No Friday Night Lights at $60 Million Texas Stadium: Muni CreditDarrell Preston and Aaron Kuriloff
Pervasive cracking has shuttered the $60 million home of a high-school football championship team in Texas after less than two years. Investors in the tax-free bonds that paid for the stadium are unscathed.
Taxpayers in Allen Independent School District north of Dallas and the $29 billion Texas Permanent School Fund, a state bond insurer, are responsible for $119 million of debt that paid for the venue and other facilities, leading officials to find a new site for graduation and possibly games after closing 18,000-seat Eagle Stadium last month.
The development suggests the fund, created in 1854 to help pay for education, shouldn’t be used for stadiums, said Colby Harlow, president of hedge fund Harlow Capital Management. The Permanent Fund has top credit ratings and secures about $55 billion of bonds, according to the Texas Education Agency. The pool has at times reached the limit of debt it can back, preventing districts from accessing it. The guarantee is still a boon to bondholders.
In the case of Allen, “we think that they have a great tax base and we think that they have a great school district, but we also know that we have the Permanent School Fund insurance on top of that,” said Lin Elliott, who oversees about $1 billion, including some of the Allen bonds, as investment manager in Waco for Texas Farm Bureau Mutual Insurance Co.
“If I buy this for 15 years, 15 years from now I am going to get all my money back,” he said.
The guarantee from the school fund is stronger than any in place when the financial crisis hit last decade and cost municipal-bond insurers their top ratings, said Elliott. The 45-year-old money manager played football at Waco High School and Texas Tech University before joining the National Football League, where he was a kicker on the Dallas Cowboys team that won the Super Bowl in 1993.
The school fund, which also distributes cash to districts for educational expenses, is financed by investments such as state land and has never had to pay out on a bond, according to the Education Agency, which manages the pool.
Debbie Ratcliffe, an agency spokeswoman, confirmed in an e-mail that the fund backed the bonds for the stadium as well as other securities from the district during the past 15 years.
She called the district “a good credit risk.”
The Allen school debt pays taxable-equivalent yields almost double those on Treasuries. Bonds sold for the stadium and maturing in February 2040 traded at a tax-exempt yield of 4.24 percent on Feb. 19, data compiled by Bloomberg show. For top earners, that’s equivalent to a taxable yield of 7.02 percent. In comparison, 30-year Treasuries yielded 3.71 percent that day.
Texas districts have been building larger venues to keep up with suburban growth, said Robert McSpadden, author of “Texas Football Stadium Guide.” Eight of the 15 fastest-growing U.S. cities and towns for the year ending July 1, 2012, were in Texas, according to Census Bureau data.
“The suburbs of Texas are just booming, and they have to have new stadiums,” said McSpadden, 62, who goes by the moniker Texas Bob.
High schools in the second-most-populous state are the setting of the bestselling book, film and television show “Friday Night Lights.”
Texas has produced a league-leading 2,226 NFL players, ahead of second-place California, including Hall of Fame members Earl Campbell, Eric Dickerson and Michael Strahan, according to data from the Hall and the website Pro-Football-Reference.com. More than a third of NFL teams last season started a quarterback who played high-school football in Texas.
Not all proposals for Texas high-school stadiums get public support. In November, voters in the Katy Independent School District near Houston rejected a $99 million bond issue that included almost $70 million for a stadium.
Closing the Allen stadium won’t harm the district’s finances, said Tim Carroll, a spokesman. The 5,300-student high school is the state’s second-largest. The jurisdiction 25 miles (40 kilometers) from Dallas said in February that it was shutting the facility to evaluate and repair the cracking. The school won the Class 5A-I title in December.
The district has hired Nelson Architectural Engineers Inc. of Plano, Texas, to investigate the structure. In a preliminary report in January, Nelson observed “pervasive cracking at the concrete comprising the concourse level of the stadium.” The cracks varied from hairline to 0.30 inch, according to the report.
Nelson’s report said the fissures resulted from “drying shrinkage of the concrete” and that it was “well in excess of cracking that is normal and acceptable in a concrete structure of this type.”
The report recommended “prompt remediation” that ranged from replacing some concrete slabs, which could require demolishing parts of the stadium, to options for sealing the cracks. The report also warned that there may be hidden defects.
Ryan Chancey, who handled the report as executive director with Nelson, declined to comment, citing the investigation. The district is in discussions with the architect, Houston-based PBK Architects and the builder, McKinney, Texas-based Pogue Construction.
Pogue Construction stands behind its work, said Ben Pogue, chief executive officer, in a prepared statement. All parties have “appropriate and required insurance to cover necessary repairs,” he said.
PBK said it has engineers analyzing the structural design and construction of the concourse. The cracks can be repaired “and are not a danger to the structural integrity of the stadium,” Fred Montes and Irene Nigaglioni, partners at the firm, said in an e-mailed statement.
“We vow to stand behind the interests of Allen ISD long after the construction of a project is complete,” they said.
Classrooms for weight lifting and wrestling aren’t in use as the cracks are being reviewed, said Carroll. The district may need a venue to play games starting in August if repairs aren’t done, he said.
“Repairs could be extensive and take months to complete,” the district said its release last month.
In 2009, voters approved the bonds for the facility and projects such as a $36 million service center to handle the district’s transportation, maintenance and food service, with 63 percent in favor. Bonds were sold in August 2010 and Eagle Stadium opened two years later.
Investors could be worse off if they depended on income from the facility rather than the tax revenue and the ultimate backing of the Permanent School Fund. Texas school districts have about $64.1 billion of debt, or 32.7 percent of all local bonds in the state.
Harlow, whose Dallas hedge fund handles $75 million, including munis, said the stadium may not fit the purposes envisioned when Texas established the fund.
“Should the Permanent School Fund be put on the hook for athletic facilities?” asked Harlow. “It’s set up for education, but high school sports have turned into more of a business than something you do for fun.”
David Jaderlund of Jaderlund Investments LLC in Santa Fe, New Mexico, said he accepts using the fund to back bonds for stadiums. His firm owns Allen school bonds among the $500 million of Texas munis it manages, though not the ones for the stadium.
“You’d never pay off a $60 million stadium with Coca-Cola and popcorn,” said Jaderlund. “Physical education is part of the curriculum.”