On Wednesday, the University of Louisville agreed to increase its annual lease payment to the Louisville Arena Authority, which manages the arena in which Louisville plays its basketball games, by $2.42 million each year. The vote to approve the new deal was a contentious one, and not all of the university’s board members were happy about the result.
“U of L athletics has lived up to every aspect of a good-faith agreement, exceeded all of its commitments and promises in that agreement and what are we guilty of? Success,” said Larry Benz, an athletics association member and former chairman of the university’s board of trustees.
He claimed U of L was “strong-armed” into the new deal and called the Yum! Center an “absolutely failed economic initiative.”
“Failed economic initiative” is actually a kind way to describe Louisville’s arena. The arena authority, which secured much of the construction costs through public financing, was supposed to have its debts paid off by 2020, but its revenue projections have fallen short and the authority is currently on track to default on its debts. Last month, a scathing audit of the authority’s financial position was released, in which it was determined that 75 percent of the arena’s operating income is being generated by public tax revenue, and that the authority wildly miscalculated its projections. From the Louisville Business Journal:
Harmon told the committee that the Yum Center TIF’s financial projections used 10 years of property tax data but 16 years of sales tax data. That meant a sales tax rate increase from 1990 was reflected in the financial projections, setting unrealistic expectations for the TIF from the onset.
With tax increment financing, a portion of the sales and property tax revenue generated within a designated area is used to fund a project.
Harmon’s office found TIF revenues have fallen as much as two-thirds below projections. A chart presented during the hearing showed a gradual increase in the TIF revenue over the years, though well below projections. The TIF revenue was $10.3 million in 2016, compared with a projection of $15.9 million.
This happens all the time with publicly-financed stadiums. The arena authority asks the city for hundreds of millions of dollars to build the thing, the city tries to pay for it with tax revenue that ends up falling well short of everyone’s projections, and then a scramble to avoid defaulting begins. That scramble is what led to this week’s new lease agreement with the university, which the authority hopes will allow it to refinance the arena’s outstanding bonds.
Don’t feel too bad for the university, though. The increased lease payment will put a squeeze on its budget, but the arena authority is coming for even more public money from the city. Arena authority chairman Scott Cox told the Courier Journal that they are hoping to finalize a new agreement with the city that would increase its financial burden by more than $100 million:
In the original deal, signed in 2007, the city started off by making a minimum annual payment of about $6.5 million, which would have cost Louisville taxpayers $206 million over 30 years.
If the city amends the arena ordinance and continues to make the maximum payments throughout the debt schedule, it would pay around $309 million in total toward the Yum Center’s debt.
Always remember that whenever a city makes a terrible deal to pay for a sports arena, there’s a good chance that the deal will only get worse as time goes on.