The City Council voted 6-2 yesterday (Conlin and Licata voting no; Rasmussen absent) in favor of a revised Memorandum of Understanding for a basketball and hockey arena in SODO.  Below are the remarks I made explaining my vote.

THANK YOU TO COUNCILMEMBERS

I’d like to begin by thanking the leadership of Councilmember Burgess in markedly improving the proposal that was originally presented to us, and thank Council President Clark and Councilmember O’Brien for their involvement in negotiations.

SIGNIFICANT CONCESSIONS

The Council received a number of significant concessions from investor Chris Hansen, three of the most important being:

1. A full SEPA review will be completed before any Transaction Documents are signed. That means the City will take into consideration alternative sites, traffic congestion, and freight mobility.

2. A Personal Financial Guarantee in case of the corporation not meeting its financial obligations on time.

3. Financially contributing to the creation of a SODO Transportation Infrastructure Fund, should tax revenues not generate adequate funds.

In addition, it is important to note that separate from the city’s negotiations, the labor unions that will be serving at the arena are very pleased with the 30 year agreement they have reached with Hansen.

HOW DOES IT MEASURE UP TO OTHER DEALS?

So how does this proposal measure up to other deals?

Academic studies reveal that of the 17 new or updated arenas built since 1999, 7 have received a 100% public subsidy, while five received 30% or less.  With two professional sport teams secured, we are seeing a proposal at about 41% public funding, which is better than most, although not the top one. If it’s just a basketball franchise the public percentage drops to 24%, but the risk of financial failure also increases.

PUBLIC VOTE

I talked to one of other co-founders of Citizens for More Important Things, who believes this is a decent proposal. Another one believes if it is so good; put it to a public vote. That suggestion was raised by King County Councilmember Pete von Reichbauer, and was rejected by the King County Council, and arena supporters, although the generally pro-business Seattle Times did support a public vote.

However, a public vote would not be a certain victory for either side. Usually the pro side significantly outspends the naysayers, so a vote would not assure public funding.  Some proposals have passed based on a 100% of public funding, such as in Oklahoma City.

SUBSIDIZING OTHER CULTURAL FACILITIES

Supporters of this proposal say the city has subsidized the construction of other cultural venues, why not this one? They have a point.

The top three cultural facilities, the Seattle Art Museum (SAM), Benaroya Hall and McCaw Hall, have a total annual attendance that is about 90% of what the new Arena’s attendance is projected to be with both basketball and hockey. However, if the new arena has only basketball these 3 institutions’ attendance would be 170% greater than the new arena’s. The total City financial assistance for these three came to $84 million, with SAM receiving no cash support. And some of this assistance is being repaid.

The new arena, on the other hand, will be getting anywhere from 40% to a 140% more city financial assistance, depending on whether one or two professional teams locate there. The arena’s tax revenue is expected to pay it off. And if not, then the investors promise to make up the difference. The complexity of this MOU, and the transaction agreements to follow, limit the city’s financial risk if the unthinkable happens—and the Titanic sinks.

PRIVATE INVESTMENT MODEL

However, I believe the most significant difference between these other cultural facilities and any professional sports facility, is that the financial model for professional sport franchises make cities compete with each other for hosting one, hiking up the value of professional teams as cities have rushed to pick up large portions of their capital and operating costs. Unfortunately, teams have become commodities to be bought and sold, with their fans treated as shabbily as panhandlers.  It’s a system that is unthinkable for symphonies, operas, ballets or any other major cultural provider in an urban setting. Do they threaten to leave for a new city that offers them better accommodations? They are local institutions that have real roots in the community.

The real difference between these other cultural institutions and the new arena is their corporate status – non-profit vs. for-profit. The administration and operation of those other institutions is open to public scrutiny, with the city having representation on their boards. The new arena will be controlled by a private corporation whose existence aside from providing sports entertainment is predicated on making a profit for their owners, and as we have seen  selling the team when their profits sink.

The problem is that privately owned or controlled professional sport facilities need huge public subsidies without providing clearly measurable economic benefits. This of course ignores the enjoyment that many local citizens derive from having a home team.

WHAT SOME CITIZENS SEE

What some citizens see is that those who have a lot of money are using public resources to make even more money. They see someone purchase private land and in a couple of years get the city to buy it from him for double the price he purchased it for.  It strikes them as wrong.

When they see the city abandoning a major public facility, e.g. the Key Arena, without a plan on how to recoup its financial contribution to the Seattle Center, they see that as a mistake. Keep in mind that the Key Arena, despite the existence of the Qwest Exhibition Hall that some said would put it out of business, made $300,000 last year and provides an additional $1 million in parking revenue generated by the 110 events it hosts every year. It is difficult to see the current proposal as anything other than a blow to the welfare of the Seattle Center and a death knell to the Key Arena, which we have plowed $100 million in tax dollars into. I predict there will be a public vote for a revitalized Seattle Center.

They see siting the new arena adjacent to our largest industrial zone and our maritime industry, as risking our city’s overall economic growth. Hundreds of millions of taxpayer dollars have been invested in keeping Seattle one of the leading ports on the West Coast. Some have argued that the land in SODO might be better used for higher profit enterprises, like the arena. Nevertheless, I believe that is a short-term strategy, based on a year-end book evaluation by investors, not by city planners who must look out at least a decade or two down the road. A perceived quick economic boost is not the same as long-term strategy for sustaining living wage jobs in manufacturing and the maritime industry.

WHAT THIS VOTE IS ABOUT

This vote is not about liking or not liking sports; it should be about what is best for the public welfare in the long term. Many good people care about the future of this city and believe that this city is big enough to host another professional sports team.

They hear from those who truly miss the Sonics and the joy that they brought to their lives. Seattle should be a place that people can enjoy in many different ways. I hear them as well, and I am satisfied that the majority of the Council has heard them.

But I also hear those citizens who want the City to concentrate its resources on protecting what we currently have in place, the Key Arena and the Seattle Center, the maritime and manufacturing industries. They want public funds used for closing the gap that has grown between the 1% and the rest of us, not for subsidizing private companies even if they provide a great cultural experience. Instead, the marketplace should determine, by the number and wealth of their supporters, a company’s financial success.

In summary, I believe this proposal is a good one; it meets a high bar for public accountability. It is a rather solid tree in a forest of not such sturdy timber. However, I concur with those who focus on the unhealthy state of the forest and not on any particular tree. Their voice says enough of this; please address our other needs first and foremost. I hear them, and I will be casting a no vote.

Aside from my philosophical belief that government should generally avoid the use of public resources to augment private investments, my practical concerns with this proposal, as with other similar proposals in the past, has been to minimize the risk of a financial loss to Seattle’s budget, which could affect our ability to provide other services to our citizens.

THIS CAN HAPPEN IN 3 WAYS

First, if the public debt incurred to finance this project is not covered by the Arena’s revenue stream; this could be triggered either by bankruptcy or the team moving.

Second, if the general business climate is negatively impacted, and thus less revenue to the city as a whole. This would be most evident if the Port, manufacturing and freight mobility are constrained in doing business and providing jobs.

Third, if the city is burdened with additional costs for maintaining the Seattle Center due to the elimination of operation of Key Arena as a profitable venue.

Let me go further in describing how each has been addressed in the MOU.

THE FIRST WAY – REVENUE FALTERS

With regards to the possibility of bankruptcy, the personal financial guarantee of Chris Hansen is groundbreaking and perhaps unique. In checking with Neil DeMause of the Field of Schemes website, and economist Roger Noll of Stanford University, both of whom are experts in stadium funding, neither have heard of any owner providing such a guarantee.

We need to make sure that financial guarantees cover both the basketball and hockey teams. In the last 40 years no NBA team has gone bankrupt; however, over half of all professional sport team bankruptcies have involved hockey teams. I want to make sure we are covered for that possibility as well and it appears that the final version of the MOU took that possibility into account by rolling it into the obligation of the Parent Company that will have responsibility over the entire operation.

We have to prepare for all events. We cannot count on the past as fixed guide to the future. There is always a first time; for instance, our own Seattle Pilots in 1970 were the first major league team to file for bankruptcy.

With regards to the team moving, I believe we have strong guarantees in place with a requirement for a 30-year non-relocation agreement, which past lease agreements with the Sonics did not include. The duration of the agreement coincides with the length of bond payments; a 5-year discrepancy between the duration of bond payments and the lease for the Sonics at Key Arena was problematic. The Mariners have a similar requirement, though it is not strictly non-relocation; they are required to play games at Safeco Field. The arena MOU includes this requirement as well.

THE SECOND WAY – OTHER BUSINESSES ARE HURT

This issue comes down to location. In essence, will our manufacturing, maritime and warehouse businesses be restrained from growing and providing jobs for our citizens and income to our public treasury? The creation of the SODO Transportation Fund is an innovative and hopefully an effective tool in addressing this concern. It will allow—and to be most effective will need—other governments to contribute, including  state and regional funds, King County, and hopefully the Port of Seattle—although the Port notes it doesn’t have uncommitted transportation funds, given its planned $300 million contribution for the viaduct replacement.

The $40 million Transportation Fund must be used as an effective tool in sustaining SODO as a manufacturing and maritime zone, if Seattle is to remain a profitable and vibrant port for world trade. Currently the Port of Seattle is in negotiations with the Korean shipping company Hanjin, which accounts for 1/3 of the Port’s maritime operations. From my reading of the MOU, even with the Transportation Fund, there is still a need for strong assurances that the new arena will not hinder the Port’s ability to do business, and that our truck routes through SODO will not become more congested. I will be talking to those representing working and operating manufacturing businesses in SODO to seek out what options could be pursued.

And we should note that we must also consider the impact to the Mariners operations. The public has invested over $300 million in their facility; we do not want our investment endangered.

THE THIRD WAY – KEY ARENA BECOMES A BURDEN TO THE CITY

I struggle with how we can justify making public investments in one private facility while appearing to be prepared to abandon another public one. No one has come up with a proposal that will save the Key Arena as a facility for either sports or entertainment. And while including it in the SEPA process is admirable, is there anyone that believes it will be chosen as the best location for a new arena? And if it was, who would renovate or build a new one there? Chris Hansen, who is the only player in town, will not do so. Even the MOU recognizes this when it opens the door for the City and County to pursue Hansen’s project if there are no other bidders for building an arena elsewhere.

This is the city’s most immediate problem. By steering five million of the seven million in the Key Arena fund away from the Key Arena to the new arena, to accommodate the women’s professional basketball team, the Storm, we have essentially sentenced Key Arena to be demolished. The city, using public funding, must decide what will replace it. Something must be in that location that can provide more pedestrian activity in the Seattle Center than what has been provided in the past by the Key Arena, and something that can support itself financially and hopefully contribute to the Seattle Center’s financial bottom line.

Of the three ways that Seattle has a negative financial exposure, this one appears to be the one least addressed in the MOU. It is difficult to see how the Seattle Center will gain from this new basketball arena; it is much easier to see how it will suffer. And, that could negatively impact our general budget. Seattle Center’s welfare must be taken into account in a manner that goes beyond this MOU.

SUMMARY

Aside from my concern with how the new arena may negatively impact our general fund, I believe that the public deserved more time to assess its strengths and weaknesses. And I too wished to dig deeper into this document that was only completed 48 hours before the Committee vote. For that reason, I abstained on the vote and had asked our Council President Sally Clark to delay the final council vote until Monday Sept. 24^th, which she did with the concurrence of the Committee Chair Tim Burgess.

City Councilmember Tim Burgess noted on his blog that the Government Performance and Finance Committee he chairs will next consider the proposed Memorandum of Understanding in September.

Hansen released a statement on discussions as well.

Eight Councilmembers sent a letter to Hansen in late July, stating their perspective on the proposed agreements.

The July edition of Seattle Channel’s City Inside/Out: Council Edition is out on the Seattle Channel.  I appear with Councilmembers Burgess and Godden.

We discuss issues such as the proposed SODO arena, utility rates, the plastic bag ban, and upcoming library and seawall levies.

The Mayor’s staff presented their perspective on June 29; you watch their presentation on the Seattle Channel, and view their accompanying document here.

City Council staff presented their analysis on July 5; you can watch their presentation on the Seattle Channel, and view their accompanying presentation here.

In addition, on July 5 the authors of Initiative 91 testified before the City Council, and investor Chris Hansen released a power point presentation with his perspective.

It’s my impression that both the Mayor and Council agree on meeting the intent of I-91, rather than getting involved in the legalese about whether the initiative applies at all.

The I-91 presentation can be found here, and you can watch a video of the presentation and discussion here.

The Council will next discuss the SODO arena proposal in committee on July 5.

Additional information about the Council committee schedule is listed in a press release from Councilmember Burgess, chair of the Government Performance and Finance Committee. Included in future Council meetings on the arena proposal is a June 20 meeting to discuss the future of Key Arena, followed by a discussion with Chris Hansen. The June 29 meeting will include a presentation by Mayoral staff on Initiative 91, passed by Seattle voters in 2006.

On May 30 the first committee meeting took place, and featured the Executive’s overview of the proposal, and Council questions and discussion. You can view the meeting on the Seattle Channel, and click on the links to view public comment or the arena overview presentation (labeled Sports and entertainment facility).

Thursday, May 31, 9:30 a.m.: Mayor’s staff presents proposal overview

Wednesday, June 6, 11 a.m.: Mayor’s staff presents financial aspects of proposal

Thursday, June 7, 2 p.m.: Mayor’s staff presents transportation plan and future of KeyArena, followed by a panel discussion with Port, labor and industry representatives

Wednesday, June 20, 9:30 a.m.: Discussion with Chris Hansen

Thursday, July 5, 2 p.m.: Committee deliberations

Friday, July 6, 9:30 a.m.: Committee deliberations

Wednesday, July 18, 9:30 a.m.: Committee deliberations, possible vote

Wednesday, August 1, 9:30 a.m.: Committee deliberations, possible vote

Monday, August 6, 2 p.m.: Full Council consideration and vote (tentative)

Monday, August 13, 2 p.m.: Full Council consideration and vote (tentative)

The MOU generally follows the outlines of the original proposal in February. There are some important changes, however. First of all, language in the MOU states that it is intended to be binding and enforceable. Secondly, the MOU would allow for an arena to be built with $120 million in public funds if only an NBA team is attained. The February proposal stated a $200 million public contribution (of the $500 million total cost) would not be made until both an NBA and NHL hockey franchise were acquired, along with a 30-year non-relocation agreement.

The MOU says public funding would proceed as follows:

• Once the site is permitted for an arena, Seattle would purchase the land for an amount determined by an independent appraiser, with a cap of $100 million
• Once the arena was completed, if only an NBA team were acquired, the public contribution would be a total of $120 million, with Seattle’s total contribution rising to $115 million (e.g. the land cost $100 million, Seattle would pay $15 million more), and King County putting in $5 million
• If both an NBA and NHL team were acquired when the arena is completed, Seattle’s total contribution would be $120 million, and King County’s would be $80 million

The public contribution comes in the form of general obligation bonds. Taxes over 30 years would fund the bonds. According to an estimate from the March 30 meeting of the Arena Review Panel, roughly $237 million in City taxes, and $12 million in King County taxes, would be used to pay off the bonds, along with approximately $156 million in rent. The difference in the figures is called “net present value”, adjusting future dollar values to the present value. I wrote about the taxes in UP #318.

The time period between when Seattle would purchase the property, and when the arena opens and tax revenues start to come in, represents a possible danger. If a deal were to fall apart then, Seattle would be left with property worth a lot less than we paid.

The Council will begin its review in the Government Performance and Finance Committee on May 31.

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 examine their concerns in further detail in my Urban Politics # 320 newsletter.

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