CHICAGO — Progress on a controversial bond-financed new hockey arena in downtown Detroit hit an obstacle this week when a state development board delayed a vote on the deal.
The Michigan Strategic Fund was set to vote Wednesday on final authorization of the $450 million private activity bond deal. The financing is part of a $650 million project that features a new hockey arena and a 45-block entertainment corridor located on a swath of blighted central Detroit.
The strategic fund, which would act as issuer on the 30-year bonds, approved an inducement resolution advancing the borrowing in late July, just days after Detroit filed its historic Chapter 9 bankruptcy petition.
The final authorization was expected to be voted on at the fund's August meeting. A spokesman declined to comment on the delay, except to say there remained a "step or two" in the process between the inducement resolution and final approval.
The project, which would tap incremental property tax revenue generated in the downtown development district, has opposition from a range of groups, including a conservative think tank, Democratic lawmakers, and municipal market participants.
Critics say the city should not be tapping already thin property tax dollars to subsidize what will essentially be a private stadium and that sports stadiums typically fail to generate the type of new revenue touted at the outset.
The timing of the deal, coming amid the city's bankruptcy that seeks deep cuts to retirees and bondholders, could not be worse, say critics.
"The optics are so horrendous — to be encumbering future tax collections for a sports arena that has a deeply questionable impact on economic development," said Matt Fabian, managing director at Municipal Market Advisors.
The financing has been months in the making and required state legislation that allows Detroit's Downtown Development Authority to use up to $15 million incremental property tax revenue generated in the district.
Gov. Rick Snyder and other supporters say the deal is vital to Detroit's revival and will generate thousands of jobs and new revenue from sports fans and others visiting the entertainment district.
Emergency manager Kevyn Orr also supports the project, and has said he doesn't think the city's bankruptcy would affect the financing.
But critics say sports stadiums rarely generate projected revenues.
"I'm not aware of any economist who studies stadiums that says they are an economic positive," said Jarrett Skorup, a research associate at the conservative Mackinac Center who has written on the project. 'We've been studying this for decades and there hasn't really been found to be overall positive results."
Skorup said potential benefits are further dampened because the Detroit Red Wings, the hockey team that will play at the new arena, is only moving from one part of Detroit to another, and had not threatened to leave the area, as some sports teams do.
The Red Wings currently play at the Joe Louis Arena.
Fabian said the move may lessen the value of the Joe Louis facility, which the city is in the midst of valuing — and possibly privatizing — as part of the bankruptcy process.
The project calls for the expansion of the downtown development district, which could cut into future tax revenue and economic growth for the city, Fabian said.
"I think for the most part sports facilities financing is a vehicle for patronage, so the governor can reward political supporters," Fabian said. "The economic growth [theory] is so specious and unproven that you can't claim it with a straight face."
Other municipal market analysts agreed.
"I have issues about sports complexes generally, but the timing of this, and the politics of it, when you have pensioners anxious about losing their benefits who did nothing wrong, versus trying to upgrade a sports facility, it's strange timing from an optics point of view," said Howard Cure, director of municipal research for Evercore Wealth Management LLC.
The possibility that the project could fail to generate sufficient revenue to cover debt service on the bonds could be a risk for the city, Cure added.
"To the extent that you don't have games being played, what happens to the tax base?" Cure asked. "There's enough history with labor problems at the NHL that there's no guarantees about it creating this additional economic development."
Richard Larkin, director of credit analysis at HJ Sims & Co., Inc. said Orr's contention that Detroit's bankruptcy won't affect the deal is "pure fantasy."
"Are insurers going to insure it?" Larkin asked. "How can this development district, which gets city tax revenue, not get drawn into the city's bankruptcy, while GO bonds with dedicated property taxes are sucked into Detroit's self-inflicted black hole?" Larkin wrote in an email. "If I were an investor, I wouldn't touch this with a 10-foot pole unless I was a speculator."
The $650 million sports and entertainment district would feature the new 18,000-seat arena for the Red Wings — as well as other events when the team is not playing — as its anchor. The stadium carries a $450 million price tag. The entertainment district is estimated to cost $200 million.
The city will partner with Olympia Development of Michigan, a real estate company owned by the Illitch family, which owns the Red Wings, baseball's Detroit Tigers, and the Little Caesars pizza chain. The new district would connect a section of the city's downtown with its midtown.
The project is estimated to include $365.5 million of private dollars and $284.5 million of public funds.
The bonds would be backed by a pledge of the downtown development authority to set aside for debt service at least $12.8 million but not more than $15 million a year. The DDA pledged to contribute up to $62 million over 30 years in revenues in addition to those pledged for the bonds to support the additional projects.
Olympia Development would make an annual payment of $11.5 million. Wayne County also may make a contribution.
The city, the Economic Development Corporation of the City of Detroit, and Olympia would transfer land to the downtown authority for the project.
The DDA would own the arena and enter into a 35-year concession agreement with Olympia to manage and operate the complex.
Olympia would be responsible for any cost overruns.
If Wayne County contributes, the authority may transfer its ownership to the Detroit/Wayne County Stadium Authority or another entity, according to documents filed with the strategic fund.