Nearly a year after finalizing the deal for the new Sacramento Kings arena, and four months after construction started, the city can’t issue the bonds needed to finance its promised $255 million contribution. City officials say the delay could cost taxpayers millions of dollars because interest rates are almost certain to go up soon.
The holdup is a two-year-old lawsuit by a trio of citizens challenging the public subsidy. City officials say they’re nervous that interest rates will jump before the case is resolved and they’re able to issue the bonds, which would be repaid with revenue from the arena and city parking meters and garages.
A glowing report on the national economy Friday made it even clearer that interest rates will likely rise, perhaps by 1 percentage point later this year. If that happens before Sacramento can sell its arena bonds, City Treasurer Russ Fehr said the debt burden could increase by around $2.5 million a year. That’s roughly $80 million over the three decades it will take to pay off the notes.
“We’d like to get this litigation resolved so that risk can be removed,” said Assistant City Manager John Dangberg. He called it a “sad irony” that the lawsuit accuses the city of wasting taxpayer dollars on the arena. In truth, he said, the three plaintiffs “are exposing the taxpayer to significant cost.”
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Patrick Soluri, one of the lawyers for the plaintiffs, said it’s “disingenuous, to say the least,” for the city to say the pending lawsuit could cost the city money. Halting the “fraudulent and other illegal giveaways of city assets” outweighs the possibility of higher borrowing costs, Soluri said in an email.
He also blamed the city for the delays, saying its attorneys dragged their feet and sought to block the litigation rather than let the case proceed to trial.
The lawsuit, which is scheduled to go to trial June 22, is the last legal hurdle preventing the city from issuing its arena bonds.
Last month the city cleared two other lawsuits off the books: an environmental challenge, which was dismissed by the courts, and an eminent domain fight over a parcel of land at Downtown Plaza needed for the arena. That case was settled.
Construction itself is well underway, heading toward an October 2016 conclusion, with the Kings paying the bills so far. The team said it’s confident the city will be able to deliver on its end of the bargain.
“We believe the lawsuit is frivolous,” said Kings President Chris Granger in an emailed statement. “We trust the courts will agree in short order, and we have no doubt the city will fulfill its obligation and fund on time.”
The Kings broke ground on the $477 million building last October, and steel columns began rising from the concrete this week. The team’s share of the project totals $222 million, and while Granger wouldn’t say how much has been spent so far, a city staff report from a year ago said the Kings would likely spend $75 million in the first few months of construction.
The lawsuit, filed by Sacramentans Isaac Gonzalez, James Cathcart and Julian Camacho, says the city’s contribution represents “a fraud on the public” and a “waste of public funds.” It says the city is giving the Kings a “secret subsidy” worth tens of millions of dollars, making the total contribution, which includes several land parcels and other assets, worth far more than the officially stated $255 million. It also challenges the validity of the bonds themselves, which can only be issued if the project delivers significant benefits to the public.
While the case sits in Sacramento Superior Court, the clock is ticking on interest rates. The national economy is improving, and inflation looms as a possible threat. Financial experts are nearly unanimous in agreement that the Federal Reserve will start hiking interest rates, possibly as early as June. The latest national employment statistics released Friday, showing a whopping 295,000 jobs were created in February, removed any lingering doubt that the Fed will act in order to keep the economy from overheating.
Jennifer Vail, an interest-rate expert at Minneapolis-based U.S. Bank, said she believes rates will rise between 0.75 percent to 1 percent by year’s end. Sung Won Sohn, an economist at California State University’s Channel Islands campus, said bond rates are already starting to creep up as the economy improves and the market anticipates the Federal Reserve’s actions.
Sohn, however, said it’s very unlikely the rates will go up in one fell swoop. “I don’t think it will go up very fast,” he said.
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City officials acknowledge that predicting movements in interest rates is nearly impossible. Dangberg said the higher cost could be “some number between zero and $200 million” over the life of the bonds, which will be paid off over 30-plus years.
“There is risk, and that’s what we’re talking about,” the assistant city manager said.
Technically, the city could issue the bonds right now. But as a practical matter, Fehr said the lawsuit creates a legal cloud that would make the bonds unmarketable.
“Investors won’t buy, nor will bankers help us sell bonds when there are outstanding legal issues,” the city treasurer said. “It stymies our access to a real attractive market.”
Another factor: Even if the city wins, Gonzalez, Cathcart and Camacho could file an appeal, keeping the litigation alive for several more months. In that case, the city might implement some sort of interim financing to get cash in the door before it proceeds with the bond sale.
City officials have raised the possibility of settling the case before trial in order to expedite the bond offering. At a City Council budget workshop in late February, City Attorney James Sanchez said “we are in the process of trying to maintain some open dialogue” with the three citizens’ lawyers.
Dangberg wouldn’t discuss the possibility of a settlement.
Soluri said his clients “are generally receptive to settlement,” but only if it includes significant revisions to the arena subsidy. He wouldn’t say if any settlement talks have taken place.
Gonzalez and his fellow plaintiffs filed their lawsuit May 14, 2013, just as the drama over the Kings’ future in Sacramento was building to a climax. The very next day, NBA owners voted to block the proposed relocation of the Kings to Seattle, where a group of investors had made a deal to buy the team. With the road to Seattle cut off, the Kings were sold to a second group, led by Vivek Ranadive, which proposed building the Kings a new arena at Downtown Plaza to replace aging Sleep Train Arena.
Up until that point, the city had made only a tentative agreement on an arena subsidy. A bare-bones “term sheet” approved by the City Council called for a $258 million subsidy.
A year later, in May 2014, the council OK’d the definitive deal, with some revisions to the earlier agreement: The city would contribute $255 million of the $477 million cost. The city is donating several land parcels around the city to the Kings, as well as other considerations. The bulk of the city’s arena contribution, $212 million, is a cash subsidy financed by borrowing against future parking revenue.
At the time it was voting on the definitive deal, the council was told the city could expect to pay 6.7 percent on the bonds. The city would be on the hook for $21.9 million a year in debt repayment, or a total of roughly $700 million by the time the bonds matured. The borrowing was originally conceived as a 36-year note, although Fehr said the term could be shortened somewhat. Lease payments from the Kings, plus anticipated growth in parking revenue, is expected to generate most of the revenue the city needs for repayment.
In the 10 months since the council voted, interest rates have fallen to the point that Fehr said the city could borrow for as little as 5 percent – if the bond offering were held today. That would yield savings of roughly $180 million over the life of the bonds, Fehr said. At least some of those savings, perhaps millions worth, would vanish if rates jump back up before the bonds are sold.
Fehr said the savings would provide extra cushion for the bonds, further reducing the risk to the city’s general fund from the arena financing. The extra cash would also improve the city’s overall “debt profile,” making it easier to undertake other borrowings, Fehr said. The city has been studying whether to replace the Community Center Theater, for instance, a project that would likely cost more than $100 million.
The arena-bond savings could be plowed into “other great and big projects,” Dangberg said. “If we can take advantage of this, that’s funding that’s available.”