Could Schwarzenegger Kill (Or Save) the Kings' Cal Expo Arena Plan?

Governor Arnold Schwarzenegger will release his May revision of the state budget today. The Sacramento Bee's Kevin Yamamura reports one of the proposals Arnold will make is to sell of various state-owned facilities, including San Quentin (?!), the Cow Palace and ... Cal Expo. As you know, the NBA is currently working on a plan to build a new Kings arena at Cal Expo as a part of a massive, multi-phase redevelopment project.

According to Yamamura, the governor's office projects selling Cal Expo will raise $80-150 million for the state (depending on whether it's rezoned as mixed use -- a rezoning that'd be required for the NBA plan). Yamamura couldn't get verification on how the potential sale would affect the NBA plan. My understanding of the situation tells me that this could be a good or bad thing.

Part of the arena plan would be funded with bonds (assumed to be sold by Cal Expo, a state agency) and with tax increment funding.

The current Cal Expo, it is my understanding, can call for a bond sale fairly easily. It is, after all, a public entity. There would need to be some cooperation from the Legislature, but (knock on wood) a strong level of support for revitalizing Cal Expo and the State Fair seems to be in place.

If Cal Expo goes private, there is no bond sale possibility (to my knowledge). This part of the financing would instead have to come from the developer getting private financing. Private credit backed by a shiny PowerPoint and Kevin Martin instead of a low-interest loan with the backing of the most populous state in the union, in other words.

But in all the winter talk about the NBA's plan, tax increment funding took on a larger role. TIF is a mechanism in which increases in tax revenue from increased property value is redirected to pay off debt incurred by the project that led to the increase in property value. In other words, say the Cal Expo land is currently worth $100 million, and the state sells it to a private developer. (These are just numbers for the sake of explanation.) The standard property tax rate of 1% would yield $1 million in tax revenue. In 10 years, the development is finishing up and the property value is now $1 billion. The state is now earning $10 million in property tax. Under TIF, that $9 million annual difference in property tax revenue would go toward paying off the debt incurred to develop the project. In exchange, the developer has to set some of that aside to build low-income and affordable housing.

So this was the plan, in part, to finance Cal Expo. What if the state sells Cal Expo? Well, it seems like it gets easier to pull off TIF financing, and it seems like it may create more future revenue for the project. Under the NBA plan, the state continues to own the land and the arena at Cal Expo, while the Kings keep the revenue from operating the arena year-round and potentially pay a lease fee. Under that plan, the arena isn't providing any property tax for the state (since it's owned by the state) ... and as such isn't providing any tax increment for Cal Expo. Basically, the arena would be a $500 million building the state isn't collecting a dime of property tax on.

If Cal Expo is private land, that changes. I assure you that the plot of land the arena eventually sits on will have far more property tax value than any other equal sized swath of land in Cal Expo. Thus, the tax increment will be comparatively massive. (In other words, if the small section of Cal Expo the arena will sit on is currently worth $10 million, were it private land the property tax would be $100,000 per year. Plop down a $500 million gym and the property tax is $5 million per year. The tax increment is $4.9 million per year. That represents a pretty massive chunk of creative, non-operations income. Depending on the market, the Maloofs could really see their personal pricetag decrease substantially.

Of course, this is all theory based on a basketball blogger's understanding of California redevelopment law, so please understand if I end up being off-base with this stuff. And I implore you to realize that the governor is threatening to sell Cal Expo. He threatens to do a lot of things to win these political battles. Rarely does he follow through. (Though in this case, Senate President pro Tem Darrell Steinberg seems somewhat amenable to hashing out the idea. Steinberg has worked for the Maloofs recently.)

(Of course #2: none of this suggests I think this -- selling off undervalued assets at or near the lowest point of the local and world economy -- is actually a good idea on the part of the governor. I'm just trying to figure out what it means for the Sacramento Kings.)

UPDATE: The Bee reports Cal Expo and the NBA were surprised and confused by Schwarzenegger's play. Of course it hurts the Cal Expo board, which (um) wouldn't exist unless the state bought a new place to hold an annual fair. The NBA, though ... see above.