Joseph Krist
Municipal Credit Consultant
ARENA DRAMA IN ARIZONA TAKES ANOTHER TURN
The season on ice may have finally ended this week, but the action continues off it foe NHL fans. The Arizona Coyotes’ tortured relationship with the city of Glendale took a negative turn last week when the City Council voted to terminate its lease agreement with the team at Gila River Arena. In 2013, the city agreed to pay IceArizona, the team’s ownership group, $15 million a year for 15 years to run the building in return for a share of the naming rights and other revenue.
Bond investors care because there is some $230 million of outstanding debt issued to finance the arena. Action by the Council to void its operating agreement could put into doubt the continued viability of the debt financing. Here is some background.
At the time of the lease agreement, the mayor and some council members opposed it before it was signed, and new council members have since been elected. The city has not released the results of an annual audit of the arena for the 2013-14 fiscal year. It has been reported in the local press that the city’s assistant auditor resigned in April because some of her findings were changed.
The council voted, 4-3, last week to end the agreement citing a state statute that allows an agency to cancel a contract if an employee directly involved with the agreement becomes an employee or agent to the other party. The Coyotes hired the former city attorney as general counsel in 2013. In November 2013, an ethics complaint with the State Bar of Arizona that the attorney went to work for the Coyotes in 2013 while still being paid a severance by Glendale.
Before the meeting, the City Council announced that the city would consider amending the deal if it “provides certainty and fairness to both parties, especially the taxpayers.” IceArizona responded that the meeting was a “blatant attempt to renege on a valid contract that was negotiated fairly and in good faith.” After the council voted to dissolve the deal the team’s chief executive and president, said the city had violated its obligations under the agreement. The N.H.L. said before the meeting that it was “extremely disappointing that the city of Glendale would do anything that might damage the club.” The league said it expected the Coyotes to continue playing at Gila River Arena.
In 2009, the prior owner of the team put the franchise into bankruptcy. The league took over the team for several years before finding new owners. The Coyotes average of 13,345 fans a game is the third-lowest in the N.H.L. The agenda posted for the Council meeting cited a state statute that allows government entities to end a contract within three years of being signed if a person involved in negotiating the contract for the city is, in effect, an employee or agent of the other party to the contract. The attorney relinquished his duties with the city when his separation agreement went into effect April 1, 2013, three months before the City Council approved a 15-year agreement with the Coyotes. He was paid his full salary through September 2013.
Glendale has still not released its audit of the Coyotes 2013-14 season a year after it notified the team that it would exercise its option to evaluate the team’s financial results. The Coyotes blamed a delay in providing information to the city on the ownership change at the end of 2014, when Barroway became the majority owner. Glendale’s losses for hockey and concerts at Gila River Arena through April were $6.3 million, or nearly 14 percent from a year earlier.
After the announcement, a Maricopa County Superior Court judge granted the team’s request for a temporary injunction to keep Glendale from killing their arena deal. Attorneys for the Coyotes filed legal claims against Glendale over the team’s lease agreement for Gila River Arena, and lawyers appeared in court Friday afternoon for a hearing about a temporary restraining order. Superior Court Judge Dawn Bergin granted the motion for a temporary injunction and set another hearing on the dispute for June 29. The next move will be when the Glendale City Council meets in executive session and decides whether to send the team a letter confirming its vote to sever the agreement.
IDEOLOGY WINS AND LOSES IN BUDGET OUTCOMES
Tax ideology has had a big influence on state budget policies in recent years. The drive to limit revenues stemming from supporters of the ideology that the only way to control government is to “starve the beast” has had great currency in recent years. This year however, the ability of that ideology to stand the pressure of service demands from constituents has tested the staying power of that ideology. The recent outcomes of budget battles in two states provided two different answers to that test.
In Kansas, it took 113 days to complete this year’s budget session, the longest ever, and more than three weeks longer than the mandated 90 days. Much of the delay was due to debate over taxes after lawmakers passed about $3.8 billion worth of tax cuts in 2012 and 2013. Democrats and moderate Republicans have cited the cuts for the budget shortfalls that have since arisen, while conservatives cite unforeseen cost drivers out of their control like Medicaid growth.
Many acknowledged that the only way to close the gap now was through tax increases. Eventually, they voted to slow the pace of income tax decreases, raised sales taxes and increased the cigarette tax by 50 cents a pack, among other measures. But overcoming the gridlock to reach that deal required long legislative sessions stretching into the early morning. Thursday morning the House failed to pass a Senate plan that leaders were optimistic would pass. Legislative leaders and Gov. Brownback issued several threats about what could happen if a tax bill was not passed — for instance, cutting all state funding for public universities and colleges.
Eventually, a tax plan was spread over two bills and the first passed at 1:51 a.m. Friday with exactly the 63 votes needed to pass. The second vote opened at 2:24. On that item the initial count was only 59 yes votes. After two hours of effort the necessary votes in the House were obtained. Later Friday, the Senate got exactly the 21 votes it needed to send the bill to the governor’s desk.
In Louisiana, the result was much less straightforward. The $24.5 billion budget passed last week contains so many short-term fixes that next year’s governor and Legislature will inherit a budget deficit of an estimated $1 billion, documents show, and the size of the deficit is only projected to grow in the following years. All four candidates for governor — U.S. Sen. David Vitter, Lt. Gov. Jay Dardenne, Public Service Commissioner Scott Angelle and state Rep. John Bel Edwards, the only Democrat — have said that if elected, they would hold a special legislative session shortly after taking in office in January devoted to finding a long-term solution to the budget problems that Jindal and the outgoing Legislature are leaving behind.
They balanced revenue with spending during the current budget year by continuing to raid the state’s trust funds and resorting to what most analysts would consider to be gimmicks, including a tax amnesty program that provided only a short-term windfall. In all, the budget passed by legislators in 2014 and signed into law by Jindal contained a record $1.2 billion in one-time money, that is, money that wouldn’t be available in 2015.
After oil prices dropped late last year, legislators and Gov. Jindal had to close a $1.6 billion budget deficit when this year’s session began April 13. After seven years of cutting taxes, Jindal and the Legislature moved in the opposite direction in 2015 and sought to raise new revenue. Legislators chose instead to shave 25 percent of the rebates that companies get from the state when they pay inventory taxes to local governments, increased the cigarette tax by 50 cents to a new rate of 86 cents per pack, limited a number of business breaks and the amount of subsidies for the solar energy and film and television industries.
Adding in a $50 increase in the vehicle title fee to $68.50, the state will raise about $750 million in new money next year. The Governor, in keeping with his presidential ambitions, is claiming it is not a net tax increase following passage of the SAVE fund. Under this measure, no students will pay a higher fee, no one will pay lower taxes and higher education institutions will get no extra money.
But the tax credit included in the plan allows the Governor to claim that it offsets all of the new tax revenue, under rules promulgated by Americans for Tax Reform, a national anti-tax organization headed by the noted anti-tax activist Grover Norquist. A June 9 report by the Legislative Fiscal Office several days before the budget was approved said that it included $509 million in one-time money — by drawing down more money from trust funds, from the final year of the tax amnesty program and through a one-year plan to reimpose a one-cent sales tax on businesses’ utility bills. Legislators got $7 million for next year only by suspending the program that allows filmmakers to sell their tax credits back to the state for 85 cents on the dollar.
The Legislature found another $73 million in trust funds for the budget. Of that amount, $20 million would come from unclaimed lottery winnings and another $25 million from the state’s Medicaid Assistance Trust Fund. The problem is that the fund has a $1.3 million balance, according to the state treasury’s office, and it last had at least $25 million three years ago. The Department of Health and Hospitals plans to replenish the fund in the upcoming fiscal year through provider fees to make the $25 million available for spending.
The net result is no real improvement in the state’s already weak budget outlook. This in turn maintains downward pressure on Louisiana’s already weak general obligation debt ratings.
GREAT LAKES WATER AUTHORITY MOVES AHEAD
Last week, the new Great Lakes Water Authority signed a lease for Detroit’s water and sewer system, two days before a deadline. This is the first in a number of steps that the Authority must take by Jan. 1, 2016, or the leases terminate and the authority could be dissolved. These steps include getting customer communities to agree to assign their Detroit Water and Sewerage Department contracts to the authority. It also must reach an agreement with the city and Detroit General Retirement System to manage its pension obligations to the retirement system, which is now frozen.
As far as the system’s debt is concerned, the authority must get at least 51% of bondholders to agree to the transfer of the water system assets and bond obligations from DWSD to the new authority. In addition, it must persuade the bond rating agencies to confirm ratings on the bonds it is assuming from the Detroit Water and Sewerage Department that are at least as high as the current ratings. This anticipates the adoption of a bond ordinance that basically mirrors the current bond ordinance of DWSD and the receipt of legal opinions on the validity and enforceability of the lease agreement as it relates to tax treatment of bonds.
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