Is the sun setting on tax-exempt stadium financing?
It was a radical idea, using a professional sports stadium to spur downtown redevelopment in an era when most teams were looking toward the suburbs. Baltimore, however, had a beautiful waterfront already well on the rehab path.
The problem was getting people to change decades worth of habit.
The city knew it needed a hook, something to draw people downtown in the first place.
Oriole Park at Camden Yards provided the answer.
The first of the new old ballparks, Camden Yards was also among the first of the major sports facilities with a downtown economic redevelopment mission. Coors Field in Denver and Jacobs Field in Cleveland followed hot on its heels.
Besides serving as catalysts for downtown revitalization, the three had something else in common — all were built with tax-exempt financing.
If New York Senator Daniel Moynihan has his way, they will be among the last of their kind.
On June 14, Moynihan introduced a bill that would prevent cities and counties from issuing tax-exempt bonds to finance professional sports facilities.
S. 1880, the Stop Tax-Exempt Arena Debt Issuance Act — STADIA (of course) for short — would prevent the issuance of tax-exempt bonds to finance more than $5 million or 5 percent of the cost, whichever is less, of building a pro sports facility.
Moynihan’s motives may be unquestionable. S. 1880 is the companion bill to S. 1879, which the senator insists is his attempt to “correct a serious misallocation of our limited resources under the present law rules that govern the issuance of tax-exempt bonds.”
S. 1879 would, Moynihan says, increase funding at educational and research facilities at private colleges and universities by removing the “arbitrary and injurious” $150 million cap on the amount of tax-exempt debt they can issue.
Despite Moynihan’s stated good intentions in introducing the two bills, however, S. 1880 has had the unfortunate side effect of setting the senator up as the country’s Stadium God. “You have to understand,” says Frank Shafroth, director of policy and federal relations for the National League of Cities. “No more stadiums can be built today unless you negotiate a deal with Senator Moynihan. It’s really very simple.”
According to Shafroth, the consequences of S. 1880 could be vastly more far-reaching than Moynihan intended.
Sports facility construction is big business — so big that a recent conference on stadium financing, hosted by The Bond Buyer, a daily newspaper that serves as the media authority on municipal finance, drew upwards of 500 people.
In fact, an article by the National Football League’s facility development consultant, Rick Horrow, points out that 24 of the 60 largest U.S. cities have built or are planning facilities that cost more than $100 million. And, with 16 NFL leases expiring in the next decade, the construction boom is not likely to slow.
Attendance at The Bond Buyer conference’s session on tax-exempt financing proved two things — the investment community is aware of Horrow’s numbers, and it is extremely concerned about Moynihan’s bill.
The fact is Congress does not like tax-exempt financing.
It tried to get rid of it in the Tax Reform Act of 1986 by taking away the tax exemption for private activity bonds that were used to finance stadium construction.
(“Congress probably didn’t think that state and local governments would be willing to issue governmental bonds for that purpose,” Jeff Berry, a partner with the Chicago-based law firm, Chapman & Cutler, told conference attendees.)
“Issuance of [tax-exempt bonds] contravenes the clear and expressed intent of Congress,” Moynihan said in introducing his bill.
Still, despite the fact that Congress may be opposed, a number of cities and counties have found tax-exempt financing to be a critical element in their economic development toolboxes. Virtually every major stadium built in the past two decades has enjoyed some kind of tax-exempt financing.
That does not mean it’s a new phenomenon, however. “The first tax-exempt financing of a sports facility was for the Roman Coliseum,” said Mitchell Zeits, managing director and head of the Sports Facilities Consulting Group for Philadelphia-based Public Financial Management, at the conference. “Tiger Stadium in Detroit was the second. The fact is, there are many more stadiums financed with tax-exempt bonds than not.”
Still, a valid argument may be made (see Reader’s Forum, page 6) that taxpayers in Toledo should not be responsible for the money it costs Baltimore to steal Cleveland’s football team. And building a stadium filled with luxury boxes to keep zillionaire team owners happy rubs many taxpayers the wrong way. But the explosion of interest in sports gives teams leverage they did not have in the past.
“In the past five years, there has been a lot of pressure on elected officials about this,” says Ernie Perez, New York-based Standard & Poor’s director of public finance. “Some lost elections because they gave in to a team’s demands. Some lost because they didn’t.”
In the final analysis, Perez says, cities do not build stadiums because they promise an economic windfall. “Stadiums bring jobs, but they are lower paying jobs,” he notes. “Plus, people have a limited amount of disposable income. If they use it to go to the ballpark, they don’t go to the zoo.”
“There is some localized benefit,” agreed Moody’s Investors Service Vice President Ken Kurtz in an interview in The Bond Buyer. “But in terms of a general economic benefit, I’d be very skeptical.”
Perez and Kurtz ate correct, but that is just a small part of the issue.
AFFECTING THE LITTLE GUYS
“The cities with big league sports franchises know that this affects them,” says Shafroth. “The common perception is that only stadiums used by wealthy owners will be affected. But those big boys can hire other big boys to negotiate with Senator Moynihan.”
That, Shafroth says, is not where the problem lies.
“There is no town in America without some kind of ball field,” he says. “And there are any number of cities with colleges whose fields are used by the pros for training facilities. People in really small places — places most people have never heard of — don’t realize that they might be affected.”
It sounds like paranoia, but Shafroth has a point. Moynihan’s bill is so broadly worded that no one is certain what facilities might fall within its scope.
Shafroth, for instance, believes that the bill could deny tax-exempt financing for infrastructure improvements — roads and water lines, for instance — around stadiums, even if the stadiums themselves are privately financed.
Milton Wakschlag, co-chair of the public finance department for the Chicago law firm Katten Muchin & Zavis, and a member of its stadium finance group, disagrees. “I’d be reluctant to read the bill that broadly,” he says. “Now, a parking lot owned by the team might be a different thing.”
Still, he admits that the bill’s language “creates an ambiguity.”
And Wakschlag does agree with Shafroth that facilities — colleges and local facilities — used by the pros for training could be affected.
Current tax law allows universities and colleges that provide training facilities for pro teams to meet less stringent tests in order for their bonds to avoid the “private activity bond” label, which denies the issue tax-exempt status. But, in its present form, the bill would eliminate tax exemptions for bonds that are to be used directly or indirectly to provide “professional sports facilities.”
Professional sports facilities are defined in the bill as “real property or related improvements used for professional sports exhibitions, games or training, regardless if the admission of the public or press is allowed or paid.”
The phrase “use for professional sports” is broadly defined to mean “any use of facilities which generates a direct or indirect monetary benefit (other than reimbursement of out-of-pocket expenses) for a person who uses such facilities for professional sports exhibitions, games or training.”
Under the bill, those bonds now become private activity bonds, a much tougher category for purposes of tax exemptions. Private activity bonds must be “qualified” — meeting extensive tests — to be tax exempt, and Moynihan’s bill adds a provision stating that private activity bonds used to finance sports facilities are, by definition, not qualified bonds. The bill then would bypass the existing private activity bond tests and substitute a single test: Are the bonds used to finance sports facilities?
In other words, Moynihan covered all the bases.
Then the screaming started.
EXCEPTIONS TO THE RULE
Moynihan’s bill was introduced into the senate on June 14, 1996, a Friday. The following Monday, Nashville, Tenn., in the process of building a football stadium in an effort to attract a National Football League franchise, and Pasadena, Calif., which was planning major improvements to the Rose Bowl, went to market with bonds that no one would touch.
S. 1880 included language that would make enforcement of its provisions retroactive to the day it was first introduced. June 14, then, became T-E Day. Nashville and Pasadena, however, were well along in their plans, so they approached Moynihan for relief.
The senator responded to their complaints by creating “transition rules” that would allow issuers to issue tax-exempt debt if they:
* had begun construction or rehab before June 14, 1996;
* had entered into a binding contract before June 14 that required the incurrence of significant expenditures–equal to or exceeding 10 percent of the reasonably anticipated cost of the construction or rehabilitation of the facility involved;
* had entered into a binding contract before June 14 to acquire a facility;
* had taken official action before June 14 to approve the issuance of tax-exempt bonds; and/or
* had taken official action to submit such an issuance for voter approval.
The fact that Congress did not pass the bill is irrelevant, since Moynihan has been quoted as saying that he would reintroduce it next year with the same retroactive date.
“An immediate effective date is necessary to prevent a rush to market,” said Moynihan, in explaining the language. “I have no doubt that bond market professionals would act very quickly to issue stadium bonds if provided a window of opportunity in which to do so.”
It is ironic, then, that Moynihan would insist that the effect his bill had on the market came as a complete surprise. “It is flattering that the mere introduction of a bill is given such credence by the bond market,” he said in his statement announcing the transition rules. “… at the time I introduced my bill… 1,879 bills were on file in the Senate and 3,659 bills were on file in the House. The vast majority of these bills will not become law, including, in all likelihood, S. 1879 and S. 1880.”
Wakschlag scoffs at Moynihan’s pronouncement. “This was deliberately calculated,” he says. “He accomplished exactly what he intended, and all statements to the contrary are disingenuous.
“You have to put this in historical context,” Wakschlag says. “The practice of giving bond counsel is rooted in the notion that investors in municipal securities must have the unqualified assurance that municipal laws have been followed and that federal tax law has been followed. If there is a deficiency on either one, investors have nothing more than a pile of dust. A bill with a retroactive effective date makes the market very skittish. It has happened time and time again.”
Still, despite the dire predictions, most market analysts seem to agree that the stadium financing market can adapt should the Moynihan bill actually become law.
“The industry was worried what the changes brought about by the tax reform act of 1986 would bring,” said David Freedman of Fitch Investors Service in a Bond Buyer interview. “But the industry retooled. It adapted to the changes. The same would happen with the Moynihan bill.”