louisville arena authority review assessment

8/12/2019 Louisville Arena Authority Review Assessment

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LAA Assessment Summary

Capital Projects and Bond Oversight CommitteePrimary Concerns

1. TIF: Can the TIF be retroactively changed, or changed at all? Also, question aroseas to whether the TIF is properly monitored.

LRC analysts indicated they could not find any language prohibiting a change in the TIFboundaries. The APA was also unable to locate any statutory or contractual provisionsregarding revision of TIF boundaries. As long as all parties are in agreement, we arenot aware of any prohibition. As for the question of whether the TIF is properlymonitored, that would entail expanded procedures to assess. (See conclusion.)

2. Bond trustees have changed. There was a question as to whether the bondindenture document (pg 65) may raise questions as to whether or not this ispermissible.

Page 81 of the bond indenture document indicates the bond trustee may be removed withthe prior written consent of or at the direction of the bond insurer as long as there hasnot been a default. There also appears to be a requirement to notify bond holders. Oneconcern raised from an external source indicates bond holders must also approve thechange in trustee. Based on the information presented in the bond indenture document, itappears bond holders must be notified of the change, but it does not appear the change inthis circumstance requires approval of bond holders.

3. Payments to Kentucky State Fair Board (KSFB): LAA is indicating it will no longerpay Negative Impact Reimbursements to KSFB, per agreement between LAA/KSFBin May 2013. KSFB issued a clarification indicating the settlement with LAA didnot include the Negative Impact Reimbursements.

This is a legal matter due to the need for interpretation as to the status of the 2006 HB380 (budget bill) language, and subsequent LAA and KSFB resolutions regarding the

settlement of amounts due. The following questions may be pertinent, but cannot beaddressed by the APA:

Is language in 2006-HB380 effective beyond the biennium budget? Was the reimbur sement agreed to because of KSFBs role in operating/managing

the YUM! Center? Under that scenario KSFB could influence which events tohost at the YUM! Center versus events to host at Freedom Hall, and therefore the

potential negative impact on Freedom Hall may be more clearly identified. Giventhat AEG now is the operator/manager for the YUM! Center, does that negate therequirement to reimburse KSFB since KSFB/Freedom Hall is now a competitor?

If the reimbursement was not based on this assumption, what is the basis for


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determining the reimbursements under the current structure? This may needclarification.

Is the LAA resolution for payment of $1.47M legally binding, and sufficient foroverriding HB 380 language?

Does KSFB have the authority to forgive prior debt of the LAA (for labor costs or

previous Negative Impact Reimbursement amounts)?

4. Question as to whether UofL Athletics Assoc (ULAA) has a sweetheart deal withits arrangements with LAA.

The LAA/ULAA agreement appears to have been legally executed, which is furtherevidenced by the terms of the agreement having been adhered to without known dispute

since the opening of the YUM! Center. Given the written agreement, whether arenegotiation can occur is a legal question between the parties and not one the APA canresolve. However, as S&P has indicated, it is clear that LAA the future outlook on future

revenue streams are somewhat limited due to revenue sharing agreements. This wouldinclude the agreement with ULAA.

Capital Projects and Bond Oversight CommitteeAdditional Concerns Raised

5. Allegations have indicated there are possible conflicts of interest related to membersof the LAA board. One example is that a LAA board member owns a bank thatissues bonds.

Review of the information provided to the APA was not sufficient to fully address whetherconflicts of interest exists. The APA would be required to do expanded procedures inorder to review necessary documents to determine whether conflicts exists in regards to

private businesses owned by LAA board members that may do business with LAA or other stakeholders. In reviewing the circumstances surrounding the bank ownership of an LAAboard member, information available does not identify the LAA board members bank asbeing a primary underwriter of LAA bonds; therefore, a conflict of interest is notapparent under these circumstances.

6. $5.5 million in unexplained/unclassified expenditures noted.

Upon a review of documentation provided by LRC, it appears the unclassifiedexpenditures are ULAA expenditures reported on its IRS 990 after executing its leasewith LAA. If these are the expenditures in question, the LAA expenditures obtainedwould not provide the details necessary to analyze the ULAA detail.


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7. Is LAA structurally sound to meet its obligations?

Based on information extracted from the documentation provided by LRC, bond ratingagencies have indicated concerns that LAA may have difficulty meeting bond payments inthe future. It does appear this is primarily due to the following reasons:

(1) TIF funding is heavily reliant upon economic growth (increase in sales tax,increases in property values, increase in income tax); and

(2) LAAs revenue growth potential is somewhat restrained by the revenue sharing agreements it has in place.

Financial information appears to indicate LAA is meeting its current obligations, and further detailed analysis would need to occur to determine any short-term concerns. However, the two primary concerns noted above indicate even without this detailedanalysis that LAA will need a long-term business plan to overcome the limitations inthose significant revenue streams.

Conclusion :

Many of the concerns expressed relate to legal issues related to current agreements in place. Audits/examinations may determine whether parties have complied with all/someof those agreements, but does not carry the legal authority to determine whichagreement/portion of agreement is binding or not. Also, audits/examinations are basedon past events, and do not forecast economic conditions. For instance, the APA mayexamine the TIF process, calculations, and disbursements made to date but cannot opineon whether the TIF is sufficient for future debt service needs since it is heavily dependenton economic conditions.

APAs procedures would not e ntail an audit of LAA operations since that is performedannually. A detail of procedures the APA may be able to perform includes:

Examination of the TIF process, calculations, monitoring, and disbursements. Review underlying data related to the LAA Amounts Available from all sources

for debt service to determine that all components of this calculation are in linewith the various agreements.

Review of revenue sharing agreements and annual settlements to ensurecalculations are appropriate and comply with the intent of the agreements.

Examination of board members and management for potential conflicts ofinterest.

Risk assessment of LAA operations to ensure that a business plan is in place toaddress concerns noted in by bond rating agencies. NOTE: APAs assessmentcannot determine that managements plan is sufficient to meet its projections,only whether or not it identifies and addresses significant risks.

louisville arena authority review assessment

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