Here is an example of what I'm talking about. Glendale is going to wind up paying a total of almost $400mil to keep a team (The Phoenix Coyotes) which is valued at only $134mil (and that's the value for the owner, not for the people of the city).
-----------
A Critical Battle Over The Sports Economics Model
Mar. 10 2011 - 11:40 am | 2,937 views | 1 recommendation | 1 comment
A critical battle is underway challenging the very heart of the professional sports economics model — and it is not the NFL labor negotiations. The unlikely fight is between a struggling league (the NHL), a suburb with delusions of grandeur (Glendale, Arizona), and a small, regional think tank (the Goldwater Institute). At stake is an important source of value for nearly every professional sports team: taxpayer subsidies.
While the NFL’s Superbowl is held in different cities each year, locations for the game used to have one thing in common: They were warm weather tourist cities like New Orleans, Miami, or San Diego. But recently we have seen the NFL award their big game to cities like Detroit, a record cold Dallas, Indianapolis, and New York. It turns out the NFL has changed its decision-model for choosing Superbowl cites. Rather than choose the city best able to attract fans, it now chooses the location best able to attract government subsidies.
Four of the seven Superbowls between 2008 and 2014 will be held in cities where taxpayers have built their football clubs brand new stadiums. In each case, the NFL held out the promise of a future Superbowl — music to the ears of powerful hotel and retail interests — as a deal-closer on a contentious publicly funded stadium proposal.
Consider the Arizona Cardinals new football stadium in Glendale, for example. In part due to the promise of a Superbowl bid, the local taxpayers paid $346 million of the total $455 million cost of the facility — a building that will be used just three hours a day on ten days a year for its primary purpose. By contrast, in 2010 Forbes valued the Arizona Cardinals at $919 million, meaning well over a third of the franchise’s value accrues from the public subsidy of its retractable roof palace. It can be argued that much of the increase in player salaries and team owner wealth in the NFL over the last twenty years has come at the expense of taxpayers.
If anything, this example from the NFL understates the importance of public funding of stadiums. Why? Because of all the major sports leagues, the NFL gets the lowest percentage of its total revenues from its stadiums. Leagues like the NBA, and in particular the NHL, are far more dependent on stadium revenue for their well-being.
Let’s return to precocious Glendale. In 2003, the city agreed to publicly fund $180 million of the $220 million cost of building a new arena for the Phoenix Coyotes hockey team. Whereas Glendale’s subsidy of the Cardinals represented about a third of that franchise’s value, their $180 million subsidy of the Coyotes represents over 130% of the current $134 million value of the team. Stuck in Arizona and losing as much as $40 million a year, the team is literally worthless without ongoing public subsidies.
Given the importance of public money to professional sports revenues, it should be no surprise that NHL commissioner Gary Bettman rushed to Phoenix this week to fly cover for yet another proposed taxpayer giveaway. Because, incredibly, those crazy folks in the City of Glendale are attempting to subsidize the Phoenix Coyotes yet again.
Specifically, the city has proposed a new $100 million bond issue whose proceeds would be handed to private investor Matthew Hulsizer so he could buy the team. Another $97 million would be paid to Hulsizer over five years in a sweetheart no-bid stadium management deal. At the end of the day, between this deal and the original stadium giveaway, Glendale will have spent nearly $400 million of public money on a a team worth $134 million, a team that still has not presented any plan for becoming profitable.
Enter the Goldwater Institute, a local Libertarian-Conservative think tank. Goldwater has a long track record in Arizona challenging certain public subsidies as violations of the Arizona Constitution’s “gift clause.” This sensible Constitutional provision requires that neither the state nor any municipality in it may “give or loan its credit in the aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation.”
The issues in Glendale are fairly complex, and are made worse by the city’s lack of transparency in these dealings . The city argues that it is not subsidizing the purchase of the team, but rather is merely buying the rights to charge for parking at the arena, a right others argue the city already owns (if the city does not own the parking rights, it raises a separate issue that the city transferred these rights to the team sometime in the last 10 years, apparently with no scrutiny and no compensation). One wonders why, if the team really does own parking rights that are objectively worth $100 million, Hulsizer does not use them as collateral for private financing.
The Goldwater Institute’s fairly sensible questioning of the deal vis a vis the gift clause has ignited a firestorm. We shouldn’t be surprised to see Mr. Hulsizer lashing out at Goldwater — after all, Goldwater is standing in the way of his feeding at the public trough to the tune of $200 million. But the NHL, the City of Glendale, and our local paper the Arizona Republic (after all, the sports section drives a lot of revenue) have all piled on Goldwater. Glendale has even threatened a lawsuit against Goldwater.
Most intelligent people understand that a lawsuit by a government body against a private group for its excercie of free speech will likely not go over well with the voters (or courts). So Glendale has come up with a novel critique — repeated by Commissioner Bettman — that by questioning the constitutionality of the deal, Goldwater has driven interest rates on their pending bond issue up by as much as 150 basis points. Goldwater stands accused, in other words, of tampering with a public offering.
But this argument is a sham, and demonstrates just how desperate the NHL is to keep the public gravy train going, and how desperate Glendale is to paper over the terrible decision it made 8 years ago when it initially built the stadium.
There are many factors other than Goldwater influencing the price of Glendale’s proposed bond issue. For example:
The major bond ratings agencies recently put the city of Glendale on a credit watch list
The bond issue depends on the success of the Coyotes franchise, which has lost money every year it has been in Arizona (including $40 million this last year) and for which no roadmap to profitability has ever been proposed. Remember, the parking rights are worthless if the team fails or leaves town in the next 30 years.
Sales tax revenues that are pledged to pay for the bonds (as a backup if parking revenues fall short or the team goes into bankruptcy again) are way down in both Arizona and Glendale. Tax receipts in Glendale are already pledged to other bond issues, so in some sense this is a second mortgage.
One of the consultants who prepared the parking revenue forecasts for the bond issue is being sued by purchasers of another municipal bond issue for inflating potential stadium revenues in a deal that was initially highly rated but now has fallen to junk status.
A dearth of new municipal bond issues in the first quarter has made it difficult for market participants to forecast yields, particularly for longer duration bonds like these, so it is no surprise initial forecasts of the issue’s yield may have been wrong.
As Darcy Olsen of Goldwater has observed, “Hulsizer could get a private loan to buy this team like most businesses do. They finance their investments not on the backs of taxpayers but take the risk privately where it belongs.” Of course, this would break the business model that has come to dominate professional sports.
The NFL labor negotiations going on this week are contentious, but are merely about how to split the pie between owners and players. The fight here in Arizona is about whether the size of the pie they are splitting will continue to be enlarged at the expense of taxpayers.
Update: This is a contentious issue here in Phoenix, and I have had a number of people challenge my position since I published this article. In particular, folks have asked why I am not swayed by the claimed $500 million of indirect benefits for keeping the Coyotes in the local community, and the “iron clad” guarantees that the team will not move or break its lease. Here are a few additional thoughts (above and beyond the Constitutional questions discussed above).
I am unbelievably skeptical about indirect benefit calculations for sports franchises. These benefits tend to ignore most substitution effects and are crafted by consultants who compete for business with municipalities by providing the highest imaginable numbers. Most disinterested economists who have looked at these calculations have determined they are wildly overblown. (By the way, by case law, courts may not consider such indirect benefits when deciding if municipalities are getting enough value in return for a subsidy to circumvent the gift clause).
I fully expect this team to be gone or bankrupt within 10 years. If there were an Intrade contract for “Will the Phoenix Coyotes be in Glendale in 2041,” I would guess it would trade at less than 10 cents. No matter how bad a failure of the team is today (defaulted bonds, closed stadium, etc) the financial situation is better with a failure today rather than in five years with an extra hundred million in bond debt.
Glendale is taking an equity risk with taxpayer money. Payment on this new bond issue depends on the survival of the team, which in turn depends on the new owners somehow making the team earn a profit when it has never done so before in Glendale. All power to private individuals who want to make this bet on themselves, but this is not an appropriate public investment
The proposed agreements not to move the team and the penalty clauses for breaking the lease are nearly worthless. When the new owners give up trying to make the team work, they can just let the team slide back into bankruptcy. If this team goes back into bankruptcy, as it was last year, who is going to pay the penalty? Just ask commercial real estate investors how much money they expect to get from their broken Borders Books store leases now that Borders is in chapter 11.
blogs.forbes.com
An Arizona city’s sports mania encounters a hard check
By George F. Will, Friday, April 8, 7:05 PM
PHOENIX
Suburban Glendale is less a community with professional sports facilities than a sports enterprise with a community held hostage to previous improvident decisions. Now Glendale’s government may multiply its follies — unless Arizona’s constitution saves the city from itself.
Taxes provided $346 million of the $455 million cost of the huge (up to 72,200 seats) retractable-roof NFL stadium where the Arizona Cardinals will play 10 times this season, if there is a season. (The NFL is having labor problems.) But Glendale (population 253,000) has a more immediate problem with its hockey team, the NHL’s Phoenix Coyotes.
After the team entered bankruptcy in 2009, the NHL bought it for $140?million and has lost at least $30?million operating it. It might decamp to Winnipeg, Manitoba. This would enable Glendale, which spent $180?million on the hockey arena, to cut its losses. Glendale, however, not wanting its eight-year-old arena to sit vacant, wants to sell up to $116?million of municipal bonds so that it can give $100?million to a wealthy Chicago business executive to help him buy the team. With the $100?million, the city would supposedly purchase the right to charge parking fees at the arena the city owns, with the fees going to pay off the bonds. But the city already owns the right it is purchasing: It already imposes a ticket surcharge for parking.
If future fees are insufficient, Glendale’s taxpayers will have to make up the shortfall. Furthermore, Glendale would pay the new owner an additional $97?million under a contract, awarded without competitive bidding, to manage the arena through the 2014 season.
Fortunately, this folly may be illegal. The Arizona constitution’s “gift clause” may block Glendale’s booster socialism — the ruinous pursuit of derivative grandeur from sports. The clause was written to prevent crony capitalism — to provide a wall of separation between corporations and government by forbidding government to give corporations gifts, loans, grants or subsidies.
The Goldwater Institute, a think tank and advocacy organization dedicated to the limited-government principles of its namesake, plans to sue, if necessary, to see that Arizona’s constitution is respected. So the city, which has been dilatory regarding documents sought by the institute, is threatening to sue the institute, which warned bond rating agencies and others about its possible constitutional lawsuit. Glendale correctly says that the lawsuit will add a risk premium to its cost of borrowing.
But before the institute announced its intentions, Moody’s, the credit rating agency, responded to Glendale’s idea of taking on another $116?million in debt by lowering the city’s rating. Its debt is already triple the median for comparable cities. Darcy Olsen, the Goldwater Institute’s president and chief executive, notes that if questioning a government’s behavior can generate “a retaliatory lawsuit by a legion of government attorneys, then journalists, bloggers and regular citizens across the state are all at risk.”
John McCain, who holds the Senate seat once occupied by Barry Goldwater but does not hold Goldwater’s views about governmental minimalism, calls the institute’s actions “disgraceful” and “basically blackmailing”: “It’s not their role to decide whether the Coyotes should stay [here] or not.” Well.
Constitutions do not impress the co-author of the McCain-Feingold assault on the First Amendment (his law restricts political speech). But the institute’s job — actually, it is every Arizonan’s job — is to protect the public interest. A virtuoso of indignation, McCain is scandalized that the institute, “a non-elected organization,” is going to cause the loss of “a thousand jobs.” McCain’s jobs number is preposterous, as is his intimation — he has been in elective office for 28 years — that non-elected people should not intervene in civic life.
NHL Commissioner Gary Bettman agrees with McCain that the world is out of joint when people can second-guess the political class: “It fascinates me that whoever is running the Goldwater Institute can substitute their judgment for that of the Glendale City Council.” He will learn not to provoke Olsen, who says, “It happens to fascinate me greatly that the commissioner thinks a handful of politicians can substitute their judgment for the rule of law.”
Warren Meyer of Forbes.com calculates that Glendale’s new plan would bring the city’s spending to almost $400?million on a team valued at $134?million — a team that has lost money in each of its 15 years here. Glendale’s rejoinder to the Goldwater Institute is an attempt at intimidation by lawsuit, which speaks volumes.
washingtonpost.com |
