They play, you pay

Last year, the idea of turning the abandoned rail yards north of downtown Sacramento into a sports-and-entertainment district anchored by a new arena for the Kings was generating all kinds of buzz. The plan held much promise as a silver bullet that could transform the northwest corner of dreary downtown Sacramento into an actual destination, a place where people go when they’re not commuting to a cubicle. Mayor Heather Fargo was an enthusiastic backer of the concept, which had potential to be a nifty feather in her political cap. Then, the plan fell into a black hole.

This year, the second phase of the expensive arena-feasibility study is six months late, there’s been no indication of progress, and no one at City Hall can say when the public will find out what the study says. The city hasn’t met with its study partners, Maloof Sports and Entertainment and Union Pacific, for months. Meanwhile, city officials are considering new taxes to fund a publicly financed arena. And nobody wants to talk about what’s going on—especially the Maloof family, which stands to benefit the most from a new arena.

It’s not a situation that inspires confidence, especially given this country’s troubled history of public financing and sports facilities. Rather, it gives the impression that the ambitious arena plan could be showing the first signs of collapsing under its own weight.

Back in March 2002, the first feasibility study brought good news: Building an arena was possible. But right there on page one was a caveat that made it clear that although the project would be possible, it would not be cheap. “The city’s participation in public investment,” the consulting team reported, “may need to go beyond only public infrastructure based on an analysis of comparable NBA markets.” In other words, the city and its taxpayers might have to pick up a large share of the burden.

A second study—the one that’s now missing in action—was to refine the conclusions of the first study and, most importantly, figure out how the city and its two study partners could structure a deal. The three parties split the $654,000 cost of hiring several teams of consultants who were to report back with a possible business model by February 28, 2003.

Early this year, when city officials got their first peek at what the draft of the second report might say regarding costs, they told the consultants to go back to the drawing board and start finding more potential funding options.

And now, no one will say when the city’s going to make the numbers public. City officials say they’re still waiting to get the final report back from the consultants.

According to draft documents obtained by SN&R, construction costs for the new arena itself are estimated at $306 million. But the grand total, which includes land, parking, streets, utilities, paying off the Arco Arena loan and financing the project, is almost twice that: nearly $600 million.

The figures outlined in the drafts were included with a June memo to councilmembers from Deputy City Manager Tom Lee, the city’s point man on the arena. To come up with a mountain of cash like $600 million, the city is eyeing a variety of taxes that would create new revenue streams to pay for building the project, which means that anyone who goes downtown to eat, drink, park or sleep in a hotel could end up footing the bill.

The Maloofs appear to be willing to contribute about $73 million, or just slightly more than the team recently agreed to pay Brad Miller, the Kings’ new center and just one of their well-paid players.

Jimmie Yee, one of the councilmembers who sits on the Downtown Development Ad Hoc Committee that is handling the arena plans, said that, at this rate, he doesn’t think the second phase of the study will be out any time soon. In fact, Yee said, he’s “not that optimistic” that the report will even be out by next March, a year later than expected. Yee said the three sides are stuck over who should pay, how much and for how long.

“The report is just sitting there,” he said. “Nothing much is happening. I wish it could come to a head because we can’t sit on this thing forever. Eventually, this has got to be put on the table, and we say, ‘OK, voters, are you willing or not?’”

So far, it looks like voters will be asked to judge the plan based on revenue sources that won’t exist for years—and figures one expert told us are easy to fudge.

With the limited information they have now, Sacramento voters probably would support building a new arena—at least one poll shows general support—but they almost certainly would have second thoughts if they were going to get stuck covering much of the nearly $600 million bill.

The basic structure of the deal would look like this: The city would acquire the land and build the arena while Maloof Sports and Entertainment would sign a long-term lease that would guarantee enough revenue to pay off the bonds.

“The model is no different than how any other stadiums or arenas are done across the U.S.,” said Lee, the deputy city manager. “The public has a majority of the responsibility, and the team basically pays their lease to make this thing work. And those are very similar to how other deals have been recently struck where they have new arenas,” such as in Cleveland; Indianapolis; Denver; and Columbus, Ohio.

Meanwhile, with all the discussion about pouring hundreds of millions of dollars into building a new home for their players, the Maloofs have been silent about the arena plan, which is the smart thing for them to do. If the Maloofs keep their mouths shut, they won’t look like multimillionaires asking taxpayers for a handout. That’s the kind of image you want to avoid if BusinessWeek magazine has pegged the value of your family’s Albuquerque-based banking-booze-casino-sports empire at $1.1 billion, as it did in 2000.

Asked about what the team wants and what it’s willing to pay to get it, Maloof spokeswoman Sonja Brown said the same thing she’s been telling reporters for two years: Team owners Joe and Gavin Maloof won’t talk about it. And why not? “It really isn’t our place to comment about the arena at this time,” she said. “It’s something that is the mayor’s vision, and it still needs a lot of research and study, so we’re really following her lead and her vision.” Brown only would confirm that, even though there hasn’t been a sign of progress, the team is still discussing a deal with the city.

Though team owners won’t say how much they’re willing to chip in for an arena, they don’t have any problem talking about how much they pay players, such as Chris Webber, whom the team is paying $123 million throughout several years.

“We have to pay the NBA about $18 million in tax because we’re over the (salary) cap,” Joe Maloof told The Albuquerque Tribune in April. “We went a little crazy, but that’s OK.”

According to the draft documents that accompany Lee’s memo to the city council, the financing plan relies on three “keys to the project.” First is Union Pacific’s donation of the 19 acres for the arena complex. Second is the negotiation of a 25- to 30-year long-term lease with Maloof Sports and Entertainment. Third is the quick establishment of various funding sources.

Exactly what those “funding sources” would be appears to be part of the reason that the second report is so far behind schedule.

When consultants came back with the first round of numbers, Lee said they were told to start looking at other revenue sources that they hadn’t considered. “We thought, ‘Hey, you’re not looking at everything. How about some of these other numbers here? It ought to be part of the scenario so we look at all the alternatives that are available to us before we decide. I mean give us some options here.’”

Lee wouldn’t say specifically what revenues city officials are considering, only that they are looking at “basically anything we can get our hands on. … We haven’t taken anything off the table because we haven’t taken anything to the council yet.”

According to draft documents, which are part of a package that Lee put together to give councilmembers an idea of where the city is in the process, city officials are kicking around several different surcharges and taxes on existing businesses. The biggest piece of the pie would be a surcharge on food and beverage sales in different parts of downtown and Old Sacramento. The key is to start the flow of revenue to the arena project as soon as possible.

The potential revenue sources listed are a 12-percent parking surcharge at existing city garages, a 5-percent countywide car-rental surcharge, and a 1-percent transient-occupancy tax hike on hotel rooms countywide (from 12 percent to 13 percent).

These “pre-arena-complex” revenue sources, which would be collected before the arena is built, could generate nearly $29 million a year as early as 2004, according to the projections.

Starting in 2007, an additional $6 million a year is projected to come from the arena itself. Most of it—almost $5 million a year—would come from lease payments from Maloof Sports and Entertainment. Smaller sums would come from property tax on the arena complex, sales taxes collected at the arena complex, and a surcharge on tickets to Kings and Monarchs games.

The projection shows another $7 million per year starting in 2009, from property and sales taxes in the new sports-and-entertainment district that would encompass new businesses that set up shop in the redeveloped area around the arena. There also could be a 10-percent surcharge on food and beverages sold in the district. By 2012, another $2 million could come from new parking structures and hotels, bringing total revenues to $45 million per year.

In other words, part of any plan to sell the arena to the public would depend on estimating revenue sources that wouldn’t exist for several years. Neil deMause, a New York-based author whose book Field of Schemes: How the great stadium swindle turns public money into private profit details how teams line up public money for arenas and stadiums, said numbers that are so many years off are hard to predict—and easy to use as justification to build a new arena.

“If you’re projecting, say, beverage sales in a multi-block area in downtown Sacramento in the year 2012, you can make up anything,” he said. “Who’s going to dispute it?” Predicting revenues from the transient-occupancy tax is also tricky, he said, because travel spending fluctuates and because no one knows how many people will be coming to town in the future. Indeed, hotel-room income in Sacramento has declined recently. The consultant’s draft documents don’t cite a source for the estimates.

In two scenarios that show different funding schemes, the total cost of the project is pegged at between $590 million and $595 million.

Donation of the land, 19 acres valued at $26 million, is an important component of making the financing plan pencil out. If Union Pacific doesn’t donate the land and also decides against contributing $24 million toward bringing utilities to the area, the city could be on the hook for 88 percent of the nearly $600 million cost, according to the draft materials that accompany the memo. In the more optimistic scenario, in which Union Pacific contributes $50 million, the city would pay a smaller share, 64 percent.

In both scenarios, the city would pick up most of the cost of building the arena itself, $233 million, and the Maloofs would pay the rest, $73 million, by leasing the arena. So, essentially the Kings get a new home, and taxpayers pay for the cost of a new building.

Part of the reason that taxpayers may end up picking up most of the burden is that Sacramento has an anemic corporate base; it’s a company town, but the company is government. In most other cities in which arenas have been built in recent years, large corporations have thrown big money at projects in exchange for naming rights. They’ve also snapped up the luxury boxes that can bring in millions of dollars a year. One of the best examples of this is San Francisco, where corporate sponsorships covered most of the cost of building Pacific Bell Park.

Greater Sacramento, which is home to 1.8 million people but not one major corporate headquarters, can’t look forward to that kind of boardroom largesse. Phase one of the feasibility study said as much, citing three reasons: Sacramento doesn’t have wealthy people and big corporations who typically bid up the price of luxury suites, club seats and season tickets; there aren’t enough media outlets to compete for broadcast rights; and Sacramento doesn’t have a hockey team that can share an arena.

It isn’t clear what would happen to the $82 million Arco Arena loan, which the team must pay off before moving out of its current home. In 1997, the city helped Maloof Sports and Entertainment refinance the debt on the arena, which had been built with private capital in the mid-1980s. By swapping the team’s expensive loan on Arco Arena for a cheaper tax-free bond, the city helped the Kings do the business equivalent of transferring a big debt from one credit card to another one with a lower interest rate.

So, does the fact that the city doesn’t want to show its cards mean that it doesn’t have a good hand?

Not necessarily. If the second phase of the report isn’t ready yet, city officials are entitled to sit on it as long as it’s in draft status. And it makes sense that they don’t really want to talk about it until they’ve double-checked their math. But at the same time, it’s shrouded in secrecy, and there seems to be a lot of massaging going on before the curtain rises on phase two of the study. Part of the reason for their reticence may be that discussions about how to structure the deal haven’t shown any sign of progress. Lee said an agreement hasn’t been reached, though “it’s closer to being resolved.” Lee wouldn’t give more information about the discussions.

It’s not exactly confidence-inspiring, especially because the arena is a major public-policy initiative that promises incredible opportunities that are fraught with enormous risks. Anchoring a new district with a major attraction like an arena could help create a new city center inside Sacramento’s still-dreary downtown. But city after city has taken a bath on an expensive new sports facility that promises the world and doesn’t deliver.

In Cleveland, it’s clear that a 10-year-old baseball stadium and neighboring basketball arena complex—one of the facilities that Fargo and other Sacramento officials toured last year—has saddled taxpayers with an enormous debt, though it isn’t clear whether the investment brought much economic benefit. In Miami, the Heat moved into a new arena in the late 1980s, only to call it obsolete and move out a decade later—into a brand-new arena nearby.

Regarding the delay, Sacramento city spokeswoman Liz Brenner said a complex deal like this one needs time to come together.

“It’s taking a lot longer than we all expected,” she said. “I think it’s because of the dynamics of each of our organizations. There are so many unanswered questions. You look at one thing, and then it unravels another thing.”

Though Lee said in July that he expected to be talking again with Union Pacific and Maloof Sports and Entertainment in August and resolving the remaining issues by September, Brenner said last week that it would be as long as 60 days until everyone got together again.

As for the three-way discussions, the three key players are still working together and planning to sit down again at some point, even if nobody knows when—which Fargo, a longtime arena proponent, takes as a good sign. “If it was a non-starter, we’d know by now,” she said. Fargo hasn’t been directly involved in the meetings, but she says she’s optimistic and ready to insert herself if needed.

Peter Wilhelm of Philadelphia-based finance consultant MZ Sports said his company’s contract for working on the arena has been reduced to being hourly. “It’s been quiet,” he said. “Nothing has moved.”

Dan Ryan of Maryland-based Turnkey Sports, the lead consultant on the project, said his company is still wrapping up work on the business model to be outlined in the phase-two report. “Part of the scope was to help the three parties get a model in place before they move forward, and that’s what we’re working on.”

Councilman Ray Tretheway, another member of the Downtown Development Ad Hoc Committee, said one of the reasons for the delay is that Union Pacific is negotiating to sell the rail yards to a private developer, Millennia Associates.

Union Pacific started to negotiate last fall with the Venice-based development firm, which redeveloped another abandoned Union Pacific rail yard in downtown Salt Lake City and turned it into a mixed-use shopping-and-entertainment district.

Suheil Totah, a Sacramento land-use attorney who is negotiating with Union Pacific on Millennia’s behalf, said that if a deal were reached, Millennia essentially would take over Union Pacific’s role as property owner. As part of the negotiations to buy the entire 240-acre rail-yard site, Totah also is negotiating possible transfers of different sections of the yards for three different potential uses: The arena, the intermodal transit station, and the new railroad museum that will occupy the historic locomotive shops some day. He expects an agreement this year.

If Union Pacific remains involved with the negotiations, its participation could be another stumbling block.

According to one source familiar with the negotiations, who did not want to be identified, the railroad has made clear already that it won’t be giving anything to the city. “UP is not going to grant the land,” the source said.

Railroad spokesman John Bromley wouldn’t talk about the status of negotiations.

“We can’t comment,” Bromley said. “It certainly is premature to say that we would or wouldn’t donate the X amount of acres. There’s a lot of different possibilities.” Bromley said he couldn’t talk about what Union Pacific is willing to do with its land until the consultant’s report is made public.

If all three parties do come to an agreement, the arena question almost certainly will need to go to voters at some point. And if it does, the odds may be in favor of the new arena, according to last year’s consultant’s report, which noted that 18 of 26 referendums for public funding for professional-sports facilities around the country have passed in recent years. On the other hand, another Northern California stadium project looking for a handout from taxpayers—Pac Bell Park—met stiff resistance in San Francisco, where voters rejected public financing four times.

City officials considered putting a measure on the ballot last November, when voters decided a variety of tax and bond issues, but then decided against it. Fargo said she hasn’t seen any specific polling on the issue, but she cited a poll paid for by Representative Bob Matsui, D-Sacramento, that showed support for redeveloping the rail yards with an intermodal transit hub and arena.

Now, a Sacramento pollster connected to Fargo’s political consultant, Richie Ross, appears to be conducting surveys on the issue.

One Sacramento city employee got a phone call earlier this summer from someone calling on behalf of pollster Jim Moore’s public-opinion research firm, J. Moore Methods. The source, who took notes on the questions, said the poll started by asking about general local and state issues and then asked about the favorability of local officeholders and candidates, including Fargo and other Ross clients. The rest of the poll was dedicated to questions like: Have you ever attended an event at Arco Arena? Do you favor mixed-use development in the rail yards? Do you favor creating a special-assessment district to fund a new arena? Other questions asked about specific funding mechanisms and how much the city should pay.

Moore initially said he had no knowledge of any polls being done on the subject of a downtown arena. In a subsequent interview, however, he said he wouldn’t answer questions about whether he’d done polling on the topic (pollsters usually can’t talk about private polls).

If Moore is polling, it’s interesting because one of his clients is Ross, who is one of Sacramento’s most powerful political fixers. Ross used his consulting skills to get Fargo elected mayor, and he also works as a registered lobbyist for the Maloofs. Ross told SN&R in March that he was advising the Maloofs, but Ross wouldn’t say how (he didn’t return calls for this article). In addition to working as a political consultant and lobbyist, Ross also was the political strategist for a successful 1988 ballot measure in San Jose that asked voters to approve building a new downtown arena at the city’s expense. The city, hoping to revitalize downtown, paid about $165 million of the $200 million cost to build the arena for the San Jose Sharks hockey team.

Kings president John Thomas already has his eye on polishing the public-relations effort that would be part of selling an arena plan to the public. In a May 2002 e-mail to then city Economic Development Director Andy Plescia, Thomas wrote: “One of the things we learned last week that was very important in Cleveland was the consistent use of the language ‘first-class, state-of-the-art’; this seems to be the time to begin using that language in everything.” (Plescia is now a private consultant advising the city on the arena plan.

In addition to voters, any plan that depends on slapping a charge on downtown restaurants and bars also will need support from business owners—and they probably won’t be jumping for joy. Most of them already hand over a portion of their profits to cover association dues. The Downtown Sacramento Partnership collects $1.4 million from downtown property owners to maintain and promote the central city. Businesses in Old Sacramento also pay into it as well as to an assessment district that handles maintenance.

“Nobody’s in favor of paying more money,” said Susan Cronenwett, owner of the Café New Orleans in Old Sacramento. “We already pay a lot.”

She said she only knows what she’s heard from news reports, that the city council is talking about increasing taxes on downtown businesses to help pay for a new arena. “Nobody has surveyed us, nobody has talked to us, and I have no idea how much more it would involve and what we’d get in return,” she said.

In any case, she’s not crazy about the possibility of an additional burden on her small business. “I don’t understand why they’re doing that. In other cities, they’ve gotten corporate sponsors to pay for it and not taxes. I don’t know why they don’t do that here,” she said.

Lina Fat, owner of the restaurant Fat City, said she and other Old Sacramento business owners support the concept of the arena and surrounding entertainment district, but that doesn’t mean they want to be the only ones paying for it. “It’s going to be a great thing for the whole region, so I hope the whole region will support it. The arena is going to be good for everyone,” Fat said. “I don’t think it should be just one area” that pays.

Politically speaking, if the report isn’t released and if the issue drags into next year, as Yee suspected it could, the arena could become a hot potato for city-council candidates on the March ballot who would need to take a stand on the issue. If the council wants to put the arena question to voters, the deadline to get it on the March ballot would be in mid-November.

And if there is a vote, one taxpayer group is ready to fight. Joe Sullivan, president of the Sacramento County Taxpayers League, said his organization would oppose any kind of public funding: “It will not succeed financially; that’s why they need to use public money.”

Another taxpayer advocate, Sacramento City Taxpayers’ Rights League President Mark Whisler, said his group doesn’t have a formal opinion but that “it doesn’t smell good.” The league filed an unsuccessful lawsuit to stop the city’s loan to refinance Arco Arena.

Whisler seconds Sullivan’s charge that the arenas cost more than they take in. He called them “net losers” that “never pay off for any other communities,” but he doesn’t think his group will need to fight at all. “I can’t see a situation where people would even vote for it. There’s a large part of the community that feels government funding of a private sports enterprise doesn’t make sense. I’m not sure we’d try to block it because I’m not sure we’d need to.”

Yee, who has been one of the councilmembers most skeptical of the arena plan, said he hasn’t been persuaded otherwise by numbers he’s seen so far. Like the mayor, he would like to see a catalyst for new development at the rail yards, but right now, the burden on the city is just too big for him to stomach. “I said the same thing to her as I said to Mayor [Joe] Serna back when he was still around. I oppose it, but I’m willing to keep an open mind. You show me the numbers, and I’ll consider it. But they haven’t shown me the numbers yet to satisfy me.”

Tretheway said it’s too early to judge the arena, but he didn’t sound entirely comfortable with the price tag, either. “The city,” he said, “would have to take a heavy burden.”