Will a Kings arena lawsuit against the city end up costing taxpayers a lot more than $1.4 million? As in more like upward of $150 million?!
Or is Mayor Kevin Johnson and city leaders to blame for much-higher arena-subsidy costs?
This week, sources inside City Hall told SN&R that an unsettled arena lawsuit could cost taxpayers big-time bucks.
Here’s the logic: The city of Sacramento needs to sell bonds to finance paying its share of the new Kings arena, which is under construction now near L and Fifth streets.
Last May, when City Council approved the final arena deal, City Treasurer Russ Fehr estimated that Sacramento would issue bonds at a 6.7 percent interest rate. At the time, Fehr called this number “more than a bit conservative.”
Turns out he was right: Interest rates went down since then. Fehr says that if the city “went to market today, [the rate] would be 5 percent. This is an incredibly low interest-rate market.”
How does that add up to saving Sacramento $150 million?
Consider: The annual debt obligation for the arena, as estimated last May, was $21.9 million. But this was based on the 6.7 percent interest rate.
Fehr speculates that if he could issue the bonds today at about 5.25 percent, the annual debt service would be $17 million a year.
Over the 30-year life of the bonds, that would save Sacramento nearly $150 million.
“It would also mean significantly less risk for the city,” Fehr points out. What he means by this is that, for instance, instead of having to come up with some $7.5 million a year in new parking revenue to pay off the arena debt during those initial six years of financing, the city would, in theory, only have to come up with $3.5 million.
That means less pressure to generate revenue, and more money to go back into the general fund, or pay for things like a performing arts center, etc.
There is of course a catch:
The city cannot issue bonds because of an unresolved lawsuit by residents Isaac Gonzalez, James Cathcart and Julian Camacho. Their case, represented by lawyers Patrick Soluri and Jeff Anderson, is set to go to trial in June. It may not be resolved until the summer, or even fall. Fehr says that he may not be able to issue bonds until late this year—or perhaps even next year.
The problem is that, he says, all economic forecasts for bonds, including three major bond indices, suggest rates will go up—and soon. “The projections now are now that rates are going to begin to increase, with most of the pressure on the 1-10 year rate,” Fehr explained to SN&R.
He says that Sacramento will pay an extra $2.5 million a year for every percent rates go up.
Needless to say, there’s chatter at City Hall lately about wanting to lock in this low rate ASAP. One-hundred-and-fifty million in taxpayer dollars is no small chunk of cheddar.
So now what?
First, it’s important to point out that City Hall officials probably should be pointing a few fingers at themselves over this conundrum.
Back in 2013, when a threat of the Kings moving to Seattle was real, city leadership struck what was basically a backroom deal with Kings investor Vivek Ranadive and others.
Only now, because the Soluri-Anderson lawsuit—which is accusing the city of fraud—do we have a sense of how this behind-the-scenes negotiation went down.
As outlined in a recent SN&R column by Cosmo Garvin, Kings investors complained to Mayor Kevin Johnson, City Manager John Shirey and Assistant City Manager John Dangberg that they were overpaying for the team in their bidding war with Seattle billionaire Chris Hansen.
Soluri says that the city sweetened the deal for the Kings by offering to pay for about $250 million of the arena, plus by giving upward of $200 million more in city assets, including property and land, digital-advertising billboards and parking spaces under the Downtown Plaza.
Fraud comes into play, Soluri claims, because Dangberg and others undervalued the digital billboards and parking spaces and knowingly misled the public.
“If K.J. and Shirey and Dangberg had not lied to the public” they would not be in this situation, Soluri told SN&R. “Sacramentans are not sympathetic to people who are lying to taxpayers.”
The attorney insists that his case will go to trial, and that they can prove city leaders defrauded taxpayers. If this happens, he says, a judge could order the city to set aside all agreements with the Kings and restructure the subsidy deal.
He told SN&R that City Hall has not reached out to him to settle the case.
“This lawsuit could go away tomorrow if they admitted the error of their ways,” Soluri said.
So how should this all play out?
City Hall insiders want Gonzalez, Cathcart and Camacho to tell Soluri and Anderson to drop the case. That their litigation doesn’t stand a chance. That the Kings arena deal is set in dry ink. That it’s over.
That’s probably a fair assessment: The likelihood of a judge freezing the deal and mandating any kind of renegotiation seems slim as spaghetti. Especially in light of what happened with last year’s STOP petitions.
Nevertheless, it’s worth praising the lawsuit. As Garvin wrote in a recent SN&R story:
“This lawsuit may not change anything about the arena deal going forward. It certainly won’t change many minds. Arena fans will see it as a nuisance; skeptics will say it confirms what they already knew. But at least it will have produced some information that ought to have been disclosed to the public a long time ago.”
The lawsuit, despite its hard-and-fast legal costs for taxpayers (upward of $1.4 million), was worth it.
That said, even if the trio of citizens behind the lawsuit were willing to settle, it’s uncertain as to whether the city would entertain such a scenario.
Some inside City Hall are furious with Soluri and Anderson. They’d much rather see a judge shoot down their suit later this year than offer a six-figure settlement. Some also say that settling would set a bad precedent.
But … if bond interest rates go up even half a percent over the next few months, that could end up costing the city more than $45 million. Isn’t it worth setting egos aside to save that amount of cash?
How about this:
The city should swallow its pride now and settle. The lawyers and citizens should accept. The lawsuit has proven what most of us were all were suspicious of, anyway. And the probability of further legal successes are unlikely.
The settlement should pay off the lawyers, but it also should include some type of community benefit for those impacted by the arena (small businesses, low-income workers, homeless downtowners).
In this scenario:
Sacramento taxpayers save north of $100 million.
The Kings and the city look like heroes for helping out low-income and underserved downtowners.
The plaintiffs also earn huzzahs for fighting for the truth—and for knowing when to admit defeat.
As K.J. would say, it’s a win-win.