Monday, March 25, 2013

Field of Dreams

Over the weekend Sacramento officials announced a breakthrough tribute to propose to the NBA to keep the hapless (25-46) Kings.   Here is what the city is offering $258 (58% of the bid) million including the pledge of $212 million from parking revenues and a gift of several parcels of land totaling more than $38 million to the other partners in the deal.   The land is valued at today's prices, the pledge of parking revenues is valued at something approaching future values.

The supporters of this suggest that it will revitalize the downtown. (Stop me if you have heard this one before.)  And while I think any kind of public money for sports franchises is a horrible idea, let's look at the logic of the proposal.

Jeff Michael, an economist at University of the Pacific, is quoted as saying "it's a better deal than last year."  Which means that the city is putting up a smaller percentage of the deal.  Although his comments suggest that the parking revenue estimates may be a bit optimistic.

The key assumption in the proposal is that a) the decline in traffic to downtown is built in part on deteriorating facilities both in downtown and at the King's arena and b) in a Kinsellian wave of optimism, if we build it, they will come.   Neither of those premises is entirely sound.

First, when Downtown Plaza was refurbished a couple of decades ago it brought some immediate growth in sales but that glow soon wore off.   Perhaps a concert and sports venue would bring more people downtown, but perhaps not.    There are two examples that could be used which are close to home.  The Staples Center in Los Angeles seems to have been relatively successful in bringing people back to downtown Los Angeles.   There are two key differences however - first LA is a lot bigger city and second, LA has a basketball team (indeed 2) that has a strong fan base.   If you build it - they will come is true, if you have winning franchise.    But the alternative view, which has a lot more of the characteristics of this deal, is the bonded indebtedness that helped send Stockton into bankruptcy.

One worry from my perspective is the competition for entertainment.   I have not seen the convention center's bookings statistics recently but with the Mondavi Center and the Three Stages in Folsom (both of which are superb venues) I suspect they are not robust.  

Second, and more fundamental are the financing assumptions.   From my view they are flakey, to be kind.   The city's parking structures have almost $5 million in current debt service so according to the City's Treasurer the bonds are structured as interest only (no principal payments) until 2022 when the current debt is retired.    The plan assumes 1.4 million attendees (who will be paying a slightly higher ticket price) which is slightly higher than current attendance.    The Treasurer is quoted as saying "all the profit comes back to the city."   Well, that is not exactly true.  The new franchise owners who are putting up less than half of the commitment will make significant profits if the franchise is successful.

Even if you can get over the notion that it is the City's responsibility to help support a sports franchise, this deal comes down to whether by building a new edifice downtown the city will attract enough collateral business to repay its investment.   If the assumptions are all correct, then it might be an OK deal.   But the contrary evidence against these kinds of proposals is pretty strong.    From my perspective every city should just say no to the extortion demanded by the professional sports franchises.

1 comment:

Lynn Beck said...

I very much agree with you, Jonathan! Well argued.