Urban Politics #320: Arena Review Panel Looks Into Funding a Basketball and Hockey Arena


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Urban Politics #320 4/6/12

By City Councilmember Nick Licata
with Newell Aldrich, legislative assistant

ARENA REVIEW PANEL LOOKS INTO FUNDING A BASKETBALL AND HOCKEY ARENA

This past Wednesday, April 4th, the Arena Review Panel, a citizen group referred appointed by Mayor McGinn and County Executive Constantine, released their final report. The panel examined an agreement that would be between the City, County and the investor Chris Hansen to fund a new sports arena for a professional basketball and hockey team. The Panel was asked to adhere to three principles: 1) existing General Fund resources are protected; 2) the City and County should be significantly protected from any financial risks; and 3) the partnership should result in an investment to the community and region.

While the media correctly caught the gist of the Panel’s conclusion that that “the proposal is favorable, has promise, and generally consistent with the principles set forth by the Mayor and County Executive,” the Panel also found that there are many “important issues to be worked through to ensure these principles are met and to address other issues of importance to the community.” They recommended that the City “begin the processes that are required to address the multitude of issues at play…”

I’ll focus here on some of their recommendations for issues to be addressed, since that’s the work that local government and elected officials will be charged with examining. You can view the report, and other materials, at http://seattle.gov/arena/.

The report states that prior to any public contribution, all land use processes must be complete; NBA and NHL teams secured, with 30-year non-relocation agreements; private investors must establish a security reserve, and disclosure of members of the investor group, and due diligence to ensure their financial wherewithal.

EXISTING GENERAL FUND RESOURCES

The Panel noted that public investment would involve the use of General Obligation bonds, and the pledge of General Fund resources and the full faith and credit of taxpayers to fund the City and County portion of the debt issued for the project. The proposal places the burden on cost overruns during construction, and operating shortfalls, on the investor group. The panel found the intent of the proposal was to provide protections for the City and County General Fund, and raised the following issues:

General Obligations: because repayment of public bonds would ultimately be a liability against the City and County’s general funds, financial protections are important. I believe that this should be the highest priority for the City Council.

Unknown Costs: there may be additional operations costs, such as police and fire, as well as additional capital costs, such as traffic and transportation improvements; it will be important to be clear about specific funding sources and expectations about costs. I believe that these on-going costs can best be covered in a tightly written operations agreement with the team owners.

Substitution: some existing tax dollars could go toward this project (i.e. entertainment spending diverted from current spending to attending events in this venue); they suggest the impact will be small, but should continue to be examined. I believe this is an important issue, particularly if there is a continuous drain on the City’s general fund because it would divert funds away from other more important city responsibilities.

Key Arena: the City will need to evaluate the impact to the Seattle Center finances, and potential General Fund impacts. Key Arena made $100,000 last year, so it currently is keeping its head above water, but if another venue opens in town that serves the same audience the city could end up losing money on it each year.

Debt rating: the City and County should evaluate potential impacts on municipal debt ratings; changes in ratings could impact the cost of borrowing. See the Presentation on Bond Ratings for a better understanding of how the City could be impacted.

PROTECTION FROM FINANCIAL RISK

The panel noted the proposal is in sharp contrast to the arrangement between the City of Seattle and the Sonics. They noted the intent is to shift risk from the City to private investors, and recommended additional scrutiny for what would happen in the case of bankruptcy or default by the investment group.

On this topic the Panel made a number of good suggestions. I will not cover all of them, but a few stood out for me.

+ Ensure investors will not return to City/County for additional public funds in the future, through, for example, a covenant. Since the average life of a professional sports stadium or arena is less than half of the 30 year lease that is being sought, this is a very real concern. Future maintenance, and any arena reconfiguration, must be covered by the investors.

+ Consider whether local market is large enough to support additional teams. Seattle currently has the Mariners and Seahawks, and the Seattle Sounders of MLS draw major-league attendance, averaging 38,000 (the annual total is more than the Seahawks). In addition, UW football draws major-league crowds, and will soon have a revamped Husky Stadium. Two additional franchises may be challenging for the region to sustain. A 2006 City report on KeyArena suggested the area may have been overbuilt with luxury suites. In any case, these issues highlight the need for any agreement to have solid guarantees to protect the public from financial risks.

+ Evaluate strength of ownership group and investor business model, and have a third-party evaluation of the financial strength of the ownership group. This is a very reasonable request and one that the City should be in a better position to evaluate since Hansen said at the press conference on April 5th that he expects to announce his investment team sometime in June. The Mayor should provide the City Council with ample time to follow up on his panels’ recommendation that their financial strength be reviewed by a third-party.

+ Protecting maritime and Industrial activities from being impacted by traffic congestion was also identified as a concern by the panel. This issue was also raised by the Manufacturing Industrial Council, Port of Seattle and Longshoreman’s union. In response, Hansen indicated he will pay for a $50,000 traffic and parking study of the potential impact of the arena on the surrounding area. The parameters of the study have not been released yet.

+ One new element in the development of the Arena proposal was also introduced yesterday. According to the Seattle Times, Hansen said that the deal could go forward without a hockey team and that it was “highly likely” the arena could be built with only a basketball team; a hockey team could come later. I seem to recall the Mayor saying that the City would not proceed until both NBA and NHL teams were secured (that’s what the Arena Review Panel report indicates). This would be a major change, particularly in how it could affect the business plan for the arena. According to estimated revenues provided to the Council, elimination of the NHL team would cut the projected admission tax revenues expected from the arena by 43%; of course, hopefully one would be found at some point.

+ The Panel’s report does not examine other questions, such as the use of city debt; the Initiative 91 issues I mentioned in an earlier blog post; or questions of the lifespan of arenas. These important issues will hopefully be covered by the City before a decision is made.

It is still too early to have an in-depth, complete evaluation of this proposal. But it is certainly better than any we have seen in the past and it deserves an honest and fair assessment. I hope the City can do one.

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