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October 12, 2009
As goes AIG, so goes Houston's sports authority?
The disarray of the world financial system continues to hit the stadium world: The latest victim looks to be the Harris County-Houston Sports Authority, which could see huge hikes in its bond payments on Minute Maid Park, Reliant Stadium, and the Toyota Center thanks to the collapse of the esoteric financial instruments known as credit default interest rate swaps. (You may recall CDSs for bringing down a little company called AIG.) Without going into all the technical details — which, frankly, I'm not sure I understand even after reading more about default swaps than is really healthy [UPDATE: Apparently I really didn't understand, as I mistook credit default swaps, which sunk AIG, for interest rate swaps, which threaten to sink the Sports Authority; everything else I wrote here is still valid, though] — the upshot is that in order to undo the bad financing, the sports authority will have to pay off its stadium debt early, with annual debt service expected to rise from $62.3 million to $83.7 million over the next two years.
That's troublesome, because the authority only collected $79.3 million total in 2008 — and tax revenues, which depend on things like car rental and hotels that are highly dependent on a booming economy, look to be dropping. "I'm deeply concerned about the financial stability of the sports authority and all its bonded indebtedness," former authority chair Jack Rains told Bloomberg News (which somehow managed to give Janet Jackson's "wardrobe malfunction" equal mention in its article). "When you borrow for 30 years, you have to do prudent things, and they didn't."
If the shortfall comes true, the sports authority could end up having to go to the county for a bailout. And we know how well that's worked in the past.
Well, we told 'em so, but the suckers had to have their playpens. Now the rush is on to gin up a TIRZ to pay for the AEG/Dynamo soccer pork as the spurts authority piggybank is below zero.
Socialize the costs, privatize the profit, to hell with the taxpayer.
Posted by tired dog on October 14, 2009 09:49 AM
No, the authority doesn't go to the county for a bailout. If the authority doesn't have the cashflow, then the bond insurance (which, contrary to what Jack Rains thinks, seems fairly "prudent" to me) kicks in and pays the bonds. If the bond insurer were to fail, then bond holders don't get paid. Period. The bond holders can't foreclose on the stadiums, they can't sue the authority or the county, they can't force the county to pay. They took a risk and they lose out. Hmm, so the county and taxpayers can't be hurt? Sounds prudent to me. Oh, that's right, Jack Rains was kicked off the authority for being an ass and now he takes every opportunity to attack it. Guess Bloomberg fell for it.
Posted by JJMB on October 18, 2009 06:13 PM
Typically, local governments will go to great lengths to avoid defaulting on bonds, because they don't want to damage their bond ratings. So while it's possible that MBIA will have to step in, I'd be surprised if Houston and Harris County let it get that far.
Posted by Neil on October 18, 2009 08:51 PM
I disagree with Neil. The sports authority was set up as a separate entity. It has specific tax revenues it can draw on (hotel, parking). The public finance investing world is well aware of this. Everyone knows that it isn't the City or the County. If it defaults, that will only affect the ability of the sports authority to issue more bonds and/or build more stadiums. It won't affect the City and County bond ratings. If anything, the City and County using money to bail out something they don't have to will make City and County bondholders wonder what the heck is going on and THAT will lower the ratings.
I also re-urge anyone interested in this to evaluate Jack Rains' credibility in this area. Check his reputation and most people's view of his understanding of public finance. There are better sources than he. Also beware of public finance professors at not-exactly-prominent colleges.
Posted by JJMB on October 19, 2009 09:31 PM
I disagree with Neil. The sports authority was set up as a separate entity. It has specific tax revenues it can draw on (hotel, parking). The public finance investing world is well aware of this. Everyone knows that it isn't the City or the County. If it defaults, that will only affect the ability of the sports authority to issue more bonds and/or build more stadiums. It won't affect the City and County bond ratings. If anything, the City and County using money to bail out something they don't have to will make City and County bondholders wonder what the heck is going on and THAT will lower the ratings.
I also re-urge anyone interested in this to evaluate Jack Rains' credibility in this area. Check his reputation and most people's view of his understanding of public finance. There are better sources than he. Also beware of public finance professors at not-exactly-prominent colleges.
Posted by JJMB on October 19, 2009 09:32 PM
You can argue that there should be a firewall between sports authorities and local governments when it comes to bond ratings and the like, but historically local governments don't treat it like that. They tend to figure better safe than guilty by association, and do whatever is necessary to prop up failing authorities.
It's always possible Houston will be the exception to the rule, but I'm not holding my breath.
Posted by Neil on October 19, 2009 10:05 PM