Commentary: Why can’t the proposed soccer stadium bond be a traditional municipal revenue bond? With a revenue bond, bond holders look to the bond project – not the taxpayers – for payment.
On August 16, the Albuquerque City Council passed resolution R-21-187 which puts the following question on the November 2 ballot: “Shall the City of Albuquerque acquire property for, and to design, develop, erect, construct and otherwise improve a public stadium for multiple uses, including, but not limited to, professional soccer events to be financed by up to $50,000,000 of its gross receipts tax revenue bonds?”
Although the resolution describes the proposed bond issue as “gross receipts tax revenue bond”, it is more akin to a general obligation (GO) bond. Bond holders will not have a lien against the stadium but, instead, a claim against future gross receipts’ taxes. Here’s the Investopedia definition of a GO bond:
“A general obligation bond (GO bond) is a municipal bond backed solely by the credit and taxing power of the issuing jurisdiction rather than the revenue from a given project. General obligation bonds are issued with the belief that a municipality will be able to repay its debt obligation through taxation or revenue from projects. No assets are used as collateral.
A general obligation, or GO, bond is a type of municipal bond that is backed entirely by the issuers creditworthiness and ability to levy taxes on its residents. Unlike revenue bonds, GO bonds are not backed by collateral and do not pay creditors back on the basis of income generated from funded projects. The amount of taxation available by a particular GO bond may be specified as either limited or unlimited. In the case of an unlimited GO bond, a municipality may increase property taxes accordingly to cover its payments and obligations.”
In contrast, if the bond holders could only look to the stadium for satisfaction of the bond indebtedness, that would be a revenue bond. Here is the Investopedia definition of a revenue bond.
“A revenue bond is a category of municipal bond supported by the revenue from a specific project, such as a toll bridge, highway, or local stadium. Revenue bonds that finance income-producing projects are thus secured by a specified revenue source. Typically, revenue bonds can be issued by any government agency or fund that is managed in the manner of a business, such as entities having both operating revenues and expenses.
Revenue bonds, which are also called municipal revenue bonds, differ from general obligation bonds (GO bonds) that can be repaid through a variety of tax sources. Revenue bonds are a class of municipal bonds issued to fund public projects which then repay investors from the income created by that project. For instance, a toll road or utility can be financed with municipal bonds with creditors' interest and principal repaid from the tolls or fees collected. Revenue bonds, unlike GO bonds, are project-specific and are not funded by taxpayers.”
I have some comments and observations.
1. According to the New Mexico United website, the team has seven owners: Ed Garcia; Jason Harrington; Ian McKinnon; Jos Shaver; Ben Spencer; Sloan Swanson and Peter Trevisani.
2. A general obligation bond will primarily benefit the team owners and not the taxpayers of Albuquerque. With a general obligation bond, the bond underwriter will be able to secure a lower interest rate because the bond is considered safer as it is backed by tax revenues. Lower financing costs would allow the city to be able to charge less rent for the stadium, greatly benefitting the team owners. In contrast, if the bond issue were a traditional revenue bond, the interest rates would be higher because the bond is considered riskier. However, if there were a default in bond payments, the creditors could only look to the stadium property to recover losses. The taxpayer is not on the hook.
3. Maybe I’ve missed something, but I’m not aware of any contract between NM United and the City of Albuquerque binding the team to a long-term lease if and when the stadium is built. If we wait to enter into contract negotiations until after the stadium is built, what happens if the team says no to a lease? Isn’t the city’s best leverage to make stadium construction contingent on NM United doing a number of things before there is a bond vote? Those requirements could include signing a long- term lease, substantial up-front payments toward the stadium construction and personal guarantees from the owners in the event of lease default.
4. To say that the proposed bond question is open- ended is an understatement. We don’t know how much the land is going to cost because we don’t know where the stadium is going to be. Shouldn’t we know where the stadium will be located before there is a bond vote? The stadium has a projected “bare bones” cost of 50 million. Does that mean that the ultimate cost will be millions more?
5. The history of minor league sports teams being successful in Albuquerque is dismal. I’ve lived here for over 40 years and believe that only the Dukes and Isotopes have lasted longer than 10 years. We’re being asked to spend a ton of money for a sports’ franchise with a very brief history in the city.
6. In light of the fact that the New Mexico United owners are not contributing any substantial sum to the proposed stadium construction costs and have not agreed to personal guarantees in the event of a lease default, it’s unfair to put a 50 million dollar plus tax burden on the city’s taxpayers.