It is often said in political campaigns for an executive office that Candidate A will run this state or municipal government like a business. Filter out all the social issue bluster, and that message wins elections: If Candidate A manages to get it across to voters that his hypothetical administration will be more businesslike than Candidate B’s, Candidate A will almost certainly win.
If only the analogy made sense, then the message would, too. But neat as it sounds, it is imperfect. The basic goal of a business is to maximize its ratio of incoming gross income to outgoing expense, producing the largest possible net profit for its shareholders. With government, “expense” still equals expense, “gross income” still equals gross income (incoming taxes, fees or fines), but there is no profit. Government breaks even in the best possible case. The rare revenue surplus gets put to use somehow. Ongoing surpluses will lead to calls for tax reductions.
Let’s say that for government, “profit” means total public benefit for its shareholders (taxpayers) at the smallest possible expense. Still, there are a lot of things to take into account that don’t strictly apply on private sector balance sheets. For example, what’s the benefit-to-cost ratio of firing or furloughing hundreds of municipal employees and cutting services? Sure, it’ll reduce costs, but a big influx of unemployed residents — which can have an echo effect on businesses — and an underfunded, overcrowded school system don’t do much in the way of making your state or city a desirable place for people to live and pay taxes.
Still, the most jarring divergence is where government invests its money. First, in traditional government expenses like schools, roads, sewers, police and fire — basic city infrastructure. Then there are less-traditional expenses: sports facilities, convention centers, hotels and so on.
Such projects often lose money and, taken at face value, produce a kind of benefit-type “profit” that is not easily measured — or in some cases, not tracked at all. And increasingly over the past few decades, the private sector has run away from them.
Why? Because the huge investment is too risky, unless the government pays for it.
Between 1994 and today, the Metropolitan Government of Nashville and Davidson County has committed itself to funding three highly visible, nontraditional projects: Bridgestone Arena, LP Field and the Music City Center. Each was offered with a similar promise: to bring economic prosperity, new entertainment and cultural mile markers to the city.
The initial costs — most of which is original construction and land acquisitions — stand at $292 million for the football stadium, $133 million for the arena, and $624 million for the new convention center, for a total of about $1.049 billion. Subtract the $67 million the state kicked in and $71 million in personal seat license sales that went toward the football stadium, and Metro’s end is $911 million. That doesn’t count interest on the eight original bond issues Metro did to raise the money:
Three for the arena:
• $60 million (Series 1994 General Obligation Multi-Purpose Improvement)
• $49.5 million (Series 1995 GO MP
• $23.5 million (Series 1996A GO Public
Two for the football stadium:
• $74.8 million (Series 1996 GO Public
• $78.9 million (Series 1996 Public
Three for Music City Center:
• $51.7 million (Series 2010A-1 Tourism
• $152.3 million (Series 2010A-2 Tourism
Tax Revenue Build America Bonds)
• $419 million (Series 2010B Tourism
Tax Revenue Build America Bonds)
Paying off the debt on those bond issues will have cost Metro more than $1.8 billion between when they were first issued and 2043, when the convention center debt is scheduled to be put to rest. Only $310 million of that — which will be Metro’s total debt service costs for the two LP Field bonds — was approved in a popular vote.
Meanwhile, Metro’s faced tens of millions of dollars in budget shortfalls every year for the past couple of years. Last year saw the Health Department cut 5 percent. The general government’s budget called for the elimination of 250 full-time positions. Public safety cuts were set at only $800,000, but that followed $8.3 million in cuts the year before. At the beginning of the past decade, Public Works’ budget was more than $90 million. That went down to $66 million last year. Federal grants, mostly, account for its rebound to $81 million this year. And even as it saw a $13 million increase in its budget, the school board privatized its custodial services, reducing wages for hundreds of janitors.
To try to avoid even worse cuts, the city turned to novel schemes to produce short-term deficit plugs. Since 2007, it’s been selling off interest on its delinquent tax receivables. It’s considered leasing out parking meters at city-owned lots to private operators. And last year, Metro restructured $190 million in long-term debt, yielding lower annual payments but with $47 million in added payments over the long term. According to Metro’s 2010 Comprehensive Annual Financial Report, debt fund balances — a contingency reserve left at the end of the year after debt service payments — shrank from $138 million in 2005 to $45 million in 2009.
The annual debt service tally comes out to about $20 million on the two sports facilities. (Of this, $4 million for LP Field comes from yearly payments-in-lieu-of-taxes from Metro Water Services, a non-tax revenue distinguishable from a tax revenue in that Metro Water’s income is derived only from those Nashville homes and buildings with running water. An additional $3.2 million comes from the hotel occupancy tax.)
Add operations costs — $1 million per year for stadium maintenance, a $7.4 million subsidy to the Metro Sports Authority, which is responsible for both facilities — and the total yearly tab on LP and Bridgestone is about $28 million.
The Music City Center’s annual debt service is estimated to be $18 million this year, going up to about $40 million per year in 2019 and staying there until the bonds are retired. So taken together, yearly debt payments on the three facilities range between $40 million and $60 million, or 30 to 40 percent of Metro’s total $137 million debt service budget — payments on every outstanding bond owed by the
government — for this fiscal year.
Metro’s total long-term debt as of the end of the 2010 budget year was about $3.5 billion, of which nearly half comes from just three facilities: the Music City Center and about $372 million that remains on the two stadiums.
“The criterion that I think should be applied is whether government should be involved in these investments in the first place,” said John Siegfried, a retired professor of economics at Vanderbilt University and secretary-treasurer of the American Economic Association.
Siegfried, along with Smith College economics professor Andrew Zimbalist, authored a 2000 paper called “The Economics of Sports Facilities and Their Communities.” It is highly critical of publicly financed sports facilities. This type of study was a burgeoning subgenre in economics at the time, and with very good reason: According to Zimbalist and Siegfried, more than $21 billion had either been spent or was committed to new or renovated sports facilities for major U.S. sports. Two-thirds of that — some $14 billion — would come from public funds. But economists could find no good reason to justify all that money.
“Few fields of empirical economic research offer virtual unanimity of findings,” Siegfried and Zimbalist wrote. “Yet independent work on the economic impact of stadiums and arenas has uniformly found that there is no statistically significant positive correlation between sports facility construction and economic development.”
There does appear to be some evidence to the contrary here.
From the mid-1990s, when construction on the facilities began, downtown Nashville and some adjacent neighborhoods have seen unprecedented development, billions in new high-rises, condos, retail, offices and restaurants. While much of it is near the sports facilities, it’s difficult to say how much credit LP and Bridgestone get for the boom, although they inarguably deserve some. Certainly other nonsports factors were at play, including continued music industry growth, proximity to one of the country’s best universities, the sudden trendiness of nearby East Nashville and other public money commitments — for example, the millions Metro government spent in infrastructure improvements in the Arts Center Redevelopment District (now The Gulch), then the millions more in tax-increment financing given to condo and retail developments like Icon and Velocity (both in The Gulch) or Encore in SoBro.
Public intervention is justifiable even in the absence of a positive economic effect, Siegfried said. It just has to live up to a few criteria: a project must be unable to attract private sector interest, and it must provide a significant public benefit, enough to offset the costs to the entire community.
“Economists have a series of criteria they call market failures, where government would get involved, such as huge-scale economies, i.e. roads,” he said.
But it isn’t as if there would be no football or baseball without public subsidies for stadiums. Teams have built their own stadiums in the past. According to “The Economics of Sports Facilities and Their Communities,” prior to the early 1950s, only three sports facilities in the entire country received public funding for construction: the Los Angeles Coliseum (1923), Chicago’s Soldier Field (1929) and Cleveland’s Municipal Stadium (1931), which, the report notes, were all built in a bid for the Olympics.
That, according to Siegfried, is the one area where something like LP Field comes out ahead, in a way.
“You and I feel better feeling we live in a major-league city because we have a football team here,” he said. “And we both know that Los Angeles is a backwater hicktown because they don’t have a professional football team, so we will benefit from this.”
But the Music City Center provides no home-team, major-league feel, or any of those intangibles. Its effect will be largely economic.
“It has an important attribute in that it’s replacing an existing one,” Siegfried said. “So the way to assess the benefits of it is not to look at the money being brought into Nashville by it. What you need to do is look at the money being brought into Nashville by the new convention center minus the money that would have been brought in by the old convention center. And then you compare that to the entire cost of the new convention center.”
That is, of course, already committed. And whether the new business can balance out 30 years of debt remains to be seen, and measured. Or not.
Certainly something has to support spending these huge amounts of money. Something does, on paper: an economic impact statement. It’s also used to structure the bond issue.
A consulting firm prepares an economic impact statement, in which it purports to demonstrate, in hard numbers, whether a major project is worth the expense, based on the new spending that project might generate.
More often than not, critics argue, the study doesn’t actually do that. Consulting firms like KPMG, the firm commissioned by former Mayor Phil Bredesen’s administration to determine whether Nashville would be a good home for the former Houston Oilers, or HVS, the one the Dean administration hired for Music City Center, are around to lend some credibility to a giveaway, they say.
“The economic impact study, whether we’re talking about the stadium or the convention center or whatever, they’re basically political tools. They’re not designed to be actual economic impact studies. They’re designed to be political tools so that people can credibly say, ‘Oh we have this study,’ ” said Metro Councilwoman Emily Evans, who opposed city financing for the convention center.
Metro Finance Director Richard Riebeling, a man who’s deeply, expertly involved in the entire major-bond-issue process, dismissed the idea that consulting firms — many of which have been conducting these studies for decades, and successfully — are offering less-than solid projections.
“The feasibility report is often used to assist in the structuring of a bond sale,” Riebeling wrote in an email to The City Paper. “I would suspect we would be subject to criticism (perhaps from the same individual) if a feasibility report was not undertaken.”
KPMG predicted that the football stadium, alone, would generate $19 million in new spending within Metro Nashville. That much in 1995 dollars is $26 million today. Of that, $5.6 million (nearly $8 million modern day) was expected to come from players’ salaries. Of course, during the offseason, many of the Titans players don’t live in Middle Tennessee. And many who do don’t live within the bounds of Metropolitan Nashville.
The study also predicts about $3 million ($4.2 million today) in attendee spending outside the stadium. The problem here is that most of the attending fans, unlike the players, probably live within (or at least near) Metro Nashville, where they’d be spending much — if not necessarily all — of that money anyway.
It’s not as if football doesn’t bring any money into Nashville. It does. Real money. It just goes back out again, said Siegfried.
“Let me point out the difference between football and, say, ice hockey,” he said. “It’s likely that football is what’s bringing money into Nashville. And that comes from one source, the national broadcasting contracts, and that’s over half of the NFL’s revenues, and it’s shared equally.”
True. Per team revenues on broadcasting were $95.8 million last year, according to an August report in Forbes. And there’s no real way to account for the cultural cachet of your skyline appearing on, say, Monday Night Football.
“We’re in a small market, so if left to our own like our hockey team is, football could not hope to generate the same amount of money,” he said. “That is a lot of money. Here’s the bad news: [Titans owner] Bud Adams just takes it all away to Houston. Or pays it to the players, who live where?”
In 1996, former Metro Councilman David Kleinfelter, current Councilman Eric Crafton and a handful of other naysayers attempted to derail the football stadium project, founding the group Concerned Citizens for Metro Nashville.
“To his credit, [Mayor Bredesen], he never tried to sell it as an economic development tool,” Kleinfelter said. “I think a lot of other people did. They felt a little less constrained by the facts, I suppose. He said he thought it was a luxury, that we didn’t need it.”
Times have definitely changed. In 2009 and 2010, the Dean administration put its full weight into securing approval of the $624 million financing package for the Music City Center.
According to the economic impact statement by HVS Convention, Sports, and Entertainment Facilities Consulting, the new convention center will not “stabilize” (begin to pay for itself through increased hotel tax revenues) until 2017. That year, though, the convention center — according to the report — will generate 207,000 net new hotel nights above what the old convention center generates now. That 207,000 comes from 154,000 attendees producing nearly 350,000 room nights, or about three nights apiece, average, according to HVS. What’s more, each one of those overnight stays will end in $296 of new spending per day.
The convention center actually has to generate those room nights or the city won’t be able to cover its debt service with hotel taxes, according to the bond statement.
Impact studies are often suggested to carry a suspicious enthusiasm. See, for example, the HVS study, which all but guarantees big returns — even though every city with even a marginal tourist draw is now competing for conventions. Asked if it’s at all typical to see a no-build recommendation, or even projections that might dissuade a city from issuing such colossal amounts of credit, Siegfried said: “No, because their whole purpose is to get a handout, i.e. public funding.”
The City Paper asked Riebeling if Metro was aware of whether consulting firms it’s used had ever issued a negative statement. He said that question would have to be put to the firms.
According to Thomas Hazinski, managing director of HVS, that would be outside of his firm’s obligation.
“Your question has an inaccurate premise. HVS provides independent third-party market and financial analysis, and our reports do not include policy recommendations,” Hazinski wrote to The City Paper in an email. “Rather, as in Nashville, we provide the information necessary for policy makers to assess the risks and benefits of projects. Our studies have never caused any project to happen. I hope this clarifies our role.
“That said, more often than not, proposed projects that we study are not built.”
Still, bond issues are not only justified politically with but actually structured around these projections. The $200 million A-bonds for the convention center can only be paid from tourism tax revenues. The 2010B issue, the one that accounts for the other two-thirds of the whole convention debt, is backed by Metro’s general fund.
That’s a big risk for Metro. It would only stand to reason, then, that it continues doing them because it can prove, through actual measurement, that past studies have stacked up, whether impact has justified expense. For the stadiums, that responsibility would seem to fall with the Sports Authority. After all, one of its explicitly stated goals is: “To continue to educate the public of the economic impact of the LP Field and Bridgestone Arena.”
“Oh, the impact is far greater for our total community, from the many events that come to the arenas,” said Sports Authority Chairman J.D. Elliott.
Asked whether he could produce any numbers demonstrating that, he directed The City Paper to the Nashville Convention and Visitors Bureau, which in turn suggested the Nashville Sports Council.
“Unfortunately, this data isn’t produced by anyone to my knowledge,” wrote the council’s Dave Herrell in an email.
To be completely sure, The City Paper went back to the Sports Authority, this time asking executive director Emmett Edwards for the economic impact numbers.
“I’m not aware of the [original impact] studies you’re talking about or how much it would be at this point,” he said.
No one in local government is actually tracking the economic effect of these buildings, so judging their success in spurring development is difficult. One measure is property values.
The land under LP Field was valued at $6.3 million at the beginning of the last decade, according to Metro Property Assessor records. It’s gone up to $6.9 million, an increase, but only 10 percent.
Even if it ultimately decreases in value, though, its neighbors are supposed to be the biggest beneficiaries. The gas station nearby, at Interstate Drive and Shelby, has fared better. Not only does it get stadium business, but its land has increased more than 100 percent in value (from $269,200 to $538,300) over the same period. The Ramada on Interstate Drive went from $614,000 to $924,600, about 50 percent. As well, a large swath of formerly industrial land is now inhabitable.
But LP, Bridgestone and the Music City Center won’t last forever. Convention centers rarely outlast the life of their debt, and sports franchises have a habit of periodically declaring their current facilities somehow inadequate.
“If you look forward 30 years, and tear the stadium down, there’s this big lot there,” Siegfried said.
Whatever benefit these projects may bring now, it’s unlikely that the piles of rubble and, ultimately, open lots they’ll become will bring any. And of course, demolition will be yet another public expense.
On the other hand, the value of Riverfront Park went from $6.3 million to $23 million between 2005 and 2009. The largest individual infrastructure expense there was the $2.3 million station for the Regional Transit Authority’s commuter rail line the Music City Star, installed there in 2006.
Adjacent properties typically saw similar increases, not to mention very obvious development. Some of this is almost inarguably attributable to the proximity of the sports facilities, if only anyone were checking up on that. The largest individual tract of the former thermal plant site, for example, was valued at $7.2 million in 2005. Four years later, even as it sat empty and the Nashville Sounds stadium deal fell through, it increased $1.4 million, to $8.6 million.
The entire rail line, by the way, cost $41 million to construct, less than one-third of the city’s bond issues on LP Field. Additionally, that cost was paid for by the Regional Transit Authority (which generates its budget from nine member counties) and the federal government. This fiscal year represented Metro’s largest subsidy to the project: $1.5 million. In past years, it had paid between $250,000 and $650,000, or sometimes nothing at all.
Riverfront Park is a telling example because it represents a combination of two economic enhancers — transit and parks — about which, unlike stadiums or convention centers, there is universal agreement.
We’ve seen huge expansions to the city’s greenway system in recent years, along with added bike lanes and sidewalks, futuristic-looking hybrid buses, and now, discussion of a new light rail line on the Broadway-West End corridor, although people who live along underserved bus lines in poorer neighborhoods might take some issue with that last project. Then again, city officials make the point that, even in the difficult 2010-11 budget year, the city increased Metro Transit Authority’s operating subsidy by $3 million, up to $23 million from $20 million the year before.
Throughout the convention center debate, the Dean administration argued that a fully realized economic development strategy should include both large, sudden stimulus projects and small, ongoing infrastructure improvements. So it’s not as if they don’t recognize the importance of the latter. And it’s not as if Metro isn’t making those types of investments, which it should. They increase property values (a solid measure of economic impact), encourage local business investment and provide services that are available to everyone, which people like. What’s really important, and maybe something Metro ought to consider the next time it prepares to commit to major, high-risk debt in the name of enhancement, is that smaller projects can provide major economic enhancement as well.
The fact that HVS was paid from the convention center bond issue itself is troubling to some. According to Tom Eddlemon, assistant treasurer for Metro Finance, $516,000 of the issue paid fees and expenses on financial advisory services. Of that, about $491,000 — $265,000 of which was the adviser fee — went to First Southwest Bank, Metro’s actual financial adviser. The remaining $125,000 was paid to HVS.
“This gets to the heart of the matter,” said Evans. “And that is that somebody decides that this is a good idea, and then because the money is so big and the fees are so big, everybody lines up behind it. Not because they necessarily think it’s a great idea, but because they get a piece of the action.”
FSW’s rate, which is $136,000 a year, is dependent on the size of the bond issue. In other words: bigger issue, bigger payday. This would appear to give FSW little financial incentive — though it does have a professional responsibility to its clients, of course — to put the brakes on something like the Music City Center bonds, even if it was an unwise move for the city.
“There is no difference in the financial incentive for either firm to recommend or not recommend bond issues — nor is it the role of the financial adviser to make policy decisions for the municipality,” Riebeling wrote.
But consider the chain of events and players that leads up to these bond issues. The consultant to the adviser to the lawyers to the underwriting bank — then of course, the PR firm who sells it to the public and council. The administration that now has a marquee project and won’t have to answer for long-term consequences of it once two terms are up. And it’s possible that the mayor may stand to gain politically from those members of the local business community who benefit. The law firm of Bass, Berry & Sims, which employs some of Dean’s largest and most frequent campaign contributors, made $750,000 as bond counsel on the MCC deal. Everyone gets paid.
Especially the underwriter. Total underwriter fees on bond issues and restructures that have included significant amounts of Bridgestone Arena debt have thus far totaled $7.8 million, and $1.4 million for LP Field. Then, of course, there was the $5.5 million to Goldman Sachs on the Music City Center.
Restructuring (aka refinancing or refunding) accounts for many of those fees. The five bond issues that represent the initial build costs for the two sports facilities have been restructured a total of 15 times (eight for the arena and seven for the stadium), each of which cost the city anywhere from hundreds of thousands to a few million dollars in overhead. Here’s the good news: Almost all of those refunds have saved a lot of money, even in the long term.
One representative example was the 2004 refund issued on the $78 million 1996 revenue bonds issued to pay for the football stadium’s construction. Under the original agreement, the bonds would have cost $161 million over 30 years. By the time it issued the refund, Metro had already paid out $48 million in total debt service on that. But in 2004, those bonds were refunded. The new bonds would cost $103 million in total debt service, for a grand total of $151 million, according to Metro Finance Department estimates from a 2008 report on the costs of professional sports. So Metro saved $10 million long-term, without even pushing back the 2027 payoff.
There is one exception to this prudent pattern, though: the 2006 interest rate swap on the other half of the stadium debt, which is, unfortunately, the half that’s backed by the general fund.
For readers who aren’t familiar, an interest rate swap is a type of derivatives transaction, and it’s a pretty high-risk one for a municipality.
In 2004, Metro agreed to give SunTrust the option (called a “swaption”) to force Metro to issue a $60 million adjustable rate bond refund on its stadium debt. If SunTrust called in its swaption, Metro would pay SunTrust a rate of 5.4 percent, but that wouldn’t actually be servicing the new debt. Instead, SunTrust would return a payment at a floating rate, depending on what the prevailing bond rate (or Bond Market Association rate) was. Metro would then use that money to pay off the adjustable rate bonds. In return for making the swaption agreement, Metro accepted a one-time $3.8 million payment from SunTrust.
In other words: Say rates were at 7 percent on the call date and SunTrust called in the swaption. Metro would pay SunTrust a rate of 5.4 percent, and the bank would return 7 percent to Metro. SunTrust wouldn’t do that, of course. Here’s an interesting line from the 2004 Metro Council analysis on the bill to approve the deal, emphasis added: “Thus, by entering into such agreements, Metro is hoping and assuming that interest rates are higher on the call date than the rates are presently.”
It’s a bet. Metro gambled that interest rates would be higher than 5.4 percent in 2006, and that SunTrust wouldn’t exercise its swaption. If that happened, Metro would just get to keep the $3.8 million for nothing. But when it actually came time, interest rates were at 3.6 percent. SunTrust Bank exercised the swaption, and Metro was stuck paying 5.4 percent interest on its then-3.6 percent bonds. On top of that, because that rate was adjustable, the refunded bonds were riskier investments and not as easy to sell to buyers as fixed-rate bonds. To secure its risk, then, Metro paid Depfa Bank, an Irish bank owned by German-based Hypo Real Estate AG, a yearly fee to essentially insure its now-less-attractive bonds, agreeing to purchase them if no one else would.
This is called a liquidity facility agreement, and Depfa was involved in a lot of them with local governments back then: Cook County, Ill., Fort Worth, Texas; Houston; the Utah Housing Corp.; the state of Illinois; and so on.
The only problem was that in 2008, all the scams underlying the absurd profits investment banks had been making finally revealed themselves, and the whole of the United States took its first big steps toward eventual third-worlddom. Cities — whose tax bases had taken some major hits — were broke and couldn’t afford their new muni-bond rates. So nobody wanted to buy the bonds.
That left Depfa — which, remember, underwrote many interest rate swaps for many local governments — obliged to purchase billions of dollars of essentially worthless municipal bonds. But Depfa couldn’t afford them. (In some widely reported financial news, the Federal Reserve last month admitted that, in an attempt to forestall a national municipal bond crisis, it handed over nearly $30 billion in emergency low-interest loans to Depfa in October 2008.)
Ultimately Depfa had to be bailed out by the German government, now the proud owner of its parent company. Meanwhile, Standard and Poors’ downgrade of Depfa to BBB — it was at AA- when it underwrote the Nashville bond issue — meant that Metro had to pay the bonds off in seven instead of 18 years.
Facing some pretty staggering bills, Metro had little choice but to refinance the debt yet again, this time through the Tennessee Municipal League’s Municipal Bond Fund, which arranged a $60 million loan from the Clarksville Public Building Authority.
Despite that hiccup, the net cost of LP Field’s original construction debt has not significantly increased. And, if you don’t count $21 million in post-build bond issues for renovations and ongoing costs since, or the $20 million 1998 issue to cover the city’s portion of the $80 million franchise startup fee the NHL charged the Predators, the same can be said about Bridgestone Arena.
Which is not to say that those are the only people getting paid. Metro’s contractors also get a piece of the action. More importantly, a piece of their piece will go to providing jobs — with decent wages and benefits — even to people who don’t have any outsize political influence. That only really does Nashville good if those jobs are going to locals. According to figures provided by the Convention Center Authority, some $322 million has been procured or committed to subcontractors; of that, $212.5 million has gone to local firms. About 60 percent of the total site workforce are Nashville-based workers.
It’s tough to accuse anyone of being too cavalier about existing sports debt here. But the important thing to keep in mind is that the debt exists in the first place, and not in a vacuum.
Every time Metro creates new debt on a potentially risky venture, it adds to its overall debt pool — the one that also includes bonds used to pay for roads, police stations, water infrastructure and so forth — adding to its overall debt service obligations, increasing overall yearly payments, draining debt service reserves, and ultimately exposing its credit ratings to added risk, a potential fiscal apocalypse if those ratings are significantly downgraded.
Such a mess can make wholesale debt restructuring appear an attractive option to term-limited politicians.
In the event that whichever mechanisms the city’s designed to pay off the yearly debt on these major project loans comes up short — a concern that Fitch Ratings had when, following the Music City Center vote and citing its strained reserves and “slim” coverage on the MCC 2010B bonds, it downgraded $1.6 billion of the city’s outstanding debt to an AA- from an AA — Metro has a few options, depending on the type of bond issue.
To not pay would force Metro’s bond insurance agent to pick up the tab, which will raise premiums and screw up Metro’s credit rating. So that’s no option. City officials could transfer additional money into Metro’s debt reserve fund. If it’s a general obligation fund — the type of bond used for half the stadium construction debt and all the arena construction debt — that money can come from anywhere else in the budget.
If, on the other hand, it’s something like the Series 2010B bond on the Music City Center, a revenue bond that requires a minimum of $26 million — equivalent to its yearly debt service payment — in its reserve fund at all times, that money can only come from “non-tax” revenues, departmental money generated by fines and fees rather than taxes. (A transfer like that is, in theory, just a short-term interdepartmental loan, unless of course the city has the same problem the next year.)
Another option is to restructure the debt for a lower yearly payment, but also potentially adding years and millions of dollars to total long-term debt service, not to mention multimillion-dollar costs of issuance. But that would also likely require added reserve funds to minimize the credit risk for an underwriter.
Those transfers, tax or non-tax, have to come from somewhere.
When every credit line’s been so complexly restructured and compartmentalized time and time again to the point that it’s impossible for a normal human being to understand just how much any single project costs, it’s not difficult to persuade voters that Metro’s money problems come from burdensome city services and public employee salaries, as we’ve seen to some degree in the past. As such, Metro will have to either make the politically difficult move of raising fees and taxes — although the voter-approved tax-rate cap, which wasn’t in effect when the stadiums were built, will limit that — or perhaps more likely, cut its expenses. That refrain becomes more common with each passing year.