ANOTHER TURKEY COMING HOME TO ROOST?

Recently it was reported in an article in the Commercial Appeal that the Memphis and Shelby County Sports Authority was considering to again reconfigure the debt on the FedEx Arena. I have been trying for some time to get the most recent financial statement (December 31, 2008) from the Sports Authority but was told by the County Attorney that the document does not exist yet and to ask again on June 30, 2009.

I think it is instructive to see what was said in the December 31, 2007 document which is attached. In reading through the document, it sounds like the Captain of the Titanic saying that there is no danger to the ship from icebergs as the ship has a double hull. According to the article in the paper, “The refinancing and an accompanying transaction known as an interest-rate swap helped reduce the sports authority's payments to about 4.25 percent. However, the financial crisis pushed the interest rate to about 9 percent. Interest rates are low now, and the authority believes it could reduce its payments by switching to a fixed rate.” Read through the December 2007 document and you will read many statements that the risk of interest rate increase in the swaps was low.

Where does the money to pay these bonds and interest come from? The Senior Lien Revenue Bonds shall be payable from the following sources.

1) A $ 1.15 per seat use charge on paid Arena events..
2) Rebate of sales tax revenues to the City and the County for the exclusive use of the Sports Authority derived from NBA Franchise events, concessions and the sale of NBA franchised merchandise in the County.
3) City Hotel/Motel Tax Revenues derived from certain hotel/motel taxes imposed by the City pursuant to the provisions of City Ordinance 4824. (A 1.7% tax was added to the existing 5% plus the + the 8.25% sales tax for a total of 14.95%). This tax has been dedicated until 2016 to the payment of debt service for the expansion of the Cook Convention Center.
4) Certain County Hotel/Motel Tax Revenues (to the extent certain tourist
development zone sales tax increment moneys are received) and subordinate to certain pre-existing debt which is pledged for the Cook Convention Center Bonds, the County Bonds for the Pyramid and a specified amount to the Convention and Visitors Bureau.
5) Payments in lieu of taxes from the Water Division of MLG&W pursuant to that certain PILOT Agreement between the City and MLG& dated July 1, 2001. The payment will be $2.5 million per year until 2028.
6) A new 2% County-wide car rental tax imposed pursuant to Section 67-4-1907 of Tennessee Code Annotated.

If these revenues are not enough to pay the bonds, then the taxpayers are on the hook except that property taxes (ad valorem) are not to be used. (This restriction was the result of the 2001 petition by Heidi Shafer to get the taxpayers the right to vote on the building of the Arena). However we will still have to pay one way or the other or maybe we will get a bailout.

Click here to read the December 31, 2007 sports authority report describing swaps and derivatives which backfired