Cuyahoga County deal reimburses Cavaliers for arena upgrades
The new money piece of a Cuyahoga County, Ohio, bond sale will reimburse the Cleveland Cavaliers for repairs the county is required to cover under the basketball team’s lease agreement on Rocket Mortgage FieldHouse.
The transaction, which is set to price on Tuesday, will offer $40 million of tax-exempt capital improvement bonds and $37 million of taxable capital improvement refunding bonds.
The tax-exempt bonds will be used to reimburse the NBA's Cavaliers for projects the team already has paid for or those currently in the works.
Rocket Mortgage FieldHouse, formerly known as Quicken Loans Arena, as well as Progressive Field — home of Major League Baseball’s Cleveland Indians — are owned by Gateway Development Corp., a joint partnership between the county and City of Cleveland. Gateway is required under leases with the Cleveland Cavaliers and Cleveland Indians to pay for major capital repairs over $500,000.
The taxable bonds are being issued to advance refund for savings a portion of the county’s outstanding excise tax revenue bonds issued in 2015. Budget Director Maggie Keenan said the county is expecting an annual savings totaling $1.5 million as a result of the refunding.
Both the tax-exempt and taxable bonds are secured by the county’s general fund, but debt service is fully covered by receipts from the county’s 20-year excise tax on cigarettes, beer, and alcohol.
Cuyahoga County voters first approved the excise tax in 1990 to help build the basketball arena and baseball stadium, then approved a 10-year extension in 1995 to assist in the construction of the stadium used by the NFL's Cleveland Browns. The county extended the tax in 2014.
Morgan Stanley is senior manager. Fifth Third Securities is co senior manager. Huntington Capital Markets and Loop Capital Markets are co-managers. Tucker Ellis LLP is bond counsel. Stifel Nicolaus & Co. is the financial advisor.
Moody's Investors Service and S&P Global Ratings affirmed Aa2 and AA ratings respectively on the bonds ahead of the sale. The outlook from both is stable. The county has roughly $902 million in outstanding debt.
The bond issue comes as the county faces legal challenges stemming from a corruption investigation and allegations about conditions at its county jail.
In 2018, the Cuyahoga County prosecutor opened an investigation into potential corruption within the county's information technology department. The investigation was later expanded to include unrelated issues at the county jail, which drew attention after eight inmates died in 2018, and the U.S. Marshals Service released a report finding "inhumane" conditions at the jail. The state attorney general took over the investigations in early 2019.
So far, the investigations have resulted in the indictment of the county's former information technology administrator, chief talent officer, and 10 jail officials and correction officers. Turnover has also increased within the county's administration, though this has not included any top finance officials.
According to the bond documents it is too soon to assess what the impact of any adverse determinations would have on the county’s finances but the documents stated that “the county is self-insured with respect to any liability that may arise with respect to these lawsuits.”
S&P said that the lawsuit and ongoing investigation aren’t expected to have an impact on the bonds or the security of the bonds however the situation could make it more difficult for the county to achieve a balanced budget for the 2020-2021 biennium budget.
The county's most recent projections show general fund operating deficits starting in 2020, largely as a result of rising costs across all departments.
“While we see no immediate or material impact to the county's overall credit profile, we do foresee possible longer-term pressures depending on how these matters unfold,” S&P said. “In our opinion, ongoing investigations and turnover can directly or indirectly affect the county's financial management; for example, if they impede the ability of management or council to make timely budget adjustments or if they lead to unpredictable costs.”