It’s All About the Money

Inside City Hall

It’s All About the Money: City treasurer on the arena deal, municipal finances and more – Inside The City

By Craig Powell

The NBA board of governors is expected to act in the first week of May on a Seattle investment group’s application to relocate the Kings to Seattle. According to leaks coming from NBA sources, there appear to be two alternative scenarios: The NBA could approve Seattle’s relocation request. Or it could turn the Seattle group down or table its relocation request to give the Sacramento investors and our city government more time to solidify its plans to build a new arena at Downtown Plaza and give the Sacramento investors time to secure a deal with the Maloof family to buy the Kings.

While the drama over the fate of the Kings is at a fever pitch, it’s important to step back and understand that the saga of NBA basketball and arena development in Sacramento, now in its fourth decade, is not likely to be finally decided at NBA meetings in some New York City hotel this month. Whatever the NBA board decides, the Kings/arena saga will merely move into a new phase.

If the NBA tables Seattle’s bid, the focus will shift quickly to flushing out the term sheet that the Sacramento investors negotiated with city officials and sold to the city council, as well as nailing down the exceedingly vague financing plan city staffers have proposed to finance the city’s sizable “public contribution” to the arena. If Seattle gets the prize, it will likely be a matter of days before the assemblage of “whales” currently backing the Sacramento bid shift their focus to buying another team (or squeezing a new expansion franchise out of the NBA) and relocating it to Sacramento to take advantage of the generous package of arena subsidies being offered up by the city.

Either way, all roads lead back to the city treasury. One key question may control all others: Can Sacramento afford the pricey bundle of subsidies it is offering up to arena developers, or is the subsidy package that’s on the table simply too rich for already stretched city finances? For insight into these questions, we recently sat down with longtime city treasurer Russ Fehr.

You have been a respected adviser on local government budgets and finance in Sacramento for a number of years, through both good times and bad. In January, you delivered a sobering report to the city council on the city’s financial condition. Can you summarize that report for our readers?

The city manager asked me to write a report cataloging all of the city’s liabilities and commenting on them. They total $1.9 billion. There are three major categories: $823 million in long-term debt, $167 million in future costs. But the largest category is $950 million in long-term liabilities for employee benefits, including unfunded pension liabilities and retiree health-care cost liabilities.

The growth in the long-term liabilities in the benefit plans is alarming. They are greater than any kind of increase in revenues or inflation. It’s a serious issue. There is no real answer to it in the short run. The governor’s reform legislation will probably take a decade to see any benefit in controlling pension costs.

Our current debt is all fixed rate. We are paying it down over time. Our general fund in terms of our debt capacity is tapped out. We won’t have any borrowing capacity in the general fund until some debt is paid off in 2022.

Your January report indicated that the city’s unfunded liability for retiree health-care costs has grown to about $440 million, almost a quarter of the city’s total debt. It’s growing, on an accrual basis, at a rate of $30 million per year in a city that has a general fund budget of only $340 million. Sacramento County dropped this benefit a few years ago and Stockton recently dropped it as part of its bankruptcy proceedings. Is it time for Sacramento to do the same?

It’s already started. Labor negotiations belong to the city manager. We are using this report and the facts to bring the issue forward to the public and the council. So, under our most recent labor pacts, new hires are no longer eligible for the benefit, except under the firefighters contract. Half of this long-term liability is attributable to retirees and the other half to current employees. That gives the labor relations process significant potential [for realizing cost savings]. Personally, I would look at changing the rules for retirees as a last-resort measure.

A month after your sobering January report, the city sold $240 million of water bonds, part of a plan to issue a total of $2 billion of utility bonds. A month later, the council approved an arena term sheet that calls for the city to contribute $221 million cash by selling 35-year bonds. Both of these bonds have your support, even though they will together add about a half billion dollars to the city’s total debt. Are you ignoring your own warnings about the city’s long-term debt problems?

We’ll start off with the water bonds. Our debt ratio (debt service to general fund revenues) has gone up, not because our debt level has gone up, but because our revenues have fallen. And we’re getting close to running out of unencumbered assets [to borrow against].

So I advised that we not take on new general fund debt. Stand-alone water revenue bonds, backed solely by utility revenue and not the general fund, were the proper approach for borrowing money for utility needs. It’s taking on new debt, but not against the general fund. And we’re addressing the problem of neglected infrastructure. We are planning another $250 million in sewer bonds, but after that I expect us to move toward pay-as-you-go repairs of city water and sewer infrastructure. I don’t think long-term debt for utilities bonds will get anywhere close to $2 billion. [This marks an apparent major shift in city utilities debt policy from last year. The policy shift to a smaller utility debt program was confirmed by another city source.]

Regarding the arena, as treasurer, I was not part of the negotiations of the term sheet or developing the policy of investing in an arena or making a city contribution to it. My responsibility was to find the most efficient way to come up with the money. The only way to do it was to monetize parking. Early on in the process, I determined that a private-sector parking concession idea [involving a long-term lease of city parking assets] was a rip-off, impractical and unfeasible.

We have stress-tested our capacity to fund the term sheet with borrowings against our parking assets. It’s not a financing plan. We have assumed conservative labor costs and interest rates. It’s based on the parking revenues we have now, with no assumptions of growth in the system. Revenue increases would come from improvements in efficiencies. I’m comfortable that we can extract $212 million from the parking revenues. It has some initial risks, but we’ve taken a lot of steps to mitigate them. But those mitigation steps have costs.

So you’re counting on receiving the same parking revenue even though you’ll have about half as many garage spots, since the city is giving up close to half of its garage spots as part of the arena deal?

But you’re assuming that all parking spaces are of equal value.

A city ordinance and state law require that net parking meter revenues can be used only to support the city’s parking operations and, therefore, can’t be used for general fund purposes and can’t be used to make payments on the arena bonds.

We’ve already worked this through with the city attorney and bond counsel. As part of the bond indenture, there would be a general fund contribution to the nonprofit financing authority equal to the annual profits of the parking meters. This additional burden on the general fund is one of the reasons the interest rate on the arena bonds will be pretty high. [Author’s note: Don’t feel dim. Why this contribution would satisfy the statutory limit on the use of parking meter profits was not clear to me either, and I asked Russ to explain it to me three times. I suppose all will be revealed in time.]

Is Sacramento moving into the fast lane headed toward Stockton, which filed for bankruptcy last year?

Stockton grossly overextended itself with unsustainable commitments to employee benefits, staffing levels and debts. Its biggest debt problem was its pension obligation bonds [$125 million]. They are just bad and evil products. Sacramento stopped just in time in its spending. We’re solvent. Reserves are being rebuilt. I’m not sure that the people to the south saw what was coming.

There are two key differences between us and Stockton: We’re far better managed, and our drop in revenues did not affect us to the same extent as it impacted them. Sacramento quit issuing long-term debt in 2006. We were late to the party in terms of addressing our spending problem, but our city council grasped the problem early enough to stave off serious problems.

Has city staff done a side-by-side, apples-to-apples comparison of the fiscal condition of Sacramento with the fiscal condition of Stockton prior to its bankruptcy filing?

We know where our liabilities stand compared to Stockton.

City staff issued a report that claims that the city is contributing $257 million toward a new arena or 58 percent of the total costs (compared to Seattle’s 40 percent contribution). Staff did not, however, count the value of the 3,700 garage spots the city is giving to the investors or the value of free city sites for the placement of digital billboards. Eye on Sacramento has calculated the value of these contributions at $75 million, putting the total taxpayer contribution to the arena at $333 million or 75 percent of the arena cost. Isn’t it misleading to the public for city staff not to include these two contributions?

I don’t know. Regarding the Downtown Plaza garage, not all of the parking spots in the system generate the same amount of revenue, and the Plaza spots are less valuable than the others. But should that value have been part of the value of the published contributions? I agree with you.

City leaders had been counting on the city’s 12 percent hotel tax to fund a future $50 million rehab of the Sacramento Convention Center theater to meet demands for ADA compliance, as well as to assist B Street Theater build a new theater and other cultural investments. Under the arena financing plan, however, hotel taxes will be pledged to the arena bondholders and won’t be available as collateral to finance the convention center theater rehab or any other upgrades of the city’s cultural assets. Are we sacrificing needed rehabs of the city’s existing cultural assets for the sake of building a new cultural asset?

The theater is a work in progress. We will have a detailed financing plan on the theater in September. The city could issue a general fund-backed certificate of participation to fund the arena, but we’d take a haircut on our credit rating.

Craig Powell is a local attorney, businessman, community activist and president of Eye on Sacramento, a civic watchdog and policy group. He can be reached at craig@eyeonsacramento.com or 718-3030. To read EOS’s report on the arena proposal, go to eyeonsacramento.org.

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Law of Triviality

Humorist C. Northcote Parkinson dubbed an observation about organizational conduct the “Law of Triviality.”

“Briefly stated, it means that the time spent on any item of the agenda will be in inverse proportion to the sum involved,” Parkinson wrote, citing a city council that devotes a just a few minutes to talking about a nuclear reactor, but hours to siting a bicycle rack.

Why? The council’s members can’t grasp a nuclear reactor; it’s simply beyond their ken. But they understand a bicycle rack.  Read more here …

Dan Walters: Parkinson’s ‘Law of Triviality’ bites in real life – Sacramento Bee