The arena funding model
| Relies on paying back $200 million in state-backed bonds over 30 years using arena revenue and Phil Knight’s $100 million donation, which is expected to accumulate $50 million additional donations. Arena revenues are estimated between $10 and $15.5 million, according to CSL International. Why are the bonds taxable? 1) Because the current financial market makes them cost little more than non-taxable bonds. 2) Taxable bonds come with greater freedom about how they are paid back. This allows the athletic department to have more for-profit deals, such as advertising and alternative vendors. |
A feasibility study completed by University faculty explores the legality of the arena financing plan
| Faculty have long worried that the $200 million arena bonds might be taxable. If the bonds were found to be taxable, yet the state sold them as non-taxable, the University could face stiff fines from the IRS and lawsuits from investors who bought bonds they thought were tax free. In February, the Emerald spoke with IRS spokesman Bill Steiner, who said he couldn’t imagine the state improperly selling tax-free state-backed bonds, which would violate arbitrage laws. And the state didn’t, announcing on Thursday that all the bonds would be taxable, thus avoiding arbitrage violations. University faculty raised their concerns about how the bonds might need to be taxed when they completed their own arena feasibility study earlier this year. Here is the full-text of their findings as published in their report, dated Jan. 8, 2008. A) Tax-exemption subsidy – arbitrage regulationsThe Federal tax-exemption subsidy is available under stringent rules administered by the Internal Revenue Service (IRS). A primary abuse that the IRS monitors concerns so-called tax arbitrage. Tax arbitrage occurs when a borrower issues tax-exempt bonds at low, subsidized interest rates and then, taking advantage of the fact that State of Oregon bonds are not subject to taxes, opportunistically invests the tax-exempt bond proceeds in investments which offer higher rates of return because most investors are subject to tax. Potential Penalties for Arbitrage ViolationsIn the event that the IRS brings action against an issuer the following penalties are possible, according to Mr. Schickli: B) Limitations on use Debt at the UO-Subsidy from the State of OregonBy agreement with th |
The state treasurer determined this week that all of the $200 million bonds approved by the state legislature for the University to build the basketball arena will be taxable – possibly adding up to $2 million per year to the debt payments.
The bonds’ taxable status could raise the total annual debt payments for the athletic department to as much as $16.5 million, which the athletic department plans to pay back over 30 years using arena revenue. That number includes debt from the land purchase, which could be paid off quicker, however.
Nevertheless, revenue projections for the arena have varied from as low as $4 million in the 2004 ECONorthwest report, to as high as $15.5 million in a feasibility study from CSL International.
“I think we really need to go back to the revenue estimates and run it out over the next 30 years to see if this will be manageable,” said University Senate President Gordon Sayre, who has scrutinized the arena project while working for the senate’s arena subcommittee. “An extra $2 million is not a small amount.”
University General Counsel Melinda Grier said the University has done so and determined it can still make the debt payments with help from Phil Knight’s $100 million donation, which is expected to accumulate $50 million in additional donations.
The Oregon State Board of Higher Education will decide June 6 if it wants to proceed with the funding model and sell the bonds to national investors.
But University and state officials say the taxable status might actually help the arena earn more revenue because unlike tax-free bonds, the taxable bonds come with no restrictions as to the kinds of revenue that can be used to make debt payments.
For example, interest revenue from Knight’s donation couldn’t be used to pay back the bond debt on a non-taxable bond because it violates arbitrage, an IRS tax law.
Under the new taxable model, that money can be used to directly pay back the bond debt, as can other more rigorous profit strategies such as alternative vendors and advertising.
“The University is gaining maximum flexibility here so it can generate the maximum amount of revenue for the building,” said Kate Cooper Richardson, chief of staff in the State Treasurer’s Office. “It’s not so unusual for us to do a fully taxable deal.”
Originally, only 20 percent of the $200 million of state bonds were assumed to be taxable, said Legislative Fiscal Office analyst Steve Bender. “As we do more public-private partnerships, and do other things with the private sector, that sort of changes the flexibility that we need because the IRS is fairly strict about that,” Grier said.
The University also used fully taxable bonds when it purchased the Williams’ Bakery lot and during construction of the Lorry Lokey underground science complex.
The bond interest rate could be somewhere around 5.5 percent, which is only a few percentage points more than a tax-free bond, Grier said.
New concerns
Since September, University administrators have assured skeptical faculty that the arena funding model wouldn’t violate arbitrage tax law.
Arbitrage prevents public institutions from using revenues – such as high-interest investments – to pay back debts on low interest rate bonds.
Now that all of the bonds are taxable, it shows there was at least some merit to faculty concerns.
“I feel vindicated to some degree,” Sayre said. “But I’m also more terrified than ever.”
But Richardson noted that the taxable status will raise money for the state.
“Over time, those benefits outweigh the additional interest rate cost,” she said.
But that doesn’t change the extra burden it puts on the athletic department, which has already agreed to accept 70 percent of the debt payments on a $10.9 million bond that will be used to pay for the $18 million parking structure.
Sayre said the reason the funding model looked good before was because the Legacy Fund, which was established by Knight’s donation, was leveraged against the state bonds at the lowest possible interest rate.
“So now the advantages of that leverage are greatly diminished,” he said.
Grier said she couldn’t be sure the athletic department will be able to earn more revenue.
“I can tell you that the financial models still work with this interest rate and it gives us enough flexibility that it isn’t a concern,” she said.
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