Vadnais Sports Center might need taxpayer bailout

The Vadnais Sports Center, controversial from the start, has sunk into a financial morass that has city leaders faced with the choice of cutting ties with the arena and defaulting on $26 million in bonds or assessing taxpayers $1 million to keep it running.

Revenues have fallen short of projections. Expenses have exceeded budget. And the center that officials promised Vadnais Heights residents would be able pay its own way without their help has been delinquent in remitting a year's worth of sales taxes to the state.

"I'm not sure we can afford this facility," said Council Member Joe Murphy. "It will be expensive to keep."

With two sheets of ice and the state's second-tallest dome covering a 100,000-square-foot turf field, the complex was supposed to become a destination that spurred economic development along Hwy. 61 and the surrounding area in the city in northern Ramsey County.

While there are no immediate plans to close the center, the glitzy facility that opened 19 months ago has created discord among city staff and council members.

Some City Council members and staff suspected that the arena at 1490 E. County Road E was under-performing financially, but the complexity of the bond financing and confusion over the ownership arrangement made it difficult to get a grasp on the depth of the problems. They recently got a clearer picture of the seriousness of the problems after seeing a council-ordered audit.

According to documents obtained by the Star Tribune, the sports center owes Vadnais Heights $127,000 for a loan the city gave it last year to make a bond payment. The center also owes the city $47,000 for unpaid legal and insurance costs, and there are $54,000 in unpaid utility bills. But most alarming for council members is that even though the arena turned an operating profit of $330,000 in 2011, that was far below the amount needed to cover debt service of $1.1 million.

In championing the sports center, Banovetz and others said the arena would have 1.3 million visitors and generate $2.3 million in revenue in its first full year, enough to pay the bills without tapping city money or needing a taxpayer bailout. In 2011, the center's first full year, revenue was about $1.5 million, or $763,000 below projections, documents show.

Compounding matters is that the center owes money to the Minnesota Department of Revenue. On Feb. 13, the department sent 12 letters -- one for each month -- to the arena demanding immediate payment of a year's worth of sales taxes. An accountant hired by the city said he feared the department would put a lien on City Hall.

Vadnais Heights already has contributed $3.2 million to the project, and, as master lease holder, is responsible for covering bond shortfalls. Bond payments are scheduled to rise to $1.6 million in 2013.

Who's in charge?

Signs of trouble surfaced about a year ago when an audit by the Edina firm of Abdo Eick & Meyers found that there was confusion about who was responsible for financial aspects, the city or the nonprofit Sports Facility Development and Management Group that the city hired to run the arena.

Auditors also found that the arena suffered from sloppy recordkeeping and had been lax in checking user permits. The findings attracted the attention of State Auditor Rebecca Otto, who ordered changes.

The city complied. It took over the sports center's checkbook, and more recently it put out a request for proposals with the possibility of hiring a new management company. Sports Facility Development and Management Group's contract is up Dec. 31.

The center made its $582,000 bond payment in February, but it needed the loan from the City Council to make it. Another $582,000 payment is due in August.

The facility is "not self-supporting," the city said in an April 12 news release.

That's what some arena opponents tried to tell city leadership long before construction workers turned the first spade of dirt.

In a 2009 e-mail to the city, Mark Erickson, a research analyst for the National Sports Center Foundation, said the financial projections for the sports center were overly optimistic. He concluded that the center would have to generate $2 million of net proceeds from its two ice rinks to make its debt service, and "that there is no existing project in Minnesota that has performed at that level."

"We are not surprised at all; we expected this to happen," Erickson said last week. "We never expected them to make their bond payments once the interest-only period finished. If communities want to provide the services, great, but they need to realize that they do not pay for themselves. It is an amenity that the city decides to pay for and give to its residents."

Erickson pointed to the Bielenberg Sports Center in Woodbury, which also has two ice sheets and a turf field, as the one complex that outperforms the average Minnesota facility. In 2011, Bielenberg took in close to $1.2 million in revenue and had a profit of $409,307. Its debt service was $362,931.

"It is self-supporting, and we have money set aside for repairs," said Bob Klatt, Woodbury's Parks and Recreation director. "That is the way it's been since Day One when we opened in 1995."

Banovetz said she still believes that building the Vadnais Sports Center was the right decision, and that the facility was never expected to be profitable in its first year.