The Las Vegas Stadium Authority is experiencing a situation that, during its planning, would have been considered unthinkable by anyone: a worldwide pandemic causing an economic downturn so dramatic it has the look of a depression.
The Pandemic caused by the shocking fast spread of COVID-19 has caused economic disruptions worldwide, and Las Vegas is no exception. Indeed, more than the common urban area by far, the place called “Sin City” is America’s most popular tourist city. So, what happens when the flow of tourism all-but stops is something that Las Vegas is experiencing, and within it the Las Vegas Stadium Authority? And, more important, what can be done to fix it?
The Pandemic Brings Record-Low Hotel Occupancy Rates To The Las Vegas Strip
By a number of reports, the hotels in Las Vegas Strip and Clark County are experiencing never-before-seen low levels of occupancy, into “the low teens”. That message was sent by Wynn Resorts CEO Matt Maddox in a video that was, in part, repeated on Twitter:
A portion (due to Twitter video length) of video Wynn Resorts CEO Matt Maddox sent out to @WynnLasVegas employees. Summary: business volume/occupancy will be in low teens
Rolling closures at outlets
All FT employees will get pay
Going to do everything we can to keep your job pic.twitter.com/UDDVGFSg7k
— Christine Maddela (@christnemaddela) March 14, 2020
So, with that in mind, I set about calculating what the March 2020 revenue for the Stadium Hotel Tax would be considering the reports, and past year’s comparable performance. Let’s start with what can be considered a normal pattern: March of 2019.
According to records from the Las Vegas Convention and Visitors Bureau and the Las Vegas Stadium Authority, this is what March 2019 looked like:
Convention Attendance: 552,200
Occupancy Rate: 91.5 percent
Stadium Tax Revenue: $4,473,013
Bond Debt / Month times 1.5
Debt Coverage Ratio: $4,500,470
Revenue / Debt: -$27.457
The debt coverage ratio is defined as in page 13 of the 276-page document describing the Clark County Stadium Bond Issue of $647 million. It reads: “(8) that the Stadium Authority has made a finding that the taxes imposed pursuant to the Act that would be pledged to the payment of the general obligations to be issued by the County would “generate sufficient revenue to meet or exceed [a] debt service coverage ratio of 1.5 times the anticipated annual debt service for each year of the term of the obligations.”
In other words, the list of the expected “annual debt service” numbers has to be divided by 12 to get the average per month debt service, then multiplied by the 1.5 debt coverage ratio. Now, the ratio is called for by law, not by me, and you can read it in the pdf file on the bond issue at the end of this post.
(And, to add, for a municipal bond issue like this, the normal debt coverage ratio is 2 to 1, and not 1.5 to 1. So, there would have to be more revenue raised to cover the bond issue per month if 2 to 1 was used. So, why wasn’t it used? It wasn’t because it would have called for a higher hotel tax rate, and that’s something then Nevada Governor Brian Sandoval, then Clark County Commissioner and now Governor Steve Sisolak and the Southern Nevada Tourism and Infrastructure Committee that created what became the Southern Nevada Tourism and Investment Act, wanted to avoid and something I complained about. With it, arguably, the deficits that have been, and will be, experienced would have been largely avoided. Moreover, the Las Vegas Convention And Visitors Authority commonly used a debt coverage ratio of 3 to 1, which is why it’s not experiencing a problem during this downturn.)
What The March 2020 Picture Will Look Like For The Las Vegas Stadium Authority
This is what the March 2020 statistical picture will look like for The Las Vegas Stadium Authority:
First, this is March 2019, again:
Convention Attendance: 552,200
Occupancy Rate: 91.5 percent
Stadium Tax Revenue: $4,473,013
Bond Debt / Month times 1.5
Debt Coverage Ratio: $4,500,470 (Listed 2019 Bond Debt of 36,003,763
Revenue / Debt: -$27.457.38
This will be March 2020:
Convention Attendance: 71,715
Occupancy Rate: 12 percent
Stadium Tax Revenue: $614,154
Bond Debt / Month times 1.5
Debt Coverage Ratio: $4,247,344 Listed 2019 Bond Debt of 33,978,750
Revenue / Debt: -$3,633,189.54
The Bond Reserve is set, again, by the legislation passed by the Nevada Legislature, at $9 million. So, based on that, the difference of a negative -$3,633,189.54 would have to be taken from that reserve, biting into 40 percent of it. One more hit like this in April would drop the reserve to $1,733,620, and for all practical purposes unable to sustain even an economic drop of 50 percent below the norm, which would be likely in May 2020, assuming a cure for COVID-19 is found in April.
Why The Debt Service Reserve Funds Aren’t Enough To Cover The Long Term Bond Debt Shortfall Problem
Jeremy Aguero recently remarked to the Las Vegas Review Journal that “In terms of the ability to make bond payments, not only was the Stadium Authority board relatively conservative in its estimates of room tax, but it also has about a year and a half worth of reserve revenue set aside to ensure that the bond payments are made. Even if the room tax was essentially to drop to zero for the next year — which no one expects, I want to be very clear about that — there would still be revenue available to make those bond payments.”
Jeremy Aguero is both right and wrong. If the Stadium Authority were “relatively conservative in its estimates of room tax” it would have followed the Las Vegas Convention And Visitors Authority’s leadership and used a 3-to-1 debt coverage ratio and a higher room tax rate, say what I recommended: 1.4 percent. But they chose 88/100ths of one percent, which has brought in less money than needed when the debt coverage ratio of 1.5 is considered – something the Authority doesn’t seem to want to mention – and I asked Aguero about:
But the main point is the $56 million in debt service reserve has to be considered against the bond debt per month times the debt coverage ratio. If that’s done, and one has to consider the draw down that’s to come, then if one takes the 2020 total bond debt times 1.5, we get $50,968,125, which leaves $6 million left over if there’s no room tax revenue. So, yes, the short term problem can be covered, but the main trouble is in the near future: the annual bond debt starts to climb, starting in 2021 – it dipped from $36,003,763 in 2019 to $33,978,750 in 2020 – going from its 2020 level up to $40,163,250 in 2029.
That means the Stadium Authority will go into its future (remember this is a 30-year-bond issue) facing climbing bond debt coverage requirements with two problems: a falling annual Las Vegas visitor rate and a small and depleated Debt Service Reserve. In all, sustaining future economic downturns without running into having to tap into the Clark County General Fund will be impossible. Keep in mind that the Debt Coverage Ratio times the bond debt service has to be figured in – the bond debt service schedule for the bond issue does not do that – so one understands how much revenue the stadium tax is supposed to generate to comfortably pay down the bond debt.
What’s The Answer? Adjusting Senate Bill One To Allow For A Las Vegas Stadium Tax Increment Revenue Zone
In total, the Las Vegas Stadium Project has a number of financial challenges facing it already existed before the Coronavirus outbreak and will be exacerbated by it. Paying for the infrastructure improvements around the stadium is one major cost that seems to have been forgotten. The original version of the Southern Nevada Tourism and Investment Act included a tax increment revenue zone. The proposal looked like this:
State of Nevada to allow creation of a Tax Increment Area
Clark County will create Tax Increment Area unless state grants necessary powers to Stadium Authority Board to do so
Tax Increment Area to include footprint of stadium and related practice facilities
EventsCo receives all revenue generated from Tax Increment Area, offsets additional capital contribution
Tax Increment Area capture rates:
Sales Tax –100% of collections
Live Entertainment Tax –100% of collections
Modified Business Tax –100% of collections
The problem is it did not include property taxes from the land and buildings within it. That was a mistake, because without the property tax revenue, the income stream would be comparatively paltry, and even more economically unstable (as we can see). The original tax increment zone was to be 25 miles in diameter. Obviously that was a hard-sell, but it was removed because Sheldon Adelson was expected to pay for any cost overruns and off-site infrastructure costs at the time. So, the whole idea was tossed.
Meanwhile, land values have gone up around Allegiant Stadium and once the pandemic and its economic impact passes, they will go up yet again. Now is time to reestablish the tax increment zone plan and add the properties and use tax increment financing within a zone that is roughly matching the plans for a development zone around the stadium at present.
The target financial size for the zone should be $700 million for base-year-assessed value used for tax increment financing revenue calculations. At that point, a bond issue of 20 years for $200 million could be established (the revenue throw-off would be much greater assuming only a 4 percent annual rate of growth) which would easily pay for any additional possible bond revenue problems, assist developers in the construction of affordable housing, and provide business recovery and employee assistance grants for the small businesses and workers around Las Vegas Stadium.
Las Vegas Stadium Authority Can’t Be Comfortable – It Must Make Changes
The point here is that given the situation, Las Vegas Stadium Authority can’t be comfortable and say “We’ve got this” when the number show a scary present and future. It has to act to protect both and make sure that the businesses and workers emerge from this awful period whole.
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