The Stadium Squeeze Is On

Does anyone here know how to play this game?

here's a mad rush on for the Phoenix City Council to approve a $200 million downtown stadium. Between now and Tuesday, councilmembers will be subject to a last-minute razzle-dazzle to try to convince them that the deal--which has yet to be finalized--is really the best the city can expect to get and requires final council action now! The bottom line is to stampede the council into giving the go-ahead for the stadium this Tuesday without bothering to ask voters what they think.

Several councilmembers are quaking in their boots about making such a decision, especially with an initiative to clip the council's wings already on the October 3 ballot. The Voters Initiative Coalition proposal, if approved, would require voter ratification of major sports and entertainment facilities with a price tag of more than $3 million.

Councilmembers also are hesitant to rely on the unproved--and unprovable--assumption that interest rates (and, therefore, stadium costs) are going to go up if they don't act immediately. And they are also not pleased that city staffers and negotiators for the stadium deal have treated them like mushrooms, keeping them in the dark about crucial details while shoving a little bit of fertilizer their way as necessary.

Under such circumstances, placing the stadium issue on the ballot would be the safe political decision. But getting a downtown stadium may require more guts than political savvy: There is some evidence that the deal negotiated by the city staff is the best that Phoenix is going to get. And, for a number of reasons, any delay could cause the whole thing to fall apart.

In 1986 Congress finally closed the loopholes in federal tax law that allowed cities and counties to float tax-free bonds for a variety of projects, such as football stadiums, that really don't qualify as necessary government services. But lawmakers from Arizona inserted a "transitional rule" giving Phoenix until the end of this year to issue tax-exempt bonds for a stadium. These bonds carry a lower interest rate than those on which the interest is taxable. That translates into a lower cost for the city and the developer.

There are other problems with referring the stadium question to the voters. The deadline for adding items to the ballot is August 4, which in theory should give the council a few more weeks to act. But the council has scheduled its annual month-long summer vacation to start July 20. What's more, city staffers--with the help of their bond counsel--are arguing that the council will face higher interest rates on its tax-free bonds if it waits for voter approval in October.

A memo from Goldman, Sachs & Co. to city Finance Director Kevin Keough suggests that swings of more than two percentage points in interest rates on municipal bonds "have not been uncommon in recent years." And that, the memo says, could translate into an additional $50 million on the project cost.

Benjamin S. Wolfe, a Goldman, Sachs vice president, prepared the document after discussions with city staff. The staffers then turned around and shared it with the council, feeling free to add their own comments on how interest rates now are at the lowest they've been in years. The message to the council was clear: Waiting until October might mean more money.

But is the memo merely a ploy to scare the council into action? While detailing what might befall the city if it doesn't act "immediately," it never mentions what advantages there might be to waiting. And not everyone believes that interest rates are on the rise.

Moe Beren is an investment counselor with PaineWebber. He is advising his clients--the people who purchase municipal bonds--that they should buy now because interest rates are likely to go lower. In fact, Beren is going out on a limb and predicting that the prime rate, which affects all borrowing costs, could drop as low as 8 percent during the next year or two. That's a full three-percentage-point decline from current levels.

"Sure, there are going to be blurps in between, depending on what happens with the price of oil and in China," Beren explains. But the softening economy will force the Federal Reserve Board to ease up on the money supply, which will force interest rates down, he says.

(In fact, three days after Beren predicted lower interest rates, several major banks lowered their prime rate by half a point, to 10 percent.)

So why would Goldman, Sachs want to push for a final council vote now? The company doesn't make its money by giving advice to cities; it makes its money by selling bonds. City officials have promised Goldman, Sachs that it will get prime consideration when they choose companies to underwrite the $190 million in bonds. With fees now in the one-point range, a company that handled even a third of the bond issue would pick up more than $600,000.

Of course, if the question goes to the voters--who might decide they really don't want to pay for a stadium--

Goldman, Sachs walks away empty-handed.
But if the company is right and interest rates do go up, missing the chance to use tax-free bonds could kill the whole deal. Attorney Paul Meyer, the city's chief negotiator, says the numbers that will go to the council Tuesday are built on the assumption that the tax-free bonds can be sold at about 7 percent. "If interest rates go up two or three points, [Chicago developer] VMS Realty Partners might walk away unless the city picks up the additional cost."

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