HOUSTON (CN) - The Harris County-Houston Sports Authority is sticking it to insurers, and possibly to taxpayers, by refusing to raise enough revenue to pay back $1 billion in bonds it issued to finance construction of Houston's three pro sports venues, the bond insurers claim in court.
The National Public Finance Guarantee Corp. and MBIA Insurance Corp. sued the city-county Sports Authority, the Harris County Sports & Convention Corp., Houston NFL Holdings and the Houston Livestock Show and Rodeo Inc., in Harris County Court.
MBIA is the nation's largest bond insurer.
The Sports Authority, established by voters and the Texas Legislature in 1997, "is a governmental entity authorized by statute to undertake certain duties: to build sports and community venues, issue bonds to finance construction, and impose and collect taxes to repay its bonds," according to the complaint.
"Between 1998 and 2004, the Authority issued approximately $1 billion in bonds, substantially all of which are insured by National, to finance the construction of Minute Maid Park, Reliant Stadium, and the Toyota Center in Houston," the complaint states.
The bonds were issued subject to "an Indenture of Trust ... that requires the Authority to 'at all times, to the extent permitted by law, impose and collect the taxes and other fees and charges which constitute the revenues, special revenues and other [funds] in an amount sufficient to pay amounts owing or to be owed on the Bonds," the complaint states. (Brackets in complaint.)
The authority is funded primarily by hotel and car rental taxes and stadium rental fees.
"At the time of their issuance, the bonds were principally secured by Hotel Occupancy Tax and Motor Vehicle Rental Tax revenues ... that the Authority projected would increase over time and provide a substantial cushion for the periodic debt service payments it was required to make," the insurers say.
"Certain of the bonds were further secured by special revenues such as admissions and parking taxes imposed on certain events at some of the facilities."
The bonds are supposed to be backed by a reserve account called the "Additional Required Reserve Account."
The complaint states: "As of December 31, 2012, the ARR should have had reserves of $55 million to be fully funded. Instead, as of that date the ARR contained only $25.5 million.
"The Authority's revenues over the past decade have fallen well short of the assumed annual growth projections used by the Authority when the bonds were issued, below the levels required to make the principal and interest payments on the bonds, and below the amount needed to maintain the required ARR balance of $55 million."
As a result, MBIA says, the Authority has not had enough money to cover the principal and interest due on the bonds seven times in the past three years.
To pay its bills, the Authority has made claims on the plaintiffs' insurance policies, and depleted the reserve account by $30 million.
"In short, the Authority has experienced, and will continue to experience, a financial crisis in which its revenues are insufficient to satisfy its financial obligations," the complaint states. "The Authority needs more money, and it needs more money immediately."
MBIA claims that because the Authority has "kicked the can down the road" in dealing with its revenue shortfalls, and depleted the reserve account "meant to protect against catastrophic events, not perpetual and chronic revenue shortfalls," taxpayers may suffer.
"The likely consequence to taxpayers of making claims on National's policies that must be repaid with interest is that tax revenues that could be used by taxpayers for other purposes will instead have to be used to pay back the policy claims at a higher interest for decades to come," the complaint states.
While the state law establishing the Authority prohibits property taxes from being used to operate any voter-approved stadium, the Authority has the right to collect more admissions and parking taxes than it does, MBIA says.
The Legislature authorized the Authority to collect an admissions tax of up to 10 percent of ticket prices at Reliant Stadium, and a parking tax of up to $3 per vehicle, MBIA says.
But the Authority charges only $2 per ticket admissions tax, and $1 per vehicle parking tax.
"The Authority has repeatedly taken the position that it will not raise these taxes and that it has no obligation to impose taxes beyond those currently in existence," the complaint states.
"The Authority's improper refusal to raise and collect taxes necessary to satisfy its debt obligations is driven, in part, by contracts by, between, and among the Authority, the Sports Corporation, the Texas, and/or the Rodeo.
"It is the Authority's apparent position that it can restrict and impair the powers granted to it by the Texas Legislature to raise and collect revenue and that through various contracts it has restricted and impaired its ability to raise and collect additional revenues.
"The Authority is wrong on both counts. The Authority cannot impede its ability to raise and collect revenue as authorized by the Texas Legislature."
To make matters worse, MBIA says, the Authority is refusing to pay all of its premiums.
The insurers seek writ of mandamus ordering the Authority "to immediately comply with the requirements of the indenture by imposing and collecting admissions taxes and parking taxes of 10 percent of ticket price and $3 per vehicle on events at Reliant Stadium," and to return $3.8 million to the reserve fund immediately.
They also seek damages for wrongful transfer of funds and breach of contract, and reimbursement of costs incurred "in connection with enforcing covenants or conditions of the bonds."
The insurers are represented by Scott Fletcher with Jones Day in Houston.
Barton Smith, an emeritus economics professor at the University of Houston, told the Houston Chronicle that "the situation presents, at worst, an 'indirect risk'" to taxpayers.
"If (the Authority) default(s), who's it going to hurt? Well, it's going to hurt the bondholders if they're stupid enough to let them default. The risk to us Houstonians ... is that they couldn't continue to carry out their functions without some type of Harris County bailout," Smith told the Chronicle in 2011.
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