Thursday, August 13, 2009

CIB Demands More Taxpayer Money Three Days After Tax Increase Passes; City/CIB Says Pacers May Need More Than $15 Million

I have to admit, even I thought the Capital Improvement Board would wait more than three days before demanding more taxpayer money. On Monday night, 14 of the 15 Council Republicans put their political futures in jeopardy by voting to increase the hotel tax, giving Indianapolis the highest hotel tax in the country, as part of a plan to borrow and raise additional taxes for the Capital Improvement Board over the next few years. I bet more than a few of those 14 Republicans Councilors were jarred awake this morning reading the Indianapolis Star article that less than three days after that vote, the CIB is back hat in hand trying to get more taxpayer money, including money for the Pacers.

Here is what Francesca Jarosz reports about the Pacer issue:

After a series of painful budget cuts, months of political wrangling by state lawmakers and a precariously close vote by the City-County Council, now comes the hard part for the Capital Improvement Board.

The fact is, the CIB, which oversees the city's stadiums and the Indiana Convention Center, still faces enormous challenges.

Among the most difficult will be hammering out a new financial agreement with the Indiana Pacers, who, after years of losses, say they can no longer bear the entire $15 million cost of operating Conseco Fieldhouse.

...

The Pacers

Among those challenges is finding a way to help the Pacers.

The team has lost $200 million since Herb and Melvin Simon bought it in 1983, said Pacers spokesman Greg Schenkel.

The Pacers have made clear, Early said, that they can't continue to sustain those kinds of losses.

"I don't want to downplay the fact that there's some urgency," Early said. "We're either going to have to (find a solution), or we run a real risk of them not being in Indianapolis." Schenkel said the team's intention is to stay here forever, and that's why it's important to continue discussions with the CIB.

The team's 20-year contract, signed in 1999, allows the Pacers an option of terminating early if they can show they are facing financial hardship, Early said. Although the team has not asked to renegotiate its contract, it has given the CIB financial documents to show it is losing money. CIB officials and city leaders have pledged they will continue to work with the team, but at this point, there are no concrete solutions.

Paul Okeson, chief of staff for Mayor Greg Ballard, said the city must get a sense of how much money the Pacers need before discussing a funding solution.

He said an agreement with the club could cost even more than the estimated $15 million the CIB would have to spend to operate Conseco Fieldhouse.

"Everything is on the table," Okeson said. "No doubt we're in a tough financial position, but we've got to make it work."

If the city and the CIB find an answer to more funding, it might need City-County Council approval. Some council members say that could be difficult, especially because the hotel-tax increase to keep the CIB viable was approved on a 15-14 vote.

"I'm doubtful that we're going to get much council support," said Council President Bob Cockrum, who also sits on the CIB.

...
So after insisting the Pacer issue was "off the table," the CIB and the Ballard administration has put it back on the table three days after the vote. This time though it's not just the $15 milion. They want taxpayers to shell out even more to the billionaire Simon brothers.

Because there seems to be some confusion regarding exactly what the Pacer agreement actually says regarding early termination of the contract, I spent an hour or so reviewing it this morning. It's no wonder that people, including attorneys, are offering different conclusions about what the provision says. It (actually it's two lengthy documents - a financial agreement and an operating agreement) is poorly drafted and incredibly difficult to follow. (The Colts Lucas Oil Stadium agreement while terribly one-sided, was at least easy to read.) According to the Indianapolis Business Journal, if the Pacers terminated early, the team would have to pay a penalty of between $50 million and $125 million. WXNT Radio Host Abdul, who is an attorney, reviewed the agreement and came to the conclusion the IBJ was wrong and that the Pacers could quit the agreement early without paying the penalty.

After reviewing through the Pacer agreements, I reach a third conclusion. My reading of the agreements (which admittedly could be mistaken) are that the Simons actually don't have the right to simply pick up and move the team. To summarize and simplify, the 10 year early termination provision appears to only apply if the Simons 1) can prove the team is losing money; 2) they decide to SELL the team; and 3) it will be relocating to another city. (For those playing at home, this interpretation comes from the convoluted Section 4 of the Financial Agreement, a single-spaced paragraph that stretches from Page 3-5; the penalty provision is in Section 5).

If the Simons do that, then the early termination provision applies, which provides a complicated formula for figuring the penalty. Basically it is a multiplier (which declines every year of the lease) times the net proceeds the Simons would receive from the sale. In 2009, the multiplier is 50%. So if the team is sold for $300 million, then the amount owed the CIB as a penalty would be $150 million.

There is a cap on that penalty - $50,000,000 plus a "scale amount" that declines every year. Let's stick with 2009 as our example. In 2009, the most the early termination penalty could be is $50,000,000 + $92,000,000 (the scale amount for 2009) = $142,000,000. Thus, if the team sold for $300 million in 2009, the Simons would owe the City $142,000,000 to quit the lease early since $142 million is less than $150 million.

If you look at the "Scale Amount" and the declining multiplier, it is apparent that the penalty for the Pacers terminating the contract early in the second 10 year contract period would be substantial, even larger than what the IBJ reported. It is only near the end of the 20 year agreement that the numbers drop enough to make paying such a penalty a financial option for the Pacers. Translation: the Simons have no leverage to force the City/CIB to fork over $15 million more plus until several more years, at least.

Of course, this all presupposes the City and the CIB would actually enforce a contractual penalty. Like the uncollected revenue on the Virginia Avenue garage the Pacers have never paid the CIB as contractually required, the City/CIB does not seem to ever want to hold the Simons' feet to the fire. They would rather ask taxpayers for the money rather than hold the Simons to their Pacer-Conseco Fieldhouse Contract. If the Republicans on the Council did not regret their vote Monday night, they should be doing so this morning. They were played for suckers by the administration and the CIB. Unfortunately, there is no other way to describe the foolishness that took place Monday night.

14 comments:

Downtown Indy said...

Don't you just love the way the game is always played? Lay out SOME of the parameters, get a Council vote on that to lock in part of your plan, then lay out some more parameters and go for a little bit more of your plan. Repeat until you have it all.

I believe we taxpayers are farther in debt and losing more money than the Simons are.

It is time for 'No' and 'Enough' to become part of the CIB/City vocabulary.

jabberdoodle said...

Shameless.

Maybe the 15 aye voters could consider the old adage, "Fool me once, shame on you. Fool me twice, shame on me."

HOOSIERS FOR FAIR TAX said...

I told those councilors to stop feeding the monster. They are spineless cowards.

Jon said...

Please sign me up for some of this corporate welfare. Where else can you go where we build the buildings and give you all of the revenue from those buildings?

Sean Shepard said...

Paul - in one of the recent Council Committee meetings didn't a CIB official indicate that the Pacers were meeting all of their financial obligations to the city? I believe this was in response to a question Ed Coleman (L - at large) asked.

This runs counter to what a lot of us keep hearing about the garage situation (which you mention) ... what's the real scoop here and how do we know for certain?

american patriot said...

I think the city county council should have been forced to watch the movie 'Major League' before they voted, maybe they would have noticed the similarity in the movie's plot to have the team lose money to escape having to stay in town.

Paul K. Ogden said...

SS, Pat Early did say that. He made the argument that the Simons didn't have to pay for the garage parking spaces because they showed they weren't reaching certain income thresholds. I did not see that "out" in the parking garage contract (which is a separate document) though I could have missed it or it could be in another document. Welsh probably would know better than me.

These Pacer contracts (with the exception of the parking garage contract) are extremely difficult to read. I've always believed in drafting documents so that ordinary people can interpret them. It's not the language so much in the Pacer contracts that's confusing, it's how the stuff is structured. There is no reason, for example, to write a provision that is one paragraph stretching over three pages.

Downtown Indy said...

Oh sure there is, Paul. When you are hoping people will get cross-eyed after the first page and not read what you slipped into pages 2 and 3.

Claudia Beck Treacy said...

Is there a difference between a panhandler and a Pacer? They both start with "P."

Paul,
"...Simons didn't have to pay for the garage parking spaces because they showed they weren't reaching certain income thresholds."

I must be missing something here. It appears to me you are discussing a "welfare" program?

Downtown Indy said...

OK, so the Council has been contemplating the sale of most of the city golf courses, which they say nets the city $1.3M annually.

But they maintain a tight grip on Conseco and LOS even though they cost us many tens of millions each year.

Do you think they have priorities all wrong or what?

I understand today they 'tabled' the sell-off idea for now. Frankly I don't know why they are even worrying about golf courses at this point in time.

Sean Shepard said...

@ Downtown Indy ...

Councilor Ed Coleman (Libertarian - At Large) offered a proposal to EVALUATE the sale of city owned golf courses (game/entertainment facilities) for purposes of determining their value and potential financial benefit to the city by eliminating them and, in the process, shrinking city government and possibly paying down debt.

My understanding was that both Democrats and so-called "small government" Republicans (Google "Bait and Switch" and "Truth in Advertising") voted to table the bill.

Downtown Indy said...

Now Sean, I wasn't pointing fingers at anyone, least of all calling out Ed in any way.

I have no qualms about selling of the courses. I was just noting that a (minor) money-maker is being scrutinized while those other two (huge) loss leaders continue to have millions poured into them.

HOOSIERS FOR FAIR TAX said...

Didn't Greg Ballard talk about selling city assets on his campaign trail? I do seem to remember that subject coming up more than once.

Paul K. Ogden said...

My only qualms about selling the golf course is that, although this would seem to be a no brainer, this city is likely to screw it up.

You know how Indianapolis politics works. They don't sell anything they can give away. They'd end up giving the golf courses away to campaign contributors, getting nothing in return. Heck, no, the city would probably give away the golf courses to campaign contributors with the promise the city would pay all the maintenance costs on the courses. That's the way this city works.