Is the Houston Sports Authority Following a Sustainable Path? -Or, Can We Keep Our Sports Teams? Professor Steven Craig Department of Economics University of Houston Introduction • My goal is to get you worried if you care about sports in Houston • We borrowed $1B to build Reliant, Minute Maid, and Toyota Center • And now we owe $2B • We gave the Sports Authority about $50M per year in tax money to pay off the debt • But that money is now committed 20 years past the expiration of the current stadiums, • Meaning we have zero financial capacity to replace them Outline • My talk is in three parts • I. What is the Appropriate Role of Government for Stadiums? • II. History of Houston Sports Authority • How to start a new government- HSA founded in 1998, stadium construction and financing started in 2000. • How did we get in this financial mess? • The role of insurance • III. Current Financial Situation of HAS • Few Cash Reserves, large debt after 2032 • IV. I am leaving unanswered, “what should be done?” But I’m trying to make the goal clear What is the Optimal Stadium Finance? Theoretical View • Should the Public Sector Pay for Sports Stadiums? • Residents cheer their teams on public media, and so we should all pay • Not everyone is a sports fan, the media gets paid through advertising • The HSA was created by a referendum: “tyranny of the majority?” • One subsidy to the three teams is basically the tax revenue, about $50M/year (less the extent that the teams generated the rental cars and hotel rooms that are taxed) Optimal Stadium Finance: Practical View • Competition with other cities • =“World Class City Effect” • Which might effect firm location/Marketing of Houston • Because there are many other cities which would like our sports teams • Las Vegas • Austin • Phoenix • Tucson • Florida • Salt Lake City “Optimal” Role of the Houston Sports Authority • If stadiums last 30 years, we want the stadiums to be paid off at the end of the 30 years, so we can build new ones • If, as in the current situation, bonds last past the 30 year life of the stadiums, the Sports Authority should have sufficient cash-on-hand at the end of the 30 years so all the outstanding bonds can be paid when they are due (=“user fees”) • BUT, in any case, the residents of Houston should have their tax money to finance new stadiums. • Which allows us to keep our teams here Why do we have a “Houston Sports Authority?” • Separate from all other local governments. • I’m not sure of the genesis, but it seems to me the history of the Astrodome is the key. • Dome is owned by Harris County • County abused by Bud Adams (Houston Oilers) • $90M Dome renovation, followed in one year by a demand for a new stadium • Left with a big bill after the stadium was abandoned (>$32M) • And, of course, the costs of renovation (>$105 M) Early History of HSA • Created in 1997, after 1996 state legislation • Mayor of Houston and County judge jointly appoint a chair, and 12 other members of a Board of Directors (6 each) • Minute Maid Park built 1997 • Reliant Stadium/NRG Stadium built 2000 • Toyota Center built 2001 • Total Cost, just over $1 Billion Financial Organization • Totally separate government, no local official backing (=independent) • Authority is financed by two taxes, rental cars and hotels (“= from visitors”) • So the question is: “How can a government with no history” borrow $1B to finance 3 stadiums • (HSA also helped with BBVA Compass Stadium, but without a financial commitment) Bond Insurance • Purchased for the benefit of bondholders-- those lending the money • The insurance company agrees to pay the bondholders if the Authority cannot • Result, the safety rating of the bonds is that of the insuring company, not of the government • So if the insurance company is AAA, so are the bonds • And the insurance worked: $1B bonds issued • Which means the tax free interest rate is low Financial Good Times 2005 Debt Service Coverage 2005 Debt Service Coverage (cont) Unfortunate History • “Bad luck” happened when the crisis of 2008 hit • One bond provision of HSA bonds was that if the credit rating falls, the bonds are immediately callable. • Which means the HSA needed to pay them off immediately • Which is what happened in 2008, the credit rating of the insurance company fell, and the HSA had to pay off their bonds- with almost no money in cash reserves • I do not know if the insurance company was “cheap” (maybe the quality was not as high as possible) More History (sigh) • So the HSA borrowed new money to pay off the old • The interest rate was much higher, so the Authority could not make the debt service, so they used negative amortization bonds (capital appreciation bonds) • This means that the interest on the bonds is being paid by additional borrowing, rather than cash (borrow $1B, pay back $2.4B) • Compared to the earlier financial statement, we can see the deterioration of the HAS’s financial status • I am first going to show 2011, and then finally the “stabilized” financing of 2014 (with new insurance company) 2011 Revenues and Expenses 2011 Expenditures 2011 Net Result Current Financial Situation • New debt is capital appreciation bonds (negative amortization) • Current rent and taxes are insufficient for debt service • Even more worrying, there is a lot of debt due after the stadiums are supposed to expire in about 2032. • The next slide shows HAS debt in 2013, that goes through 2041. • And the following slide shows the impact of the 2014 refinancing, where HSA “stabilized” its finances by pushing out repayment to 2053. Debt Owed as of 2013 Impact of 2014 Borrowing • Borrowed $558M, paid off $37M, but these are just the face amt 2014 Bond Maturity Amount = $430.9M Original Principal = $90.3M Approximate Annual Revenue Notes to Revenues • Tax revenues have been significantly below forecast ($33.8M in 2005) • Technical changes in economy • Interest earnings about half of those in 2011, (which had a declining cash balance of about $75M) • Suggesting there is not much of a cash balance • But, the goal needs to be that there is cash reserve in 2032 = to owed debt • Otherwise, current taxes will pay for old stadiums, leaving no resources to buy new ones • And of course, no rent Future Looks Worrisome • The current taxes are pledged through 2053, need new stadiums in 2032 • The cash balance (no data) appears to be very low, and the $430M due after 2040 is an under-estimate of debt due after the stadiums are done in 2032 • One interesting fact is that the Astros have two five year options after 2032. I don’t know about the other teams • And it appears these options are at the Astros choice Summary and Conclusion • The HSA has fallen into a financial mess • It has tried to get out of it by extending financing to 2053 • There is one externality that it does not seem to be considering • Which is what will happen in Houston after 2032? • There are a lot of cities that would like major league sports • Austin, San Antonio, Las Vegas, Tuscon,… • If all the current tax revenues are pledged to pay bonds on the current stadiums through 2053, how are we going to compete? • The HSA needs a big bank account by 2032, so we can use the current taxes for the next round • To do so, it would have to raise taxes/prices now (parking).