Wednesday, October 01, 2008

Bond Insurance Watch

For the universe of public finance wonks who read this... that would be Fester. Municipal bond insurer FSA had its credit rating downgraded and is on credit watch negative. Why would anyone care? The Sports and Exhibition Authority funded the arena with variable rate debt that is insured by FSA so the credit worthiness of the bond insurer could impact how big the bond payments are.

Anyway, there was some news back and forth a few months ago over the question of whether the state was truly obligated to make up funding that may or may not come from the casino for the arena bond. That issue may appear to have dissipated with the turnover in the casino ownership, but I still wonder.

Found in this state bond prospectus (page 57 per the pdf numbering) is a more concise explanation of what the state's obligations are with regards to the arena bond. Yet the non-lawyer in me can't figure out if it says the state is indeed obligated to make up any shortfall in the arena bond payments. It says that the state is obligated by lease agreement to make up any shortfall, yet it also says those payments are both subject to appropriations and limited to 19 million a year. Is the limit operative is the lease language binding no matter. Don't ask me, this is why we pay attorneys. But here is the actual verbiage:

In October 2007, the Commonwealth and the Sports and Exhibition Authority of Pittsburgh and Allegheny County (the “SEA”) entered into a lease agreement (the “Arena Lease”) that, while not creating indebtedness of the Commonwealth, creates a “subject to appropriation” obligation of the Commonwealth. The SEA, a joint public benefit authority, issued in October 2007 its $313.3 million Commonwealth Lease Revenue Bonds (the “Arena Bonds”) to finance a multi-purpose arena (the “Arena”), which will serve as the home of the Pittsburgh Penguins (the “Penguins”), a hockey team in the National Hockey League. The Arena Bonds are not debt of the Commonwealth but are limited obligations of the SEA payable solely from the Special Revenues pledged therefor. These Special Revenues include annually (1) $4.1 million from a lease with the Penguins, (2) not less than $7.5 million from the operator of a casino located in the City of Pittsburgh, and (3) $7.5 million from the Commonwealth’s Economic Development and Tourism Fund (the “Development and Tourism Fund”). The Development and Tourism Fund is funded with an assessment of five percent of the gross terminal revenue of all total wagers received by all slot machines in the Commonwealth less cash payments. While the Special Revenues currently are projected to be adequate to pay all debt service on the Arena Bonds, to the extent such revenues are in any year inadequate to cover debt service, the Commonwealth is obligated under the Arena Lease to make up the deficiency. The obligation of the Commonwealth to make such payments is subject in all cases to appropriation by the General Assembly. The maximum annual amount payable by the Commonwealth under the Arena Lease is $19.1 million. (emphasis added)


Anonymous Johnny G. said...

Chris: It all depends upon the "Arena Lease". But a fair reading of what you quote seems to obligate the Commonwealth as a guarantor, at least up to $19.1 million annually.

The tricky part, of course, is that the executive branch apparently created the guarantee without legislative approval, hence the requirement that any payments are subject to legislative appropriation. So, what happens when the legislature says "no" to the appropriation.

I know, all likely a moot point, but fascinating nonetheless.

Wednesday, October 01, 2008 5:16:00 PM  
Blogger C. Briem said...

ok... make that Fester and Johnny G. Maybe we can get the Judge, who is a contract law specialist in his own right (when not writing satire that is) to weigh in?

Thursday, October 02, 2008 7:38:00 AM  

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