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LOUISVILLE, Ky. (WDRB) – By many accounts, 2016 has been a banner year for the KFC Yum! Center.

The NCAA men’s basketball tournament returned in March, drawing 39,000 fans to games that included eventual national champion Villanova. In June, arena officials announced the number of events had reached a three-year high. The building was in the international spotlight for Muhammad Ali’s memorial service that same month.

But the success of the Yum! Center isn’t tied to basketball games, concerts or family shows. Saddled with more than $690 million in outstanding construction debt, its long-term financial footing instead depends on a mix of public and private funding – including a sometimes volatile state sales tax subsidy.

Thus far, those revenues have been sufficient for the Louisville Arena Authority to make annual debt payments. And while the politically-appointed board expects to have enough money to meet its obligations until 2020, “after that we are going to have some issues if we don’t change some things,” Scott C. Cox, the board’s chairman, said at a Nov. 14 meeting.  

The concerns are not new. Bond analysts have cited a “narrow” amount of excess revenue for debt payments that are only going to increase in the years ahead, rising from roughly $23 million this year to more than $30 million a year during much of the next decade.

Against this backdrop, city, state and arena officials have begun seeking changes to the arena’s financial deal with the University of Louisville and agreements that divert millions of dollars from state and Metro government. In particular, the arena authority wants to refinance its debt, in hopes of reducing the annual costs, and extend a downtown tax district for an additional decade.

“It’s easy in a situation like this, when you know you’re in good shape for three or four years, to kick the can down the road,” Cox told the arena authority. “The governor does not want us to do that. None of us want to do that.”

U of L officials have declined to speak in detail about the prospect of a revised lease. The current deal largely gives the university scheduling control of the building and decides how revenues from suites sales, concessions and U of L basketball games are shared.

Since leaving Freedom Hall for the downtown Yum! Center in 2010, the U of L men’s basketball team has become the most valuable program in the nation. Gov. Matt Bevin, who named Cox to lead the arena authority in June, has described the university’s lease as “overly generous from one direction” and suggested it ought to be changed.

At the same time, a state legislative panel has asked Kentucky Auditor of Public Accounts Mike Harmon to conduct a special examination – and possibly an audit – of the arena authority. Harmon, a Republican, was elected in 2015; his predecessor, Democrat Adam Edelen, declined to pursue a formal audit in 2014. Harmon’s office is reviewing the request, a spokesman said.

Rep. Jim Wayne, D-Louisville, has pushed for a state review of the arena authority for years and helped lead the renewed effort by the General Assembly’s capital projects and bond oversight committee for an audit.

“This is an effort on our part to clear the air, so to speak, to get all the facts out there, so the public can be reassured that the arena authority is being run in the best way possible and the taxpayers that are subsidizing this arena in several different fashions – that they have full knowledge of what’s going on and that there aren’t any financial hidden secrets anywhere,” Wayne said at a meeting Nov. 15.

Wayne also is seeking clarity on a dispute between the arena authority and the Kentucky State Fair Board, which operates Freedom Hall at the Kentucky Exposition Center. The board claims it’s owed $11.1 million in revenue that was lost when U of L’s basketball teams moved to the Yum! Center. 

Tax subsidy struggles

At the heart of the arena’s financial struggles is an economic development tool called tax increment financing.

In most cases, the concept is simple: Allow developers to recoup a portion of the annual, incremental growth in tax revenue generated from their projects to help cover costs. It doesn’t add new taxes.

For the Yum! Center, Kentucky determined the amount of property and sales taxes in a six-square-mile area around the arena prior to construction. Assuming the project would spur new businesses and sales in that area, officials agreed to let the arena authority keep 80 percent of any annual increase in those taxes.

The tax increment financing, or TIF, district was projected to return millions of dollars back to the arena authority each year. Those tax revenues would be more than enough to cover the debt payments for the life of the bonds, according to estimates at the time.

A TIF district that performed in line with projections also would allow Metro government to pay a smaller amount towards the debt service. The city pledged $6.3 million each year toward arena costs, and up to $9.8 million if other revenues fell short.

However, the TIF district has failed to meet its forecasts, prompting the Metro Council to approve shrinking the district to two square miles in 2013 – a move supporters said would better capture arena-related business. The city also began making the maximum arena payment that year.

The slimmed-down TIF has grown each year since then but still lags behind the earlier projections. It generated $25.8 million for the arena authority from 2013 to 2015, or about $10 million less than anticipated.

But Louisville Metro Council member Kelly Downard, who in 2007 co-sponsored the measure allowing the city to make the minimum annual payments, said concerns about the TIF are misguided. He noted that, for example, the $10.3 million produced in 2015 is roughly the same as the $9.8 million projected for 2013. 

“It’s increasing at the right amounts,” he said. “It’s growing at the right amounts. We just got started late.”

Metro council ordinance

For its part, the council also wants changes to its arena subsidy. An ordinance filed this month seeks to eliminate the minimum payment, agreeing to lock in the maximum contribution from the city’s budget each year.

If approved, the measure would commit Metro government to roughly $240 million in Yum! Center payments through 2039 and forego the possibility of paying the minimum amount of about $160 million. The council’s budget committee plans to take up the measure at a meeting on Thursday.

The proposal is contingent on other steps, including state approval of the extended TIF district and a new U of L lease at the Yum! Center that directs more of its arena revenue toward debt.

“This is an opportunity to get the conversation going,” said Metro Council President David Yates. “I don’t know if anything will happen immediately.”

Yates said locking in a firm commitment from the city is necessary if the arena authority hopes to raise analysts’ opinion of the arena bonds, which are now viewed as below investment grade – commonly known as “junk” status.

The arena bonds are insured, and the authority has more than $15 million in a reserve fund that can be tapped if all other revenues fall short. In a worse-case scenario, the authority would default on its obligations and raise the possibility of bankruptcy. (U of L would have the first right of refusal to buy the arena in the event of a foreclosure.)

Louisville Mayor Greg Fischer, who along with Bevin appoints the arena authority, said his administration has been working on changes to the arena’s finances for about three months. Asked if it’s possible the city will have to increase its annual contribution beyond the maximum amount already, he said, “I certainly hope not.”

“There’s definitely multiple pathways forward,” Fischer said. “It is going to require a partnership, though, to do that – between U of L, the state and the city.”

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