Arizona stadium proving Trojan horse for taxpayers

Glendale, Arizona’s bet on becoming the Phoenix area’s sports and entertainment hub is resulting in higher taxes, fired workers and rising penalties on its debt.

The city confronts new budget cuts after agreeing last month to pay $308 million over the next 20 years to keep the National Hockey League’s Phoenix Coyotes, which had the worst attendance in the NHL last season. After downgrades by both Standard & Poor’s and Moody’s Investors Service that cited the hockey payments, investors demanded a 7.5 percent higher penalty on city debt compared with 11 months ago.

“If you look back to 2009, they were a perfectly normal city,” said Neene Jenkins, an AllianceBernstein analyst in New York. The company oversees about $32 billion in municipal securities and bought debt offered in Glendale’s latest sale. “It’s a bigger issue than just the arena. The risk, coupled with recessionary factors, has really hit Glendale.”

The city joins municipalities nationwide, from Wenatchee, Washington, to Harrison, New Jersey, that had their ratings cut after economic gains from sports projects fell short amid the longest recession since the 1930s. Glendale is now weighing budget reductions of $20 million over the next four years, including the elimination of 64 mostly vacant jobs by June.

“Every city department from the city court to code compliance to economic development will see cuts of staffing or operation and maintenance in the budget,” said Julie Frisoni, a Glendale spokeswoman. She said that about two-thirds of the positions identified for cuts aren’t held by anyone.

Glendale is looking to curb spending even though a tax increase won support at the polls in November. Voters rejected an initiative to overturn a sales-tax increase passed by the City Council in June -- a step that officials warned would devastate the budget. The boost, from 2.2 percent to 2.9 percent for a total combined rate of 10.2 percent when county and state levies are included, is expected to generate as much as $25 million a year before expiring in 2017. The city is making cuts now to wean itself off the extra money by then, Frisoni said.

Glendale, a former farming community of 230,500 west of Phoenix, is the fifth-most populous Arizona city. In 2003, the municipality issued $155.2 million in revenue bonds backed by sales taxes to finance what is now called Jobing.com Arena. That lured the Coyotes from Phoenix, where the team had relocated from Winnipeg, Manitoba, in 1996.

Construction of a venue for the National Football League’s Arizona Cardinals also began in 2003 in the city, financed by the Arizona Sports and Tourism Authority, which is supported by its own taxes. Glendale paid for some surrounding infrastructure. The team began playing at what is now known as University of Phoenix Stadium in 2006.

The city also ventured into baseball, issuing debt in 2008 to finance a $200 million spring-training facility called Camelback Ranch for Major League Baseball’s Los Angeles Dodgers and Chicago White Sox. Taxes from a planned adjacent development and aid from the state sports authority were to repay the debt.

The national economy and the city’s development hopes began to crumble before the first pitch was thrown at the ballpark.

The owner of the Phoenix Coyotes sought bankruptcy court protection in 2009. The league purchased the team for $140 million with Glendale agreeing to cover its losses to keep the franchise playing at its arena -- $50 million over the past two years. While the Coyotes won the Pacific Division title last season, home-game attendance was the lowest in the 30-team NHL.

Development around the sports facilities stalled. The Westgate City Center, a mixed-use retail project adjacent to the hockey arena, wasn’t fully built when the lender repossessed the property last year. A sports-themed project of housing, retail, lodging and office space around the spring training facility never materialized.

“The economy crashed so fast and so hard,” said Glendale City Councilwoman Yvonne Knaack, who has served since 2007. “There was supposed to be this huge development to support Camelback Ranch,” she said. Now, around the ballpark, “it’s all field, all empty.”

The value of building permits in Glendale plummeted to $118 million in fiscal 2011 from $582 million in 2007 as a Freddie Mac Arizona home price index fell 51 percent from May 2006 to August 2011, wiping out six years of gains. Sales-tax revenue fell to $53.8 million in 2010 from $65.6 million in 2008. Debt payments have depleted the reserve fund, which had $70 million in 2007, said Diane Goke, the city’s chief financial officer.

In May, confronting a $32 million deficit, Glendale fired 49 workers -- the latest in cuts that have eliminated about 300 jobs and trimmed operating costs by 25 percent, Goke said. It also moved forward on an arena lease with potential Coyotes buyer Greg Jamison, the former San Jose Sharks chief executive officer who has a tentative agreement with the league.

Under a lease approved Nov. 27, Glendale will pay the team an average of $15 million annually to manage the rink. This year’s amount will be less because of a lockout that has canceled play so far this season. Though Horatio Skeete, the acting city manager, estimated it would cost $6 million to run the arena without the Coyotes playing there, the city projects it will be financially better off in the long term by providing home ice to the team.

The municipality’s general-obligation bond rating was cut two steps by S&P on Dec. 12 to A-, four levels above non- investment grade. That followed a Moody’s downgrade on Nov. 30 to A2, its sixth-highest rank. Both companies cited declines in Glendale’s reserve fund from the payment for the Coyotes and the effects of the 18-month recession that ended in June 2009.

After the rating cuts, Glendale sold about $240 million of excise-tax revenue bonds to refund previously issued debt, data compiled by Bloomberg show. Debt maturing in nine years was priced to yield 2.53 percent, or 1.15 percentage points more than benchmark AAA munis with similar maturities, the data show.

That extra yield penalty was 0.08 percentage point higher than what investors demanded on similar-maturing Glendale excise-tax debt sold in January, data compiled by Bloomberg show.

Glendale is “a good example -- and hopefully a warning sign to others -- that when you deviate from your core purpose, you increase your risk,” said Alan Schankel, managing director of fixed-income research at Janney Montgomery Scott LLC in Philadelphia.

Still, the refinancing will save the city $9.5 million in the current fiscal year and $43 million through 2038, Goke said. The city was also able to issue all its securities, unlike in the January sale, when much of the deal went unsold.

“The fact that we sold all of our bonds and we actually got a pretty good rate for them shows that investors are willing to invest in the city of Glendale and believe in the long-term success of the city,” she said.

Those savings, coupled with new development on the horizon bode well for the city, Goke said. Part of the vacant land around the baseball facility was recently purchased, while a plan has been announced to build a 500-bed hospital near the hockey rink. A Tanger Factory Outlet Centers Inc. mall opened near the arena in mid-November.

Knaack, the councilwoman, said she regrets approving the baseball stadium, though she still sees the chance for economic gain from the hockey arena.

“We’re stuck with it,” Knaack said. “But on the other hand, look at the potential we have. To me, we have a lot more potential because of it.”