FOLLOW US ON TWITTER @SaveOurBucks
It was an exciting day for Bucks fans as Governor Scott Walker presented his arena financing plan this morning. Does this mean we are home free? Is NBA basketball now secure in Milwaukee for decades to come? Not yet. There are still some battles to come in the coming months. We will need all of you to be ready to have your voices heard with your State and local legislators. We will have details shortly on some events that you can participate in to show your support for the project, so we’ve got some work to do.
All that being said, if you assume Bucks fan angst over the team relocating is a malady that began around 2003 when Senator Kohl almost sold the team to Michael Jordan, we are probably 95% through this. We’ve still got to get through that last 5% that will entail LED outlining their site plans and the politicians lining up to hopefully make this funding plan a reality.
We have a few thoughts and questions from this morning’s press conference. So let’s get this started!
This Proposal Solves a Major Objection
We’ve listened to a number of fellow citizens and commentators over the past year regarding the funding of a new arena. There have been many common refrains, but this was one we heard over and over:
“How do we know these guys won’t just build the arena and sell the Bucks at a big profit immediately afterwards?”
The part of Walker’s plan that was left as an afterthought by most media coverage was his announcement that he had negotiated a provision with LED that if they later sell the team, the first proceeds from the sale must go to pay-off any outstanding arena debt. From a technical standpoint, it is possible that other secured creditors, primarily the league’s credit facility and any other loans LED have related to purchasing the team might be ahead of the taxpayers on this provision. Nonetheless, this development is a fabulous statement of commitment on the part of the new Bucks ownership group that they are here to stay for the long-term.
We’ve heard a number of people over the past year opine that they could support some level of funding for a new arena, but they didn’t want to enrich the Bucks owners if they sold the team. It would be especially unfair they argued, if the new owners would be able to make big profits from a future sale based on increased team value as a result of a new facility partly funded by public money. The plan put forth by Walker solves that potential and perceived unjust enrichment. This is no small matter either, as the Selig family and other former Brewer ownership interests were able to profit substantially upon their sale of the team to Mark Attanasio as a result of an increased franchise valuation due to Miller Park.
Can Edens and Lasry later sell the team to Seattle for one billion dollars, pay off the arena debt and still make a big profit? Perhaps, but it is highly unlikely the league would allow the Bucks franchise to relocate after just building a new arena. Further, as an extra protection for the State, it is likely that the new arena will also involve the Bucks committing to a long-term 30-year lease, similar to what the Brewers have with Miller Park that will also tie the team to Milwaukee in the long-run.
A Few Questions
One thing that struck us today was the fact Mayor Barrett was not part of the announcement nor did he have a press release on the matter. This is probably because the funding mechanism is the State income tax, which is part of the State budget, hence appropriate for Walker to be the one setting forth the proposal and explaining the details.
Rich Kirchen of the Business Journal did reach Barrett for comment:
Barrett said he’s met repeatedly with the team owners, and wants to have a conversation on partnering with them. Beyond that, however, the mayor was not specific.
“A lot of this is dependent on site acquisition,” he said.
The city of Milwaukee was involved in funding the BMO Harris Bradley Center in the mid-1980s. Those costs are ongoing, Barrett said, and could get wrapped into the next arena project, depending on which site the Bucks select.
It is quite possible that Barrett is very informed about the site selection process and the site discussion is in a sensitive stage, thus precluding the Mayor from comment; still his comments to Kirchen seemed a bit tepid. We’ll give the Mayor a mulligan on this one, but his unconditional support for the Walker proposal is going to be needed very quickly. As we wrote a few days ago, the GOP politicians are not going to follow Walker lock-step on this unless the Democrats in Milwaukee quickly get behind this thing. Walker is using valuable political capital with his suburban and rural base on this initiative. Mayor Barrett and Milwaukee politicians can’t leave him on an island without support or only conditional support.
To reiterate what we said the other day, this project is one where both sides of the political aisle can work together and not compromise their core values while at the same time providing a great economic and cultural outcome for the City, County and State of Wisconsin.
The Future Growth Of NBA Payrolls
The funding proposal took a slightly different form than what many of us had been led to believe regarding the jock tax funding aspect. Rather than divert existing State income tax revenue from the NBA, this proposal will pledge all future NBA income tax revenue above a $6.5 million dollar baseline, which according to State officials is the income tax that NBA players generated last year.
We are very bullish on NBA revenues given the significant money that will flow to the league with the recently negotiated TV deal as we discussed last fall. However, the team and Walker will need to better outline exactly how these bonds will be structured to accommodate significant revenue coming in the out years versus coming in now. Given that current year NBA player income tax revenue is not sufficient to pay level debt service on a $220 million dollar obligation, these will likely be “zero-coupon” bonds in which the debt is not paid until maturity. That type of bond structure will be needed or alternatively the definition of who is in the income tax pool will need to be expanded to include Bucks officials and new arena employees in addition to NBA players.
But the more important question than structure is whether or not the State of Wisconsin will be responsible for the payment of principal and interest on bonds if the NBA revenue growth is not sufficient to pay the bonds. This morning, Walker used the term “revenue bonds”, which is a very specific and important distinction. Most revenue bonds are structured so that investors are entitled to be paid back only if the revenues related to the proposed project are sufficient. This differs from “general obligation” bonds whereby the State would pledge all tax revenues and taxing power of the State to pay back the bonds, regardless of whether or not the project was a success.
If the new arena bond issue is a revenue bond issue then the State of Wisconsin taxpayers will not be “on the hook” so to speak should the tax revenues not meet projections. We’ll need the parties involved to clarify the proposed terms of the bond issue quickly, as a common refrain heard today from arena opponents was concern State taxpayers would be liable if revenue projections are not met.
How To Communicate Today’s Developments
The most important thing to remember is that there will be opponents of this measure who simply do not want the State to participate at all in providing some level of funding for a new arena. We heard a caller this morning on Charlie Sykes radio show cite a number of objections to any public funding for a new arena. When Sykes pointed out that this new plan addressed virtually all of the caller’s objections, the caller said he still didn’t like it. Arena proponents need to respect that opinion and realize that not everyone will support this project, even if the Bucks and Walker have now addressed perhaps 90% of the objections people said they had to public funding before this proposal was rolled out.
The fact the goalposts on public funding are now in the process of being moved by certain arena opponents is to be expected. In a perfect world, there would be no public involvement in arena construction. However, Wisconsin competes with 49 other states for business and industry, pro sports teams included. The Walker plan is no different than the numerous public-private incentive plans that states provide to lure and retain business. As Walker said, this plan makes sense financially for the State of Wisconsin. We were generally encouraged today by the amount of influential people who admitted that this proposal sounded reasonable and they might be able to support it when provided with further details.
Right now we’d encourage Bucks fans to communicate to skeptics that this plan requires no new taxes, provides for the taxpayers to be made whole in the event the team is sold and will ensure that State of Wisconsin retains an employer that currently contributes significant tax revenues to the State. We also think you should make sure you note that the Bucks ownership group and Senator Kohl are bringing $300 million or 60% of the cost to the table upfront for a facility the team will only occupy for 30% of the nights booked, with the other dates being used for other teams and events.
In an interview this afternoon, Bucks owner Wes Edens informed Don Walker that site details could be released as early as a week from now. The lack of details on the project was the missing piece from this morning’s news conference. For any project of this magnitude, you need the sizzle, the vision, the visual aids BEFORE talking about how to pay for something. Presumably due to complications LED has encountered in securing a site, the actual plans have to come after Walker’s funding discussion. Despite this complication, we should realize that this project is going to be a whole lot more fun to talk about and present to your family and friends once the location and drawings are released. That is the next chapter and it is coming fast. Stay tuned Bucks fans!