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Tuesday, March 31, 2009

Paulson stadium deal more delusional every day

Both Willy and the O are reporting that the sort-of-deal that the Portland City Council passed this month to fund the crazy Henry Paulson stadiums project has lots of holes that make it an iffy proposition. In addition to the fact that the mortgages on the new stadiums will be subprime in the extreme -- today the O estimates that the interest rate will be 9%, with no interest and no payments for 11 years -- now it appears that a key part of the plan is that some of the bonds will bear tax-exempt, as opposed to taxable, interest.

Whoever thinks that that will happen is exhibiting some serious naïveté.

As the O explains it:

[Eric] Johansen [the city's debt manager] says the city's current plan is to sell taxable, zero-coupon bonds. But there's virtually no demand for such bonds in the public debt markets.

Public officials elsewhere have successfully used similar bonds for stadiums.

The Louisville Arena Authority offered $349 million in bonds -- including $30 million in zero-coupon bonds -- to finance a new arena.

Unlike Portland's proposal, the Louisville zero-coupon bonds were tax-exempt and a relatively small amount of the overall package, said Jim Host, the authority's chairman. Despite those advantages, "they ended up becoming the most difficult to sell," he said.

Johansen said he, the city's underwriters and Paulson's contacts at Goldman Sachs will search for ways to turn some borrowing, including the zero-coupon bonds, from taxable to tax-exempt. That move could reduce the interest rates and financing gap.

They make it sound as though the issue of tax exemption for the bond interest is somehow controlled by the wizards of Wall Street. Unfortunately for Paulson and Johansen, it's not. It's a question of federal tax law, and under that law it is notoriously difficult for interest on bonds being used to benefit private companies (such as Paulson's) to qualify as tax-exempt.

Indeed, so tough are these rules that even the bonds that the city recently floated to some day build a new Multnomah County Courthouse don't qualify as tax-exempt. Because they were part of an "urban renewal" bond measure with potential private benefit, the city went ahead and agreed to pay interest on those bonds at taxable rates. It pays those relatively high rates to this day, while the proceeds of the bonds are sitting in some investment account, earning much less, if anything at all. (The courthouse won't be built for many years, if ever.)

If you can't float tax-exempt bonds to build a county courthouse, can you float them to create a "soccer only" stadium, thereby restricting existing public uses of the facility, and build a new baseball stadium, to be leased to a private company to make a private profit? It's a lovely, but seemingly unrealistic, hope.

The fact of the matter is that in order to produce even a modest 6% return on the $130 million or so total investment that will be needed from all corners to make this deal fly -- and in order to pay everyone back their investment over 25 years -- the soccer and baseball teams would have to generate about $10.2 million a year above operating costs. If a third of the investment commands a 9% return, they'd have to clear $11.2 million a year. And if Paulson's partners want a 12% return on their third, the required annual net is $13.2 million.

It's truly ludicrous to think any such thing is ever going to happen.

Comments (14)

Leave it to a tax attorney to gum up the works.

Seriously though, what's to stop the city from just doing it anyway? Say, pay it out of general funds then pay that back with bonds that would qualify? Sam loves playing those sorts of shell games. Why not run an end around and figure out how to pay it in five years? Or, as Seinfeld once put it, let Future Sam deal with it.

Who is getting paid under the table to try and do this deal; and how much?
That seems to me the only reason why this whole nutso project is being given any consideration

If governments have difficulty selling bonds what does that say about the fiscal stability of these governments? Something on the order of third world countries perhaps?

Government debt has traditionally been regarded as the safest of investments because they can take money by force (taxes)from those who earned it to pay their debts. Yet buyers of government debt aren't buying as much anymore.

Extrapolate the above points to a national scale. What is going to happen when the federal government cannot raise enough money to pay it's debts?

You're the tax guy, but I thought they purposely made ZCBs non-tax exempt since the cash flows are so screwy.

If they are taxable, then the holder has to report a shadow income (imputed interest) and pay taxes on that, so selling these things is going to be pretty sticky.

We still haven't gotten close to the final story or truth. The only positive thing is Sam and Randy will look like a pair of chimps by the time this is through.

Last November the LA Times and Propublica.org reported that Goldman Sachs urged some of its big investors to bet against California bonds by selling them credit default swaps against default of the bonds. The problem was that Goldman Sachs had also helped sell the bonds, and charged the State of California millions for placing them. ("Goldman Sachs urged bets against California bonds it helped sell")

Recommended reading. The Propublica.org piece is more detailed.

Zero-coupon bonds are similar to the mortgages sold during the housing boom? Well, that's good enough for me.

Told you that when the recall election became a sure thing that Sam would start setting Randy up to be the bigger chimp by June. What a train wreck.

It's all because of the bad economy. Henry Paulson's deals helped bankrupt a country. Merritt Paulson's deals only help bankrupt a city. Talk about your downsizing.

At some point, Sam or Randy mentioned using PDC money. I don't see that mentioned in The O article.

Is it possible that all of this talk about funding sources is meant to be a diversion; that Sam and Randy know precisely where the money will be coming from and that we won't know until it is too late?

Is it possible that all of this talk about funding sources is meant to be a diversion; that Sam and Randy know precisely where the money will be coming from and that we won't know until it is too late?

Very similar to them saying they'd put the new stadium until Lents right up until the deadline, when they suddenly switched to Memorial Coliseum.

I see where you're going with this. Sure, so what's the most weasel-like thing out there?
I know. How about paying for PGE Park with an Urban Renewal District in Lents? Why not? They're already mad about what happened plus it'll help include them in the process.

That really would be underhanded. But maybe the residents of the Lents URA would be offered comp or discounted MLS and Beavers' tickets in return, boosting game attendance figures to exceed projections.

"The fact of the matter is that in order to produce even a modest 6% return on the $130 million"

Don't forget to add the 300 new jobs at a cost of $50K/yr (I assume we are talking living-wage jobs) each. That adds another $15M/yr.

As I say, you'd need to make $10 million or more a year after operating expenses, and salaries would be a major operating expense. Players' salaries alone would be $1 million to $2 million.

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