Braves Stadium Bond Challenge to be Heard in Georgia Supreme Court

Update 6/29/2015: The Georgia Supreme Court has rejected the challenge to the stadium bonds.

Original post:

On Tuesday, February 3, the Georgia Supreme Court will hear oral arguments in three cases challenging the financing of the new Atlanta Braves stadium in Cobb County. Since the cases combine my interest in baseball with my interest in appellate litigation, I reviewed the main briefs and have some comments.

Before I get into the details of the bond challenge, this is the short version of the transaction, as I understand it:

  1. Cobb County doesn’t want to issue general obligation bonds to build the stadium. Such bonds have to be put to a public referendum.
  2. The County would like to use revenue bonds instead, which don’t have to be put to a referendum. But to qualify as revenue bonds, the project’s revenues must completely cover the bond payments.
  3. The Braves will only be paying $6.1 million annually in rent, while the annual bond payments will be up to $25 million. So the bonds wouldn’t ordinarily qualify as revenue bonds.
  4. Instead of Cobb County issuing the bonds, the Cobb-Marietta Coliseum and Exhibit Hall Authority issues the bonds. The Braves pay $6.1 million annually to the Authority, and Cobb County pays the Authority whatever else it needs (around $18 million annually) to make the bond payments.
  5. The bonds now qualify as revenue bonds. The revenue the Authority receives ($6.1 million from the Braves plus around $18 million from Cobb County) completely covers the bond payments. No referendum is required.

And now to the details of the bond challenge. Procedurally, the dispute started as a bond validation hearing in Cobb County Superior Court. The challengers to the stadium financing are not themselves parties to any of the transactions. They are Cobb County residents who intervened in the bond validation as authorized by statute. OCGA § 36-82-77. Appeals in such cases go to the Georgia Supreme Court, primarily because OCGA § 36-82-77 says they are to be treated like injunction appeals, although these particular cases probably would have gone there anyway because of the constitutional issues involved.

The new stadium will be financed in part by up to $397 million in bonds. The plan is for the Cobb-Marietta Coliseum and Exhibit Hall Authority, not Cobb County, to issue the bonds. The Authority is a public corporation, separate from the County, created by act of the General Assembly. The Authority’s annual payments on the bonds may be up to $25 million. This will be covered in part by the Braves, who will pay annual rent of $6.1 million, and the rest (around $18 million annually) will be covered by Cobb County.

“Revenue derived from the project”

The bonds will be “revenue bonds.” Under Article IX, Section VI of the Georgia Constitution, revenue bonds are “repayable only out of the revenue derived from the project.” The Authority is counting both the Braves’ rent and the payments it receives from Cobb County as “revenue derived from the project.”

The Georgia Supreme Court approved this approach in Clayton County Airport Authority v. State, 265 Ga. 24 (1995), but the intervenors in the Braves cases challenge it. It’s probably true, from a high-level perspective, that the money from the County is not “derived from the project.” It comes from the County’s general tax revenues. But from the Authority’s perspective, the money is directly tied to the stadium project. It gets the money only because it entered into the stadium transactions. The Georgia Supreme Court has treated the Authority’s perspective, not the high-level perspective, as the relevant one.

“New debt”

Another hurdle the bonds’ proponents have to overcome is Article IX, Section V of the Georgia Constitution, which prohibits counties and political subdivisions from incurring “any new debt” without voter approval in an election. There was no election to approve the stadium bonds. Some media reports have suggested the bonds themselves might be “new debt” requiring an election, but it’s actually pretty clear that they aren’t, as long as they are in fact “revenue bonds.” (If they aren’t revenue bonds, they would seemingly be invalid no matter what.) The issue is really whether Cobb County’s promise to make payments to the Authority is “new debt.”

This issue has also been decided previously by the Georgia Supreme Court. E.g., Avery v. State, 295 Ga. 630 (2014). A promise to make payments to an authority is not “new debt;” rather, it is treated as an “intergovernmental agreement” (“IGA”) subject to Article IX, Section III of the Georgia Constitution. In some economic or accounting sense it is probably true that a county incurs a “debt” or a liability any time it enters a long-term agreement. But requiring a referendum for each such agreement would be untenable. From the County’s point of view, it is not really relevant that the Authority is using the money to pay a debt, as long as the County is getting the benefits it contracted for. Again, the Georgia Supreme Court has treated the county-level perspective, not the high-level perspective, as the relevant one.

“Parks, recreational areas, programs, and facilities”

Because Cobb County’s promise to make payments to the Authority is treated as an IGA, Article IX, Section III sets up a third hurdle for the bonds’ proponents. IGAs “must deal with activities, services, or facilities which the contracting parties are authorized by law to undertake or provide.” In other words, both Cobb County and the Authority must be otherwise authorized to provide a stadium facility like the Braves’.

There doesn’t seem to be too much doubt that the Authority can build a stadium; the trickier part is whether Cobb County can. Article IX, Section II, Paragraph III of the Georgia Constitution empowers counties to provide “[p]arks, recreational areas, programs, and facilities.” The bond proponents argue that the stadium facility is both a “park” and a “recreational area” or “facility.” Personally, I think the argument that a stadium is a “park,” as that word is used in the Georgia Constitution, is a bit of a stretch. I didn’t see this in the briefs, but the Court might look to the many cases interpreting the phrase “park purposes” in deeds. For example, in White v. Metropolitan Dade County, 563 So. 2d 117 (Fla. App. 1990), the court held that conducting a professional tennis tournament in a park violated a deed restricting the land’s use to “public park purposes only.”

“Recreational area” seems like a broader phrase and probably encompasses a professional baseball stadium. Attending a baseball game, not just playing in one, is recreational. There might be some difficulty in that the facility under construction in Cobb is much more than just a stadium; it will have office space, residences, and other elements outside the ordinary meaning of “recreational area.” But I’m not quite clear on how those things are being paid for; they may or may not really be at issue in the bond financing.

The holistic argument

It looks like the main specific arguments against the stadium bonds have already been considered and rejected by the Georgia Supreme Court, or are otherwise weak. (I didn’t review all of the challengers’ arguments.) But the challengers also have a holistic argument: without a referendum, Cobb County couldn’t borrow money on its own to build a stadium to be paid back out of general funds; it shouldn’t be able to use the Authority as a conduit to effectively do the exact same thing. That argument doesn’t seem to have worked before, but the Court may never have been presented with a case where the IGA conduit device was pushed as far as it’s being pushed here.

I plan to listen to the oral arguments on Tuesday and update this post.

In the interest of full disclosure, I’m currently representing a client adverse to Cobb County in a dispute. I also used to work at Seyfarth Shaw, which is or was involved in the Braves stadium financing. But I have no personal or professional interest in the outcome of the bond challenge cases, and I have no non-public information about them.

Update after oral argument:

I listened to the oral argument live this afternoon. The questioning of Tom Curvin (on behalf of the County and the Authority) was a little more intense than I expected. The justices seemed most interested in whether this project is of a type that the County and the Authority are “authorized by law to undertake or provide,” which is a requirement of the Intergovernmental Agreement Clause of the Georgia Constitution, Article IX, Section III.

Justice Nahmias asked what services the Authority is providing, and Mr. Curvin responded that the “main one” is providing the revenue bonds, citing Frazer v. City of Albany, 245 Ga. 399 (1980). That case describes issuing revenue bonds as a service. Id. at 400. Justice Nahmias then asked whether Mr. Curvin would agree that the Braves stadium case would go somewhat beyond any prior cases, seemingly implying that what the Authority is doing here is less connected to its statutory authorization than what the Albany-Dougherty Inner-City Authority was doing in Frazer. Mr. Curvin stood by Frazer and did not concede the point.

Justices Melton, Nahmias, and Hines all asked questions about the source of the funds being used to pay back the bonds. Mr. Curvin conceded that the payments from the County to the Authority come from general taxpayer funds. Justice Melton commented that “conceptually” revenue bonds are supposed to be paid back from revenues generated by the project, and “we’re seeing more and more” revenue bonds being paid back out of general taxpayer funds. Justice Nahmias also pointed out that if the county itself were issuing the revenue bonds, it wouldn’t have been able to pledge taxpayer funds toward them. Mr. Curvin didn’t disagree, but pointed to the line of precedent approving such arrangements and noted that many projects have been built and financed in reliance on that precedent.

As for the bond challengers, Larry Savage, a non-lawyer arguing on his own behalf, argued that the line of Georgia cases approving financing arrangements like this one had eviscerated the Georgia Constitution’s debt limitations and should be overruled. Justice Nahmias was skeptical of overturning pre-1983 Constitutional interpretations. Tucker Hobgood, an attorney also arguing for himself, focused on the authorization issue and repudiated Mr. Savage’s concession that any precedent needed to be overturned. He argued that the Authority’s enabling law wouldn’t let it be a “bank” for the county. Gary Pelphrey, on behalf of Richard Pellegrino, picked up on the issue of the procedural correctness of the validation hearing, arguing it shouldn’t have been a “pep rally.”

I never read too much into appellate judges’ questioning at oral argument. But there did seem to be some judicial discomfort with the use or abuse of IGAs as a conduit for avoiding constitutional debt restrictions.