Would ENRON be an apt analogy? No, the NFL has not used mark
to market accounting to distort profits, or has it? However, the bonds issued by municipalities,
which are perhaps more in line with the 2007 mortgage backed securities
collapse may be a better analogy.
A little history
Municipalities, since the 1950’s, have been issuing bonds
and levying tourism taxes and property taxes to finance bonds which built
stadiums, mass transit, and associated infrastructure for the professional
sports industry in the united states.
Prior to 1953 the sports industry provided its own financing, that all
changed when the browns built their new stadium (http://money.cnn.com/2016/09/09/news/nfl-sports-stadiums-tax-breaks-taxpayers/index.html). As the tax subsidized income started flowing
the industry inflated, sound like the housing market?
To date no one knows what the total municipal bond debt
associated with professional sports venues may be. To be sure this is not an indictment of the
NFL, all of the pro sports leagues suckle at the teat of the burdened tax
payer, and their whorish federal cronies.
However, due to the recent drop in ratings and the public outcry,
investigation, and loss of govt revenue secondary to the “fake patriotism”
investigation, it is my belief that the stadiums primarily used for the NFL and
the associated debt obligations are bound to failure. This will start a landslide of collateral
obligations, and may possibly bankrupt entire municipalities.
Between 2000 and 2016 the NFL had convinced municipalities
to finance over $13 billion dollars in debt obligations to build stadiums and
associated infrastructure for their franchises to use (http://www.foxbusiness.com/features/2017/09/28/nfl-spends-massive-amounts-taxpayer-cash-on-new-stadiums.html). It should be clear that the NFL and its franchise
owners rarely, if ever, buy in to the stadiums they use. If this lack of confidence is not a red flag,
I’m not sure what is. If a stadium is a “good
deal” wouldn’t you want to buy it? Could
I be wrong?
Well, according to city fillings Philadelphia still owes
over $160k on veterans stadium, which was demolished over ten years ago. That is comparable to the “super dome” in
Seattle, which the city finished paying off just 15 years ago long after its
demolition date. The list of stadium debt
obligations, which never seem to pay off the stadiums which don’t exist anymore,
seems to go on forever (https://www.reuters.com/article/us-sports-nfl-stadiums-insight/with-nfl-rams-gone-st-louis-still-stuck-with-stadium-debt-idUSKCN0VC0EP). Of course the tax payers in the districts are
still obligated, and will pay for the bonds.
Even more disturbing is that while the NFL continued to lose
viewers, over 20%-24% in 2013-2015, the credit and bond obligations issued to
the league continued to increase at an alarming rate (https://www.forbes.com/sites/briangoff/2017/10/23/nfl-losing-viewers-at-alarming-rate-but-faces-limits-on-its-response/#41ee79cf4212).
Just like anyone on the fringe of inevitable catastrophe the
franchises took desperate measures, even though few if anyone seemed to notice. With a stated TV market value of over $18
billion dollars, similar to the mark to market accounting model Enron used, and a credit rating of A+ by FITCH, Wall
Street bit down hard! The NFL hit Wall
Street hard and right between the numbers so to speak, and the banks hit back
with hundreds of millions of dollars of credit extended from JP Morgan chase
and others (http://m.sportsbusinessdaily.com/Journal/Issues/2001/09/20010910/No-Topic-Name/NFL-Debt-A-Hit-With-Investors.aspx).
2001 was a great year for the NFL franchise owners and the credit flowed
freely, and cheaply.
As the noose
tightens:
As the salad years passed by, and the US military industrial
complex needed good press, the NFL found another tax subsidized nipple on which
to nurse. The military was all too happy to pay an undisclosed amount of
discretionary money for “patriotic” events and displays during NFL games. The
exact amount of funds disbursement will, most likely, never be known. However, data released by the senate armed
services committee in 2015 after a discretionary audit showed that the US military
had paid at least $6.8 million dollars to teams to spur patriotism the prior year
“For example, taxpayers paid $49,000
to the Milwaukee Brewers to allow the Wisconsin Army National Guard to sponsor
the Sunday singing of "God Bless America." In another contract, the
New York Jets were paid $20,000 to "recognize one to two New Jersey Army
National Guard soldiers as hometown heroes." (https://www.npr.org/sections/thetwo-way/2015/11/05/454834662/pentagon-paid-sports-teams-millions-for-paid-patriotism-events).
Since 2015 this practice has ended,
and tax payers have decided almost en mass that they can no longer afford to
finance the Romanesque circus of the ultra-wealthy. The recent tax legislation reflects this
trend. It would change the tax free
income generated by bondholders who lend money to municipalities to fund
stadiums from a $3.2 billion dollar per year loss, to a $3.7 billion dollar a
year income for the IRS (http://money.cnn.com/2016/09/09/news/nfl-sports-stadiums-tax-breaks-taxpayers/index.html).
Landslides happen
all at once:
It is worth noting that before the collapse of the housing
market, Enron, and almost any other financial catastrophe in the last 200 years
those captaining whatever titanic disaster that was happening always deny
anything is wrong, right up until the ship sinks. My favorite was the “wizard of finance” Allan
Greenspan saying to reporters that the mortgage backed securities industry was
in absolutely no danger, just days before major banks almost went bankrupt due
to insolvent housing bond portfolios.
The NFL will be no different. Accounting can be used in many
ways, and it can be used to make a dead company look alive. Enron used mark to market, the housing market
used collateralized debt obligations, and denied the bonds in their housing portfolios
were worthless paper.
As viewership drops, and regardless of what people say it
has, profits will plunge. Wall Street investment banks will realize that their
investments are not safe, and they will require more interest for loans. And since credit is all that is keeping this
dying industry alive that will be the nail in the coffin. Stadium debts will start to balloon as people
realize the industry is insolvent.
All of the hotel taxes, rental car taxes, restaurant taxes, property
taxes and instruments normally used to pay the bond debt for pro stadiums won’t
be able to pay the principal of the stadium bond debts, and eventually the
bonds issued by the municipalities will go in to default (https://www.usatoday.com/story/sports/2016/08/22/nfl-mlb-stadium-tax-hotel-tourists-fans/88489236/). The story is sad, as the cities and state
districts dependent upon the revenue of professional sports decline the debt collapse
will spread in to other non sport related bond portfolios.
The students of the Ohio school system suffered a loss of
over $119 million so that the Bengals could maintain their stadium. The budget shortfall for the Ohio public
schools was just the tip of the iceberg, and to prevent default the state also
cut $26.3 million from public health funding to keep the stadium and bond debt
solvent (https://www.theatlantic.com/magazine/archive/2013/10/how-the-nfl-fleeces-taxpayers/309448/). As the debt collapse spreads out, and
municipalities become insolvent they will not be able to borrow and pay the
interest on the debt for even the other services for which they have issued
bond debt.
It would be overly speculative and simplistic to say that
any city or state with bond debt that is related to the construction and maintenance
of stadiums will default and fail to pay their other bond debt obligations. However, I would not be surprised to see this
trend in the future.
Of course, it is entirely possible, and indeed probable,
that govt will step in and prevent collapse.
Again, as in the 2008 crisis, the tax payer will be put on the hook for
the speculation of the ultra wealthy franchise owners. Just as they were for
the auto industry executives, and the banking lenders……
I have not been able to find any finance blogs with anything
about NFL bond debt defaults looming. If
you have an opinion, with data to back it up, please send it my way.
Thanks,
Zach
