Kentucky Auditor Mike Harmon: Louisville arena deal based on faulty projections
Harmon singled out the University of Louisville’s athletic association – the arena’s main tenant – for improving financially even as arena officials have struggled to pay off construction debt, prompting calls from some legislators for an audit of that U of L board.
FRANKFORT, Ky. (WDRB) – In a far-reaching analysis of the KFC Yum! Center, Kentucky Auditor Mike Harmon told lawmakers Tuesday that the project was based on “unrealistic” financial projections and repeatedly emphasized the large public subsidy that goes to the downtown Louisville arena.
He faulted the Louisville Arena Authority, the oversight board appointed by Kentucky’s governor and Louisville’s mayor, for outsourcing all of the arena’s operations – a move that has led to a web of contracts and some revenue that’s not even reported to the board.
And Harmon singled out the University of Louisville’s athletic association – the arena’s main tenant – for improving financially even as arena officials have struggled to pay off construction debt, prompting calls from some legislators for an audit of that U of L board.
“Overall, the net positions of the University of Louisville Athletic Association and the arena authority have been on opposite trends,” Harmon said at a meeting of the Kentucky legislature’s capital projects and bond oversight committee. That panel recommended last fall that Harmon’s office audit the arena authority’s financial statements.
U of L and the arena authority have been negotiating a new lease in which the university would contribute at least $2.5 million more toward arena debt per year than it now does. Harmon later said it’s “very important that the University of Louisville put more money in.”
John Karman, a U of L spokesman, said in an email that negotiations are ongoing, "and we are confident that a new lease agreement will be finalized soon."
The audit was released last month and contained one finding. It noted that the arena authority and U of L twice failed to meet deadlines for annual payments from an arena revenue-sharing deal.
The arena board risks the possibility of mistakes if the payments are calculated and made late, Harmon’s office found.
But Harmon’s presentation to lawmakers Tuesday was broader in scope. Time and again, he focused on U of L and how it “benefits significantly” from an arena deal that allows the university's athletics arm, for example, to keep 97 percent of suite licensing revenue at the Yum! Center and 88 percent of premium seating licensing monies in 2016-2017.
The university’s revenue at the arena, negotiated before the building opened in 2010, has come under fire in recent years as the main source of paying back the project’s construction bonds has failed to meet original projections. Only recently has the tax increment financing, or TIF, district near the Yum! Center generated more than half of its projected revenue.
The TIF district counts on annual increases in sales and property tax revenues – with the arena authority getting a portion of the yearly increases to help pay off debt.
Kentucky state officials provided the original estimates in 2007, a year before the arena’s bonds were sold, using a study from U of L economics professors.
But Harmon told lawmakers that those estimates were based on flawed data that included using a 16-year analysis for sales tax and a 10-year review for property taxes. Most notably, he said the projections factored in a 1 percent increase in the sales tax in 1990 that skewed the overall figures.
“The faulty analysis of the overly high growth rate contributed to the unrealistic expectations of the TIF performance,” the auditor said.
Harmon’s report to the committee vindicates those who believe the TIF projections were manipulated at the project’s onset to get the arena deal done, said Sen. Chris McDaniel, a Republican from Taylor Mill in northern Kentucky.
McDaniel said Harmon, a Republican and former state representative, is the first public official “with the guts" to look at the financial issues surrounding the Yum! Center. McDaniel said the arena deal “unfairly” funnels public money to U of L’s athletic association.
“The taxpayers are being fleeced. Period,” McDaniel said.
Harmon’s office noted that it was difficult to fully understand how U of L has benefited from the Yum! Center, since the university receives some arena revenues directly without an accounting with the arena authority.
At least one legislator, Rep. Jim Wayne, a Louisville Democrat, called on Harmon to perform a separate audit of the athletic association.
Harmon told reporters after the meeting that his staff will discuss the proposal.