Vikings Stadium to Make Minnesota Pay Up After Suit: Muni Credit

Minnesotans are set to find out the cost of retaining the National Football League’s Vikings.

After overcoming a legal challenge, Minnesota is reviving a sale of $468 million in bonds backed by state appropriations, offering documents show. The issue planned for today caps a quest by the Vikings to get help in financing a new $975 million stadium. The debt isn’t backed by venue revenue or the state’s full faith and credit. Instead, the legislature can vote to cancel the obligation.

The state expects that bonds for the Vikings, which have been a mainstay in the Twin Cities since 1961, will lure buyers. Yet investors may demand 0.2 percentage point of extra yield on the debt because the pledge is weaker than a general obligation, said Matthew Hilliard, an analyst at Minneapolis-based Sit Investment Associates, which may buy some of the debt. Such a gap could add about $15 million to interest payments over the life of the tax-exempt bonds, data compiled by Bloomberg show.

“One would expect a significant yield difference between what Minnesota would normally pay for their debt and what they’ll pay here,” said Richard Ciccarone, chief executive officer of Hiawatha, Iowa-based Merritt Research Services, which analyzes municipal finance.

“One, it’s an annual appropriation. Two, it’s for a non-essential purpose. And three, it’s one of the non-essential projects receiving the most political attacks -- the area of sports stadiums,” he said in a telephone interview.

Scrutinizing Security

Investors in the $3.7 trillion municipal market are scrutinizing localities’ full-faith-and-credit pledges after a year that included a record bankruptcy filing by Detroit. The city’s emergency manager wants to cut payments to general-obligation bondholders. Minnesota lawmakers can reduce or repeal appropriated funds to pay debt service in any given year, canceling the bonds, offering documents show. That action wouldn’t count as a state default, according to the documents.

From hockey and spring-training facilities in Glendale, Arizona, to the NFL stadium in Indianapolis, the cost of hosting professional sports strained municipalities’ finances during the past two recessions. Local governments are on the hook for about $11.5 billion of sports stadium bonds, with at least one-fourth for the NFL, according to Bloomberg data.

Taxpayers nationwide spent about $10 billion more than planned building the 121 major-league stadiums in use through the 2010 season, according to data from Judith Grant Long, a Harvard University professor of urban planning. That’s fueled questions over the venues’ economic benefit.

Roof Collapse

The Vikings, which finished at the bottom of their four-team division last year, played for more than three decades in the Hubert H. Humphrey Metrodome. Though the team began asking for a new stadium in the middle of the last decade, the collapse of the Metrodome roof in 2010 under the weight of snow strengthened the push.

In March 2012, the team and public officials agreed to build a $975 million stadium, with the state covering as much as $498 million through bonds.

Doug Mann, a one-time Minneapolis mayoral candidate, led a lawsuit filed Jan. 10 to block the bond sale, saying the plan unconstitutionally relied on city sales taxes to pay the debt. The city is obligated to pay its share of a principal amount of $150 million plus interest, while the state’s liability is limited to payment on as much as $348 million of bonds plus interest, according to the petition.

Thrown Out

Minnesota’s top court threw out the legal challenge on Jan. 21. Mann said he would consider his appeal options and that the constitutionality of the laws authorizing the sale wasn’t addressed.

Even without the lawsuit, the state will have to pay a yield penalty because the bondholder pledge “reads like a back-out clause,” said Hilliard, whose company oversees $3.1 billion in munis, including a Minnesota fund.

The debt’s AA grade from Fitch Ratings is one level below the state’s general obligations.

“It’s not going to be that bondholders are somehow going to get a lien on the stadium,” Hilliard said. “You just have to have faith and trust that the state is going to honor its obligations.”

Limited Differential

Minnesota is unlikely to ever back out of the obligation because it would impair the state’s market access, Hilliard said. Sit Investment will consider buying the bonds, he said.

“Given the state’s strong credit ratings, the pricing differential of the state’s prior series of general-fund appropriation bonds to the state’s general-obligation bonds has been relatively small,” John Pollard, spokesman for the Minnesota Management & Budget office, said in an e-mail.

Though the state has never reneged on a continuing appropriation, which is automatically built into the budget, it did fail to make sufficient payments to the Minnesota State Zoological Board in the 1980s for debt service on certificates of participation, according to offering documents for the stadium deal.

“It does remind an investor that just because you have a good-quality and well-run state, it doesn’t necessarily mean there’s an irrevocable pledge on these particular bond issues,” Ciccarone said. “It will cause some investors to walk away.”

2012 Precedent

Minnesota sold bonds similar to those in the stadium offering in 2012, and they were “well received in the market,” Pollard said.

In November 2012 the state sold about $656 million in tax-exempt and taxable bonds that were backed by appropriations, Bloomberg data show. A tax-free portion maturing in March 2023 priced to yield 1.85 percent, or about 0.2 percentage point more than AAA munis, the data show.

By comparison, when Minnesota issued general obligations three months earlier, the interest rate on its 10-year debt was about 0.03 percentage point less than benchmark yields.

The stadium is expected to open in time for the 2016 season and seat 65,000 people, according to the website of the Minnesota Sports Facilities Authority, which oversees the project. It will generate development in downtown Minneapolis and provide a venue for national events such as the Super Bowl, said Michele Kelm-Helgen, chair of the authority.

A developer has announced plans to build two office buildings, investing $400 million in a project expected to bring 5,000 jobs, underscoring the interest in land around the new facility, Kelm-Helgen said.

“With demolition and excavation work under way on the site and the bond sale proceeding, the largest construction project in Minnesota history remains on time and on budget,” Jeff Anderson, a Vikings spokesman, said in an e-mail.

Supply Rebound

Issuers from New York to California plan to offer about $5 billion in long-term debt this week with benchmark yields the lowest since June.

The interest rate on AAA 10-year munis is 2.63 percent, compared with 2.73 percent on similar-maturity Treasuries.

The ratio of the yields, a measure of relative value, is about 96 percent. It compares with a five-year average of 99 percent. The smaller the number, the more expensive munis are compared with federal securities.

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