Note: I have a hard time finding the time to put together what I consider an adequate argument on a subject so this is my first Fan Post. I would like to take more time to make this cleaner and more concise but I have a job and a small child so this is my attempt at explaining why the potential arena proposal makes sense. Please let me know if anything is inaccurate.
As someone with a degree in economics who spent some amount of time studying how to determine the impact of certain events and projects, and as someone who has worked for the government for approximately 11 ½ years, it shocks me how well put together this Sacramento entertainment and sports complex deal really is. Although the arena’s financing will likely carry some risk, based on information from reading just about every article possible, watching news stories, and paying attention to the city council meetings, it seems as though the city would almost certainly gain from the potential deal. I am not sure how a reasonable member of the city council could possibly vote no on this. The city is certainly not getting fleeced. In fact, as I will do my best to detail below (sorry in advance for the length), I think the city could do very well on this deal.
Mainly, I want to explore what appears to be the most significant source of funding for the arena, the lease of the city’s parking facilities. I remember at the beginning of this ordeal, not long after the news broke that the Kings were very possibly moving to Anaheim, there were many proposals floated to build a new Sacramento arena or renovate the current arena. Also, the David Taylor group, eventually Think Big was put together to explore options for building a new arena here in Sacramento. One common concept that many of these proposals shared was the idea that the city would go into debt to finance an arena and that debt would be paid off with money from various possible revenue streams (ticket fees, a Kings arena lease, fees imposed on a local business district, etc.). This is a common method to finance public projects (see the recent new Sacramento International Airport terminal and red bunny) but the downside to this method is the fact that municipal bonds are like any other debt, so the city would be forced to pay interest which actually increases the actual cost of the arena. So if the city sells $300 million in bonds to get up front money for the arena, they actually pay significantly more than that (dependent on interest and inflation rates of course).
However, by leasing its parking facilities instead of issuing bonds, it appears that the city will be considerably better off for several reasons. First, the city will avoid some amount of interest it currently pays on servicing the debt associated with the parking facilities. Based on what I have read, I believe that the city is targeting a bid of somewhere around $245 million to lease the parking facilities for 50 years. At that amount, approximately $200 million would go towards building an arena. The rest of the money, approximately $45 million, would go towards paying off debt associated with these parking facilities. I think this is actually an undersold part of this deal. The city currently has $45 million of debt associated with these facilities and, of course, debt requires interest to be paid. So by paying off this debt now, the city avoids interest payments on $45 million worth of debt. I have not seen any information as to what rate the city is paying on this debt or for how many years but it is undoubtedly a significant amount of money (if you calculate conservatively and rather crudely, 3 percent of $45 million is $1.35 million). So by paying off that debt now, the city avoids all remaining interest on that $45 million.
A major concern with leasing the parking facilities is that parking revenues currently contribute approximately $9.1 million per year to the general fund and this money would be lost by leasing the parking facilities to a private entity. However, everyone associated with the deal continues at assert that this revenue would be replaced. I have not been able to find specific details as to how it would be replaced but assuming it is, the city loses ZERO general fund dollars. To me, this is where the Think Big team will earn their hero status. I will be extremely impressed if they can backfill that $9.1 million reliably enough to get the city council votes. But like I said, everyone associated with the venture sounds very confident that this money will be there.
Looking at it another way, the city will end up with $200 million in spendable money and assuming that money is spent on the arena and the general fund money is backfilled, the city will then be essentially EARNING interest on the $200 million. David Beinick from KCRA tweeted yesterday (Monday, February 13) that this works out to 3.8 percent interest. So the city saves the interest it would have paid on the $45 million of debt and earns interest on the $200 million paid towards the arena.
Also, the city is leasing the facilities, not permanently relinquishing control. Granted, 50 years is a long time but once that 50 years is up, the city will have another chance to run the facilities, lease them again, or who knows, sell them permanently. It is not like selling your house and then someone else owns it. A private company (or companies) will pay the city to operate the city’s facilities for 50 years, then the city will regain control of those facilities.
There will undoubtedly be other concerns raised, people saying the city is getting hosed. People will argue that you can use $200 million to pay for other things like schools, libraries, or police officers. I am all for putting money into schools, libraries, and police officers. However, a criticism of Chicago’s deal to privatize its parking facilities is that they used the money for just that purpose but it is just one time money, not a continuous revenue stream. And schools, libraries, and police officers do not generate revenue. So you spend it on schools, libraries, and police officers but have to find more money to continue to fund those items or you end up having to lay off teachers, librarians, and police officers when that $200 million is spent. The arena plan will put the $200 million towards construction and then generate revenue.
Maybe the private entity leasing these parking facilities will be getting a fantastic deal if they also get revenue from parking near a new arena. So with a new arena and keeping the parking facilities, the city would actually be getting more than $9.1 million per year into the general fund from parking. People will cry foul. But the city does not get that money without an arena and the city does not build an arena without leasing the parking facilities, so I find that to be an empty argument.
There will also be concerns about the people who work in the city garages, control of parking rates, and various other concerns related to the city relinquishing control. These risks can be mitigated through the negotiation process and I am sure that they will need to be in order for this to go forward. I have little worry there. Most of these private bidders are undoubtedly familiar with negotiating with government agencies and I am sure that they have priced these potential clauses into their bids.
So looking at leasing the city’s parking facilities, the city seems to actually come out ahead. Instead of using the common method of issuing bonds to finance this public project, and paying the large amount of associated interest, the city would actually be DECREASING its debt while losing no general fund dollars, and actually EARNING 3.8 percent interest on the $200 million investment.
But here’s the kicker, the city is really earning more than a 3.8 percent return on that money because of private investment money going towards the arena. Various articles seem to peg the goal for private investment at somewhere around $130 million ($50 million from AEG, $80 million from the Kings/NBA). So by investing that $200 million into an arena, you get a return of 3.8 percent plus the $130 million pumped into the local economy from private investors, money that would NEVER come to Sacramento without an arena being built.
And this is a city and region brutalized by the housing bubble. We NEED construction jobs and this is a huge construction project. Plus, the area right around the arena will be ripe for development. I have season tickets and I know I will want restaurants and bars close by so I can spend my money before and after games. So those are more construction jobs. One thing my economics degree taught me is that growth creates growth (just like contraction fosters more contraction). So there will be other immediate positive impacts.
And none of this takes into account the positive impact of having a state of the art facility and the continuing economic impact to Sacramento. Without building a new facility, it will not be long before we have no facility at all. The arena formerly known as Arco Arena is old and difficult to operate. And it is owned by the Maloofs who will be moving the Kings without a new arena. It likely won’t be long before the arena is torn down or converted for another use. And arenas do impact local economies positively. Sure there are a lot of conflicting studies as to whether you actually make more money than you spend on an arena. But, as I’ve laid out above, I believe that the city is almost certainly going to benefit financially from an arena even without quantifying the tangential positive economic impacts of the arena (arena jobs, increased tax revenues from businesses around the arena, increased hotel occupancy rates, etc.). And there’s no doubt that if you take the cost of an arena out of the equation, you are better off economically with an arena than without one.
There are some holes here for sure. What I have written about adds up to approximately $330 million of funding. The estimated cost of the arena is somewhere between $387 and $407 million, so there is a $57 to $77 million gap. About $20 to $30 million of that may come from hotel fees, which seems fair since the hotels benefit from arena events. Some of that apparently will come from selling off city-owned property. There will undoubtedly be concerns about that, but as with leasing the city’s parking facilities, that is one-time revenue and it is just not practical to spend one-time revenue on ongoing expenses (teachers, police officers, etc.) and all the additional economic benefits associated with an arena most likely cover losing assets such as land (oh and by the way, a private developer is likely to purchase that land and, you know, develop it, which means more jobs).
So from what I know so far, this seems to be a very well-crafted plan to build an entertainment and sports complex. The city manages to pay off $45 million in debt and thus save the associated interest, plus the city puts $200 million towards and arena and earns approximately 3.8 percent interest, and AEG and the Kings/NBA pump $130 million into the region. Fill in the remaining gap and you build an arena. Building the arena means countless jobs during construction and after. Having a first class facility to attract events results in all the associated positive economic impacts such as further development of downtown and people from other regions coming to Sacramento spending their money. And we can also have an increased sense of pride in our region. Or we can make this about greedy owners wanting to fleece the taxpayers and just be a has-been cowtown.