NEW YORK -- The auction-rate bond crisis is raising borrowing costs on more than sewers and hospitals, forcing some states to pay three times higher interest on 65,000-seat sports arenas with moving roofs and 50-foot video displays.
Debt payments for Louisiana's Superdome, home to the National Football League's New Orleans Saints, ran the state about $1.8 million last month up from roughly $500,000 in January after interest rates tripled to 12 percent, said Whit Kling, director of Louisiana's bond commission.
Some private borrowers are paying even more, with rates on bonds sold by owners of the NFL's New York Giants reaching 22 percent this week, according to a person familiar with the debt.
"I don't think anyone ever anticipated this," said John Kennedy, Louisiana's state treasurer. "We're paying the price."
States and cities that subsidize sports venues to stimulate the economy have often failed, and this year's credit meltdown will make it even harder to avoid raising taxes or reducing services to cover bills, said Dennis Coates, a public finance professor at the University of Maryland in Baltimore.
Coates' studies on the effect of major league franchises on U.S. cities show stadiums hurt residents by steering public and private spending away from health, safety or other forms of entertainment, he said.
"Is there a sufficient public justification for borrowing? I'm not sure there is," said Coates, co-author of "The Stadium Gambit and Local Economic Development," a paper published in 2000. "It's not like this is fundamental infrastructure."
At least five states and cities -- Louisiana, Indiana, New Jersey, Washington, D.C. and Cleveland -- used tax-exempt auction-rate bonds to host teams in the NFL, National Basketball Association and Major League Baseball since 2005.
Bankers billed the debt as a cheap alternative to conventional fixed-rate bonds.
Like sewer districts, universities and hospitals, state agencies in charge of economic development jumped at the chance to lower costs and still borrow for 20 or 30 years.
The auction-rate market is now backfiring on hundreds of borrowers as fallout from the collapse of the subprime mortgage market threatens the credit ratings of the world's largest bond insurers, deterring investors from even the safest debt.
The bonds' annualized interest rates reset at auctions held every seven to 35 days, and when there are no bids, rates jump to the maximum proscribed in penalty terms.
Rates on bonds that reset weekly climbed to 6.56 percent on March 19 from an average of 3.68 percent for the 12 months through January, as investors retreated and the banks that manage the auctions refused to make their own offers, according to an index from the Securities Financial Markets Association.
The average fixed-rate municipal bond maturing in 20 years yielded 4.28 percent the past 12 months, according to the Bond Buyer.
Louisiana's costs are surging because auctions for $238 million of bonds a state agency sold in 2006 have lacked bidders five of the last seven weeks, and the bank managing them, Merrill Lynch & Co. (NYSE: MER), stopped stepping in to pick up the slack, according to Kling.
Penalty rates of 12 percent are more than triple the average since issuance, Bloomberg data show.
The auction-rate market is a predicament for the Giants as well as taxpayers in New Jersey, where the stadium in East Rutherford is shared by the New York Jets.
Giants Stadium LLC, set up by the Mara and Tisch families that own the team, sold $650 million in auction-rate securities in August 2007 to help finance a new stadium scheduled to be completed in 2010.
Rates on $123.8 million of those range from 11.5 percent to 22 percent after at least one monthly auction failed on March 24, according to a person who asked not to be identified because the figures aren't made public.
Alice McGillion, a spokeswoman for the stadium project, declined to comment.
'All the rage'
Interest on bonds sold to refinance debt related to the existing 32-year-old stadium is also soaring just two years before it may be demolished.
The New Jersey Sports and Exposition Authority sold $190 million in securities in November, only to have some rates more than triple to 15 percent from 4.3 percent one week last month.
The auction-rate market "was all the rage," said Joe Consolazio, chief financial officer of the New Jersey authority, which voted this month to explore refinancing the debt again. "Because of this liquidity crisis, everyone's skittish."
The Indiana Finance Authority borrowed $611 million between 2005 and 2007 to help build Lucas Oil Stadium, a facility for the NFL's Indianapolis Colts that's scheduled to open later this year.
Interest rates on some of the auction bonds, secured by state appropriations and insured by New York-based FGIC Corp., jumped to 15 percent on Feb. 13 from 3.4 percent on Feb. 6, data compiled by Bloomberg show. As of March 26, they were 5 percent.
The city of Cleveland sold $108.4 million in auction-rate securities in October 2007 to refinance fixed-rate debt sold before the Cleveland Browns Stadium was opened in 1999.
Rates jumped to 12 percent last month from less than 4 percent in January, and were 10 percent as of March 20, Bloomberg data show.
Jennifer Alvey, public finance director at the Indiana Finance Authority, declined to comment. Sharon Dumas, director of the finance department in Cleveland, didn't return phone calls.
In Louisiana, where some of the bond funds helped restore the Superdome after Hurricane Katrina, the state's Stadium and Exposition District never anticipated the subprime crisis and overestimated how much tax revenue it would get from nearby hotels, said Kennedy, the treasurer.
Now the state is preparing to bid on its own bonds to lower interest rates that threaten to reduce the district's credit rating below investment grade, Kling said.
Moody's Investors Service (NYSE: MCO) on March 6 said it may downgrade the debt, now rated Baa3, one level above junk status.
"Certainly everyone would prefer the teams to stand on their own," Kling said. "That's just not a financial reality."