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Sunday, September 05, 2004

A bit of honesty on the stadium mess...just a bit, though

Today's Arlington version of the Fort Worth Star-Telegram: front page of the Arlington section - headline "Cowboys could ask Arlington to issue bonds." It's about time they mentioned this, Heavy Lifting mentioned this on August 19 (more than two weeks ago) here.

Today's "story" has three points to it:

a) The Cowboys can "ask" the city sports authority to float municipal bonds that the team would "pay" back. The team and the city would negotiate the length of term and the revenue streams to pay back the bonds.

It is a little more scary than that according to the master agreement as it is outlined at the moment (see section 2.8.(d)). The Cowboys would probably receive a $125m loan from the NFL and then ultimately can ask for the balance of the team's so-called 50% commitment, i.e., $200 million, to be funded through municipal bonds. While it is true that the city could say 'No' I doubt that would happen. The city can't seem to say NO at the momement to anything Jerry Jones suggests, regardless of how financially damaging it might prove to the City.

What the master agreement really states is that Jerry Jones might not have to PROVIDE ANY UP FRONT MONEY OF HIS OWN FOR THE STADIUM!!!

Current muni-bonds are costing about 4-5% per year. Current corporate bonds are costing 7-9% per year. Granted the muni bonds are tax free (although I am not sure that this is the case for the particular stadium bonds that would be issued), and therefore carry a little lower interest rate, but the bonds are essentially a low-interest loan to the Cowboys. I wish Arlington had done something like this when I first bought my house - at 8.375% interest - it would have saved me a bunch of money before and after my refinancing.

b) There is no risk to the city if the team does not pay off the bonds because there will be a trustee that will receive money from the team and pay off the bonds.

This again is not completely true. While the city will set up a separate sports authority with the power to float bonds for the stadium, the sports authority is ultimately on the hook for those bonds. While the team may or may not pay off - and it would probably be bad business for Jones not to try to pay off his portion of the debt - there is substantial risk for Arlington as a whole.

In the end, whichever entity floats the bonds has the responsibility of paying it back. Much like if you were a co-signer with your best friend on a loan that your friend promised to pay back. Ultimately, you as a cosigner are on the hook for the debt service if your best friend finks out on you.

If the Cowboys do not or cannot pay back their portion of the debt, which seems likely as the master agreement only requires the Cowboys to pay off the bonds with ticket sales taxes (up to 10%) and the $3 per vehicle parking tax. Let's do some quick math - $200m in muni-bonds at 5% interest will require $1.073m per month in principal and interest or $12.88m per year. If the Cowboys sell out all ten regular and pre-season games at an average ticket price of $65 dollars and collect the full 10% ticket tax, this would yield (75,000x10x$65x0.10 =) $4.875m dollars per year. If the Cowboys sell 15,000 parking spots per game this would yield another (15,000x10x3=) $450,000 per year. Therefore, the Cowboys would have approximately $5.2m to help pay off the bonds that the Arlington Sports Authority floated for Jerry Jones.

Where does the other $7.5m come from? The Cowboys are not required to pay anything more than the revenue generated from ticket sales and parking. Perhaps there will be some other events in the stadium during the year, but I sincerely doubt it. For one thing, the natural turf can cost up to $4m per year to maintain - something tells me that letting High School football players or monster tractor pulls tear up the turf is not going to be high on the priority list of Cowboys management.

The sports authority either has to come up with additional revenue to pay of the bonds, refinance the bonds, float additional debt to build up a cash reserve with which to service the debt, or default. Defaulting and refinancing are not good options. Floating more debt was the answer in Houston, which is having trouble paying off its bonds for Reliant and Minute Maid Park (plus the basketball arena).

The upshot: the city of Arlington, one way or another - either through higher interest rates on other debt, by going into further debt, or by extending the existing debt service (which includes three sales tax increases) - the city will have to pay if the Cowboys ticket and parking taxes don't generate enough revenue.

c) The additional Cowboys bonds would not impact the city's bond rating.

Again, perhaps not directly. But if the city of Arlington wants to float general purpose debt, the debt rating services will surely recognize that, if the stadium is built, there would be three bond-granting entities in the city: The stadium authority, Arlington Independent School District, and the city of Arlington. All three of these entitites are competing for a portion of a limited pot of tax revenue - be it sales or property tax. If the stadium authority has a definite claim on 1/2 penny of sales tax revenue for the next thirty years, is it conceivable that Moody's and S&P and Fitch, the three big bond rating agencies, would not consider these long-term limitations on the city of Arlington to raise tax revenue to service additional debt?

Of course these agencies would take into consideration the limited ability not only for the city to service debt but for the AISD to do so as well - which will make future public debt more expensive.

This is for a number of reasons. Arlington voters must recognize that there are only two major sources of revenue for the city government: sales taxes and property taxes. The city gets a one percent sales tax and has to share total property taxes with the local school district, the county, and the Tarrant county community college - all of which have millage rates that can and have been increasing.

The increase in sales tax of 1/2 penny takes, in a static calculation, $19m in sales tax revenue out of the city's potential revenue stream, as the city is not collecting the revenue at the moment. This will push some marginal firms out of business, thereby reducing economic activity in Arlington, some people will practice tax avoidance, either by shopping online or out of the city of Arlington. Therefore, the amount of potential tax revenue lost to the cit of Arlington is substantial.

Over the next thirty years, there will be no decline in the demand for services in Arlington, so where does the additional money the city will require come from? The city is already in deficit approximately $16m and therefore it seems that services will have to be cut or taxes will have to increase. Tax increases are going to happen whether it is to build new fire houses or to service stadium bonds. Which use of tax dollars is more appropriate and has the greater potential public benefit?

A painful fact must be recognized: there is only a limited amount of possible tax revenue to be had in Arlington before substantial behavioral changes will be observed, i.e., population moving out of the city, retail activity dropping substantially, etc. The only reason Arlington is in the running for a stadium is that the city council has not, in the past, raised the local sales tax to the state maximum.

Talk about perverse incentives to tax the hell out of the local population. If you don't tax us for wasteful government spending that might actually have an impact on our lives, e.g., cop cars and fire trucks, then you will tax us to spend the money on something that has a much more nebulous and likely negligible effect on our lives - a new stadium.

It is nice that the paper provided some information to the voting public, much of which will not bother to read the fine print in the master agreement. Unfortunately, the source for the "answers" about giving the Cowboys a low interest loan was the city of Arlington. While I am not an expert of public debt and public economics, it would seem that simple economic analysis indicates the following: more debt-floating agencies competing over the same or slightly growing pot of money will reduce the amount of money available to one or more of the agencies.

Unfortunately, the paper makes the corporate welfare seem innocuous.

I ask again, why didn't the city of Arlington offer to float $100k in munipal bonds so that I could have bought my house in 2000 at below market rates? Is it only because I didn't ask? I would have promised to pay the bonds back - heck, I am good for it.

Oh yeah...city governments don't normally get involved with private investment and consumption decisions, especially in financing them, unless the decision involves a stadium.

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