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The news leaked out earlier this afternoon. First from local Milwaukee talk radio personality Mark Belling and then quickly followed up by the reporters at the Milwaukee Journal Sentinel. The elements of a deal are in place to finance a new Milwaukee arena complex.
We are going to give it our best shot at explaining what the key moving pieces are and what to look for next. Before we begin, we’d like to offer our condolences to the family of Don Walker, the MJS reporter covering the arena issue, who passed away unexpectedly last week of a heart attack at the age of 62. Don and I (your SOB editor) had many email conversations on all things Milwaukee Bucks and the arena project over the past two years. I had known Don from assisting him with some prior stories on Miller Park many years ago. He was a very hard working reporter who was respected by all. As the excitement of the arena takes shape, we do so not only without Don, but also Bradley Center Chairman Marc Marotta, who unexpectedly passed away last month as well. The sad irony is that a key driver of the project (Marotta) and the key reporter covering the project (Walker) are not with us to shepherd things as we enter the home stretch. That said, we know they will be there in spirit when the first Bucks home game is played at the new building. Condolences for the families of both men.
Not a Done Deal Yet
When the specific details are announced in the next week, it is important for Bucks fans to realize that this is simply “the plan” for financing the new arena. This plan has many moving parts and will need a number of different constituencies to sign off on things. If some of these groups fail to go along with the plan, there might not be an arena. Thus it is critical that arena supporters convey to your elected representatives in the coming weeks that you want them to support the project.
Here are the important takeaways based on the deal specifics as outlined by MJS reporters Dan Bice and Patrick Marley this afternoon:
Everyone is now contributing money to the project. Outlined below are the major players that are providing funding.
|Senator Kohl||100 million|
|Current Bucks Owners (LED)||150 million|
|State of Wisconsin||75 million|
|Milwaukee County||50 million|
|City of Milwaukee||47-54 million|
|Wisconsin Center District||93 million|
We already know about the $250 million being contributed by Kohl and LED. Let’s focus on the new funding components outlined above.
State of Wisconsin: Under the plan, the State will contribute $55 million towards construction costs and also pay off $20 million of existing Bradley Center debt. Where will the State get the money for that? They will bond for it and pay the money back over a 20 year period at an assumed rate of 3.5% interest. The buyer of the bonds will be the Public Lands Trust, a State agency that has surplus funds available to invest in State projects, with the investment returns being used to provide supplemental funding for the State’s budget expenditures on education. The Public Lands Trust in years past purchased bonds issued by Brown County for the Lambeau Field expansion.
How will Wisconsin get the money to pay for the annual bond debt service of $4 million per year? That money will come from the general budget. As we discussed earlier regarding Governor Walker’s “jock tax” proposal, NBA players and Bucks employees pay substantial amounts of State income tax annually. Those income tax payments are expected to double and triple in the years ahead based on new TV contracts. Under the earlier Walker proposal, the State was borrowing $220 million, which raised questions about whether the jock tax revenues would be sufficient to retire that amount of bond funding. There should be no such questions about only a $55 million obligation ($75 million if you count the existing Bradley Center debt).
The incremental growth of income taxes provided by the Bucks and paid to the State will more than cover this debt and provide continued surplus revenues to the State’s general fund in the current year and the years ahead. Again, if the Bucks leave, these tax revenues will NOT be replaced by replacement economic activity, as we’ve discussed many times. Finally, if the Bucks leave, the taxpayers will be on the hook for up to $100 million dollars in repairs and renovations in the coming years for a Bradley Center without an anchor tenant. Wouldn’t it be smarter for the State to put that money towards a new facility?
Milwaukee County: This one gets a bit tricky. The way we understand the plan, an additional $50-$55 million in bonds will be issued by the State and purchased by the Public Lands Trust under the same terms and conditions as the State bonds described above. However, the money for the payback of this portion of the bond issue will come from Milwaukee County.
How will Milwaukee County get the approximately $4 million in annual debt service for their portion of the bonds? It appears that Chris Abele will in effect assign uncollectible County debts to the State of Wisconsin each year and allow the State to use its broader collection mechanisms (think State income tax liens) to better get at these monies. You might ask what type of uncollectible receivables does the County have? Evidently a lot. We found this 2007 audit report online that details the problems the County encounters in collecting the many fees the County assesses individuals and business for such services as parks, court fees, airport fees, EMS, certain social services fees, etc, etc.
The County funding element will be the most scrutinized component of the plan. A logical question to ask is how collectible will these receivables be by the State, if the County was unable to collect on them in the first instance? If the receivables transferred by the County to the State don’t add up to the needed $4 million of annual debt service on the County portion of the bonds, it is unclear whether the State would ultimately be responsible for paying debt service on that portion of the bonds or whether the State might withhold future service payments to the County to offset a lower realized value on the receivables.
As an analogy, think of it as your father (the State) loaning you money for a new laptop computer at the start of the summer with the promise you will work off the debt over the course of the summer doing yard work and odd jobs. Will you actually perform an equivalent amount of work over the summer? Maybe, maybe not. Will your father require you to do work into the fall if he felt you didn’t do enough in the summer? Maybe, maybe not.
Based on the reporting from Bice and Marley, we are assuming that County Executive Chris Abele has the executive authority to assign these uncollectible debts to a collection agency (in this case the State) without needing the approval of the County Board. While this action may be legally permissible, unanswered is the question of how the Bucks ownership group will access needed parcels of County owned land in the Park East corridor for the ancillary development, including a Bucks training facility, hotels, restaurants and other development. The County board will likely need to be involved in the decisions on how to sell or gift that land.
We give County Executive Chris Abele a great deal of credit for helping to bring all parties together on this deal, and coming up with a creative way for the County to fund a portion of the costs. That said, the details of this element of the financing package are complex and will be subject to a great deal of scrutiny and debate.
The City of Milwaukee: Again per the MJS article, the City is going to contribute $12 million in TIF funding from the ancillary development and will construct a $35 million dollar parking garage for use by the new arena complex. It is believed the City will need to borrow this money, but it will be paid back with revenues generated from the new parking garage. Not mentioned in the article is the need for the City to gift to the project the existing City owned parking structure on 4th street that will be razed for the new gathering plaza being envisioned for the project. That could add another $7 million to the value of the City contribution.
The Wisconsin Center District (“WCD”): This is the new player in things. The Wisconsin Center District will issue $93 million of zero coupon bonds and will ultimately control and run the new arena, along with their current responsibilities of running the Convention Center, The UWM Panther Arena and the Milwaukee Theater.
Where will the WCD get the money to pay back their bonds? Currently the WCD collects taxes on hotels, car rentals and restaurants in Milwaukee County that generate approximately $28 million in annual tax revenues. Most of that money goes to pay bond debt incurred in the construction of the Convention Center and later the Milwaukee Theater. That prior bond debt was incurred in the 1998-2003 period and currently totals approximately $220 million depending on how you do the accounting. Under the current terms of payment, that debt will be entirely paid off by 2027. It is expected that the WCD will then use the already existing tax revenues to pay off the new arena bonds during the 2028-2045 period.
For the non-finance person, here is the analogy. You took out a 30-year home loan in 1998 to build your house. You are now 17-years into paying that loan off, however your family has now grown and you’d like to build an addition. The Bank will loan you the money, and will keep your monthly mortgage payment the same. However, instead of having your home paid off in 13-years, you will keep making mortgage payments for a longer period of time to fund the money lent to build the addition. This is what the WCD would be doing here.
The important thing to remember is that the WCD is NOT RAISING TAXES to accomplish this. They are simply going to use available future tax money to pay for their newly issued arena bonds. And these bonds are zero coupon, which means that the WCD will not pay cash interest each year, but rather will only pay interest and principal in 2028 after the bonds for the earlier projects are paid off. The use of zero coupon bonds by the WCD is not new. They’ve utilized them before in the construction of the Convention Center and Theater projects.
What are the Key Pressure Points?
The GOP controlled State legislature will need to be convinced to include the arena plan in the State Budget and then subsequently approve the State budget. If members of the GOP insist on pulling this plan out of the State budget and having a separate hearing and separate vote on it, it will be a tougher road. We are hopeful that the GOP will agree to include this in the budget due to the fact the proposed State of Wisconsin outlay is so much smaller ($75 million) than the original $220 million first proposed by Governor Walker back in February.
We understand some members of the GOP caucus would like to put state Democratic party legislators on the record in a separate vote for the arena plan rather than including it in the State budget. We hope that the GOP will instead accept the fact that three major political bodies in Milwaukee and Milwaukee County will also need to go on record to approve the plan as discussed below. Everyone will need to get in the boat so to speak and we encourage them to do so, otherwise this plan won’t work.
The City of Milwaukee will need to approve their $47 to $54 million dollar contribution. This will require the approval of the Democratically controlled Milwaukee Common Council. This is where Mayor Tom Barrett will need to step forward as Sacramento Mayor Kevin Johnson did in their arena project. He can not allow individual members of the Council to grandstand on the issue and/or tie their support to all sorts of additional taxing and spending requests. Ultimately it will be up to Barrett and the 15 members of the Council to decide whether or not they want to contribute 5-10% of the cost towards a $500 to $1 billion dollar project in a blighted area of the City. Most cities nationwide would jump at that type of economic development opportunity. This is where we’ll need SaveOurBucks supporters who live in the City to lobby their representatives in the coming weeks.
Chris Abele and the Milwaukee County Board will need to be able to come to an agreement that it is within the power of the County Executive to pledge the uncollectible receivables to the State and also agree on how to provide the land in the Park East. Again the same dynamic will be at play here as with the City. We’ve got a massive project going into Milwaukee County at the Park East site that has been vacant for over a decade. Does the County want in or not? For those SaveOurBucks supporters who are County residents, here are your County Representatives.
The Wisconsin Center District will need to approve using their future tax revenues to pay for bonds for the arena project. Will use of those revenues limit the ability of the WCD to later construct a larger convention center? Possibly. Then again, it hasn’t really been in the cards politically or economically to build a new convention center anyways. There are legitimate questions about whether Milwaukee would get any type of significant return on an expanded convention center. We are all proud of our City, but the fact is we aren’t a convention town and will always have problems competing with warmer weather convention cities around the country.
What is in the deal for the WCD is the ability to centrally manage the primary entertainment facilities in the City. Under this plan the WCD would get to manage not only the Convention Center, UWM Panther Arena and Milwaukee Theater, but also the new arena and the Marcus Center for the Performing Arts. This will spare the WCD from having to compete with a new arena for events.
Wes Edens had mentioned in the past that he wanted the new arena to have the ability to host smaller 4,000 seat concert events. Doing something like that would likely put the Milwaukee Theater out of business. Further, a new arena would compete with the Milwaukee Panther Arena for events. Pull the Marcus PAC into the mix, and you’ve basically got WCD control of all the major Milwaukee venues outside of the Riverside/Pabst Theaters and the Summerfest Grounds.
So the WCD has a choice to either partner on the project and help fund (and also operate) the new arena or risk having WCD facilities get competitively hurt by the new arena venue. It makes sense on many levels to have the WCD operate, fund and coordinate these facilities with this proposed plan.
Where Do We Go From Here?
All of the commentary above is based on the deal parameters leaked this afternoon. It is quite possible that plan specifics will change in the coming days (hours?) before the final details are announced. That said, within days we should have a concrete plan for funding for the new arena.
Paul Henning, our SOB spokesmen will likely be helping to coordinate public events and activities in the coming days. Please follow us on Twitter @SaveOurBucks for details as the time is soon upon us to lobby your legislators and representatives.
This past season the Bucks gave us all a glimpse of how great it can be to have a successful NBA team in town. The new Bucks owners are developing a product that is extremely exciting and will likely do nothing but improve in the years ahead. Tonight we saw the formerly moribund Golden State Warriors franchise advance to their first NBA Finals appearance in almost 40-years. The Warriors success is a result of their new ownership group that came on the scene a couple years ago and completely turned things around. We see the same thing happening for the Bucks here in Milwaukee. We are close to the finish line on the new arena project. Let’s bring this home!
Your SOB Editor