The Goldwater Institute expresses grave reservations over the forthcoming issuance of bonds by the City of Glendale to help finance the private purchase of the Phoenix Coyotes. The City appears to be taking an extreme and possibly illegal gamble with taxpayer money. The Institute plans to provide a formal evaluation of the deal in the near future, but releases this statement in light of the bond ratings issued Wednesday by Moody’s Investor Service in connection with $116 million in bonds the City plans to sell next week.
The Institute has been examining the deal between the City of Glendale and Chicago businessman Matthew Hulsizer, in which the city would pay $100 million to Mr. Hulsizer to purchase the Phoenix Coyotes and $97 million to the team to manage the Glendale arena over the next 5½ years. The $100 million payment to Hulsizer will be financed through bonds that are supposed to be repaid from parking revenues. The Institute questions the constitutionality of the deal under the Gift Clause of the Arizona Constitution and as an enormous financial risk that would be borne by Glendale taxpayers. The deal was hastily approved by the Glendale City Council without the benefit of reliable or comprehensive financial analysis or a meaningful opportunity for Glendale residents to evaluate the deal in advance.
Although a more formal and comprehensive financial analysis will follow, the Institute raises the following specific concerns at this time:
1. As a result of the proposed issuance of bonds, Moody’s reduced Glendale’s overall bond ratings, which means that Glendale may have to spend more tax dollars for all of its debts and future borrowing. Among the factors contributing to Glendale’s rating downgrade are “the city’s high debt burden” and “high leverage of the city’s largest general fund revenue.”
2. The City Council was assured, based on a study by T.L. Hocking & Associates, that parking revenues would be sufficient to repay the bonds. As we will present in our more formal analysis, we believe that conclusion is inaccurate and based on faulty assumptions. Our investigation suggests Glendale residents will be forced to contribute heavily to the repayment of the bonds through taxes.
Moody’s evaluation confirms that Glendale “has pledged a second lien on its excise tax revenues, which consist of unrestricted local and sales use taxes, state shared revenues, and other fees and charges to make [bond] payments.” That means that Glendale taxpayers will pick up the tab for bond repayments if costs exceed parking revenues. If the Coyotes fail once again to become a money-making team, the financial exposure for Glendale taxpayers could be significant.
3. We have learned that Glendale’s consultant, T.L. Hocking & Associates, on whose report the City relied in determining that parking revenues would be sufficient to repay the bonds, is the defendant in a pending lawsuit by Allstate Life Insurance Company. Hocking provided a similar analysis and financial projections to the Town of Prescott Valley in connection with the construction of an event facility, for which $35 million in bonds were sold in 2005. The bonds were issued at investment grade and later were downgraded to junk-bond status. Allstate was the largest bond-holder and sued Hocking and others for fraud. Allstate alleged that Hocking and other defendants “intentionally and fraudulently increased event and attendance projections to inflate projected revenue and achieve an investment-grade rating.” Those are the same types of projections on which Glendale relied on Hocking to provide for this bond sale. On November 4, 2010, U.S. District Court Judge Murray Snow found that Allstate had stated a reasonable claim for fraud and refused to dismiss the action. Allstate Life Ins. Co. v. Robert W. Baird & Co., Inc., 2010 U.S. Dist. LEXIS 123834 (D. Ariz., Nov. 4, 2010).
The Goldwater Institute believes the financial risk of the Coyotes deal to Glendale taxpayers is far greater than disclosed to the City Council or to Glendale residents. Although we appreciate the City’s desire to retain the Coyotes, the financial risk appears enormous and the transaction appears to violate the Arizona Constitution. We urge the City to reconsider its bond sale.