Muni Credit News July 14, 2016

Joseph Krist

Municipal Credit Consultant

SAN DIEGO STADIUM PROCESS KICKS OFF

We have previously commented on efforts to get the City of San Diego to finance the bulk of the cost of a new stadium for the NFL’s San Diego Chargers. Those efforts took a major step forward when the San Diego City Clerk announced that the Chargers secured enough valid signatures for the team’s proposal to raise local hotel taxes for a downtown stadium and convention facility to appear on the November ballot.

The announcement will provide another opportunity for proponents and opponents to make their cases regarding this project. The project itself will consist of the football stadium and an adjoining convention center annex. The existing center’s exhibit floor spans more than 525,000 square feet. The Chargers are proposing a total of 260,000 square feet of new exhibit space, of which 100,000 square feet would be on the stadium floor adjoining the proposed convention center.

That is much more exhibit space than a previous city plan to enlarge the center on the waterfront, which has been supported by the mayor and hotel industry but has been blocked in court. The grouping of the convention center expansion with the stadium is a shrewd move by the Chargers given that it ties their stadium to revenues from the hotel industry which wants an expanded convention center on its own.

The Chargers would contribute $650 million for the stadium portion of the project, using $300 million from the NFL and $350 million from the team, licensing payments, sales of “stadium-builder” ticket options to fans, and other private sources. The city would raise $1.15 billion by selling bonds that would be paid back with the higher hotel tax revenues. That $1.15 billion would cover the city’s $350 million contribution to building the football stadium, $600 million to build the adjoining convention center annex, and $200 million for land.

The initiative would raise the city’s tax on hotel stays from 12.5 percent to 16.5 percent to finance a $1.8 billion stadium and convention center in downtown’s East Village, next to Petco Park (the stadium for MLB’s San Diego Padres). City Attorney Jan Goldsmith says the initiative would need approval from two-thirds of voters. But Goldsmith more recently indicated there was a chance that approval by somewhere between a simple majority and two-thirds would leave the fate of the initiative in limbo until a Supreme Court decision whether to uphold or overturn the lower court ruling, which said only simple majorities are required for tax increases by citizens’ initiative.

Opponents include politicians (mostly Republicans when it comes to the stadium portion), business organizations and neighborhood groups. Neighborhood and citizens groups have raised the issue that such a tax increase should contribute revenue for other priorities and that higher hotel taxes could damage local tourism. They would prefer to see higher taxes applied to basic services. They do support an expansion of the convention center on its own.  

The outlook for voter approval is uncertain, especially if a two thirds vote is required. Now that Cleveland has one the NBA championship, San Diego bears the dubious distinction of being the major league city with the longest “championship drought”. The performance of the Chargers on the field has not been particularly successful over the past two decades and the popularity of the Spanos family and its ownership has been uneven at best. These are the qualitative factors that make these deals so interesting and we will continue to monitor the situation through the fall. Quantitatively, The proposed 32 % tax rate increase would lift San Diego from 21st highest in the nation for hotel, or transient-occupancy, taxes, up into a tie for third. The new rate of 16.5 percent would be slightly above San Francisco at 16.25% and Los Angeles at 15.5%.

HARRISBURG BACK IN THE NEWS

The Harrisburg Parking Authority sent notices of default to the executive director of the Pennsylvania Economic Development Finance Agency asking for payments due totaling $1,468,732. The money comprises mostly unpaid payments from 2014 and 2105, when the system didn’t generate enough revenue. The EDFA floated the bonds for the long-term lease of the city’s parking assets as part of the overall restructuring of Harrisburg’s finances in 2013.

City council members agreed to “sell” city parking assets in late 2013 under a 40-year lease. Since then, parking revenues have not generated enough moneyto ma ke all the payments listed in the deal’s “waterfall of payments” after debt obligations and operating expenses. City officials believe they are still owed their full payments, as the city ranks first in the prioritized waterfall. But parking officials claim that the language in the asset transfer agreement is “ambiguous,” as to whether it must pay unpaid payments from prior years when revenue falls short.

The dispute could wind up in court to determine if the city is owed full payments from prior months and years when revenue lagged. The city was promised $3 million this year, for example, from so-called waterfall payments. But parking officials approved a parking budget in December that called for $2.1 million in payments this year, while still paying full payments for “performance fees” for parking managers.

Although overall revenue fell short of initial projections by about 12 percent, the system made money, ending the first six-months of this year with more than $800,000 in cash. Parking officials have previously said they would have to raise parking rates if the city insists on its full payments. But city officials have said that the system should instead defer on “performance fees” for parking managers and cut operating expenses. The parking system could draw funds from its capital reserve fund to pay the city.

In the meantime, the bonds that financed the long-term lease of the parking system in Harrisburg have been reduced to junk status, by S&P Global Ratings, downgraded two notches to BB+.  Parking officials in June started withholding some revenue payments from the city and plan to continue to hold that money in a separate account until “there is resolution on this matter,”. Meanwhile, the city will continue to get the $3 million in so-called waterfall payments it expected this year.

Parking officials released an unaudited financial report for 2015 at Monday’s meeting that showed overall revenues for the parking system fell $1.2 million short of expectations. The biggest disappointment came from enforcement revenue (-$1.6 million) while meter revenue exceeded expectations by $764,000.

The confrontation serves to show the limits of financial engineering in the face of daunting economic challenges. The City’s fiscal position may have been temporarily shored up but the underlying fundamentals remained essentially unchanged. It leads us to once again repeat or view of the need for strong economic fundamentals whether it be a tax backed or revenue backed, public or private.

PUERTO RICO WATER LEGISLATION

The PRASA Revitalization Act was signed into law this week. by amending the moratorium act, the law establishes a securitization mechanism, whereby the utility would pledge 20% of what it charges its clients, for new debt that could reach as much as $2 billion. It establishes a securitization mechanism, whereby the utility would pledge 20% of what it charges its clients, for new debt that could reach as much as $2 billion.

For now, the legislation establishes limits to ensure no more than $900 million is issued in new money—a key amendment from the Senate that helped in overcoming the deadlock with the House. The utility is called to use any new debt raised to pay its suppliers, who are owed about $150 million, as well as to restart its $400 million capital improvement program. The remaining capacity, which is estimated to be about $1.1

The legislation’s enactment is meant to facilitate the issuance of debt on an expedited basis. This could provide for issuance before the establishment of an operating oversight board included as a major part of the PROMESA by the U.S. Congress. We have concerns about the execution of such a large transaction outside of the terms of PROMESA. While it is understood that Puerto Rico is resistant to the oversight of the board, efforts to circumvent its oversight can only be interpreted as interference with that oversight. this would be against the interests of all of Puerto Rico’s stakeholders.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

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