrastructure, not stadiums. The resulting 1986 Tax Reform Act removed stadiums as permissible projects that qualified for the tax subsidy.
This brings us full circle to the El Paso stadium scam.
The city is floating two Special Revenue Bonds; Series 2013 A and B. The Special Revenue Bonds, Series 2013A is for $40,980,000 and the Series 2013B is for $19,820,000. One of my initial questions is why are there two types of bonds?
My very simplistic understanding of the revenue bond market is that under the 1986 Tax Reform Act, the city needed to form an entity, better known as a “conduit” to be able to sell the revenue bonds to build the stadium. The city formed the El Paso Downtown Development Corporation to act as a “conduit” for selling the revenue bonds for a private use that the legislation meant to do away with. Because the legislation put limits on the total amount of tax free bonds that can be issued, the city was forced to issue two versions, the larger one being the tax-free version and the second being the taxable version.
According to my crash-course in municipal revenue bonds the city needs to issue a document called the “Official Statement” when it actually issues the bonds. Because the bonds have not been issued yet there is only a preliminary version of the document available. The document is basically a promissory note detailing how the city expects to repay the bonds.
The latest version I could was able to obtain is the one titled; “Preliminary Official Statement Dated June 27, 2013”. The 220-page documents details the ballpark funding scam.
You only need to read this document once in order to see how convoluted the city needed to make it in order to get the process through. As I read the document I soon understood why the city decided to basically sue itself in order to get a judge to issue a ruling attesting to the city’s right to sell the bonds and that all of the agreements were proper and legal.
The document spells out that the El Paso Downtown Development Corporation (the “conduit” as discussed above) will issue the bonds. The corporation is entering into an agreement between itself and the city of El Paso where it will “enter into the Lease Agreement”, “whereby the Corporation will obtain a leasehold estate” and “immediately sublease the Project back to the City”. “In turn, the City has agreed to lease the Project to the Developer as tenant pursuant to a Ballpark Lease Agreement among the City, the Developer and Mountain Star (sic) Sports Group, LLC.”
Basically, the city has created a company to float the bonds using collateral that the city owns and is leasing to MountainStar Sports Group, LLC. I am sure there are many “technical” reasons why this has to be so convoluted but, to me, it is nothing more than gaming the system to get around restrictions on these types of transactions.
Under the heading “Investor Considerations”, the funding document offers the following.
In regards to the Hotel Occupancy Tax (HOT) rate, the document states that the “Lease Payments largely depend on the occupancy and average daily rates (‘ADRs’) at hotels located within the City”. The document adds that the “aggregate hotel occupancy tax rate of 17.5%” is “one of the highest in the nation”.
The document goes on to detail what the repayment requirements would be under the initial interest rates (3-5%) before last week’s hike. It states that in 2014, the city is obligated to pay $3,184,069 in interest and principal increasing slightly through 2023 when the payments jump to about $4 million a year.
And here is where things get interesting. According to the city’s own projections, the historical analysis of the potential 2% revenues from 2009 through 2012 show that on average $2.4 million will be generated from the HOT taxes. That is at least $700,000 less than needed to pay for the ballpark bonds. I realize that the city has stated that principal and interest payments will also be paid for from lease payment from the ballpark owners. The problem is that there is no cushion to offset potential market distabilizations such as the recent national recession or unforeseen events such as the recent drug war in Cd. Juárez.
What happens if revenues drop? Where will the money come from to pay the annual payments?
The document goes on to point out that the “Federal Bureau of Investigation has begun conducting a criminal investigation of public corruption in El Paso County. Several persons have been indicted and/or pled guilty to charges of bribery and fraud involving votes on government contracts with various local government entities.” The document goes on; “As of the date of this Official Statement, no City official has been indicted, charged, named or otherwise identified in any publicly disclosed information about the investigation”.
I guess former city officials like Larry Medina do not count as requiring disclosure in this document.
And finally there is a major “factor” that the city is relying on to generate the funds needed to pay for the ballpark. Under the Appendix B tab, titled; “City of El Paso, Texas General Demographics and Economic Information”, I found this little nugget of information. Titled; “Cd. Juarez (sic), immediately adjacent to El Paso, is a major factor and attraction in the area.”
It speaks for itself so I will restrain myself from commenting on that item.
Unfortunately the ongoing predictions of future doom and gloom for the taxpayers’ are not as far-fetched as the proponents of the ballpark want you to believe. According to another Bloomberg report on November 23, 2010, titled; “Muni-Bond Issuers May Face Default ‘Crunch’ as Stimulus Ebbs, Lehmann Says”, the projects funded by economic development projects, such as the ballpark, accounted for a “more than a third of the defaults” in 2010.
In an upcoming blog post I will be writing about Chapter 9 and whether it will affect El Paso taxpayers’ if the HOT taxes or the ownership team fails to make the necessary payments.