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 . . .
At least five states and cities -- Louisiana, Indiana, New Jersey, Washington, D.C. and Cleveland -- have used tax-exempt auction-rate bonds to host teams in the NFL, National Basketball Association and Major League Baseball since 2005.
The debt was billed by bankers 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. Owners of the Giants, New England Patriots and Dallas Cowboys took part too, selling taxable auction-rate debt for their share of stadium projects.
The auction-rate market is now backfiring on hundreds of borrowers as fallout from the collapse of the subprime mortgage market threatens 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. When there are no bids, rates jump to the maximum proscribed in penalty terms . . .
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.
Jennifer Alvey, public finance director at the Indiana Finance Authority, declined to comment . . .
To help ease the pain, the feds are allowing state and local governments to bid on their bonds to prevent the interest rates from adjusting--at least in the short run. In Indiana, there has been virtually a complete news blackout on the potential financial calamity for the State of Indiana and the City of Indianapolis, save for this one earlier report in the Indianapolis Business Journal. You would think it would be newsworthy that taxpayers were paying a 15% interest rate on Lucas Oil Stadium bonds. Who would have thought that high of an interest rate was even possible with publicly-issued bonds?