KFC Yum! Center

KFC Yum! Center

Though the University of Louisville men’s basketball team has become the most profitable program in the country — by far — since moving its games to the KFC Yum! Center in 2010, the state agency tasked with managing the debt payments for the bonds used to construct the arena faces serious financial challenges in the coming years, as those payments are set to increase significantly.

The Capital Projects and Bond Oversight Committee in Frankfort addressed this issue in a meeting two weeks ago, voting unanimously to request that state Auditor Mike Harmon examine the finances of the Louisville Arena Authority. Legislators on the committee have expressed concern that the Arena Authority may be headed toward default in the near future if it does not have enough funds to make those debt payments, and some have suggested it should alter its lease with the UofL Athletic Association to steer more of its basketball revenue toward the agency.

While officials with the Louisville Arena Authority have in the past resisted such efforts to renegotiate this lease and dismissed skepticism about its finances, newly appointed board chairman Scott Cox told Insider Louisville that the authority does have “financial challenges moving forward” and has recently spoken with key stakeholders about ways to improve its financial position.

“We have three partners in terms of moving forward with the arena, and it’s the state, the city and the university,” said Cox. “And we’re talking to all three of them about improving the arena’s long-term financial position. It’s important that we strengthen the arena’s financial position.”

Asked what those specific improvements would be — and if the Arena Authority has ever asked UofL or its athletics department to alter the lease — Cox said it was too soon to publicly discuss those details.

“This is a public building, it’s a public institution, and I appreciate the fact that you’re following the story,” said Cox. “But there are some details I can’t get into yet. But moving forward, when I’m able to I will, because I do think it’s important. And for now I’m very comfortable telling you that we’re talking actively with all three of our partners.”

Cox added that while the arena has long-term financial challenges, its short-term financial position is fine. To emphasize that point, he said the revenue the authority received from the arena’s tax increment financing (TIF) district in the 2016 fiscal year was $10.3 million — $2.2 million more than than the previous year and roughly $1 million more than what they had budgeted for the year.

Such TIF revenue originally was projected to make up most of the authority’s debt payments, but the financial collapse in 2008 has led to the total of such revenue amounting to roughly half of what was projected. While the city decreased the size of the TIF district two years ago to increase this revenue and the authority switched the arena’s operator to private company AEG to cut down on costs, the TIF revenue from 2016 is still $4.6 million less than the original projection for that year.

Barring a remarkable leap in TIF revenues over the next four years, there appears to be a great challenge in finding the funds to meet debt payments that leap by over $6 million by 2020, and by another $8 million in the following decade. Louisville Metro Government has had to pitch in the maximum $9.8 million annual payment to the authority in recent years so it could make its debt payment, which is set to increase to $10.8 in future years.

Cox added that another financial difficulty on the horizon for the Arena Authority is the fact that the Kentucky International Convention Center in downtown Louisville is now closed for two years worth of renovations, saying this loss of revenue within the arena’s TIF district “is going to be a challenge.”

Asked if Cox or arena officials have had discussions about its finances with the administration of Louisville Mayor Greg Fischer, mayoral spokesman Chris Poynter said city CFO Daniel Frockt had an initial meeting about this with Arena Authority members a couple of weeks ago, “but the conversation is just beginning. We’re barely at tip off.”

UofL Athletics: We negotiated arena lease in good faith, have not been asked to alter it

UofL Athletic Association spokesman Kenny Klein told IL that he is not aware of Louisville Arena Authority officials ever asking the department to amend its Yum! Center lease — the terms of which have vaulted an already profitable men’s basketball program to well above all other peers.

As IL reported last week, the total revenue of the UofL men’s basketball program leaped from $25.9 million to $40.9 million in the 2011 fiscal year, its first season playing in the Yum! Center. That total reached $45.8 million in 2015 — along with a net income of $29 million — both of which are more than $12 million greater than the second place program.

Source: EADA reports from U.S. Department of Education

Source: EADA reports from U.S. Department of Education

Klein says such net income goes toward its other athletic programs that spend well more than what they generate in revenue, also noting that the basketball team’s “presence at the arena and being the primary tenant is what got (the Yum! Center) built” in the first place.

“When we moved to the KFC Yum! Center it provided more premium seating opportunities in particular, which in turn provided more revenue opportunities,” said Klein. “Our fans and donors are going to support our programs, and that would be wherever we play… So we’ve got great fans and great support, and they’re paying to support our programs.”

Asked if the UofL Athletic Association would be open to altering its lease to allow more revenue to go to the authority’s debt payments, Klein said that would be up to the administration, but “I couldn’t comment on something specifically because I don’t know if anybody has reached out to us about anything.”

Klein added that they have worked with the arena’s management to free up dates for musical acts during basketball season and they have been a great tenant that negotiated its lease in good faith.

“We always try to do our part, and we’ve exceeded all the expectations that were placed on us when all of the financing for the arena was put in place,” said Klein. “I’d say that they would probably consider us a good tenant. You can ask them, but I’d say we’ve done our part there and the agreement we have in place was negotiated in good faith, was discussed and approved in open meetings. So it’s in place and that’s what we’re working with right now.”

State legislators shine light on arena debt and lease to stave off potential disaster

The Capital Projects and Bond Oversight Committee delved into issues surrounding the Louisville Arena Authority last year, voting to ask the Legislative Research Committee to hire an auditor to examine its finances and requesting former Attorney General Jack Conway to issue a formal legal opinion on whether there were conflicts of interest on the authority’s board, as a number of its members had strong ties to UofL. However, the LRC never hired an auditor and Conway punted by issuing an “informal” opinion, stating he could make no ruling on conflicts because none were specified in the committee’s request.

Rep. Chris Harris, D-Pikeville, the co-chair of this committee, told IL that it recently re-examined this issue and lodged a request with the state auditor because of the arena’s financial challenges and the fact that many questions remain unresolved.

“The disparity that we see in the profitability that the university is having in their association with the Arena Authority is really unlike any that I’ve heard of around the country,” said Harris. “So hearing these noises about what’s coming down the road, we don’t want to be in the headlines for having the nicest arena in the state where the university plays defaulting on bonds. So we’re just trying to get out in front of that, find out what’s going on, see if there’s anything we can do to try to stem that problem that seems to be creeping up on us.”

While Harris fears the state may bear some responsibility if the Arena Authority defaults on its debt payments, he adds that his committee can delve into its problems but “doesn’t have the power to go out and force a renegotiation of the lease.”

Rep. Jim Wayne, D-Louisville

Rep. Jim Wayne, D-Louisville

Rep. Jim Wayne, D-Louisville, also sits on the committee and has been one of the largest skeptics of the arena deal dating back to its inception.

“The national studies on arenas are such that you have to really be careful as government entities in making sure they work financially and are not jerry-rigged, so to speak,” said Wayne. “In this case the UofL contract just seems extensively generous, in my opinion. And we want the auditor to look at it and give us his opinion.”

Wayne restated his disappointment with Conway’s legal opinion last year on potential conflicts of interest on the authority’s board, saying he hopes this issue will be re-examined by new Attorney General Andy Beshear.

“It does raise questions on how legal a lease can be if there are so many conflicts of interest,” said Wayne. “And my hope is that once we get the auditor doing an audit, we could reconsider our action in asking the new attorney general to look into the legality of some of these actions.”

Along with Wayne, Sen. Chris McDaniel, R-Taylor Mill, has led the charge in the committee over the past two years to highlight the Arena Authority’s financial challenges. McDaniel told IL he actually spoke to the administration of former UofL President James Ramsey and encouraged them to consider altering its arena lease, “because the fact is they are turing a tremendous operating profit, and it’s at the expense of Louisville and the Arena Authority, who ultimately stand at risk in this deal.”

Ramsey was pressured into retiring this summer, but McDaniel says he plans to formally reach out to acting President Neville Pinto and the UofL Athletic Association in the coming weeks and state his case that renegotiating the lease “would be a prudent step.”

UofL spokesman John Karman has not yet returned an email asking if Pinto has been in discussions with Cox, Arena Authority officials or the athletic department about any potential changes to the arena lease, and if he would be open to such a suggestion.

While the legislative committee is examining whether the state is on the hook for any of the Arena Authority’s bond obligation, McDaniel says if that is not the case the authority should not come to Frankfort looking for a bailout if it can’t come up with enough funds to avoid a default.

“(Kentucky) has got issues with pensions to the tune of billions of dollars a year, with expanding Medicaid costs that will be approaching $350 million a year,” said McDaniel. “I do not view shoring up the Arena Authority or this deal in any way as something that is in the interest of the commonwealth.”

If the state does turn out to be on the hook, McDaniel said that would cause him “to take a little bit different approach,” but he’s not willing to place the arena’s obligations above the state’s public pension crisis and rising Medicaid costs.

The committee is expected to approve its formal request of the state auditor’s office at its meeting on Nov. 15, while the board of the Louisville Arena Authority has its next meeting on the previous day.

The spokeswoman for Gov. Matt Bevin did not return an email seeking comments for this story.