For this next installment of Sactown Royalty's ongoing series of Q&A's regarding the joint effort of the city of Sacramento and the Sacramento Kings to build a new arena in downtown Sacramento, I caught up with a nationally recognized expert in the area of sports facility financing.
Mathew Parlow is associate dean for academic affairs and professor of law at Marquette University Law School. He focuses on local government law, land use, urban redevelopment and sports law.
Parlow has researched sports arenas for more than a decade and has been published on the topic as well. He has served as a consultant to many local and state elected officials in cities that were considering the public financing of new sports arenas. His work in this area has been used in reports for government analysis of sports arena deals in Los Angeles, Miami-Dade County, Ohio and San Diego. He also was recently appointed to the Regional Cultural and Entertainment Capital Needs Task Force that the Metro Milwaukee Association of Commerce put together as a result of the fact that a new sports arena is being considered in Milwaukee.
One of Parlow's research papers delved into the growth over the last 20 years in the number of new sports facilities for professional sports teams, specifically those that state and local governments have provided public financing for. In this paper, Parlow concluded that public investment in sports facilities isn't always justifiable, but that under certain circumstances and depending on the way the deal is structured, it is justifiable.
He points to the Staples Center in Los Angeles as an example of a project that fit his criteria for a "good deal." And now, he has found another deal that he says is structured properly and will provide a return on investment for a public contribution - Sacramento's arena plan.
Parlow, who holds a J.D. from Yale Law School, where he was an editor of the Yale Law and Policy Review and the Yale Journal on Regulation, was kind enough to answer some questions about the plan to build an arena in downtown Sacramento.
BE: So you published a paper that analyzes whether new sports facilities are justifiable for a city government to fund. In your paper, you found that in certain circumstances it is justifiable. How did you come to that conclusion and what makes an arena deal economically justifiable for a city?
MP: I have been researching new sports arenas for the past fifteen years, including documenting how each arena/stadium in the four major sports leagues-MLB, NBA, NFL, and NHL-were financed. Through my research, I found that those that were more successful than others had certain characteristics. First, these sports arenas have a relatively fair or balanced financing (private and public) and split of arena revenues to enable the city to cover its debt payments and for the teams to improve their profits and thus, the worth of their franchises. Second, the arenas were part of a larger economic development/urban redevelopment plan - that is, the city had planned for other development in and around the arena to build economic synergies with the new arena. Finally, the more successful arenas for cities are those arena deals that have protections for the city to cap or protect against cost overruns or yearly debt repayment obligations. Such protections help ensure that the city does not need to raid its general fund to finance cost overruns or greater-than-expected debt financing payments.
BE: In Sacramento, the city, for it's portion of the public-private deal, is going to go to the market and borrow money against the value of some of the parking garages and on-street spaces it owns. It is going to repay that over time. So the city is reusing its own assets to create value for an arena it will own. Does this seem justifiable to you?
MP: Cities and states tend to refinance their public debt through various taxes, and sometimes cities and states use existing assets (and revenue from those or other assets) to help fund the debt service obligations. I think that the parking approach that Sacramento takes seems to be justifiable to me. The city knows it has a consistent, dedicated revenue source to repay the public debt, and it has a plan to back-fill the lost general fund dollars that the parking would otherwise account for in the city's budget that seems realistic. So overall, yes, this approach seems justifiable to me ...
BE: Cost overruns and city debt as it relates to arena deals is something you have focused on quite a bit in your research. The Sacramento deal calls for the private partnership group to shoulder the burden of handling the cost overruns. What are your thoughts on this?
MP: I think that cities and states providing public financing for arenas need to protect themselves from unanticipated, increased costs - whether on the overall construction or in the annual debt repayments. The city protecting itself against cost overruns by shifting that risk to the private developer is a very prudent move and is one of the reasons that I think this deal is justifiable for Sacramento.
BE: The city is also contributing real estate and other pieces of land the city owns as part of this deal. This includes land close to the arena on the 800 K Street block in downtown Sacramento, which is a dilapidated area in the core of downtown. Revitalization is something you have keyed in on in your research. Do you have any comments on this portion of the Sacramento deal?
MP: It is incredibly common for cities and states to donate land to a private developer as part of an arena deal. The fact that Sacramento is contemplating the new arena as part of a larger redevelopment (and economic development) plan makes it more likely that the arena will be a better deal or more justifiable for the city.
BE: In a city that only has one professional sports team and a mall that is vastly underused in the core of its downtown, is this the ideal situation for an arena project to thrive and provide a decent amount of return on investment?
MP: Downtown redevelopment has become a big push for many major and mid-major cities in the past 15 years or so. With the rise of suburbanization, many cities found their downtowns to merely be office buildings without much other activity or vibrancy. Downtown areas had not become destinations for other economic or entertainment activity, nor neighborhoods where people wanted to live. Cities have undergone downtown transformation to remake and rebrand their downtown areas, and those that have used sports arenas as a piece of an overall redevelopment plan of the area have seen success in doing so. In this regard, I think that Sacramento is wisely looking to place the arena downtown with other projected development to occur around the arena. If done well, people will look back and see it as a success in terms of investment of public resources.
BE: You often have pointed to the Staples Center in L.A. as a good example of an arena success story. What makes it a success story?
MP: Staples Center was a good deal for Los Angeles because it met some of the criteria I mentioned above. The arena deal had a reasonable amount of public debt that the allocated taxes could realistically repay. And if those taxes did not cover the debt service in a particular year, the gap-filling provision in the development agreement put the cost on the developer to cover the difference. So, in this regard, it also protected taxpayers with a cap-like provision that limited their repayment exposure. Finally, Staples Center was part of a larger redevelopment/development effort in Los Angeles to bring more economic vibrancy to downtown Los Angeles. One only need visit Staples Center, see the construction that has occurred around it the last decade or so, and compare it to pre-Staples Center days to know that the arena, and the development plan for downtown Los Angeles more generally, was a success.
BE: Do you think that Sacramento will be doing more good to the local economy than harm through this deal, as it is currently crafted?
MP: Yes, I do. I think the deal is structured in a thoughtful and deliberate way which, if executed properly, should be a net positive for the Sacramento economy.