Taxing Question

Law allows tourism authority to tap $1 billion for stadium construction

In a sleight of hand that would make Cardinals quarterback Jake Plummer proud, the Tourism and Sports Authority says if necessary it can tap all of the hotel and car rental taxes it collects to pay for stadium construction bonds before any funds flow to tourism, Cactus League and youth sports.

The amount of money at stake is huge.

The TSA quietly is pledging to bond underwriters every dime of the $1 billion it is projecting to collect over the next 30 years from hotel and car rental taxes to first repay construction of the Arizona Cardinals football stadium.

The pledge raises the possibility that in the event of construction cost overruns that are TSA's responsibility, additional bonds could be sold and repaid from tax funds earmarked for tourism promotion, the Cactus League and youth sports.

Senate Bill 1220, which was approved last November by voters when they narrowly passed Proposition 302, appears to limit the amount of money from hotel and car rental taxes that could be spent on repaying stadium construction bonds to $165.5 million, plus interest.

The law states that after TSA has spent $165.5 million from the hotel and car rental tax funds, those taxes are to be earmarked for tourism promotion, the Cactus League, the TSA's operating expenses and, finally, youth and amateur sports.

However, another provision of the bill that received little attention allows TSA to use all revenue it collects for repayment of construction bonds.

"All revenues are pledged to debt service first," says TSA chief financial officer Charles Foley.

TSA president Ted Ferris says the authority can "circle back" and tap hotel and car rental taxes a second time if the initial $165.5 million plus additional funds generated from NFL income taxes, state sales taxes and revenue generated at the stadium are insufficient to cover construction bond debt.

TSA bond consultant Kurt Freund says TSA would not tap into funds earmarked for tourism, Cactus League or youth sports unless it was facing a default.

"The only way you would go into that situation is if revenues were not sufficient to cover the bonds," Freund says.

In the last four months, TSA has increased the amount of construction debt it plans to issue to $245.5 million, up from $238 million in June.

TSA also is privately telling bond underwriters that the cost of the stadium could increase to as much as $361 million, up from the $331 million that was promised voters before last November's Proposition 302 election. The Arizona Cardinals are contributing a maximum of $85 million to build the stadium.

Three key legislators say it was not their intent to allow the TSA to spend more than $165.5 million of hotel and car rental taxes to pay for construction of the stadium.

Senate President Randall Gnant says he believed the law limited access to hotel and car rental taxes. Gnant has strongly objected to TSA's selection of the Tempe site.

Senate Finance Committee Chairman Scott Bundgaard says the Legislature was "misled by TSA proponents" who stated that only $165.5 million in hotel and car rental taxes would be used to repay construction of the stadium. Bundgaard strongly supported the west side location for the stadium that was presented by developer John F. Long.

"What the public was told by the proponents and what is actually occurring are two separate things," he says. "This needs to be cleaned up or this whole project needs to be done away with."

House Judiciary Committee Chairwoman Roberta Voss says the Legislature intended to place a cap on construction spending from the hotel and car rental taxes.

"There was no way they were supposed to come back and tap those funds," Voss says.

Voss and Bundgaard say the TSA spending plan could be dragged into next month's special legislative session on the hemorrhaging state budget.

"I think people are very frustrated with the TSA," Voss says.

Not only were key legislators caught off guard by TSA's spending priorities, the authority's treasurer knew nothing about the plan until told by New Times Tuesday morning.

"What can I say?" TSA board member Rod Williams said.

Williams also says he was never informed that TSA was telling bond underwriters that the cost of the stadium could increase to $361 million.

Williams says he still assumed the cost of the stadium was set at $331 million, since that is what voters were told it would cost.

"The public was led to believe it was $331 million," Williams says.

Williams says the higher cost estimate conflicts with assurances the board was given by Robert Hunt, chairman of Hunt Construction Company, that the stadium could be built for $331 million.

"I asked Hunt that at a public meeting at the Biltmore [hotel]," Williams says. "His answer was yes."

Calls to Hunt seeking comment were not returned.

Williams isn't alone in believing the stadium was supposed to cost closer to $330 million rather than $361 million. Maricopa County voters last year were told in the county's election publicity pamphlet distributed prior to the November 8 Proposition 302 election that the cost of the stadium would not exceed $331 million.

TSA officials are now saying that voters should have interpreted the $331 million cost as merely a projection.

"There isn't any language in the [law] that specifically locks the stadium to $331 million," says TSA's Foley. "It would be unreasonable to expect what the cost of the stadium would be at that point."

The TSA's proposed "multipurpose facility" must sidestep a minefield of potential budget-busting features to stay even within the higher $361 million cost estimate.

Not only does the TSA intend to put a retractable dome roof on the Arizona Cardinals new stadium, it also wants to have a retractable field to allow the facility to be used for conventions and other purposes, and these amenities don't come cheap.

In a belated attempt to add "multipurpose" features to the stadium, the TSA is considering adding 70,000 square feet of meeting space and a massive electrical grid embedded into the concrete floor to allow for trade shows.

Massive construction projects like the stadium are notorious for going over budget.

Just look at Bank One Ballpark, where cost projections and reality diverged from the moment construction began. Hunt Construction Company also was the general contractor for Bank One Ballpark.

Then take into account that Bank One Ballpark is significantly smaller than the Cardinals stadium, with 50 percent fewer seats. And Bank One doesn't have an expensive retractable field. Yet the cost of building Bank One Ballpark exceeded $375 million -- $14 million more than what TSA is now projecting to spend on its even grander version of professional sports palaces.

The TSA board cleared the way for the $361 million cost scenario late last month when it voted -- without discussion -- to approve the sale of up to $250 million in construction bonds.

According to TSA documents submitted to bond underwriters, a $361 million stadium would be financed by $245.5 million in TSA bonds, $85 million from the Arizona Cardinals, $16 million in interest from unspent bond proceeds, $11.5 million in construction sales taxes diverted back to the project and $3 million from the City of Tempe.

TSA board chairman Jim Grogan says the $361 million projection given to bond underwriters provides the TSA with "optimal flexibility" to finance the stadium.

"That's the highest of the high end," Grogan says.

At the same time, Grogan admits that no one knows how much the stadium will cost because a final construction contract has yet to be signed.

"Right now, there are a lot of question marks on cost," Grogan says.

The TSA has not signed a contract with Hunt Construction Company to oversee construction of a stadium for the Arizona Cardinals. The contract is expected to include a "guaranteed maximum price," calling for Hunt to cover all cost overruns other than change orders approved by the TSA board of directors.

Contract negotiations between TSA and Hunt have been delayed by a lawsuit filed last month by John F. Long challenging the constitutionality of the authority and by a pending Federal Aviation Administration review of the stadium's proposed location 2.3 miles east of Sky Harbor Airport's north runway.

Without a firm construction start date, Grogan says it is impossible for Hunt Construction Company to set a definitive cost to build the stadium.

"What they are saying is, we can't give you a price if you can't give us a start date," Grogan says.

The Long lawsuit is scheduled for a series of hearings later this month in Maricopa County Superior Court. The FAA will close its public comment on the proposed new location of the stadium on property owned by Salt River Project on October 22. The FAA has indicated it will issue a report soon after on whether the new location poses a threat to air navigation.

Hunt Construction Company planned to begin digging the stadium's foundation last July. But work was stopped on July 11 after the FAA stated the stadium was a presumed navigation hazard at its former proposed location on the southeast corner of Priest Drive and Washington Street in Tempe. The TSA moved the stadium 1,200 feet southeast in an effort to win FAA approval.

The city of Phoenix already has filed suit in Maricopa County Superior Court to block the TSA from resuming construction at its new site until the FAA has finished its review. Phoenix has agreed to not seek a restraining order until the FAA submits the report.

While the city of Phoenix legal action could be resolved with a favorable ruling from the FAA on the new site, the John F. Long lawsuit has the potential to drag on for months, preventing TSA from selling bonds needed to begin construction.

"The Long lawsuit is creating a cash flow problem and obviously hurting our ability to aggressively go forward from now until it is resolved," says TSA president Ferris.

Long is alleging the TSA's enabling legislation violates the state Constitution because it provides special interest benefits to Maricopa County residents and the Arizona Cardinals. Attorney General Janet Napolitano, however, has issued a ruling that disagrees with Long's allegations.

As the legal action drags on, the likelihood of completing the stadium in time for the 2004 regular season becomes less likely with each passing day. The TSA has already given up hope of having the stadium completed before August 2004 exhibition games.

"We are trying to hold on to the stadium being available for the regular season beginning in 2004," Ferris says.

Meanwhile, Ferris says the TSA is meeting its funding obligations for tourism promotion, Cactus League stadium improvements and youth and amateur sports. He says TSA can sustain a 30 percent decline in hotel and car rental taxes this year and still meet these obligations.

However, if the sharp drop-off in tourism in the wake of the September 11 terrorist attacks continues, the TSA will face significant spending constraints.

"We can't take it a second year in a row," Ferris says.

The TSA already has spent more than $13 million on the stadium project and has yet to break ground. Most of the money has gone to Hunt Construction Company under an interim contract. As of September 10, Hunt had been paid $4.2 million and is owed another $3 million for preliminary design work on the stadium.

Legal fees are also eating up a large portion of TSA's budget. TSA has paid its attorneys at the Phoenix law firm of Fennemore Craig more than $1 million and owes the firm another $1.4 million.

TSA is also racking up unexpected consulting expenses related to the FAA controversy. The authority owes its private consultant Friedlob Sanderson Paulson & Tourtillott, a Denver law firm, more than $225,000.

The authority is also out more than $656,000 it spent to clean up asbestos and other material at the old Tempe site. TSA treasurer Williams says that money should be repaid by Tempe, which is responsible for preparing the land for the stadium.

"All those funds expended at the first site, no matter what it is, must come back to TSA from the Cardinals or Tempe," Williams says.

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