The ultimate, definitive Sacramento Kings arena number crunch

Billions and billions. That's how many dollars the new Kings arena will generate for Sacramento. As in, “The entertainment and sports complex, if located downtown, is expected to bring over $7 billion of economic impact to the region over the next 30 years.”

That's the claim by the group DowntownArena.org, an extension of the developer group Region Builders, formed to promote a new publicly subsidized Sacramento Kings arena. DowntownArena.org really drives home the economic-impact message on its website, touting $100 million in revenue annually for downtown and $157 million a year in economic activity for the region. In fact, Region Builders director Joshua Wood said that “$7 billion is probably a conservative number. It will absolutely transform Sacramento.”

The message seems to be getting through. When a Sacramento Bee writer recently slipped and referred to the city's arena “subsidy,” he was corrected by a Bee letter writer: “The city will own the new arena, a very valuable asset from which the city will derive massive financial returns. The city's monetary contribution should rightfully be called a smart investment, not a subsidy.” Another writes, “In the long run, it will provide a lot of money to the city.”

Massive financial returns. Seven billion dollars, conservatively speaking.

The problem is that those financial returns aren't real.

“I’m open to some wild ideas, but that one just defies belief,” says Geoffrey Propheter, a Ph.D. candidate at George Washington University. Propheter is from Sacramento, and his research on the economic impacts of urban basketball arenas has actually been used by paid city consultants and Sacramento Bee columnists to support the city’s plan. He’s a basketball fan, and he thinks there are valid reasons for cities to help build arenas.

But $7 billion in new economic activity? “A number like that gets pumped into the political system, people start parading it around as if it were gospel. Pretty soon, it’s ’Let’s rubber stamp this sucker.’ That’s a travesty.”

The consensus among economists is that arenas don’t generally produce more money for city coffers than they consume. The same economists will tell you that publicly subsidized sports arenas are not efficient job producers or the best way to redevelop blighted areas. They are but one way to do redevelopment, and they can be effective—under the right conditions, with the right safeguards.

But they don’t produce massive financial returns. And that’s not just the opinion of some anti-arena folks. But it is something that has to be understood in order to have any sort of honest discussion of a project like this.

Also, it is not true, as is often said, that this arena plan has no effect on the city’s general fund. According to the city’s own numbers, financing the arena will divert millions of dollars every year that would otherwise be available to the general fund, or could be used to lower taxes or make other investments. More on that below.

Still, there are arguments to be made for building a downtown arena with public money. It could help to revive a part of town that has been stubbornly resistant to the city’s efforts. What would it take for the Kings arena to be one of the success stories?

That’s what this story aims to explore. What are the project’s likely costs and benefits, both tangible and intangible? Is it the best tool to achieve the city’s stated goal of a revitalized downtown? If Sacramento is to go ahead with the plan, is it getting the best deal it can get?

And, with the possibility of a public vote on the plan in June 2014, does the city have any leverage to get a better deal?

The NBA cartel

Supporters of the arena plan will tell you it’s not about basketball. It is, however, about the economics of the National Basketball Association.

“What must be realized is that NBA owners have formed a cartel that operates as a near monopoly, exempt from U.S. antitrust policy,” says Rob Wassmer, who teaches economics and public policy at Sacramento State University. “It sets the price—in the form of public subsidies—that need to be paid for our city to buy their product.”

Otherwise, the NBA will sell to someone else, like Seattle or Anaheim. The price to each city largely depends on how profitable the market is for the NBA.

For Sacramento, the price is $258 million. That’s about 58 percent of the estimated $448 million price tag for a new arena on the site of the existing Downtown Plaza. As part of the agreement, the city promises to contribute $212 million in cash, and various parcels of property last assessed at $38 million. The city is also throwing in signage rights to billboards in the area of the arena project, and giving up the 3,700 parking spaces it now owns (and collects revenue from) beneath Downtown Plaza. The Kings would contribute $189 million. Any cost overruns are to be borne by the developers.

Oh, bondage

In order to get the $212 million in cash, the city will have to sell bonds. All of the money will be paid back from the revenue the city collects from its parking meters, tickets and garages. That money now is either reinvested in parking operations, or it goes into the general fund to pay for services like police and parks.

The city actually needs to borrow more than $212 million in order to create a reserve, pay legal fees and other costs of borrowing, and possibly to make immediate repairs and improvements to its existing parking garages.

City Treasurer Russell Fehr says that his conservative, worst-case estimate is that the city would borrow as much as $304 million in bonds. He says that number will be revised lower as he gets closer to releasing his final financing plan in mid-February—two months before the Sacramento City Council is expected to vote to approve the deal.

Part of the additional borrowing by the city will be used to help make the bond payments in the early lean years, when it estimates the parking system won’t generate enough to make the annual debt obligation. Otherwise, the city would wind up tapping its hotel tax or the general fund.

The city will make “interest only” payments on its bond debt for the first eight years. After it is done paying off another set of bonds—which it’s still paying for the construction of downtown parking garages—that money, about $3 million, would be switched over to start paying principal on the arena debt.

It’s also true that local governments always pay lots of interest on big public projects; that’s the nature of public financing. It’s true of home mortgages and college loans as well.

To be on the safe side, Fehr’s model assumes a high interest rate of 5.75 percent on the bonds. The rate could be lower; he says it won’t be higher.

It should be noted that the total cost of financing the arena, over time, is going to be closer to $770 million, once you count all of the interest the city will have to pay over the 35-year life of the bond. Again, that’s assuming high interest rates.

In the city’s model, bond payments start at about $6.5 million a year in 2016, they jump to about $17 million a year in 2019, then to $19 million in 2022, topping $23 million by 2035.

SN&R asked how much those estimates might reasonably be expected to change, assuming lower rates and lower borrowing costs, and Fehr said it could vary by $3 million to $4 million. So, instead of a $17 million payment, the city might make a $13 million payment.

All of these numbers are suspect, according to Craig Powell, with the local government-watch group Eye on Sacramento. Powell is also one of the leaders of the effort to gather signatures and force the arena issues to a public vote. He says interest rates have been rising, and the city can’t afford to add so much debt to the $2 billion it already holds.

He objects to borrowing extra money to cover the early debt payments—because it adds as much as $93 million to the total costs of financing the project over time. “This thing is put together with bubble gum and baling wire,” says Powell.

And he objects to spending parking revenue that could be used for core city services on an arena. “That’s a source of revenue that the city desperately needs to get healthy.”

Backfill or bust?

City officials say this plan protects the general fund, or “holds the general fund harmless.” In other words, Sacramento can build the arena, and it won’t affect the ability to provide services.

“This is wordplay. The city’s current general fund will not be hurt by this—but the city’s future general fund will be hurt,” says Wassmer.

According to Fehr’s model, in 2014 the city estimates $26 million in parking revenue. About $11 million will go to pay for the operation of the parking system. Another $5 million goes to pay the existing debt on the outstanding bonds for the city’s parking garages. Almost $10 million a year would be “profit,” which goes into the general fund for services like cops, parks maintenance and keeping swimming pools open.

Under the arena plan, these future profits go to pay debt on the arena bonds. The city has identified several sources that it proposes to “backfill” the general fund. But the amounts of the debt service and the amount of the backfill aren’t equal.

The largest source of backfill, about $3.75 million a year, would come from a 5 percent surcharge on all tickets at the new arena.

It’s worth noting that the same surcharge was in the arena deal offered to the Maloof family more than a year ago, and it was criticized by the firm Beacon Economics, who said it was based on ticket sales numbers that the current arena hasn’t seen since the economic boom times of the early 2000s. (Keep in mind, Beacon was hired by the Maloof family to assess Sacramento’s arena financing plan, and Maloof is not a name that engenders much trust around Sacramento these days.) But Beacon owner Chris Thornberg told SN&R his assessment stands. “The revenues they are predicting are not there. Simple as that.”

Some of the backfill money, about $1 million a year, will come in the form of profit given to the city by the Kings.

The building will generate a certain amount of tax revenues. The city estimates $300,000 a year in sales taxes, and $898,000 in property taxes. Of course, the city will own the arena, so there it is counting money that it is paying to itself.

According to the term sheet approved earlier by the city council, the city will rely on a certain amount of new revenue from parking by patrons of the new downtown arena. But not very much—only about $625,000 a year. The number is low partly because the city is giving away all of its 3,700 Downtown Plaza spaces, a major chunk of its garage inventory.

Finally, there’s $3 million a year in backfill coming from the extra money the city borrowed. That $3 million will be replaced after a few years by the money the city is currently using to pay off its parking garages.

That’s money that could be put back into the parking system, or it could be put in to the general fund. But the arena-financing plan treats it like new money.

All in all, the city’s general fund is said to be “held harmless,” because the total amount of the backfill equals the $9 million that flows from the parking operation to the general fund right now. But really, it’s only $6 million in new revenues.

And that $6 million—the surcharges and taxes and additional parking revenue—is far less than the $13 million, or $17 million or $19 million payment that the city will need to make every year on the arena bonds.

Powell says the city may have to dip into its hotel taxes to make up the difference. Fehr says that’s very unlikely to happen, because the parking system is almost certain to grow and generate more money over time.

The parking diversion

And this is the part that seems to get left out of most explanations of the arena-financing plan. Even after the “backfill” is taken into account, it relies on millions in future parking revenue that could otherwise flow to the general fund.

The city’s model up to this point has assumed low growth in parking revenue, accounting for inflation and small rate increases that are already planned. Nothing reflecting what Fehr calls “growing the system,” like technological improvements, additional parking meters and “dynamic pricing” (charging people more when demand is high).

But, of course, the city does plan to expand and update its parking system.

That’s going to happen whether or not the city builds an arena. “It’s just what cities are doing to maximize parking revenues in a way that meets market demand,” says Assistant City Manager John Dangberg.

Sacramento is paying a company called Walker Consulting LLC to do a new inventory of the parking system, and give some projections about how much new revenue it can expect from improvements and a rebounding economy. It will also begin to look at how much new parking revenue might be generated because of the arena and new development associated with it.

If the arena does generate some new parking revenue—because more people come downtown to park—that’s certainly going to be a help to the general fund. But the rest of the parking profits would be there in the future, anyway—with or without an arena. Committing those revenues to the arena counts as a drain on the general fund in the future.

“There is a diversion of future general-fund dollars to this arena project that could be used for other city expenditures, or cuts to taxes or fees for city residents or businesses,” Wassmer says.

As Propheter says, “Money is fungible. You could do anything else with that money.”

They're multiplying!

So, what does the city get back for its investment? Certainly not $7 billion in new economic activity. That number was taken from a study by a paid consultant to Mayor Kevin Johnson’s Think Big Sacramento organization. It is arrived at by measuring the current spending at the Kings arena, making some assumptions about how that spending spurs other spending (a multiplier) and projecting out 30 years.

There’s nothing wrong with generating an economic impact number like this. But it’s easily misused.

Assume that the Kings did leave town. People only have a certain amount of discretionary income to spend, and everyone who spent money on the Kings will simply shift their spending to something else, like movies or restaurants or AAA baseball. It is spending that will happen with or without the Kings.

Because of this “substitution effect,” these sorts of economic-impact numbers can be quite misleading—giving the impression of hundreds of millions, or even billions, of dollars in benefits from a project that aren’t real.

Similarly, the claim that the arena project will create 4,000 new jobs should also be looked at closely. Most of those jobs are temporary construction jobs. The same consultants who came up with the $7 billion number also estimated that a new downtown arena would create 375 permanent jobs, but said the number would be closer to 229 jobs once the substitution effect was taken into account.

Show Sacto the money

Last week, Mayor Johnson formed a new political committee that he’s branded “The4000,” to counter the ballot effort by Powell and his friends. The name is a reference to the jobs the project would create, but sports-subsidy skeptic and Field of Schemes author Neil deMause quipped the mayor’s group might more appropriately be called “The229.”

Sacramento-area trade unions struck a deal with the developers—called a “project labor agreement”—that requires 60 percent of the construction jobs go to workers living in the Sacramento region. So, many of the highly skilled, highly paid jobs could go to people in Roseville or Rocklin. But it’s the city of Sacramento subsidizing the arena, not these other jurisdictions.

This is a key consideration: How much of the benefit flows to Sacramento residents, who are paying the bill, and how much goes to other areas?

“If you’re in a suburb of Sacramento, there’s nothing better than if the city pays for your entertainment, and you’re free to spend your money on good schools and low crime,” says Victor Matheson, a professor of economics at College of the Holy Cross, who has been following the project.

Stanford University economist Roger Noll says urban basketball arenas can “break even” for their host city, if they are done right. They are certainly better than football stadiums, which are dark and useless much of the time—a basketball arena can be busy with other events such as concerts and ice shows most of the year.

We know the arena itself will generate some sales taxes, but only about $300,000 a year. And the Kings owners say they intend to build $500 million worth of new development—including a hotel, retail and some housing—next to the arena.

Let’s assume that happens. On $500 million in assessed value, the city could expect to collect about $1 million a year in property taxes.

The city says it has done no estimates of potential sales taxes that might be generated by the new development around a downtown arena. Let’s take their word for it and try to find some sort of comparison instead.

Let’s assume that the promised new development will generate more in sales taxes than Downtown Plaza does—about $1.1 million in 2012, down from $1.7 million in 2000.

Let’s go on and assume—completely hypothetically—the new development promised by the Kings generates as much in sales taxes every year as the city’s current biggest sales-tax generator, Arden Fair mall, which is similar in size to what is being proposed and which generated $4.3 million in sales taxes for the city last year.

Take away Downtown Plaza, replace it with an Arden Fair-sized economic engine, a $3 million gain, add a million in property taxes and voil&#;agrave;: The city could make about $4 million a year. Not nearly enough to cover the debt service on the arena, but every little bit helps.

Best way to spend $258 million?

Wassmer warns that a real estimate would take into account the impacts on other areas. “The growth of an arena entertainment district would likely slow Midtown activity of this sort, and at some of the hubs in places like Roseville, … Folsom, Granite Bay, north Natomas.”

That gets at the city’s stated policy goal. “It’s to concentrate economic activity from around the region into the downtown,” says Fehr. This is doable, says Jeff Michael at the University of the Pacific in Stockton.

Michael is pretty optimistic about Sacramento’s arena project, though he too says, “sports arenas, in general, have a poor record as an economic-development strategy.

“If your objective is to create jobs and raise incomes, then no. A lot of the benefits are really intangible.”

Among those intangible benefits are a more vibrant downtown and reuse of an obsolete urban shopping mall that will likely never perform well again. “It’s definitely an area that certainly needs a catalyst. And this is a chance to shape the development and the feel of the city,” says Michael.

For sure, many cities have used downtown arenas as urban-revitalization tools. But are they the best tools for the job? Do they give you the most bang for your urban-revitalization buck?

“It’s not necessarily what I would pull off the shelf. But within that universe, this is not bad,” says Michael.

Some have suggested that the city could use that $258 million for a package of other amenities—such as housing, a streetcar, completion of the new science center north of downtown. Assistance to the Kings could be part of that package, but not all of it.

“You’ve got to ask, ’Could we do something else with that $258 million?’ Politically, that’s not a very appealing question, and no one asks it,” says Propheter. He says dollar for dollar, the city would probably be better off making investments to promote small business.

“I’m a big fan of having a long, drawn-out conversation when you are making a policy choice to spend $258 million. It’s frustrating when these things get pushed through without a discussion.”

The problem is it may not be possible to have a long, drawn-out conversation and still keep the Kings.

“In an ideal policy world, you’d say, ’I want to leverage this parking asset, and an arena is something I might consider.’ That’s one tool. And you’d go through a process and decide what you want to do with it,” says Michael.

“And in the time it took you to have that conversation, the city would lose its team.”

If you build it, make them come

Even though Propheter is skeptical about arenas as economic-development tools, his work has been used by backers of the Sacramento arena.

In a 2012 Journal of Urban Affairs paper, Propheter published his finding that—holding all other factors equal—basketball-only cities that built new arenas between 1995 and 2009 experienced a $600 annual increase in per-capita income.

Arena boosters have latched onto Propheter’s study to say that arenas lift the economy. But he says the relationship might actually work the other way around—maybe cities with stronger economies are more likely to build arenas. Or there could be no causal relationship at all. “The short answer is we don’t know. It’s a mess. The relationships are really difficult to untangle.”

If the city’s stated policy goal is to spur development and revitalization of an area, how can it be sure that will actually happen?

Noll says an arena project has to be part of much bigger economic-development plan. “You can’t plunk down a basketball arena and hope everything else comes along.” Similarly, the businesses around the new facility “can’t just be a fancy and bloated version of the concession inside the facility.”

Wassmer says the arena has to be designed “to not capture every restaurant and drink dollar of a patron attending an event there. Entrepreneurs can then locate nearby and expect to get some spillover from an event.

“But, of course, the difficulty of actually doing this is it works entirely counter to the arena owner’s desire to capture all of this revenue for themselves by providing it within the arena.”

Most agreed that timing is important. “The developer really should be building the arena in conjunction with the retail and the other development,” says Matheson.

Sacramento has a promise from the Kings to build around the arena site. “We believe this is a significant enough project to be a game changer on its own,” says Dangberg.

But it doesn’t have any kind of guarantee that development will happen, or when it will, even though the city is giving the developers several parcels of downtown property.

That could be a problem, says Mark Rosentraub, a sports economist at the University of Michigan. He says that sports facilities can help turn around downtowns, and he’s worked on projects in cities like Los Angeles and Edmonton. But he warns that the city shouldn’t rely on the developers’ good intentions.

“’If you build it, they will come’ never works,” he says. “If I were you, I would be trying to figure out the best way to make sure that real-estate development happens.”

Rosentraub says the city of San Diego is the model in this regard.

City voters there approved the subsidy to build Petco Park, new home to the San Diego Padres, via a 1998 ballot measure. It included a contractual guarantee that the team owners build supporting development in the rundown East Village neighborhood nearby. The measure also required guarantees that the new development would generate enough new sales and hotel taxes to offset the city’s annual bond payments.

If the tax revenue came up short, the team owners would be required to make up the difference.

Since construction started in 2004, more than $2 billion have been invested in the area adjacent to Petco Park, and the new tax revenues generated in the district around the arena are reported to be greater than the city’s annual debt payments—as guaranteed. It’s widely considered one of the most successful stadium-redevelopment projects in the country. Rosentraub says San Diego’s insistence in development guarantees was critical. Sacramento is getting no such guarantees in exchange for its investment.

Measuring the intangible

When asked whether the tangible economic benefits of the arena project outweigh the costs to the city, Dangberg and Fehr will tell you no, they don’t.

Rather, they describe it as an amenity, for which benefits can be hard to measure.

That’s true of parks, clean air, museums, and also things like civic pride, regional identity and a vibrant downtown. There’s an argument that the benefits of keeping the Kings in town can’t be assigned a dollar value; the region simply gets a psychological boost and a lift of quality of life that can’t be easily quantified.

The problem with intangible benefits is that they tend to let you off the hook when you’re trying to decide if a project is worthwhile. If you can’t measure intangible benefits, how can you do any sort of meaningful cost-benefit analysis?

But, as Propheter notes, “There are definitely techniques to estimate how much people value these intangible things.”

One of the most common is called “contingent valuation,” and it uses surveys to tease out what residents would be willing to pay for any amenity. Propheter says what residents are willing to pay for a sports team is typically far less than the amount of subsidy proposed.

For example: In Pittsburgh, researchers measured a “willingness to pay” of $66 million, which was about 30 percent of the $180 million that was being asked for to renovate a new facility for the city’s professional hockey team, the Penguins. On the very high end, researchers found a willingness to pay in Portland, Ore., of $110 million, almost half of the $235 million that the Trail Blazers wanted to build a new arena.

The city of Sacramento could pay for this sort of contingent-valuation study, to add some data to back up its point about intangible benefits. But that seems unlikely to happen.

Could Sacramento get a better deal?

In the last 10 years, Los Angeles, San Diego, Pittsburgh, New York City and Atlanta have struck community benefits agreements with team owners and developers as part of their arena or stadium deals. These pacts help ensure that benefits from a new facility reach low-income communities, not just people who can afford tickets to games and concerts.

In Los Angeles, the CBA for the development around the Staples Center included living wages for all jobs in the project area, money for affordable housing and investment in neighborhood parks, among other benefits.

In San Diego, a CBA for the Ballpark Village development included living wages, job-training funds, affordable housing inside the project and a grocery store.

In Sacramento, several groups are starting to push for more community benefits from the new arena. The Greater Sacramento Urban League is asking for 60 percent of new jobs associated with the arena to go to low-income residents.

Other community groups have joined together to form the Sacramento Coalition for Shared Prosperity, to ask city council members to include a CBA in the development agreement for an arena. The groups include Sacramento Housing Alliance, local labor groups, neighborhood groups, the Environmental Council of Sacramento and Sacramento Area Congregations Together, among others.

They are asking for strong local hiring and job-training requirements, targeted toward low-income workers who live in the city. They want to “ban the box” and remove questions about criminal history from job applications at all arena-related businesses. (Employers could still ask about criminal history during interviews or later in the hiring process.) And the coalition is asking for “labor peace,” meaning employees at arena-related businesses would be allowed to join unions without interference.

The coalition wants 50 percent of the housing built within five blocks of the arena to be affordable to certain income levels. They are asking that a cool $750,000 go to Sacramento Steps Forward to provide transitional housing, and it wants an additional 25 cent surcharge slapped on to every ticket sold to help fund the city’s Housing Trust Fund.

The list goes on—public transit and shuttles for arena workers; extended bus service and light rail in the area; on-site child care for arena workers; bike parking; 24-seven public restrooms and drinking fountains in the three blocks around the arena; and private security patrols for adjacent neighborhoods of Alkali Flat, Mansion Flats and Southside Park.

So far, it sounds like city council members are not quite sure what to make of the coalition’s list.

And it’s not clear what leverage the coalition really has. Groups pushing for CBAs in other cities were helped by the California Environmental Quality Act, and the ability of local groups to file lawsuits and demand that developers mitigate impacts in their communities. That’s hampered by legislation pushed through by Senate President Pro Tem Darrell Steinberg, which limits the ability of community groups to file CEQA lawsuits against the Kings arena project.

But if the measure on funding the Kings arena actually makes it onto the ballot this June, that could provide some leverage.

That’s no sure thing. The city recently decided to accelerate its timeline for issuing the bonds on the new arena. Assuming the city council gives its blessing to the deal in April, bonds could be issued in late May. That could effectively make moot the results of any ballot measure on June 3.

And, if that’s the case, the city is asking for a lawsuit and a fight, says Powell. “The city is about to steal this election on the arena issue. It’s the most autocratic thing I’ve ever seen the city do. It’s disenfranchisement.”

Not having a vote may also mean that city officials have less incentive to negotiate things like community benefits or development guarantees, or to come up with ways to lower costs for the new arena.

But there will still be plenty of people talking about the billions in new revenue it will bring.