The Financing Terms Are the Last Part of the Deal Arena Critics Should Be Attacking

Hey, welcome to the Seattle Times editorial board, Sharon Pian Chan, it looks like you fit right in.

In a blog post yesterday Chan notes that the board is "still analyzing" Chris Hansen's arena proposal, but that doesn't stop her from pointing readers to a recent NY Times article as an opportunity to put forth examples of some "worst-case scenarios" for city-backed bonds.

It's unclear how similar these deals are to the proposal Seattle and King County are considering, but it raises another question worth asking, and answering.

Except, it's not unclear how similar these public financing deals are to what's being proposed for a new Sonics arena... at least not to anybody who has bothered to put the effort into analyzing it.

In a sense, all these bond deals are the same in that they are municipal bonds backed by the "full faith and taxing power" of municipalities, regardless of whether the bonds are issued directly or through some municipal sub-entity like the arena authority Seattle and King County would jointly create. That's the nature of municipal bonds, and it's one of the reasons municipalities can borrow money so cheaply.

So yeah, the arena bonds would be exactly like those issued by the Scranton Parking Authority Chan mentions (which by the way, is in Pennsylvania, not New Jersey) in that city and county taxpayers are guaranteeing them.

But the comparison ends there, because unlike all of the deals-gone-bad the NY Times article mentions—issued with a projection that the facilities financed would produce revenue sufficient to service the debt—Seattle's debt would be serviced by guaranteed revenue. I mean, read the Memorandum of Understanding. Actually read it. The annual bond payments will be met by the tax revenues raised from the facility plus $2 million in rent plus additional rent "that is sufficient, when combined with Base Rent and Arena Tax Revenues (described below) received by the City and County for use in that year, to equal the total annual debt service obligations of the City and the County for the Public Financing."

That's not some estimate that revenue will likely meet the debt service. That's a contractual guarantee. And there are all types of reserve accounts and capital accounts and first priority liens on revenue and receivables to back it up.

But wait, what if the team relocates, just like the old Sonics? Won't taxpayers be left paying the bills on an empty arena? No, the deal includes a 30-year-lease with a non-relocation agreement. Okay, but what if ArenaCo and/or the team go bankrupt? Won't the bankruptcy court let them break the lease? Maybe. But ArenaCo's obligations are secured by the investment group's equity investment in the arena and the team, including "first distributions of any proceeds from any sale of the NBA Team" beyond the $125 million cap the NBA reserves for repayment of loans used to purchase the team. The Sonics sold for $350 million six years ago, and there isn't an NBA team valued less than $268 million.

Plus, the city and county would own the arena and the land it sits on, a capital cost of $500 million purchased for $125 million without an NHL franchise, $200 million with. At some point during the 30-year term, as the principal is gradually paid down, the resale value of the land alone will be worth more than the city owes on the bonds.

So while no deal is risk free, this deal is nothing like the public financing disasters other municipalities have found themselves in. It's just not. By any stretch of the imagination. And it's irresponsible to let that assertion just hang there before fully analyzing the deal.

Look, there are a lot of legitimate angles from which to criticize the arena proposal. It's impact on the nearby freight terminals might just not be worth it, or economic substitution and lost opportunity for tax revenue on money spent at the arena might present too big a hit to city coffers. Or perhaps we just don't want to play the NBA's arena extortion game purely as matter of principle. Honestly: I haven't made up my own mind on whether I support or oppose it. I'm torn.

But to suggest that the deal might be too risky for taxpayers is just plain stupid. No deal is unbreakable, but when you look at the cash flow and assets backing up this one, it's about as close to risk-free as we can get.