By all estimations, the University’s plans for a new, state-of-the-art basketball arena to open in 2010 will prove a winning proposition for everyone. Assuming that a few remaining hurdles – including the acquisition of land neighboring the vacant Williams’ Bakery – are cleared, construction of the arena can begin.
But questions regarding the University’s means of funding the operation are swirling before a single shovel even breaks ground. The Emerald reported yesterday on an obscure tax law known as arbitrage – an action the University could find itself in violation of if it doesn’t tread carefully.
If a public body, such as a state university, takes out a low-interest bond, then immediately turns and invests the bond in a higher-interest-rate market, it is committing arbitrage. The incentive for an institution to do so would be to exploit the price differences in separate markets, and make an instant profit as a result of these differences.
Talks on the future of the arena had stalled, but Phil and Penny Knight’s $100 million donation to the University’s athletic department reinvigorated plans to move forward. It suddenly seemed that the athletic department had nearly all the money it would need to build the arena. But the picture became cloudy when the University revealed its plans to take out $200 million in bonds from the state to pay for construction costs. None of the donation money from Phil and Penny Knight would be used to build the arena.
Instead, the donation is being used to establish the Oregon Athletics Legacy Fund, with the aim of providing a financial safety net for the athletic department. This money will be invested and could yield returns as high as 10 percent. By contrast, the bonds will come with an interest rate of only 4.6 percent. The University plans to pay the loan back with the revenue the new arena is expected to bring in. That number is expected to fall between $8 and $14 million annually.
The bond, meanwhile, will cost the University $11 million to $12 million per year. So if the revenue from the new arena were to fall closer to the low estimate of $8 million, the University would be forced to dip into its own pockets to pay the remaining bond debt. But if the University paid for it with money from the legacy fund – invested money earning returns in excess of the 4.6 percent bond interest rate – that is arbitrage. As a result, the University would be forced to pay taxes on the difference between the two interest rates.
University officials insist this scenario won’t play out, and it is unlikely to be a problem once the arena opens – so long as the legacy fund isn’t used to pay back the bond. Plans for the new arena estimate its seating capacity to be between 12,500 and 15,000. That’s between 2,500 and 5,000 more seats than are in McArthur court. It should make millions of dollars for the athletic department to spend at its discretion. Furthermore, the Duck Athletic Fund, which consists of uninvested donor money, could be used to compensate for a potential revenue shortfall, should one occur, with no legal ramifications whatsoever.
As it stands, the new arena should pay immediate financial dividends upon its opening. But all of this uncertainty calls for greater transparency within the University’s and athletic department’s methods of financial allocation. That the issue of legality can even be brought up in this process raises caution flags. The University should fully inform the public as to how it plans to borrow, spend and repay the money in order to avoid much of the uncertainty surrounding the issue.