Wisconsin governor’s arena plan depends on future NBA players averaging $33m/year salaries

Wisconsin Gov. Scott Walker unveiled his Milwaukee Bucks arena funding proposal yesterday, and oh man, was there ever a last-second plot twist. Walker is not, as rumored previously, proposing to raise $150 million for an arena by kicking back all state income taxes on Bucks players and other employees and also possibly some arena sales taxes as well. No, he says he’s going to raise $220 million, and only from Bucks income taxes — and only from new income tax above what team employees already pay:

“There’s absolute security for the taxpayers,” Walker said. “No new taxes, no drawing on existing revenues, no exposure to the future…”

Well, except for the uncertainty of what happens if NBA salaries don’t soar to the point where enough new money pours into state coffers that the government can use it to pay off $220 million in arena bonds. How likely is that? I was all gearing up for some painful Excel crunching, but fortunately Walker’s office has made a handy-dandy chart for us:

That red block along the bottom is how much the Bucks (and visiting teams’ players, pro-rated for the days they play in Milwaukee) pay now in state income taxes, which is $6.52 million a year. The current Bucks player payroll is $62.6 million, and the top state income tax rate is 7.65%, so about two-thirds of that figure comes from the team’s roster, with the rest presumably coming from visiting players, team execs, hot dog sales people, and the like.

How much would salaries have to rise to make the green part of the above chart come true? Walker’s projected state revenue in the year 2046 is about $45 million, meaning at a 7.65% state income tax rate, we’re looking at $588 million in payroll. If two-thirds of that is the Bucks, then for a 12-player roster, the average player salary would have to be $33 million a year in order to make these numbers work.

Is that as crazy as it sounds? The average NBA player salary 31 years ago was $330,000, and it’s $4.1 million today, so it’s on pace with historic trends. (Salaries have leveled off the last few years, but they’re expected to take a big jump in the next CBA thanks to the league’s lavish new TV deal.) But past performance doesn’t guarantee future returns, and lots of things could torpedo that assumption:

  • The cable bubble could burst. In fact, it’s a near-certainty that nobody will be watching NBA games in 2046 by turning on a cable box — broadband Internet will have replaced it decades before then — but the issue isn’t really what pipe people use to get their sports fix but how much they’re willing to pay for it. Right now, sports on TV is a loss leader for cable companies to get viewers to buy their service at all; once everybody is watching TV on the web and companies don’t have to worry about cable cutters (because everybody has to have Internet service whether they want to watch TV on it or not), the economic calculations start to change. Unless you envision a future where a huge number of people happily pay $1000 a month for the right to watch sports on TV, NBA revenue — and salary — inflation is going to have to level off sometime soon.
  • Basketball could sink in popularity. The NBA has done great at expanding its marketing in recent decades, but who knows what the future holds? Competition from leagues in other nations? Kids defecting to watching e-sports? Not that this necessarily would mean plummeting salaries — baseball has lost market share for a while now, but continues to rake in more cash — but it wouldn’t help.
  • Jon Bois could seize control of the NBA and make it die an agonizing death.

If any of that comes to pass, it’s not altogether clear what happens to Walker’s arena bonds: I haven’t been able to find any indication of what the backup revenue stream would be if income tax revenues don’t balloon as expected. (There will have to be something, though, or else nobody’s going to buy these bonds.) But this is essentially an income-tax variant on a TIF — an iTIF? — and if the increment fails to materialize as they so often do, the only possible answers would be new taxes, drawing on existing revenues, or the Bucks paying of the debt themselves … okay, ha ha, that’s not very likely.

(I should also note that I’m slightly skeptical that Walker’s green triangle would be enough to finance $220 million in bonds — it looks like about $600 million in nominal dollars, but the bulk of that is pushed way back into the future, which is going to require tons of finance charges like Miami took on for the Marlins. But a more specific accounting is going to have to wait for someone with better Excel skills than me.)

And finally — finally — keep in mind that all of this is not actually found money, but rather income tax receipts that the state of Wisconsin would otherwise be able to spend on other things if they weren’t handing it over to the Bucks owners. Unless you assume that the Bucks would definitely leave without $220 million in subsidies, and that Milwaukee sports fans wouldn’t find something else to spend their money on that would increase income tax receipts elsewhere, neither of which is anywhere close to a sure thing.

What Walker appears to have done is to come up with a way of writing a $220 million check to the Bucks that is rationalized in the most politically acceptable way possible: It’s not new taxes, it’s not existing taxes, it’s just future taxes on future imaginary super-rich basketball players who otherwise wouldn’t be playing in future Milwaukee because the future NBA will have future teams everywhere but there unless the state subsidizes a new arena. (And the city or county — Walker assumes another $50 million from those taxpayers, though he doesn’t specify how.) That still may not be enough to win over the state legislature, whose leaders were making mildly skeptical noises after Walker’s announcement yesterday, but it’s got as good a shot as anything.

And okay, really finally, I can’t let the Milwaukee Journal Sentinel article on all this pass without noting that Walker’s plan was apparently so remarkable that it stunned Journal Sentinel writer Don Walker into actually calling some economists to ask what they thought of it:

Andrew Zimbalist, a sports economist at Smith College in Massachusetts, says studies have found there is no statistically positive correlation between sports facility construction and economic development.

“Bear in mind that this is an observation about the average case,” Zimbalist said via email. “It does not mean that in a particular case that there can’t be a positive or negative effect. I would say in individual cases one has to look carefully at the financing and lease terms, as well as elements of land use and the local economy.”

The Bucks will argue that plans for ancillary development near the arena site will bring new construction jobs, new dollars and new development to a revitalized downtown Milwaukee.

Mark Rosentraub, a professor of sports management at the University of Michigan, says the key for Milwaukee and the Bucks is whether the anticipated ancillary development is successful. The new Yankee Stadium in New York, he said, was a “complete wasted opportunity. One billion dollars was spent and it had no impact at all on the south Bronx.”

This is, so far as I can tell, unprecedented in the history of Don Walker reportage, which normally lends itself to this. Maybe he’s actually starting to realize that only citing the people proposing the arena plan isn’t the best way of doing journalism—

Patrick Marley of the Journal Sentinel staff contributed to this report.

Or maybe not.

Chicago is still building that $125m arena for DePaul, in case you were wondering

Heather McCoy of KUCI, whose show I’ll be making my weekly appearance on at 8 am Pacific today, asked me yesterday what was up with Chicago Mayor Rahm Emanuel’s much-ridiculed plan to build a $125 million basketball arena for private DePaul University. The answer, it turns out: Damn the ridicule, full speed ahead.

The Metropolitan Pier and Exposition Authority board has approved the purchase of the final land for a planned entertainment district in the South Loop around McCormick Place. … The city is contributing $55 million in tax increment financing to McPier for the project, of which $26 million will go for hotel and ABC building land and $29 million toward hotel construction. McPier paid $14 million for the remaining land needed for the DePaul arena.

The state legislature approved the plan last spring, then the city council followed suit with a “very quiet” vote in favor last July. Now that the land has been acquired, construction can begin, and Chicago will at last have the 10,000-seat arena that it’s been lacking for all those concerts by bands that are too big for 5,000-seat venues but can’t fill 20,000-seat venues. In other words: Nickelback, please never retire.

Virginia Beach approves “private” arena plan that would use $7m/year in public money

The Virginia Beach city council voted last night on which of two arena plans to pursue, and according to the Virginian-Pilot, it “chose United States Management’s privately financed proposal” over a competing bid that would have “relied almost exclusively on taxpayer money from the city and state and would have forced the city to pay $262.5 million in debt service over the next 25 years.”

Well, that’s a no-brainer, right? So how does USM intend to pay for the arena without public money? Let’s see:

USM’s plan calls for it to spend more than $200 million of its own money to build the arena, then receive up to $7 million annually in tax revenue to pay down its debt.

Um, excuse me, what?

People, people. I understand that this whole “money” thing is hard to wrap your brains around. There’s money now, and money next week, and my money, and your money, and it can all be so confusing sometimes. But even elected officials and journalists have to understand that $7 million a year in tax revenue isn’t private money, right?

Actually, it could be more or less than $7 million a year — USM is asking to get 1% of the city’s hotel tax, plus a full kickback of all “taxes generated by the operation of the arena,” which presumably means sales, income, and property taxes, though don’t go looking in the Virginian-Pilot archives for an explanation of any of this. If tax revenues go up, USM gets more money; if they go down, USM has to cover the shortfall.

This is still likely better for the city than the competing W.M. Jordan plan, which would have required the public to pay off $10.5 million in annual bond payments, plus other costs. (The city would own the arena under the Jordan plan, but as we’ve covered here before, the last thing a city wants is to own an arena; it’s owning the arena’s revenue streams that’s the important part.) Of course, the USM plan could still fall apart — which given that it relies on getting a $200 million loan from a bank in China, seems like a pretty likely scenario — in which case the Jordan plan would be back on the table.

The important thing is, though, that whether you have the city paying to build an arena and “repaying” itself through the taxes paid by arena patrons that would normally go to the general fund, or the team paying to build an arena and repaying itself with those exact same taxes, it’s pretty much the same kind of tax subsidy. The Virginian-Pilot could have run a headline like “Council chooses less risky arena proposal,” but instead it went with “Va. Beach council picks privately funded arena plan,” which has the advantage of being more grabby, if the disadvantage of not actually being true.

When TIFs go bad: the Reno Aces story

The Reno Aces, the Arizona Diamondbacks‘ Triple-A affiliate, are getting about a million dollars a year from the city of Reno to pay off their stadium construction debt, and it turns out every single person running for mayor of Reno thinks it’s a bad idea to keep making those payments. Or at least wouldn’t raise their hand at a candidate forum to commit to making the payments, which isn’t quite the same thing, but still.

So what would happen if Reno were actually to default on its stadium commitment? As it turns out, the original stadium deal was to pay off the stadium with the resulting rise in property tax receipts — so-called tax increment financing, or TIF — except that, as is so often the case, property tax receipts didn’t actually go up, leaving the city to fund the stadium debt out of its general fund. That means the city council must vote on making the payments every year, and there’s nothing stopping them from voting “no.”

If that were to happen, we’d enter uncharted waters: As the Reno Gazette-Journal puts it, “Well, baseball could leave. Baseball could also take the city to court.”

This is essentially the same scenario that Columbus was considering with the Blue Jackets last year, except that there it was a good-government group with a broken website that was pushing it, whereas here it’s actual people running for actual office who are threatening to play the default card. I’m kind of hoping they do, not because I have a particular interest in the fate of either the Aces or Reno’s budget, but because it would be extremely interesting to see how a court would rule on the legality of a city stopping payments on an already-built stadium. I suspect you’d see a lot of city attorneys — and good-government groups — poring over a hypothetical Aces v. Reno ruling for years to come. Though in the meantime, it’s still at least a good cautionary tale about the risky nature of TIFs, if anyone is listening.

Manhattan Jets/Olympic stadium plan: the cost that keeps on costing

The New York Jets Manhattan stadium plan may be long dead, but its legacy lives on in the form of “Hudson Yards,” the mixed-use development project that was supposed to surround it on Manhattan’s West Side. Back in 2005, you will recall, Mayor Michael Bloomberg succeeded in convincing the city council that key to getting tens of thousands people to shlep several blocks west of Midtown to see football, the Olympics, or whatever, was to build an extension of the #7 subway line west of Times Square. This would cost $2 billion (if you think that’s a lot, don’t get me started on the 1,500-foot tunnel in Queens that cost $645 million), but never worry, as it would all be paid off by increased property tax payments by new development on the site — that’s right, a TIF.

Except that the development still hasn’t happened, which as Juan Gonzalez reports in today’s Daily News has resulted in the inevitable consequences:

The Bloomberg administration paid $234 million during fiscal year 2012 to a city-created development group that oversees the huge new commercial and residential complex, one of the mayor’s most ambitious projects.

City Hall quietly earmarked most of that money — $155 million — to the Hudson Yards Infrastructure Corp. in late June, because the group has not been generating enough revenue to pay the annual interest due on $3 billion in bonds it issued.

Of course, there are still hopes that Hudson Yards development will one day take off as originally planned — as Gonzalez wryly notes, “Maybe it will in 50 years, when most of us are dead.” If only anybody could have seen this coming.

Sacramento proposes Atlantic Yards West for Kings

The NBA and city of Sacramento officially issued their plans for a new Sacramento Kings arena on the site of Cal Expo yesterday, and you sure can’t accuse them of thinking small: It includes a 350-acre “living village” with a new indoor fair space, and retail, office, and residential buildings, and a whopping price tag of $1.9 billion. If this sounds familiar, it’s because it’s a dead ringer for the similar office/residential/arena plan that is currently in the process of collapsing in Brooklyn, thanks to plunging demand for office or residential space.

All parties seem to be aware that this is not the best time to be looking for billions for a development project, with NBA arena consultant John Moag (formerly of the Maryland Stadium Authority, where he helped get stadiums built for the Baltimore Orioles and Ravens) calling it “not a shovel-in-the-ground project,” and saying the arena wouldn’t open until 2013, with the rest of the project following over the next 25 years. That will give them time to finalize such niggling details as finding an interested developer, and figuring out how to pay for it all — there’s talk of tax-increment financing, but no real details.

Economist Claude Gruen, a specialist in these kind of giant development deals, called the plan’s economic projections “too rosy,” and said it wasn’t reasonable to expect it could pay for itself. But at least it’s created some much-needed jobs for architectural sketch artists.