Latest Sacramento Kings arena deal might be worse than old one
City assumes more annual debt in new agreement
Last week, City Hall released some details on a revised financing plan for a new Sacramento Kings arena downtown. City Treasurer Russell Fehr called it a “safer, more flexible plan” than the one put together last year.
The Sacramento Bee and other daily media reported—without too much analysis—that this is the best arena plan yet. Would you be surprised to learn the numbers don’t actually show that?
As with the old plan, the city will kick in $223 million in cash, $32 million-ish in public property that it owns, leases for six new monster digital billboards and all the parking spaces the city currently owns under Downtown Plaza.
In order to raise the cash, the city will issue lease revenue bonds, and pay the bonds back with proceeds from the city’s lucrative parking operations. Basically, every time you feed a parking meter or get a parking ticket, you’ll be helping to pay for the arena.
According to Fehr’s estimates, the debt service on the bonds will cost the city $21.9 million a year. That’s a lot more than the $9 million in parking “profit” that currently flows to the city’s general fund.
However, parking revenue is expected to grow in the future, because the city plans to write more tickets, put in more meters, and raise meter prices and ticket fees. The growth in parking revenue will help pay the bond payments every year.
Another portion of the annual debt service will come from the Kings, in the form of an annual lease. The lease payments will start off small, $6.5 million a year, but will grow by 3 percent annually (or by inflation, whichever is higher), starting in 2020. Another $2 million will come from property taxes paid by the Kings on the arena and the other properties that the city gives them.
Arena boosters will flip out if you say it, but the difference between the Kings lease and the debt service—that $10 million or so every year—is a hit to the city’s general fund. Because that money would otherwise be available to pay for city services or to make other—possibly smarter—investments.
The Kings lease is the main difference between this plan and the last plan. The old plan cobbled together ticket surcharges and a profit sharing (a minimum of $1 million a year) to help “backfill” the city’s parking revenue.
We’re also told this deal is better because, under this plan, the city will own the arena and the land underneath it. But the fact is the Kings will operate the arena, keep all the profits, and have the option to buy the arena and land for $1 when their lease is up in 35 years.
The annual debt service estimated in the new plan, $21.9 million, is also much larger than annual debt service of $17 million estimated in the old plan.
That’s because Fehr is assuming a 6.75 percent interest rate—a rate he says is a very conservative estimate. Last year, he conservatively estimated a 5.75 interest rate.
A small portion of the rate increase has to do with the difference between taxable and nontaxable bonds. The city had to switch to taxable bonds when the structure of the deal changed. But most of the increase, says Fehr, has to do with rising interest rates and the likely timing of issuing the bonds sometime in the fall.
So, yes, the Kings’ contribution is going up. But the city’s yearly bond payments are going up more.
Another troublesome point: The Kings lease payment is supposed to be a more stable source of revenue than the earlier profit-sharing plan. But if the Kings decided to keep the profit-sharing money and give the city a guaranteed lease payment instead, which one do you think is more valuable?
“The Kings paid us a premium to get out of their books,” Fehr explained. Fehr has seen the Kings’ books, and he says giving up profit sharing is a better deal. He notes the Kings have not been very profitable in Sacramento over the years.
Bites would counter that the whole point of building the arena with public money is to make the Kings profitable in Sacramento. Otherwise, they’d go somewhere else.
And since the Kings now don’t want to show us their books—even though public funds will be directly subsidizing their profits every year—we can’t really tell how much the city is losing by giving up the profit sharing. We’ll have to take their word for it. (Or not.)
The good news is that, either way, the new plan appears to be only marginally worse or marginally better than the last plan. Or as The Sacramento Bee would put it: Best. Arena. Deal. Ever.