Wisconsin may have found a new way to fund arenas

The state of Wisconsin has presented a creative way of funding a major sports arena without introducing new taxes. Now the question is whether the bonds it's offering are a good investment.

Brandon Knight of the Milwaukee Bucks
Getty Images
Brandon Knight of the Milwaukee Bucks

Public funding for new athletic arenas often creates political firestorms as opponents and supporters of coliseums or stadiums argue the wisdom of using taxpayer money to fund private sports franchises whose boost to the local economy—or lack of it—can be debated endlessly.

This week, Wisconsin Governor Scott Walker introduced his "Pay Their Way" plan, an arena-funding scheme under which the state plans to issue $220 million in bonds that will be funded by Bucks and visiting NBA players' projected income tax revenue.

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John Koskinen, chief economist at the Wisconsin Department of Revenue, said he expects tax income revenue from NBA players to grow in the coming years, since the league signed new TV contracts with Walt Disney's ESPN and Time Warner's TNT. The NBA and the two networks signed a new, nine-year deal worth $2.66 billion per year that takes effect during the 2016-2017 season. The league's current contract with the two networks is worth about $930 million per year.

"Our assumptions regarding future tax revenue growth from NBA players are conservative, yet reasonable," Koskinen said.

The state would issue the bonds only after the Bucks separately secure other capital for their portion of the project, Walker's office said. The plan also relieves state taxpayers of paying for the new arena through additional taxes, Walker's office added.

Tax income revenue from NBA players will rise with the new TV contract because of the collective bargaining agreement between NBA owners and players, according to Victor Matheson, an economist at Holy Cross University. "The [NBA's collective bargaining agreement] states that half of basketball-related revenue has to go to players," he said. "Any increase in TV contracts will eventually work its way into NBA players' pockets."

Taxing professional athletes is nothing new, according to Robert Raiola, senior manager at O'Connor Davies. "Every professional athlete is subject to what's known as the 'jock tax', [which is] state and local income taxes levied on professional athletes just for stepping off the plane," he said. "This is not a new tax. Wisconsin already imposes a jock tax."

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The idea for using jock-tax-income revenues to pay off bonds for a new arena is, nonetheless, unusual, Raiola added. "It's a relatively new concept."

Bond buyers, however, should be wary of the risk involved with such an investment, according to Marilyn Cohen, president of Envision Capital Management, which specializes in bond investments.

"Location is really important," she said. "I'm seeing that the Bucks have not yet named a specific site area for the arena. I've seen it happen in the past where the designated area ends up being so far out of town that hardly anybody comes."

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Cohen added that investors should take into account the team's performance on the court when assessing risk. "It's the Bucks," she said. "What happens if the Bucks end up at the bottom of the barrel, and people don't want to go see them? Is the TV revenue going to be enough to make the bond payments?"

Another risk investors should consider is that the Bucks could leave Milwaukee. "That would be a total disaster," Cohen said. "There have been a couple of cases where that has happened. [The city builds] a new stadium and the team they built it for decides to leave."

Potential bond holders should also hedge against the possibility of another player lockout, Raiola said. The league suffered its fourth lockout in 2011 after the 2005 collective bargaining agreement between NBA owners and the NBA Players Union expired. The lockout lasted 161 days and concluded once the new, ten-year CBA was signed.