Tuesday, March 25, 2008

Shell game hides taxpayer contribution to new arena

Last year, the City of Edmonton struck a committee to review the feasibility of a new downtown arena for the Edmonton Oilers. Shockingly the committee has recommended it be located in downtown Edmonton.

To be clear, the CTF couldn't care less whether an arena is built downtown, uptown, or not at all, our sole concern is who is going to pay for this thing.

As we've seen numerous times in other cities, taxpayers are often on the hook to pay for these new palaces.

But Mayor Mandel clearly stated that no new tax dollars would be used to build this arena.

The committee is claiming to have stuck to this restriction, however, they instead are proposing a cute shell game to tax Edmontonians via the backdoor.

Here's how they recommend the arena be funded.

Cost:
$450-million (not including the cost of purchasing the land)

Private financing:
$100-million (Edmonton owner Katz)
$35-million (other private sources)

So, this means a $315-million debt would be incurred by... someone.

That someone would receive these various sources of revenue to pay off the mortgage:
$2.5-million from the City of Edmonton (currently being used to subsidize Rexall Place)
$3-million from a "ticket surcharge"
$10-million from a "community revitalization levy"
$11-million from cash flow from facility operations

Total: $26.5-million

According to a quick and dirty mortgage calculator, a 20-year $315-million mortgage at 6% could be paid off at about $27-million per year, so that number may be about right to cover the debt. But, the $450-million price tag doesn't include the cost of land, nor the 20-30% annual inflationary increases in capital we're seeing right now.

Putting that major point aside for a second, are the sources of funding correct?

$2.5-million from the City of Edmonton
Well, the argument goes that this is money that is already being provided by city taxpayers to subsidize Rexall Place, if it moves over to the new arena, there's no cost. Well that may be true, but there is an opportunity cost. If the city stops providing that money they could build roads, sewers and all the other things that taxpayers pay for in taxes now.

The $3-million from the "ticket surcharge"
Provided that it wasn't a new municipal or provincial tax, this is a good idea. It's essentially a user pay system where the owners and the users cover the costs, and considering that there is a natural price point that people are willing to pay for tickets, the owners would eat even more of the costs out of their potential profits.

$11-million from cash flow from facility operations
Again, provided that the owner of the facility is not the city or province, this would be from the owners profits. So, this is fine.

$10-million from a "community revitalization levy"
Now this is completely bogus. The idea is that the city would designate an area as a "community revitalization zone." They would look at the assessment of the property in that zone now, and the taxes it generates for the city and compare it to the assessment of the property in the zone post-arena development, and the taxes collected by the city then, and use the difference to help pay for the arena.

The report suggest that there is a potential of $2.5-billion in additional assessment, resulting in $20-million of new tax money for the city. The report suggests using $10-million of this to help pay for the arena.

The fatal flaw in the logic is that there will be economic growth in Edmonton as a whole over and above what would have happened anyway. Granted, in that zone there will be more development than before, but it's merely a shift of development that would have occurred elsewhere in Edmonton.

Dr. Brad Humphreys, the foremost expert on the economic benefits of professional sport teams and arenas has proven that there is not an economic growth, but merely a shift of where the money is spent.

Here's just a sampling of some of his work:
https://netfiles.uiuc.edu/brh/www/papers/rsue2003.pdf
https://netfiles.uiuc.edu/brh/www/papers/pfm2003.pdf
https://netfiles.uiuc.edu/brh/www/papers/regulation.pdf
https://netfiles.uiuc.edu/brh/www/papers/jpam1999.pdf
https://netfiles.uiuc.edu/brh/www/papers/sej2001.pdf
https://netfiles.uiuc.edu/brh/www/papers/jse2002b.pdf

But it makes sense. For example, if you build a parking lot next to the new downtown arena, that parking lot will make more money than the vacant lot that was there previously, and will pay more in taxes than before. However, at the same time, the parking lot next to the old arena will now be a vacant lot and will not generate any money and will no longer pay taxes. Net benefit = zero.

The same goes for say nightclubs or hotels. There is a fixed amount of money that will be spent going out to nightclubs. If you build one next to the arena, it may thrive and generate lots of assessment and taxes, but that also means the people who are going there are not going to other nightclubs, meaning loss of assessment and tax dollars elsewhere. Again, net benefit=zero.

Alternatively, if the demand for hotel space necessitates building a new hotel in Edmonton, if it is built within the zone, the money goes to the arena, whereas otherwise it would have been build outside the zone with the money going to the city.

However, the report is not taking this zero-sum game into account and is calling development within the zone "new money" and puts it into the arena. It fails to recognize that this is money the city is going to get anyway, regardless of the arena, just from another geographic location.

So, the money that is going to the arena would have otherwise been collected for things like road repair, snow removal and other civic priorities will have to be funded by... that's right TAXPAYERS.

But to the committees credit, it is an impressive shell game.

2 comments:

Lee Harding said...

All of these arguments equally apply to new CFL stadiums including the proposal in Winnipeg and any that may come to Saskatchewan.

Andre Darmanin said...

Downtown development comes at a cost but I think if someone wants to build especially through community revitalization, they they are the ones that should pay. If regular developers have to pay for the cost to build, why should Katz do any different. City council will buckle down. You just watch, especially since it's a election year.

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