Audit of Louisville Arena Authority finds U of L, arena board fa - WDRB 41 Louisville News

Audit of Louisville Arena Authority finds U of L, arena board failed to finalize payment on time

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LOUISVILLE, Ky. (WDRB) – State auditors faulted the Louisville Arena Authority and the University of Louisville for failing to finalize annual payments for use of the KFC Yum! Center on time – the lone finding from a review of the arena board released on Thursday.

But Kentucky Auditor Mike Harmon raised other issues during his office's five-month review of the agency, noting that an arena renovation fund hasn’t been properly replenished and the board apparently failed to competitively seek a new contract for an arena management company when it extended AEG’s agreement in 2015.

While those aren’t included as findings in the audit, they are “important matters for consideration in the Authority’s governance of arena operations,” Harmon wrote in a letter to Scott C. Cox, the arena authority chairman.

In a separate statement, Harmon alluded to the lack of a new lease with U of L, the building's main tenant, that would provide millions of dollars more each year toward arena debt. He said "there is no firm commitment from other key parties to provide additional funds." Cox and U of L officials said later Thursday that they were close to a deal.

The audit's single finding deals with a revenue-sharing agreement between the university and the arena authority that breaks down how much U of L pays to the arena after each basketball season. In both 2016 and 2017, Harmon found, the payments totaling $2.74 million were calculated and made late.

Harmon's office found the delays could result in errors going unnoticed and create cash flow problems for the arena board, which has struggled to pay off construction bonds.

Kenny Klein, a U of L athletics spokesman, said in a statement that it was "disappointing" that the audit didn't specify why the payments were made late. He said the university provides periodic updates during the season about projected revenues and makes its payment soon after the calculation is done. 

Cox, whom Gov. Matt Bevin appointed as arena authority chair last year, said in an interview that he takes responsibility for the delays and U of L should not be blamed. A new lease with U of L should give more time for all sides to correctly determine what is owed, he said. 

"Certainly we still take very seriously the comments and some of the criticism that he had of the arena authority," Cox said of Harmon. "We view that as constructive criticism that we want to act on and do a better job."

The audit was requested last fall by the Kentucky General Assembly’s capital projects and bond oversight committee, which long had raised concerns about the arena authority’s ability to make debt payments on the Yum! Center’s state-issued construction bonds.

Harmon expanded his office's review beyond an audit of the arena authority's financial statements,

Auditors analyzed the status of a fund that was supposed to be stocked with $3 million per year to repair and renovate the arena that opened in 2010. Instead, they found it had $642,700 at the end of last year.

Cox acknowledged that the renovation fund and other accounts are running low balances, saying "that was just really a symptom of our financial problems."

Harmon's office also found that the arena authority has never hired a consultant to evaluate projected revenues for debt payments.Bond documents require such a review after revenues fell to a level barely above the amount needed to make the payments.

Auditors also said they were unable to show that the arena board followed a competitive process when it extended AEG's contract in 2015 for 10 years. The authority was not required to solicit other bids because the contract was amended, Ed Glasscock, the board’s general counsel, said at the time. 

As part of its agreement, AEG guarantees an annual operating profit to the arena board of $1.5 million. Earlier this week, the company presented a budget for the upcoming year that includes a record 28 concerts at the arena.  

“They really do a marvelous job running the arena, and we’re very happy with them,” Cox said.

State Rep. Jim Wayne, D-Louisville, said the audit and Harmon’s observations will be helpful to lawmakers and the arena authority. Wayne was a member of the bond oversight committee when it asked for the audit.

“There were things left unsaid that I think we still have to shine some light on, but overall I’m pleased with what Auditor Harmon and his team did,” Wayne said.

He said it’s also important for the arena authority to make whole its debt to Kentucky Venues, which was known as the Kentucky State Fair Board when it managed the arena from its opening in 2010 until 2012.

A spokeswoman told WDRB News last fall the agency believes it is owned more than $11 million for revenue lost when U of L’s basketball teams moved to the downtown Yum! Center from Freedom Hall at the Kentucky Exposition Center.

“The fair board is now coming hat in hand to the legislature and saying, ‘We need more help just to keep ourselves afloat and to maintain our facilities,’” Wayne said.

The authority, appointed by Kentucky’s governor and Louisville’s mayor, uses a mix of city, state and other funds, including revenues returned by U of L, to pay off the bonds.

With annual debt payments set to rise sharply over the next decade, the arena authority has warned it won’t be able to fulfill its obligations as early as 2020. Wall Street analysts now consider the bonds to be below investment grade – commonly known as “junk” status.

Meanwhile, the arena board has begun taking steps to reorganize its finances and plans to refinance its bonds later this year.

In March, state lawmakers approved adding 25 more years to a tax increment financing, or TIF, district near the arena that lets the authority collect sales, property and other tax revenue for project debt.

The Louisville Metro Council has given Mayor Greg Fischer the flexibility to approve a new arena payment from Metro government, which now sets aside $9.8 million a year for the building’s debt.

But the arena authority and U of L have yet to finalize an amended lease under which U of L would return at least $2.5 million per year more to the authority, although it’s unclear how the additional contribution would be structured.

Cox had said Monday that he was "extremely concerned" that a deal hadn't been completed. Speaking Thursday, however, he indicated that an agreement may be imminent.

“I believe we will have a deal – a new modified lease agreement with the University of Louisville – very soon. Very soon. … They have really stepped up to the plate and I think they’re going to do more than their share to be a partner in this financial restructuring," he said. 

Harmon’s office plans to brief the state bond oversight committee about the audit, the TIF projections and the arena’s revenue-sharing agreements at the panel’s June 20 meeting.

Reach reporter Marcus Green at 502-585-0825, mgreen@wdrb.com, on Twitter or on Facebook. Copyright 2017 WDRB News. All rights reserved.

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