By now, most of the local media have posted stories examining the Kansas City Chiefs’ upcoming move from Kansas City, Mo., to the Kansas side of the state line. But I haven’t seen anything that aggregates all of the issues I spotted in reading through the term sheet and the applicable statutes. So I’m going to write a series of posts diving into all of it with the goal of adding to the discussion.
Why are the Chiefs moving?
Chiefs owner Clark Hunt wrote a letter to Chiefs fans that purportedly answers this question. In essence, his argument is that he’s following in the footsteps of his father, Lamar Hunt, as a “visionary” and a “pioneer.”
In reality, he’s explicitly building a stadium that is like most other modern NFL stadiums. The term sheet between the State of Kansas and the Chiefs directly references Mercedes-Benz Stadium in Atlanta, the new Nissan Stadium in Nashville, and US Bank Stadium in Minneapolis as models for the new Chiefs stadium. So maybe this isn’t really about being a pioneering visionary.
What Hunt really wants is money. And a legacy. But mostly money. A new, domed stadium in Kansas allows him to sell Personal Seat Licenses (PSLs) and vie to host the Super Bowl, Final Four, major arena concerts, and other events. All of these are worth many hundreds of millions of dollars to him. The term sheet lets him keep all the revenue from PSLs and events.
And Kansas is letting him do all of it for about 40 cents on the dollar. Maybe less.
What are STAR bonds?
STAR stands for “sales tax and revenue,” a type of quasi-government bond* that Kansas and its peer states in tourism, Illinois and Nevada, offer for development purposes.
*This is not a technical term. I’m not a finance lawyer and don’t know if these are technically government bonds. Smarter writers than I have noted that they aren’t backed by the full faith and credit of the state and won’t carry the state’s credit rating.
Here’s how it’s supposed to work: via a large bank, Kansas will issue these bonds and investors will buy them. Who are these investors? Your guess is as good as mine, but probably it will be mutual funds and other large, institutional investors*. The money that they pay for these bonds goes to Kansas to fund their obligations. We’ll explore the real cost of their obligations in Part II.
*The term sheet specifically provides that the bank issuing the bonds may restrict sale or transfer to “sophisticated investors only.”
So what do the investors get out of this? Ideally, they get their investment paid back, plus interest. They’re called “sales tax and revenue bonds” because the revenue used to repay them comes from increased sales tax that Kansas collects from the development built with the bond funds. This increased sales tax revenue pays off the principal and interest on the bonds (i.e., debt service). Or at least, that’s the idea.
Ordinarily, the only sales tax revenue available to pay back STAR bonds is new (or “incremental,” in legalese) sales tax revenue. As provided in K.S.A. 12-17,162(hh)(1), the state is supposed to calculate “Base Year Revenue” by determining how much sales tax was collected in the STAR bond district in the 12 months before the bond district was created. Going forward, all sales tax revenue exceeding the Base Year Revenue total goes to pay off the bonds until they’re retired.
But there’s a twist! In section (hh)(2), the state and, if they choose to opt in (more on this later) counties and municipalities can set Base Year Revenue at any level they like. This provision specifically references K.S.A. 12-17,181, one of several statutes the Kansas legislature passed aimed at stealing luring attracting one of Missouri’s professional sports franchises to Kansas. In that context, the state, counties and municipalities involved in a bond district can set the Base Year Revenue at any level they want.
We’ll come back to this. Repeatedly.
How are these bonds paid back?
There are three sources of revenue for repayment:
1. State sales tax that exceeds Base Year Revenue collected in the bond district
2. County and Municipal sales tax and “transient guest tax”* that exceeds Base Year Revenue collected in the bond district … but only if these entities opt into this deal as provided in K.S.A. 12-17,164(b)
3. Alcohol sales tax that exceeds Base Year Revenue collected in the bond district
*In English, that’s hotel tax, not a tax on drifters.
Only No. 2 above is of interest here. We should pause here and define the “bond district” that we’ve referenced a few times already. Essentially it includes the following:
· Almost all of Wyandotte County
· All of Kansas City, Kansas (KCK)
· The cities of Shawnee, Lenexa and Olathe, which are all in Johnson County
All of these entities have the option to participate in this project. Or not. To participate, there are two requirements per K.S.A. 12-17,164(a)(1)(B): they must hold a public hearing, and they must pass an appropriate ordinance or resolution.
Given the numbers involved here, which we’ll explore in more detail in Part II, I can’t imagine that Topeka hasn’t already secured commitments from Wyandotte County, KCK, Shawnee, Lenexa, Olathe and Johnson County to participate in this project. But as I gradually become an adult, I find that adults, even those in positions of incredible responsibility and power, are winging it far more often than I suspected.
If commitments haven’t been secured, then presumably the counties and municipalities, which I will hereinafter refer to as “the Locals,” will be incentivized and/or threatened to participate. There’s certainly some natural pressure at play here because now that this project is public, anyone seen as standing in the way will face significant public pressure to fall in line.*
*And this is speculation, but I suspect that the provision allowing them to participate via “resolution” gives them a way around a formal vote in case they need it.
But there are good reasons for the Locals to hesitate, especially KCK and Wyandotte County. Participating in a STAR bond project essentially freezes their sales tax ceiling at current levels for at least two decades. And that’s if they don’t set Base Year Revenue at a lower rate, which they’re allowed to do. And may be pressured to do. For KCK and Wyandotte County, where the new stadium will be built, they are likely to incur significant cost for new infrastructure (think roads, sewer, police, etc.), so they have especially good reason to consider the ramifications of opting in.
OK, this is a lot, when is all of this happening?
Things are about to start moving quickly. The term sheet is not a legally binding document. It merely sets forth the broad outlines of what the two parties have agreed to. Kansas and the Chiefs will negotiate and sign formal documents (the “Definitive Documentation” as the term sheet calls it) that will run many hundreds of pages long. The term sheet specifies that all obligations are null and void if this documentation isn’t completed by October 31st, 2026. So between now and then, among other things, the Chiefs must obtain the land for the stadium and convey it to the state, Kansas (and a bank) have to issue and sell more than a billion dollars in bonds, and the NFL has to approve the deal.
For now, keep an eye on what the Locals do. They will have to hold at least one public hearing on the matter, and they have to pass an ordinance or resolution agreeing to pledge their incremental sales tax revenue to the project. As we will see in the upcoming posts, it doesn’t seem possible that there will be enough sales tax revenue if they don’t participate.