State Auditor Harmon concludes that KFC Yum! Center project based on faulty financial projections

06/20/2017 06:24 PM

FRANKFORT — Kentucky Auditor Mike Harmon told members of the Capital Projects and Bond Oversight Committee on Tuesday that the financial information used to initially fund the building and maintenance of the KFC Yum! Center was based on unrealistic projections from the very beginning.

Harmon, who released his audit of the the Louisville Arena Authority last month, said that 75 percent of the Yum! Center’s operating income comes from tax dollars.

The original principal bonded indebtedness in 2008 was $349,218,518. In 2016,
that number was $341,225,781. In 2016, taxpayers were on the hook for $20,097,345, compared to $6,734,231 in non-tax income.

“When they were beginning to set those TIF boundaries, they looked at 10 years of property tax and looked at 16 years of sales tax, and of course sales tax makes up the primary amount of the TIF, and during that year 1990, 1991, that included a 1 percent increase, which was adopted, so that kind of skewed the numbers,” Harmon said.

Harmon also expressed concerns about the transparency and oversight of the Yum! Center since the arena authority has no internal staff.

“Other than its board of directors for whom this is not a full-time job, all functions of the arena, including management, are outsourced,” Harmon said. “This had led to a web of contracts, and some revenue generated by the arena is not reported to the authority.”

Harmon also pointed out that net position of ULAA, and the net assets of LAA for U rose from $25,890,003 in 2010, when the Yum! Center opened, to $45,632816 in 2016. U of L athletics net position rose from $102,754,000 in 2008 to $139,973.000 in 2016. However, the Louisville Arena Authority’s net position dropped from $75,413,8546 in 2008 to $17,099,286 in 2016.

The arena authority receives just 3 percent of the suite licensing fees and 12 percent from premium seat licensing while U of L gets the rest, according to the audit.

There were also unrealistic TIF projections, according to testimony Tuesday. In 2016, the projection was $15,896,000, but the actual TIF revenue generated $10,297,345 last year.

Sen. Chris McDaniel voiced concerns that financial estimates that were presented were unrealistic and were only presented in a effort to secure funding to build arena.

“It’s our belief when this project was initiated, the intent was you make the numbers look appropriate to pass what we need to pass to put this arena here, “ said McDaniel, R-Taylor Mill. “There was manipulation of data, in historical tax data, to get us to the point and I think it was simply intended to get the arena built and punt on the payments of it.”

McDaniel also expressed concerns about how revenue rose over $15 million for U of L after the Yum! Center opened in 2010, but taxpayers were left with most of the burden of paying for the new arena.

“You open an arena, and the athletic association sees an annual increase of $15 million in revenue. The taxpayers are being fleeced, period,” McDaniel said.

Louisville businessman Denis Frankenberger testified before the committee and echoed McDaniel’s comments about the unrealistic financial statements that got the project off the ground.

“If you look through the 520-page bond indenture agreement, you would find the TIF projections, and as I understand, those projections were made by the state budge director, and I’ve often said privately, Bernie Madoff wouldn’t of had the guts to generate this kind of projection because the first nine years of the TIF were projected to be 19.5 percent compounded per year increase, and that increased from year one in 2010 to 2019 was 425 percent,” Frankenberger said. “It’s absolutely impossible.”

Former Kentucky Attorney General Chris Gorman said Harmon should audit the U of L athletics department to get a complete picture of the entire financial situation.

Gorman also believes the state has no business supporting a major Division I basketball program.

“Athletics is a business,” Gorman said. “It is a big-time business, and they do not need to be supplemented by state and local government.”

While not promising anything, Harmon left the door open to the possibility of a future audit of U of L athletics.

“We’ll have to sit down with staff and see if that’s something that we have the staff to do as well as try to see if there’s an active way of taking care of that,” Harmon said.

The university and the arena authority have been negotiating a new lease in which U of L would contribute at least $2.5 million more toward arena debt per year than it currently does.


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