Arena voting: Simply put, what's a JPA?

While driving his 16-year-old grandson, Wesley, to school, they often debate the issue, talking about the pros and cons of the $344 million project.

Stone says he has significant health problems and figures he may not be around to see the new arena if it does get built. That's why the part-time psychologist resolved to let his grandson determine how he'll cast his vote.

So far, his grandson hasn't made up his mind.

One of Stone's big questions is why Lincolnites are voting on only $25 million of the $344 million cost.

He is one of dozens of people who have sent letters to city leaders in recent weeks about the arena project. Today, we'll try to answer Stone's question and those of many others concerning financing that have arisen in recent weeks.

When voters go to the polls May 11, they will face the question of financing the arena and, officials say, its fate.

What will Lincoln residents be voting on May 11?

Whether they approve of using an estimated $1.5 million in annual sales tax revenue generated by the arena and nearby hotels to make payments on about $25 million in debt to help pay for the project.

This is the so-called "turnback tax."

What is the turnback tax?

Created nearly a decade ago to help finance Qwest Center Omaha, the mechanism turns back to cities 70 percent of sales tax revenue generated in the arena and nearby hotels.

The remaining 30 percent goes into a grant pool to help smaller Nebraska cities build or maintain civic, cultural and convention centers.

Omaha gets about $3 million in turnback revenue per year.

If Lincoln builds an arena, it expects to get $1.5 million a year initially, with the figure expected to rise.

The city wants to use that money to pay off a $25 million general obligation bond over 25 to 30 years.

Why are voters deciding on only $25 million of a $344 million project?

Because the city plans to sell a general obligation bond backed by the turnback tax, state law requires voter approval.

Bond attorney Lauren Wismer said a vote would not be needed if the city were to wait until after the arena was built to apply for the turnback revenue.

But Mayor Chris Beutler wants voters to help decide whether to proceed with the project, and this is the vehicle his administration settled on.

According to Scott Keene of Ameritas Investment Corp., the city's financial adviser, the city's other options were:

•  Finance the project with $344 million in general obligation bonds, all of which would have to be approved by voters.

•  Finance the project with revenue bonds, which don't require a public vote but carry a higher interest rate.

•  Finance the project with lease-purchase bonds, which don't require a public vote but carry a higher interest rate.

Why not put the whole $344 million on the ballot, including the turnback part?

The mayor's office says it would have had to put two questions to voters -- one for the $25 million turnback tax and another for the remaining $319 million in bonds -- and state law prohibits more than one subject in a ballot question for general obligation bonds.

It could have separated the two, but the mayor's office says it would have been confusing to have two questions on the same topic, and it's possible voters would have approved one and not the other, leading to legal entanglement.

What about a straight up-or-down question about whether the city should build a new arena?

City Attorney Rod Confer says the city can't put a nonbinding question on the ballot.

However, both he and Wismer said the city could put a binding question on the ballot. In other words, the city can't just ask voters if they think an arena should be built; it would have to follow their wishes.

In fact, that's how the 52-year-old Pershing Center -- the outdated arena Lincoln is debating replacing -- got built. Wismer said the state Supreme Court ordered Lincoln to end years of delays and build Pershing as voters had requested.

Did the city include only $25 million on the ballot to make it more palatable to voters?

Rick Hoppe, the mayor's chief of staff, said that issue was "a very minor discussion point."

"We have been open and transparent about the fact this is a $344 million project," he said. "Most importantly, we have made it clear from the very beginning that this is a vote on the entire arena project."

An authority on civic projects such as arenas and convention centers, Heywood Sanders, a professor of urban studies in the College of Public Policy at the University of Texas at San Antonio, says it's not unusual for a city to put just part of the funding on a ballot to make it more likely to pass.

"Folks try and structure financing in a way that looks like the local taxpayer isn't bearing the burden," he says. "If you want to make a convention center or an arena happen, that's a way to ease the path."

Why vote at all? Why not just build it?

The city could have bypassed a vote -- and some arena proponents lobbied the mayor to do that -- but Beutler has long said voters should have the final say on what is believed to be Lincoln's biggest public works project ever.

Sanders says some cities avoid a public vote altogether. Omaha, for example, is building a new baseball stadium without one.

How can the city issue general obligation bonds without a public vote -- isn't that required by law?

Yes, state law does require a public vote on general obligation bonds issued by cities. But not on bonds issued by a "joint public agency," which the city and University of Nebraska-Lincoln are forming. The JPA's primary purpose will be to issue up to $319 million in general obligation bonds (everything but the turnback portion).

The city lends its taxing authority to the JPA. The $25 million bond issued by the city would be paid off with the turnback tax. If revenue does not come in as projected, the city could levy a property tax.

Does the city get a lower interest rate by financing the arena through a JPA?

Keene said he would expect the interest rate to be the same if the city issued general obligation bonds itself.

However, if the city had chosen to do revenue bonds or lease-purchase bonds, it would have had to pay a higher interest rate.

What is a joint public agency?

It's a whole new governmental entity that largely exists on paper and when its board meets. Its sole purpose is to issue bonds, collect revenue and make bond payments.

The JPA would not have an office or employees; city employees perform functions such as paying bills.

The board of directors would be made up of the mayor, a City Council member and a member of the NU Board of Regents.

City officials say the JPA would be separate from the city, as is the school district. However, the city lends its taxing authority to the JPA.

Lincoln formed a JPA with Lancaster County in late 2008 to finance a new county jail. The owner of a $150,000 house pays about $45 per year for that JPA's debt.

The county and Lancaster County Agricultural Society also formed a JPA to build the Lancaster Event Center. The owner of a $150,000 house pays about $6 per year for that JPA.

Does that mean I'll see a new line item on my property tax bill that says "Arena JPA"?

Only if revenue doesn't come in as projected and the JPA is forced to begin levying a property tax to cover a shortfall.

But before resorting to that, the city's arena coordinator, Dan Marvin, says other measures could be taken, such as increasing the ticket surcharge (now at $1) or dipping into the arena's capital repair budget.

Marvin says creating a JPA and separating its finances from that of the city protects other city budgets from being raided if there's a cash crunch.

"It's a separate governmental entity," Marvin says. "It's gotta sink or swim on its own."

He expects the JPA's board would do everything to prevent levying a property tax.

"I think people would move heaven and earth to avoid it ever showing up on there," he says.

It's akin to the Airport Authority, which has the authority to levy property taxes but doesn't, he says.

Is UNL helping to finance the arena?

No. It is helping the city by agreeing to form a JPA and paying a nominal fee to have its basketball teams play in the arena for 30 years, but it's not financing the arena.

Then why create a JPA at all?

City officials say the project will be more transparent because the JPA will have its own budget, separate from the city's.

Wismer isn't so sure.

"I think it's six of one and half a dozen of the other," he says. "The city perceives there might be some legal advantages to doing it through the JPA."

How does a JPA take the arena debt "off the city's books"?

If the city issued a general obligation bond itself, it would increase its tax-supported debt nearly eight-fold.

Lincoln now has about $52 million in voter-approved, tax-supported debt for things such as storm sewers and makes $6.3 million in annual payments, or nearly 5 percent of its operating budget.

That's low compared to most triple- or double-A rated cities our size, Keene says.

By putting the debt on the JPA's books, it's as if the city has nothing to do with the obligation -- even though the city is paying it off, primarily with new entertainment taxes and arena revenue.

What would happen if the city issued the debt itself, without a JPA?

The city could do that with voter approval, but the city's debt would increase to $396 million, with payments making up nearly 16 percent of its tax-funded budget, a more than three-fold percentage increase over the current 5 percent. Credit rating agencies consider 12 percent high.

The heavier debt load could lead credit rating agencies such as Standard & Poor's to lower the city's stellar triple-A credit rating, increasing its borrowing costs on other projects.

"There's a chance the credit rating could be impaired," Keene says.

By creating the JPA, rating agencies view the debt the way they look at the school district or county's debt --just to see what Lincoln taxpayers' total debt obligation is, Keene says.

How will the $344 million in bonds be repaid?

•  49 percent would be paid off with a new 2 percent citywide tax on bar and restaurant tabs and 4 percent tax on hotel rooms and car rentals.

•  24 percent with arena revenue, from things such as naming rights and premium seating.

•  8 percent from private donations, primarily from the 2015 Vision group.

•  7 percent from the turnback tax.

•  5 percent from parking revenue.

•  4 percent from land sales and tax increment financing.

•  Other smaller revenue sources.

What will the mayor do if the May 11 vote fails? Would he try again?

Beutler is up for re-election in 2011, and his chief of staff says, "There is no Plan B."

Reach Deena Winter at 473-2642 or dwinter@journalstar.com.