Category: Calgary Flames

The city of Calgary has finally revealed some of its legal contracts with the Flames governing the team’s new arena — six months after voting on it, because that’s totally how democratic oversight is supposed to work — and the highlights include:

• As previously reported, the city will pay $275 million toward construction, plus financing charges and the cost of demolishing the old Saddledome (previously reported at $12.4 million), while receiving $250,000 a year for 10 years in naming-rights fees, plus 2% of all ticket sales, capped at $3 million a year for the first five years. Last time I crunched the numbers on this I came up with a net total of $212.9 million in public costs; given that the ticket tax payments will be significantly backloaded toward the end of the lease, the base cost to the city is probably more like $230 million or so.
• Not as previously reported, the city will be on the hook for any insurance premiums above what the team would pay if the arena weren’t in a flood plain, and will have to cover 50% to 67% of any construction cost overruns, depending on future negotiations.
• The Flames owners won’t be property taxes, but instead will make payments in lieu of taxes in the amount of
  Yep, they omitted the actual payment amount, citing a section of Alberta’s Freedom of Information and Protection of Privacy Act that exempts from public disclosure laws information that would be “harmful to business interests of a third party,” though the very next section says the exemption doesn’t apply if “the information relates to a non-arm’s length transaction between a public body and another party,” so hopefully we’ll see some lawsuits to get that number revealed.

The total cost is impossible to say without knowing how much of a tax break the team is getting or how much cost overruns could be, but suffice to say we’re probably looking at more than $250 million now, which is a whole hell of a lot more than the $47 million net loss the arena’s backers touted to get the deal approved by the city council.

Calgary Mayor Naheed Nenshi says he’s not concerned about cost overruns because the Calgary Municipal Land Corp. “is the project manager on that project, they know how to build stuff on budget and on time”; all those who are reassured by this, please raise your hands. Now, all those who are wondering when Naheed Nenshi was replaced by an alien shapeshifter, please raise your hands. Keep ’em up, I’m still counting…

In case you were holding your breath to see if the Calgary city council might rethink its $200 million-plus Flames arena subsidy now that it was facing a $23.45 million budget shortfall and possibly having to make cuts to police, fire, and transit services … well, that was a bad idea, who told you to hold your breath for that?

Coun. Evan Woolley put forth the proposal that would have the city withdraw a $290 million total contribution for the arena, with $200 million going towards the troubled Green Line project, $45 million towards the construction of a new downtown Calgary police station and $45 million for deferred capital maintenance for Calgary Housing…

When the dust settled, councillors defeated the reconsideration 11-4.

Instead, the council voted to close the budget gap by raising taxes on residential property owners (while subjecting business owners to a smaller increase than they would otherwise have been) and eliminating the proposed budget cuts. One can argue about who should bear what share of the tax burden in Calgary, but that’s kind of beside the point for our purposes, which is to note that the city would have plenty of money to hold the line on taxes and maintain services if it weren’t shoveling so much toward a new private arena project, which is exactly what those four councillors on the losing side of the vote were pointing out. (Yes, some of that money is from projected future taxes from development surrounding the arena — but there’s plenty of reason to believe at least some of that money would arrive with or without the arena.) The cost of subsidizing sports venues isn’t just abstract dollar amounts — it has real effects on real people when the public cash is suddenly no longer available for other uses. There are many ways to define opportunity cost, but you can’t spend the same money twice is a reasonable shorthand.

The city of Calgary is facing a $23.45 million budget shortfall that could result in cuts to police, fire, and transit services, and also spending $200 million or more on a new arena for the Flames. What to do, what to do?

Some councillors, including Evan Woolley and Jeromy Farkas, have said that as the city looks for cuts in this year’s difficult budget “everything should be on the table” — including the arena deal…

Farkas argued that as there’s still no signed agreement between the city and the Calgary Flames owners, he’d like to see the arena deal revisited.

That’s an idea! And even one that a local economist had suggested earlier this month. But a voice is speaking up in defense of the subsidy deal that was agreed to this past summer after just one week of debate, and if you’ve been in a coma for the last year, the name will likely surprise you:

Mayor Naheed Nenshi said he thinks talk of reconsidering the deal is “distracting.”

“On the arena, we had a very comprehensive public debate, and ultimately, council decided to move forward,” he said. “That is a decision council has made, and frankly nothing has changed in the economy between July and now that would make me say, ‘We’ve got to rethink our capital projects.’”

That’s right: Naheed Nenshi, erstwhile member of the Gang of Four and the man Flames execs tried to force out as mayor because of his opposition to arena funding and declared “worse than Trump” when they failed, is now the leading defender of giving tax money to the Flames. Our transition to Bizarro World is complete.

If you haven’t been in a coma for the past year, of course, Nenshi’s statement will come as less of a shock, as he was a vocal supporter of the arena deal when it passed, for reasons that weren’t entirely clear even at the time. And they’re even less clear now that it’s been made apparent that most Calgary residents were opposed to the deal (or at least most of those who sent in comments to the council), and there are people literally marching on City Hall to oppose the possibility of a 250% price hike for low-income transit passes as part of the budget cuts. If Nenshi felt like he didn’t have the support to oppose the deal in July, he certainly has political cover to do so now; presumably either he’s agreed to some quid pro quo that is stopping him from calling for the deal to be renegotiated, or is more afraid of alienating developers than nice white-haired people marching on City Hall, or genuinely thinks that this deal is somehow much better than the previous one he rejected despite it not being anything close to the “public benefit for public money” that he had said was his bottom line for any deal.

Meanwhile, Farkas also raised the question of why, if there’s still no formal arena agreement in place, “this was so pressing that it had to go through in the middle of July with barely a week of consultation.” This really is an excellent — and rare — opportunity for a city to rethink a project that was rushed through without enough public debate; it doesn’t seem likely to happen, and maybe wouldn’t even with Nenshi’s support, but it’s still remarkable how quickly the political winds shifted on this one. Hey, Jay Scherer, do you have time to write another book?

The Calgary city council approved around $200 million in subsidies for a new Flames arena earlier this month only eight days after releasing the proposal, meaning there was no time to tell how the public felt about the idea of using tax money to help pay for a billionaire’s new sports home. There’s plenty of time now that it’s too late for it to have any impact, though, and it turns out Calgarians — at least, those who wrote in to the council during those eight days — were not so crazy about the idea:

An analysis of more than 4,000 individual public submissions found about 55 per cent of those who wrote to the City Clerk’s office did not support the deal approved by city council in an 11-4 vote on July 30.

In particular, reports the Calgary Herald, which requested the public comments — apparently in Canada public records requests move a lot more quickly than in the U.S. — people were upset about the rushed timetable (“The fact that the Flames made the timeline so tight that it disallowed for meaningful public consultation shows an utter disdain for democratic norms and should have been an absolute non-starter”) and the fact that Calgary was approving arena funding at the same time it was cutting its operating budget for things like transit and fire services (“Do not let [Calgary Sport and Entertainment Corp.] bully you into spending money that could desperately be used elsewhere”).

Sometime sports subsidy apologist Mark Rosentraub told the Herald that allowing public input vs. deciding behind closed doors each “has its ups and its downs,” and that “if people are dissatisfied, then they should vote the scoundrels out.” That’s way easier said than done — people vote on a multitude of issues, so it’s tough to punish elected officials for a single decision, especially if their opponents would have done the same thing — but given that the council’s approval ratings were already in the toilet before the arena move, this certainly isn’t going to help. Unfortunately, the next elections aren’t until 2021, by which time it’s extremely likely there will be something fresher in voters’ minds to use as a basis for their ballots — and if you suspect that that’s yet another reason why the council wanted to vote as quickly as possible, you’re probably not far off.

 

Welp, that went about as expected: The Calgary city council voted 11-4 yesterday to build a new Flames arena, just eight days after most of them learned about the plan and following just a few hours of debate. The estimate construction price tag is $550 million, with the city and team owners splitting the costs, and the team getting the vast majority of the revenues.

Among the highlights from yesterday’s council meeting:

• Several councillors asked for a delay until September so that they could fully vet the arena plan — as one remarked, he’s spent more time researching buying a car than he got to on this deal — but the Flames owners said no. And since the deal itself contained a poison pill where it would self-destruct if not approved by yesterday, the council had no choice but to vote it up or down, with no opportunity even to suggest changes.
• Many of those voting yes cited a figure, provided by the city’s CFO, that the net present value cost of the deal to the city would be just $47 million, thanks to ticket tax money from the arena and incremental property taxes from the surrounding development that would help defray costs over 35 years. This puzzled me at first because the lowest figure I could come up with was $138.9 million, but it turns out the CFO used the city’s projected bond interest rate of 2.5% as the discount rate for calculating the future value of money, which makes taxes that won’t be collected until the 2050s somewhat less worthless. This is not necessarily the best way of choosing a discount rate, and there are other questions about whether all those revenues should really be counted as defraying the public’s cost (see below), but at least the math checks out a bit better. (I still get at least $60 million for the net present value cost, even using the 2.5% discount rate.)
• There was some concern expressed about the Flames owners’ exclusive option to buy two parcels of city land valued at an estimated $100 million, but it didn’t get much debate in the limited time available.
• Calgary Mayor Naheed Nenshi said the deal is better than most other North American sports venue deals — a pretty low bar, as regular readers of this site will already know — adding: “It was important [that] we have a great financial deal and I think we did, but it was also important for us to think about the intangibles that we are investing in. I wanted to make sure we had a great balance of social and financial return, and I think we’ve accomplished that here.”

Okay, so it’s impossible to put a value on “intangibles” like ensuring that the Flames stick around for 35 years without move threats (not that the team owners were threatening to leave, except when they were). But what about that financial return?

The biggest problem is counting future property taxes on the surrounding development as paying back the city’s costs. This would only be new development, yes, but there’s no way to guarantee that it would be new development that wouldn’t happen without the arena, at least somewhere in the city. (Studies of whether new arenas spur increased economic growth come down decidedly on the side of “What, are you high?”) Plus, as discussed here previously, property taxes on new development aren’t a windfall, because they’re already needed to pay the costs of all the city services new development requires — police and fire protection, schools for any children living in new housing, etc. — so counting them as available to pay off an arena is double-dipping. If we throw out the property tax revenues, even using the city’s lowball 2.5% discount rate, suddenly the city’s present-value costs balloon to $165 million. (And probably much more than that, since the ticket-tax money would be significantly back-loaded thanks to ticket prices rising over time, but the city hasn’t provided a breakdown of how those revenues would change over time.)

Then there’s the fact that the Flames would get the land for free — as a swap for the site of the Saddledome — and would pay no property taxes on the arena itself, which is typical for U.S. city-owned arena deals but much less so in Canada. These should both be considered subsidies to the team, but there’s no way to put a dollar value on them without more number-crunching, which there wasn’t time for in the past eight days.

So we’re looking at a city net cost of probably somewhere close to $200 million, at minimum. Meanwhile, the Flames owners would put up the same $275 million up front as the city, but would get way, way more in return: All the revenues from selling tickets (except for that 2% ticket tax carveout) and concessions and ad signage and most of the naming-rights money, and so on. A recently revealed study from 2016-17 by University of Michigan sports economist Mark Rosentraub estimated that the Flames could see increased revenues of $48.7 million per year — even if that’s before deducting their debt payments for the new arena, it would leave Murray Edwards and his fellow owners clearing about $30 million a year in new profits, while the city is losing millions of dollars a year on its share.

And that’s the most damning perspective on this deal: Not that it will bankrupt the city of Calgary (it won’t) or that it’s significantly worse than other awful arena deals out there (it’s not), but that the city council has entered into a partnership with a private sports team where they split the costs roughly down the middle, but the private team owners collect virtually all of the resulting revenues. That is a huge gift to the rich dudes who own the local hockey team, and saying well, at least the city won’t take too much of a bath on its part, if you squint at the numbers right is pretty cold comfort.

None of which matters much now, as the deal is done, with Calgary taking its place alongside Minneapolis and Miami and a whole bunch of other cities that were the poster children for holding the line on sports subsidies, until suddenly they weren’t. Can we please stop pretending that the stadium subsidy racket is drying up now? It may require jumping through a few more hoops these days, but owning a pro sports team remains one of the best ways, short of becoming a defense contractor, to make money off of the public till.

The vote on putting $275 million (and maybe more — see below) in city money into a new Calgary Flames arena doesn’t take place until tomorrow, but it’s already becoming clear which way the council is going to go:

The majority of council members have indicated support for the deal, including Mayor Naheed Nenshi, who last week said the arena would create public benefit through “intangibles.”

“It’s about bringing community together. It’s about uniting people,” Nenshi said. “This deal makes sense on its own merits.”

Also, councillor Jyoti Gondek said a new arena was needed so that people could watch e-sports like League of Legends and Fortnite. With a straight face, presumably, though the Calgary Sun doesn’t say.

Meanwhile, a bunch of economists have noted the same thing I did here, which is that projecting $400 million in new city revenue over 35 years is not the same as $400 million today, which means the city will almost certainly be taking a loss on the deal — and that’s if taxes on new spending don’t simply cannibalize taxes on old spending, which will almost certainly be the case given that this is just a matter of moving an arena a few blocks away. Also, it’s not counting any cost overruns, an agreement on which “still needs to be worked out,” according to the Toronto Star, but the “expectation” is the city would be on the hook for 50% of them.

If that’s all somewhat confusing and seems to call for a more in-depth examination of the numbers, well, tough, because the council is voting tomorrow. This is kind of an amazing ending to a years-long arena debate where the city seemed set on holding firm against any significant public subsidies, but also kind of not amazing, because that’s how these deals tend to happen: not for a long, long while, then all at once.