The funding plan for the new basketball arena has the potential to violate tax laws, but whether the plan violates the law depends on legal interpretations, and the University insists it won’t.
The University’s arguments are backed by the interpretations of two law firms, but the legal question demonstrates how the complexity of the funding model takes the University into uncharted territory, which spawns looming questions in the minds of those who closely watch the athletic department.

The funding model’s possible illegality centers around Nike founder Phil Knight and his wife Penny Knight’s $100 million donation.
That donation established the Oregon Athletics Legacy Fund, which with future donations is expected to grow to $150 million. That money will be invested at an interest rate as high as 10 percent and will provide “financial stability” for the athletic department.
Instead of using Knight’s donation to pay for construction costs, the University plans to take out a $200 million loan from Oregon taxpayers.
Here’s how it could break the law: if the athletic department uses revenue from the legacy fund to pay back the $200 million loan, it would violate an obscure tax law called arbitrage.
But why is that a problem? Because arbitrage law is intended to prevent public entities – such as universities or city governments – from taking out bonds at low interest rates and then investing them in another market with a higher interest rate in order to make an instant profit.
The issue could apply to the athletic department’s funding model because the legacy fund will be invested at a high interest rate, but will take out the $200 million loan at only a 4.6 percent rate. If the legacy fund revenue is used to pay back the debt it would create an instant and tax-free profit.
But even if the University is found to be in violation of the tax law, the greatest punishment wouldn’t be harsh enough to restrict the University from completing the arena, said Melinda Grier, the University’s general counsel. The athletic department would be required to pay taxes on difference between the interest rate of the bond and the interest rate on the legacy fund.
Moreover, the University can avoid this problem if it simply doesn’t use the Knights’ donation to the legacy fund to pay back the debt – which is something administrators are certain won’t happen.
“We’re not going to do anything wrong,” Grier said. “We just wouldn’t do that.”
Instead of using the legacy fund to pay back the debt, the University plans to use revenue from the finished arena for the annual debt payments, which are estimated to be $11.5 million per year.
But early projections show the arena will only generate between $8 million and $14 million annually, so if revenue from the arena comes in short, the athletic department will need to draw from another pool of donations, the Duck Athletic Fund. The Duck Athletic Fund is a donation stream that can be used for athletic department expenses, and it’s not being invested, which is what sets it apart from the legacy fund.
Nevertheless, for those watching the plan closely, it’s worrisome.
“It’s an unknown how much risk it poses,” said Gordon Sayre, University Senate president and member of a Senate subcommittee that is analyzing the plan. “We’ve been trying to keep things in perspective and not rush to judgment on the details of what the administration is telling us.”
Administrators say they have the backing of both the UO Foundation’s Bond Counsel and the State Board of Higher Education’s Bond Counsel.
“They give us very good legal advice,” Grier said. “They would tell us if this was going to be a problem. If we were going to be using (the legacy fund) to pay the debt they would have concerns about it, and rightly so. But that’s not what we’re going to do.”
But how would anyone know the difference if the athletic department used money it earned from the arena or money it earned from the legacy fund to pay back the debt?
“You don’t just put a little tracker on a dollar bill,” Grier said. “What (the IRS) is looking to see is what’s happening.”
Grier said that if the legacy fund was the athletic department’s only revenue source then the IRS would say, “That doesn’t look good to us.” But because other revenue would flow into the athletic department from the future basketball arena, Autzen Stadium and the Duck Athletic Fund, the IRS would understand that the legacy fund wasn’t being used to pay back the debt.
“I’m comfortable with what we’re going to do,” Grier said. “We’re not going to use the legacy fund to pay off the debt. We’ll use revenues and other donations.”
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