Hey Sacramento — publicly-funded arenas are bad for business

Hey Sacramento — publicly-funded arenas are bad for business

While running record deficits, Sacramento’s Mayor Kevin Johnson and city officials approved a $447.7 million arena deal at the Downtown Plaza in March, claiming a public-private partnership – only the private contributions amount to about one-third.724-730-K-street

Sacramento’s publicly funded arena deal has been billed as “the largest redevelopment project in city history” in Sacramento, which should make every tax payer shudder.

A publicly funded arena will mean Sacramento taxpayers can expect a giant toilet flushing publicly funding. Other people’s money is so easy to recklessly spend.

City-created the blight

The blighted Downtown Plaza in downtown Sacramento is entirely the fault of the city, through eminent domain, and its lousy property management. As the largest slumlord on the street, the city is responsible for driving the downtown K Street Mall area from a once-bustling pedestrian mall filled with independently owned shops and department stores, into a crime laden, blighted area replete with abandoned buildings and homeless people — after spending hundreds of millions of dollars in redevelopment money on the space.

Sacramento Police Department has had to cut cops. There are no road repairs. Park maintenance is dwindling. City services overall have been cut already. The publicly funded arena will just usher in massive debt. And when the team can no longer pay its bills, the city, already sinking under huge debt and unfunded pension liability, will file for bankruptcy.

Publicly funded arena deals are public sinkholes, and a bad deal for taxpayers.

New York arena bust

The Wall Street Journal just reported the New York City Barclays Center arena is not producing nearly the revenue projected. The Barclays Center is not only losing money, it made only one-third the first year projected revenue, and can’t pay the annual debt service.

Sacramento’s bad deal

Officials claim the Sacramento arena deal would require the city to commit “$258 million in value, or 58 percent of the arena cost,” according to reports in the Sacramento Bee. “Of that, $212 million would come from selling bonds backed by future revenues from city downtown parking garages. The city’s contribution is the same as it was in last year’s aborted project to build an arena at the downtown railyard.

But that’s just part of the public’s contribution. Public policy watchdog Eye on Sacramento, says the public’s contribution is actually $375 million, when all of the publicly owned assets being thrown into the deal are accounted for.

What else is being thrown into the pot? The city also agreed to give the arena private development group the city’s empty 100-acre plot next to Sleep Train Arena in North Natomas, as well as six other city properties, five of them adjacent to or near the downtown arena site.

And Sacramento officials are giving away the city’s parking lot and metered parking revenue, after claiming the parking lots have no value.

Is it any wonder economists think arenas make bad investments for taxpayers?

Arenas and sports stadiums a bust

“The basic idea is that sports stadiums typically aren’t a good tool for economic development,” said Victor Matheson, an economist at Holy Cross who has studied the economic impact of stadium construction for decades, reported the Atlantic. “When cities cite studies (often produced by parties with an interest in building the stadium) touting the impact of such projects, there is a simple rule for determining the actual return on investment, Matheson said: ‘Take whatever number the sports promoter says, take it and move the decimal one place to the left. Divide it by ten, and that’s a pretty good estimate of the actual economic impact.’”

“The main problem, I think, with the public financing of sports stadiums isn’t that they happen, but that they happen so often because of how they are sold to taxpayers.”

SinkholePoster

Ohio arena bust

“Nearly 20 years after county officials promised that public financing for a pair of professional sports stadiums would help usher in a new era of economic vitality, the reality is somewhat different,” the Huffington Post reported in March about Drake Center. “The county’s agreement to build new stadium facilities for the Cincinnati Bengals and the Cincinnati Reds has been described as ‘one of the worst professional sports deals ever struck by a local government’ by the Wall Street Journal.”

Arizona arena bust

In June 2012, the city council of Glendale, Arizona, decided to spend $324 million on the Phoenix Coyotes, an ice hockey team that plays in Glendale’s Jobing.com Arena.

“As the city voted to give a future Coyotes owner hundreds of millions of taxpayer dollars, it laid off 49 public workers, and even considered putting its city hall and police station up as collateral to obtain a loan, according to the Arizona Republic,” the Atlantic reported. “The latter plan was ultimately scrapped.”

Glendale is on the hook for $15 million per year over 20 years to a potential Coyotes owner, but also committed to $12 million annual debt payment for construction of its arena. In return, the city receives only $2.2 million in annual rent payments, ticket surcharges, sales taxes and other fees.” The city will still lose $9 million annually.

The art of the deal

The pubic cost of Sacramento’s current arena subsidy plan will require payments of $25 million per year for 27 years after the initial 8 years of “interest only” payments.  The state recently prohibited school districts from using similar long-term “capital appreciation” bonds.

Arena projects rarely make economic sense because of the flawed way they are structured. Stadiums and arenas are financed with long-term bonds, sticking cities with the debt for unusually long periods of time. Sacramento’s arena bond debt will be around for at least 30 years.

7 comments

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  1. No one thinks about interest
    No one thinks about interest 28 October, 2013, 09:14

    What’s the cost of that $258 million public subsidy if interest paid on the bonds is included?

    Reply this comment
    • John Hyde
      John Hyde 28 October, 2013, 21:18

      With interest, total payment on the 35-year bonds is expected to be about $700 million or more — i.e., nearly 3/4ths of a billion dollars. That’s money that won’t be used for city services like police, parks, and youth sports.

      Reply this comment
      • Jan
        Jan 29 October, 2013, 13:34

        The total interest I got is $266,787,029 – $212,500 @ 5.5% x 35 yrs. Total P+I = $479,287,029, still not cheap. How did you get the $700 million figure?

        Reply this comment
    • Jan
      Jan 29 October, 2013, 13:29

      The total interest I got is $266,787,029 – $212,500 @ 5.5% x 35 yrs.

      The 5.5% is what the city treasurer hopes he can get. If we have to pay a higher rate to sell the bonds, the total interest we pay will be higher. The higher the interst rate we have to pay to sell the bonds, the riskier the bond market thinks the deal is. 5.5% is already expensive.

      Reply this comment
  2. Queeg
    Queeg 28 October, 2013, 09:36

    Eight bucks for a small draft beer.

    25 bucks to park your Kia or Yugo.

    100 bucks for a ticket top row in end zone,far far upper tier corner.

    The memorable opportunity of seeing local thugs splashing gasoline on car tires and lighting them off to the delight of the gathered rabble….sorta like a Stonehenge Druid meet up!

    Reply this comment
  3. Katy Grimes
    Katy Grimes Author 30 October, 2013, 16:17

    The $350 million immediate subsidy, plus interest on the projected $255 million arena bonds which will roughly amount to $450 to 500 million over their 35-year team. Total taxpayer cost: $800 to 850 million, depending on the interest rate at which the arena bonds are issued. It could be higher if long-term municipal bond rates continue their recent sharp increase. Interest costs will be exacerbated by the fact that bond payments in the first 8 years will be interest-only “teaser payments” and not a dime of principal will be paid until the 9th year of the bond.

    It’s a potential city killer, particularly when you consider that almost all NBA arenas require a $100M rehab within 10 years and become functionally obsolete after 18 years – 17 years before the 35-year arena bonds will be paid off.

    Keep in mind: Sacramento is already $2.250 billion in debt and has only a $370 million annual general fund.

    Reply this comment

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