May 21 (Bloomberg) -- The city of Glendale, Arizona, celebrated a decade ago when the National Hockey League’s Coyotes abandoned downtown Phoenix for a taxpayer-funded suburban arena surrounded by a sports and entertainment complex.
Since then, much of the planned development has stalled, tax revenue and attendance have plunged, and the team’s former owner filed for bankruptcy protection. That left the city of 227,000 spending $25 million a year to subsidize the Coyotes’ losses as the NHL seeks a buyer for the franchise, which avoided elimination in the playoffs with a win yesterday in game four of the Western Conference finals against the Los Angeles Kings.
Glendale officials are negotiating an arena lease that would give a potential buyer of the team $17 million a year to manage the arena, while they work to close a $32 million budget deficit for the coming year. The city fired 49 workers last week and is considering a sales-tax increase that would make its rate one of the highest among major U.S. cities, according to the Washington, D.C.-based non-profit Tax Foundation.
“They said under the worst conditions financially we would make over $100,000 on the arena” each year, said City Councilman Phil Lieberman, who has served for 20 years. “How could we go wrong? It would cost us nothing.”
The losses underscore the risks cities confront when they offer incentives to lure professional sports teams and develop nearby properties in anticipation of an economic surge, said Timothy James, an economics professor at the W. P. Carey School of Business at Arizona State University in Tempe.
“They’ve got a big hole in their budget to keep the ice hockey team in town,” James said. “It’s not like a road system or hospital where there are benefits everyone gets. It’s a sports team. It should be able to stand up on its own.”
In 2003, Glendale issued $155.2 million in revenue bonds backed by sales taxes to finance construction of what’s now the Jobing.com Arena, to bring the Coyotes from Phoenix. The franchise had moved there from Winnipeg, Manitoba, in 1996.
The ownership group was led by Steve Ellman, who planned to develop retail, residential, restaurant, office and hotel space around the stadium. The project, Westgate City Center, opened in 2006, just after Glendale scored another coup, drawing the National Football League’s Arizona Cardinals to the new University of Phoenix Stadium in the city.
While Westgate’s sales taxes were pledged to the arena bonds, only about a third of the development was built, Lieberman said. The developer defaulted on loans and the property was repossessed by the lender, New York-based IStar Financial Inc., in September after it failed to sell at auction.
Jerry Moyes, who assumed ownership of the Coyotes in 2006, filed for Chapter 11 bankruptcy protection in 2009. Jim Balsillie, then co-chief executive officer of Research In Motion Ltd., offered to buy the team with the intention of moving it to Hamilton, Ontario. The NHL bought the team for $140 million. Fearing its prime arena tenant would leave, Glendale agreed to subsidize the Coyotes’ losses until a new buyer emerged. Forbes values the team at $134 million, the lowest in the NHL, with annual losses of $24.4 million.
The second annual payment to the NHL is due soon, said Julie Frisoni the city communications director.
In January, Moody’s Investors Services downgraded Glendale’s general-obligation bond rating to Aa3 from Aa2 and cut the outlook to negative. It lowered the rating on senior lien excise tax revenue bonds issued by the Glendale Municipal Property Corp., which include the debt for the arena, to A1 from Aa3 with a negative outlook. Further assistance to the Coyotes could prompt further downgrades, Moody’s said in a report.
Twice the Debt
Matt Jones, a senior vice president for Moody’s public finance group, said Glendale has more than twice the debt level of cities with the same rating.
The NHL announced two weeks ago that it had reached a tentative agreement with a potential buyer, former San Jose Sharks chief executive Greg Jamison, after the Coyotes advanced past the first round of the playoffs for the first time since the franchise moved to Arizona.
“I’m excited about the Phoenix Coyotes,” Jamison said at a May 7 press conference with NHL Commissioner Gary Bettman just before the Coyotes clinched a spot in the Western Conference finals. “I’m excited about the Jobing.com Arena in Glendale, Arizona.”
Few details of the purchase negotiations have been made public. As Jamison negotiates with the NHL, he is simultaneously negotiating a lease agreement with the city for the arena. Frisoni, the city spokeswoman, said the city would like to finalize an agreement in the next several weeks.
‘Maintain the Team’
“It is important for us to maintain the team here,” Frisoni said. The city would suffer a $200 million economic loss over the next 20 years if the Coyotes left, she said.
“I want the Coyotes to go away,” Lieberman said, adding that he and other opponents are outnumbered by Coyotes supporters on the council. “How any member can vote to keep the Coyotes and then raise the sales tax and the personal property taxes, I can’t condone that.”
Among other obstacles: the Goldwater Institute, a Phoenix-based public policy research organization that advocates limited government, scuttled another potential deal last year with the threat of a lawsuit. Under that arrangement, Glendale planned to issue $100 million in bonds to purchase parking rights to the stadium from the new owner, a move that the institute charged ran afoul of the state constitution’s ban on gifts to private entities.
Byron Schlomach, chief economist at the institute, said the proposed management fee to the team is too high, because comparable facilities garner around $10 million. That could be reason for the group to sue, he said.
‘Like a Gambler’
“They seem like a gambler with their last buck,” Schlomach said in a telephone interview. “There’s no way they are going to spend it on a meal, they are going to try to get back in the game.”
In recent years, the city has cut costs by putting employees on mandatory furloughs, shortening library hours and cutting youth and recreational programs. The firings last week represented 2 percent of the city workforce and included five police employees who aren’t sworn officers and 15 staff members from the parks, recreation and library department, according to a memo from Acting Human Resources Director Jim Brown.
James of Arizona State said the fate of Glendale’s gamble on hockey in the desert rests on recruiting more fans.
Even though it won the Pacific Division title, the Coyotes had the worst attendance among the NHL’s 30 teams this year, averaging 12,420 fans for their 41 home games. They’ve sold out all eight of their home playoff games, averaging more than 17,250 fans.
“The long-term question is the viability of a Phoenix ice-hockey team,” James said. “Can ice hockey work in Phoenix and generate a large enough revenue stream?”
The Coyotes face the Kings tomorrow in Glendale for game five of the Western Conference finals. The Coyotes won 2-0 yesterday against the Kings, who lead the series 3-1. The winner advances to the Stanley Cup finals.
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