(Editor’s note: This posted was updated at 4 p.m. on December 24 with comment from State Sen. Chris Daniel.)
For three years, Louisville Arena Authority officials have portrayed the KFC Yum! Center as a financial success.
And for those same three years, Wall Street bond rating agencies have issued regular debt downgrades, stating their concerns about whether the special taxing district dedicated to paying for the arena can ever reach the lofty projections made back when the bonds were placed.
Now, one state lawmaker is probing what’s really going on with the arena, trying to get the facts about whether the Arena Authority can keep meeting debt servicing obligations on $348 million in arena bonds.
Rep. Jim Wayne, D-Louisville, said he’s monitoring what’s going on with arena finances, with an eye toward future options in a worst-case scenario.
Wayne, 35th House District, said he and Sen. Chris McDaniel, a Kenton County Republican, have interviewed former Arena Authority Chairman Jim Host and current State Fair Board CEO Clifford “Rip” Rippetoe as they gather information.
They’re not only looking at the financing mechanisms, but exploring ideas for future fixes on the way to possibly calling for an audit by Adam Edelen, Kentucky Auditor of the Public Accounts.
A Democrat whose district bisects central Jefferson County from the Highlands to the Jefferson/Bullitt county lines, Wayne is a member of the Capital Projects and Bond Oversight Committee, as is Daniel.
The question, Wayne said, is whether the auditor has standing because it’s not clear if the arena authority and the arena itself are in the private sector, or part of the state. Wayne emphasized his committee has not spoken with Edelen, and he and his personal staff are still gathering information.
That information is not encouraging.
State officials might have to face the fact that bond servicing mechanisms for the arena were flawed from the beginning, and lawmakers and the public might need to start thinking differently about the arena, Wayne said.
The tax increment financing district concept that’s an increasingly popular way to fund public projects is “a bit of an illusion.” The whole idea of a TIF basically is a way of getting state money into a project in a way that’s palatable to tax payers, he said.
The concept is that a new public project such as an arena stimulates the area around it. The TIF mechanism takes the increases in sales and property taxes that would otherwise go to the General Fund and dedicates them back to the project in a virtuous funding circle.
Looking at the Yum! Center as “an investment that will stimulate the economy,” Wayne said, is much more honest than maintaining it will pay for itself.
Evidence is strong that the KFC Yum! Center was never going to pay for itself. “I don’t know of any arena anywhere that’s in the black,” Wayne said.
McDaniel said ultimately the question is, would an arena authority default ultimately require the Commonwealth coming up with additional money: “At the end of the day, could this impact the General Fund?”
With the KFC Yum! Center TIF, two problems arose immediately. First, the Great Recession changed the national financial landscape, discouraging significant investments in the TIF. Then, a major business in the arena TIF, Boland Maloney Lumber, closed downtown in 2010 just as the arena opened.
Wayne added that the arena authority may ultimately have to go to the general assembly to ask for money via a line item in the biennial budget to stabilize arena finances.
Wayne is focusing on the following arena elements:
• The TIF district for the arena:
Wayne said he is trying to determine if retroactive, unilateral arena authority moves — such as paring down the district to 2 square miles from 6 square miles and replacing the bond trustee — are legal. Alex Rorke, a financial consultant to the arena authority, told Insider Louisville that Birmingham, Ala.-based Regions Bank is in place as the new bond trustee, replacing U.S. Bank, based in Minneapolis.
Rorke, senior managing director at Hilliard Lyons, the Louisville-based brokerage and financial services firm, said he expects the Kentucky Economic Development Finance Authority, or KEDFA, will “in the next few days” sign off on shrinking the TIF area.
Wayne said the Capital Projects and Bond Oversight Committee is trying to determine if the arena authority has violated the bond covenant with these moves.
The total with the smaller TIF would be $5.6 million, according to state insiders. The actual amount of tax revenue generated by the 6-square-mile TIF is closer to $4.2 million.
The total due to bondholders for 2013 will be $21 million.
• The “sweetheart” deal between the arena authority and its putative “tenant,” the University of Louisville Athletic Association, which gets 88 percent of revenue from U of L basketball games:
U of L’s deal with the arena authority “is the most lucrative contract in the NCAA,” Wayne said. According to a 2012 Forbes Magazine Article, U of L’s mens basketball program supplanted the University of North Carolina as the most valuable college basketball team in the United States, with the team generating about $20 million for the University of Louisville Athletic Association.
• The disputed payment to the Kentucky State Fair Board the arena authority may be required to make next year:
Earlier this year, the general assembly nullified the Fair Board’s forgiveness of about $5 million owed by the arena authority due to concert revenue the KFC Yum! Center took from the Kentucky State Fair and Exposition Center.
If the arena authority ultimately has to pay that $5 million, it will make it unlikely it can service the KFC Yum! Center debt, Wayne said.
Wayne said he wants the arena to succeed. “We all want this to succeed,” he said. “There should be no pointing of fingers or assigning blame.”
But the situation is complicated, with multiple players including the Louisville Metro Council, the Beshear Administration, the bond rating agencies and various consultants, he said.
“There are a lot of players. I am assuming everyone is working in the best interests of the taxpayers.”