PAWSOX: “Snatching Defeat from the Jaws of Victory” - Guest MINDSETTER™ O’Neill
Thursday, July 05, 2018
Guest MINDSETTER™ Jim O'Neill
I’m saddened; I supported the original plan whereby the State of RI would have provided the “backstop guarantee” “recourse” for those purchasers of the Tax-Exempt Bonds if the project failed to meet projections. Specifically, the debt was to finance purchasing of the Apex land site, improvements, and construction of the ballpark. I spoke at three of the tour sites the Senate organized on their plan (State as the backstop); and all the House committee meetings on their plan (no State backstop).
I offer this primer to the reader to understand my concerns over the current approved legislation in terms of dollars and cents. Citizens are familiar with AMORTIZATION (equal monthly payments over 30 years); this method enables many families to purchase homes at a comfortable financing level based upon their incomes.
The newest “deal” now requires $71 million to be borrowed by the Pawsox organization through the PRA (Pawtucket Redevelopment Authority) with an additional $12 million equity contribution up front by the Pawsox. No State backstop on these revenue “non-recourse” bonds.
The Pawsox are responsible for 46.5% of the $71 million bonded debt; or $33 million. Besides the $12 million cash up front; they’re responsible for ALL cost over-runs. I am using a Tax Exempt 4% state-backed bond interest rate vs the PRA 7% (my estimate) for purposes of this exercise.
Using an amortizing schedule; the Total principal and interest costs over 30 years at 4% equals $122 million rounded; 5% equals $137 million; 6% equals $153 million; 7% equals $170 million and on and up! This amounts to a $48 million cost increase; a $22.3 million increase (46.5%) to the Pawsox with that interest rate differential from lowest to highest; (4% vs 7%).
Cities and Towns, like the State, have the taxpayers as “recourse”. They use a borrowing method called level principal with declining interest rates; usually 20 years. If this method could be used for 30 years it would cost less; $33 million more using the 4% to 7% differential spread. The team’s share: $15.35 million at 46.5%. This form of financing is not recommended because the P & I costs are at their highest in the early years when the debt proceeds are most needed to build.
The State has a pristine Moody’s rating of Aa2; Pawtucket’s rating A3, five levels under the State; and the PRA (Pawtucket Redevelopment Authority) is hoping for Baa1 rating, barely investment grade. The rating could even be lower because the debt is “Non Recourse” no backstop by any entity. The Treasurer’s State Debt report states: “Pawtucket, a weak tax base, with severe pension and health care liabilities.”
The underwriting team will price the bonds based on the (1)credit risk of the project obligations; (2) the ratings from Moody’s, Fitch, or Standard & Poor’s; and the (3) yields and maturities buyer portfolios need. Hopefully, they can reduce the total cost even more. However; there will remain a multi-million dollar increase in costs to the PRA (Baa1) vs the State’s plan (Aa2). A good sales force, of course, will whisper to the buyers “you don’t think for a moment the State would allow this to fail (shades of 38 Studios); which at least had State backing and insurance)!
Why is the Senate’s Finance Chair boasting about “not one more penny above Pawtucket’s share towards building the stadium? He finally admits what everyone already knew; this is a massive state and city redevelopment project using the Pawsox as an anchor.
If you want the Pawsox to remain in RI you must use the State’s pristine credit rating and CALL THE HOUSE BACK INTO SESSION. Asking the Pawsox owners and the city of Pawtucket to cough up another $48 million using the amortization spread as an example is not putting out the “Welcome Mat.”
Please don’t let this House plan fool you into thinking the State is not “back-stopping) these bonds. The State’s citizens are very involved; giving up personal income taxes; sales taxes; naming rights along with TIF income (the tax incremental financing method to attract new business) to help pay off the bonds.
The total House and Senate members voted to approve this legislation: 81 approve; 22 against; nearly 80%. The commissioned polling pros had the public voting 60% to 80% against. Those pollsters; they just don’t understand the people have no voice!
Important observations never discussed:
1. The Pawsox owners were the only successful RI purchase offer to the Ben
Mondor estate’s heirs.
2. I can count on one hand the praise offered to the Pawsox owners. Risk-takers
whose success has brought jobs, taxes, community betterment and the
recognition that Rhode Island just might have its act together despite itself.
3. I fervently hope the news reports that the House’s financing plan will cost $83
million more than the Senate version is a scribe’s error. Otherwise, we have
entered the land of ridiculous with over $200 million in total debt costs!
4. Philanthropic: the Pawsox lose money with a 50% increase in attendance;
(400,000 to 600,000). At ($8 per ticket X 600,000 = $4.8 million). Yearly debt
cost: ($2.6 million); Lease ($1million); Salaries ($2 million) etc etc etc.
The House must RECONVENE; lest we recall Ernest Thayer’s poem: “there is no joy in Mudville tonight; for the mighty Casey has struck out”. A synopsis of this poem tells us “that the team was down two runs in the ninth with two men in scoring position when the mighty Casey came to bat; being so overly confident he didn’t bother to swing at two fastballs down the middle;” and the rest is history.
Jim O’Neill lives in Wakefield and is former baseball coach and Red Sox fan. He is also a former South Kingstown Town Councilman.