Goldwater Institute Announces Lawsuit against City of Glendale

From Goldwater:

March 15, 2011

Phoenix–After examining more than 1,000 pages of documents provided by the City of Glendale under court order in the past 10 business days, the Goldwater Institute is announcing today that it will file a legal challenge to the agreement between the City of Glendale and Chicago businessman Matthew Hulsizer to subsidize the purchase of the Phoenix Coyotes. The deal has not been signed by the parties yet but is expected to close soon.

Under the pending deal, Glendale plans to borrow $100 million to help Mr. Hulsizer purchase the team. The bonds ostensibly will be repaid from parking revenues, but the city has pledged sales and excise taxes as well. According to Moody’s investor service, the city’s existing debt level already is three times higher than the typical city of its size. Additionally, the city will pay Mr. Hulsizer $97 million to manage the arena over the next five-and-a-half years.

The Goldwater Institute has determined the agreement violates two prohibitions of the Arizona Constitution, which requires that no Arizona government “shall ever give or loan its credit in aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation. . .” The Goldwater Institute prevailed in a similar case against corporate subsidies last year in the Arizona Supreme Court.

The first part of the clause is violated by Glendale’s decision to provide its credit to make a payment to Mr. Hulsizer, who will use the proceeds to purchase the team. The city’s credit rating was lowered by Moody’s due to its debt overload, thereby increasing the cost of city borrowing. The second prohibition is violated because under the Arizona Supreme Court’s decision in Turken v. Gordon (the CityNorth case), Mr. Hulsizer is not providing roughly proportionate value for the payments he will receive from the city.

Earlier this year, the Buffalo Sabres hockey franchise was sold to a private buyer who purchased the team with his own money. And this month, the Arizona Center was sold to private buyers for $136.5 million. Goldwater Institute President and CEO Darcy Olsen points out that “Deals of this size and scope happen all the time in the private marketplace without putting taxpayers on the line.” Mr. Hulsizer’s net-worth is reported to “dwarf” that of other known multi-hundred millionaires. “Mr. Hulsizer certainly appears better equipped to buy this team with his own funds than the taxpayers of Glendale,” said Ms. Olsen.

The Coyotes franchise is a perennial money loser, posting losses between $25 million and $40 million each year and having already plunged once into bankruptcy. The deal poses enormous risks to Glendale taxpayers, who will have to repay the bonds if the team fails again or if parking revenues are insufficient to repay the bonds. The Institute has urged the City to restructure the deal so that Mr. Hulsizer or another private buyer, rather than taxpayers, bear those risks.

The decision to file the lawsuit takes place against the backdrop of a two-year legal battle by the Goldwater Institute to obtain public records from Glendale. Because the city has changed the deal’s parameters multiple times and continues disclosing previously withheld documents, including 391 yesterday, the Institute will file its lawsuit when the deal closes. The Goldwater Institute’s Scharf-Norton Center for Constitutional Litigation will represent Glendale taxpayers whose taxes are pledged to repay the bonds for the Coyotes subsidy.

Well it appears that the Goldwater Institute is calling the City of Glendale’s bluff.  Time for the City to reveal it’s hand.  What can be next?  It seems doubtful that the bonds will sell.  Perhaps an equity investor steps up but that seems unlikely at this point.