The yearlong effort to refinance the construction bond debt of the KFC Yum! Center and avoid a looming default took another key step forward on Thursday, as the Metro Council Budget Committee advanced an ordinance to increase the city’s financial obligation to the Louisville Arena Authority in the hopes that its officials can refinance with investment grade credit.
Arena authority chairman Scott C. Cox sounded the alarm last year that arena was headed toward default in 2020 due to ballooning debt service payments kicking in at that time, as the original projections for how much revenue the arena would pull in from its Tax Increment Financing (TIF) district turned out to be greatly inflated. Cox then initiated efforts for the state, city and University of Louisville — the anchor tenant of the arena — to each increase their financial commitment to the arena in order to refinance the debt and avoid an embarrassing default for the state-of-the-art arena that has transformed downtown Louisville since 2010.
The Kentucky General Assembly passed legislation early this year extending the life of the TIF district and lifting the $265 million cap on tax revenue that could go toward the arena, and last month the boards of both UofL and the UofL Athletic Association approved a measure to pitch in an extra $2.42 million annually to the arena. By passing the ordinance by a 10-0 vote Thursday evening, the budget committee has sent the city’s formal attempt to pitch in to the full council for final passage at their meeting next week.
While the city had originally pledged to contribute a minimum of $6.5 million to $7.2 million and a maximum of $9.8 million to $10.8 million annually to the arena though 2039, the ordinance would commit the city to pay $10.8 million each year until the bond debt is fully paid off and retired, or until 2054. While Cox is confident that the refinanced bond debt could be retired long before 2054 — thus, ultimately saving the city, state and UofL money, in addition to avoiding default — another hypothetical dramatic downturn in the economy and TIF revenue could push payments back to this date, at a great cost to the city.
Metro Government CFO Daniel Frockt addressed the committee on Thursday and said that the ordinance — partly negotiated by the administration of Greg Fischer, as directed by a Metro Council resolution last year — “will place the arena on sound financial footing.” He added that the city is not alone in making a sacrifice, citing the previous agreements by the state and UofL that ensured they too were “full financial contributors to the arena.”
Frockt said that under the ordinance the city’s total payments to the arena through 2039 would be $7 million higher than if the city paid the maximum amount to the arena each year under the current agreement. However, Councilman Bill Hollander, D-9, noted that originally the city had only agreed to pay the maximum annual amount if the arena did not have enough revenue to make its debt payment, and that this actually served as a $80 million increase in the minimum payment by the city to the arena through the original term of 2039.
While Frockt added that the city could be committed to payments until 2054 if the debt is not retired by that time, he expressed confidence that the debt would likely be paid by 2036 to 2040 if the TIF revenue of the arena met new conservative projections for the growth of sales tax (2.5 percent) and property taxes (1 percent) in the district. He said that sales tax revenue grew by 8.7 percent, 3.4 percent and 9.8 percent in the years 2013 through 2015, and despite the closure of the downtown convention center for the next two years as it is being renovated, the new assumptions for TIF revenue in those two years is only 1 percent growth.
Cox then took questions from the council members, expressing confidence that the arena authority would be able to refinance the bonds by the end of the year if the council passed the ordinance, and there would be “a decent shot” at receiving investment-grade credit for the bonds that currently have “junk” status.
“We think if interest rates stay pretty much where they are – and they’ve been flat for a pretty long time now – and if you all will adopt this ordinance, we think we have a pretty good chance of getting investment-grade credit,” said Cox.
While Councilman Hollander noted there was “skepticism in the community” about the ability of the arena to meet the currently scheduled payments set to start ballooning in 2020, he and Cox both stated that the amounts of these payments would now “level out” once the debt is refinanced, though these exact annual payment figures will not be known until this refinancing happens.
Cox added that though the original TIF revenue projections for the arena district were a bust — currently amounting to totals about four years behind those projections — he said, “we all should be really bullish on the TIF” revenue growth now, citing the figures stated earlier by Frockt and the construction that will soon be completed on the new convention center and hotels in this downtown district.
“When these new hotels open up — and restaurants and bars and so forth — we get 85 percent of any increases in sales tax and property tax,” said Cox. “So, this should go up relatively quickly. It might be flat this coming year because the convention center has been closed, but the convention center is going to be amazing. I think it’s already booked for many, many months in the future, and that just drives the TIF.”
After the meeting, Cox again expressed confidence to IL that the arena authority would be able to refinance the bonds on the market before the end of this year if the council approves this ordinance, though investment-grade credit cannot be promised at this point.
“I’m not promising that we’ll get investment grade, because that’s a lot out of my control,” said Cox. “But I think I we’re in a strong position to get that, and certainly every investment banker that we’ve talked to believes that we can get these bonds issued this year.”
Cox added that this investment advice came from the merged Bank of American and Merrill Lynch, and their co-lead Siebert Cisneros Shank & Co., which “both believe that we can get these bonds issued this year.”
He also expressed confidence that the refinanced bonds would be able to be retired before 2054, reaffirming his belief that TIF revenue “really should take off” once the new hotels and convention center open, whether that happens in two years or five years.
“That’s possible,” said Cox. “Do I think we’ll pay it off really quickly? No. Do I think we have an excellent opportunity to pay it off faster than 30 years? Yes.”
Cox acknowledged that in a hypothetical worst-case scenario of economic downturn and poor TIF revenue, the city would have to continue paying $10.8 million every year until 2054 — amounting to $162 million past 2039 — but said, “I don’t think that will happen.”
“If you look at the historical performance of the TIF, it’s gone great,” said Cox. “And you can’t underestimate the value of the council’s contribution, because they’re a AAA-rated municipality. It’s worth so much more to the companies that rate our bond. So their firm commitment – if they pass this – for $10.8 million for the length of the bonds is just invaluable.”
The resolution is scheduled to be voted on for final approval by the full Metro Council at its meeting next Thursday.