Three Metro Council members filed an ordinance Thursday that would increase the city’s minimum financial obligation to the Louisville Arena Authority by up to $80 million over the next 22 years, provided the University of Louisville Athletic Association alters its lease at the KFC Yum! Center to direct more revenue toward the financially challenged arena‘s rising debt payments.
As part of the original financial agreement to pay for the construction bonds of the Yum! Center, in 2007 Metro Government pledged to pay a minimum of $206 million over 30 years to the Louisville Arena Authority, consisting of annual payments between $6.5 and $7.2 million starting in 2010. If the authority ever had an insufficient amount of funds to meet its bond debt payments in any given year, the agreement stated the city would chip in a maximum payment of $9.8 to $10.8 million — which, if occurring every year, would total $309 million.
However, the tax increment financing (TIF) district created for the arena that was intended to provide the bulk of the $839 million in debt payments has woefully underperformed by roughly half its original estimates, forcing the city to pay the maximum amount to the authority each year so far in order to prevent a default. With the authority’s annual debt payments scheduled to increase dramatically in the near future, a state legislative committee in Frankfort has requested that state Auditor Mike Harmon examine its finances.
Additionally, several members of this committee have suggested the authority should alter the lease of its anchor tenant, the UofL Athletic Association, saying its conditions are too favorable to the university and not enough revenue from its events go toward debt payments. As IL recently reported, while the authority is in a financially perilous position, the UofL men’s basketball team has become the most profitable NCAA basketball program in the country by a large margin since moving to the Yum! Center.
Though past leadership of the arena authority’s board has dismissed skepticism about its finances and suggestions to alter UofL’s lease, new chairman Scott C. Cox recently acknowledged the arena’s long-term financial challenges, saying he has begun discussions with city, state and UofL officials about possible solutions.
The ordinance filed Thursday — sponsored by council members Marianne Butler, D-15, Kelly Downard, R-16, and Angela Leet, R-7 — appears to be an attempt at such a solution, involving the city and state governments, the arena authority and UofL.
If approved, the ordinance would guarantee that Metro Government pays the maximum annual amount to the arena authority regardless of its ability to meet the debt payment, provided that certain conditions are first met. The first of these conditions is that “the Arena Authority and the University of Louisville or the University of Louisville Athletic Association, Inc. enter into a new lease agreement with terms and conditions that require the University of Louisville or University of Louisville Athletic Association, Inc. to contribute more money, funds, or receipts toward the retirement of debt.” It adds that “in the discretion of the Mayor” this increase in funds for the arena’s debt payments “is sufficient to assist in the retirement of debt.”
Another condition — that state government amend the termination date of the arena’s TIF district — is a suggestion Cox raised after the authority’s board meeting on Monday. Cox stated then that he wanted the TIF extended for 10 years, to match the 30-year maturity period of the bond. The ordinance also states that Frankfort must “correspondingly increase the released amount and cap of the TIF.”
Other conditions in the proposed ordinance include:
- The mayor of Louisville receives an opinion from bond counsel that entering into the amended agreement is permitted under the Arena Bond Trust Indenture and will not adversely affect the arena bonds, including the tax exempt status.
- Metro Council and the arena authority pass resolutions requesting the Kentucky Economic Development Finance Authority to issue refunding or advanced refunding bonds to retire the current arena bonds and such refinancing appears to be
- The bond insurer consents in writing to the amendment.
If all parties agree to and implement these conditions, the city’s minimum required payments to the arena authority through 2039 would surpass $240 million — which is $80.2 million more than it would be under the current agreement if the city was only obligated to pay the minimum amount each year.
The original agreement between the city and the arena authority clearly implied it was not expected to pay the maximum amount each year. It stated in the event that for two consecutive years Metro Government was required to pay above the minimum amount, the city could mandate that the authority hire “an independent public accounting firm of national reputation in the field of arena operations… to examine the revenues and operating expenses of the Arena Authority and to file a report with recommendations as to actions which may be taken by the Arena Authority to increase net revenues available to pay debt service.”
Despite the fact that the city has kicked in the maximum payment to the arena authority each year, Mayor Greg Fischer has never requested such an audit. Gov. Matt Bevin announced last week that he believes UofL’s lease should be altered, as it is too favorable to its athletics department.
Cox of the arena authority told IL that they are “very appreciative of the city taking the lead in the process” by drafting the ordinance, as all three of the arena’s partners — the city, state and university — must play an important part in the solution.
“From the first time that we met with the mayor and the Metro Council, they agreed that they would help us in any way they could, but they wanted all three of the arena’s partners to assist,” said Cox. “So this proposed ordinance just basically makes that pretty plain, that it needs to be kind of a universal fix to the issue.”
Asked if his talks with UofL have been as fruitful as those with the city, Cox replied “we’re hustling.”
“There are a lot of moving parts to this, as you might imagine,” said Cox. “But we’re working super hard on it, and we’re hopeful.”
Cox had mentioned on Monday that a supermajority of the Kentucky General Assembly would be needed to alter the arena’s TIF in next year’s short session, as opposed to a simple majority in 2018. Cox added on Thursday that Republicans winning a large majority in the state House may change their plans and “I’m hoping we can make some progress this session.”
UofL spokesman John Karman told IL that acting President Neville Pinto “would defer to athletics for any comment on this topic.” IL asked UofL athletics spokesman Kenny Klein for the reaction of athletics director Tom Jurich to the ordinance and if he is open to altering the lease, and he replied, “We will likely have discussions on the subject moving forward, but do not have any details at this time.”
Chris Poynter, the spokesman for Mayor Fischer, stated in an email to IL that “We look forward to further discussions with council about the proposed ordinance. We have not yet had a chance to review it.”
Metro Councilman Bill Hollander, D-9, the chairman of the Democratic caucus, told IL that he has read the proposed ordinance and believes his colleagues should thoroughly consider it because of its ramifications for taxpayers, noting that it “includes some very indefinite language.”
“The proposed increase in Metro’s guaranteed payments represents millions of dollars that won’t be available for other pressing needs through 2039 – and transparency is critical,” said Hollander. “There is no need to rush this ordinance through Metro Council. The public deserves a thorough review of both the ordinance and the need for the independent, expert financial review of the Arena Authority which Louisville Metro is entitled to demand. We all want the KFC Yum! Center to succeed but we should also want to protect Louisville Metro’s taxpayers.”
Hollander noted that one of the conditions in the proposal is the state altering the TIF, saying it seems likely this won’t be approved until the 2018 legislative session, after which the council could take action.
Democratic caucus spokesman Tony Hyatt said Councilwoman Butler and Metro Council President David Yates were unavailable for comment on Friday; Republican sponsors of the ordinance also were not immediately available for comment. Amanda Stamper, the spokeswoman for Gov. Bevin, also did not immediately respond to an email requesting comment on the proposed ordinance.