Saturday, January 14, 2012

In the New Yorker, a dissection of plans behind a new stadium (and some AY echoes); also, a look at the modest study of the Staples Center economic impact

Connie Bruck's New Yorker profile of Philip Anschutz and the Anschutz Entertainment Group, The Man Who Owns L.A.: A secretive mogul’s entertainment kingdom., is subscribers-only, but it's well worth reading, especially for the machinations behind plans for a new football stadium in Los Angeles.

[Graphic by Mark Ulriksen for the New Yorker]

Anschutz owns the Staples Center and L.A. Live, and via key lieutenant Tim Leiweke, has proven quite adept at getting city and state legislators on their side.

Getting going

Bruck writes:
For the nation's second-largest city, L.A.'s downtown was shockingly underdeveloped. By the late nineties, many of its biggest firms... had been bought by other companies and their headquarters moved elsewhere. It was the perfect place for Anschutz, a confirmed bottom-fisher, to buy low and build a new empire.
Of course, L.A. is a more sprawling, West Coast city, and it had a large downtown, not a small piece of land, as in Brooklyn, designated for sports facility development.

The impact of a ballot threat

Success involved eminent domain and some interesting horse trading. Bruck writes:
Leiweke was especially deft at recruiting every political group he needed. "In the end," [former Councilman Joel] Wachs said, "we were fighting the unions, the business community, the L.A. Times, the Cardinal." But polls showed that, if the issue went to a ballot, A.E.G. would likely lose, and after a battle that lasted nearly a year Wachs got what he wanted from A.E.G.: the funds to pay off the city's bonds would come out of A.E.G.'s pocket.
In other words, it's always possible to recruit prominent supporters, but the public is wary--as it was with the Atlantic Yards subsidies, until a poll managed to frame the issues in the most advantageous possible way. With Atlantic

Claims for the new plan: "repetition did not make it true"

Now A.E.G. aims to build not only a new football stadium, but also a new convention center, one that would replace an antiquated space that leaves L.A. 15th in the nation in convention cities. Bruck writes:
Leiweke vowed that the project would rescue the ailing city economy, "for our children's children." And even though the city would have to issue about three hundred million dollars of tax-exempt bonds, he said that "it won't cost you a penny." Leiweke made this argument countless times, and soon politicians like Villaraigosa and City Council woman Jan Perry were echoing him. But repetition did not make it true.
Repetition did not make it true. Connie Bruck is a Truth Vigilante!

In New York, however, the local press did not challenge, for example, the statements made by Gov. David Paterson and Mayor Mike Bloomberg at the Atlantic Yards arena groundbreaking.

Bruck quotes the city's financial analyst as pointing to several pitfalls in the deal. The NYC Independent Budget Office's skeptical reports came in 2005 and 2009, well after Forest City Ratner had locked in significant support.

Dissing academics

Bruck describes Leiweke's public pitch to neighborhood and civic groups, and what happened when a questioner asked about the need for an academic study to validate the claims:
"I'd be more than happy to show you that," Lewiweke responded. "And I'll make you a deal. I'll buy you dinner one night at L.A. Live, and we can sit there, look at three billion dollars in development, and we can question whether the professor that came in and said there would be no economic development that will come from Staples Center was right. I can show you studies--but how about I show you brick and mortar?" His questioner pressed about the research, and Leiweke, raising his voice, replied, "You bring your professor, who never has invested one penny in this community, and then I will bring all the union guys, who are sitting here with forty-per-cent unemployment, and you ask them, Do they want to let those people that have never spent a dime of risk in this community sit there and preach that there's no economic development and impact that's going to come from stadiums and arenas?"
That's probably a powerful speech, but if A.E.G. had learned from Atlantic Yards, they would know to get your own professor, like Andrew Zimbalist, to say everything will be fine.

A study in L.A.

As it happens, the Los Angeles City Controller commissioned a 2003 study by sports economist Robert Baade, which aimed to "address the issue of whether the City of Los Angeles derives revenue sufficient to justify their $71.1 million investment in the Staples Center." The report says yes, but the claims are modest, not outlandish.

Baade notes that the investment--which likely involved lower exposure to taxpayers--was quite low in the general realm. And Staples houses five professional sports teams.

Why facility owners in big cities can pay more

Baade writes:
Theoretically, all else equal, one would expect an inverse relationship between the
size of the subsidy for a playing facility and the population and size of the metropolitan economy. The reason for the inverse relationship relates to the relatively greater revenue that the largest urban areas command through a larger fan base, naming rights, the sale or lease of luxury seating, and greater media revenue....

Municipalities in the United States on average contributed 11 percent of the
construction costs for venues that jointly accommodate NBA and NHL teams. In an
effort to make this comparison more valid for the Staples Center, the 11 percent figure
reflects the average public contribution for arenas built through 1997, the year before
ground was broken for the Staples Center. The maximum public contribution of $71.1
million for the Staples Center represents about 21.5 percent of the reported $330 million construction cost. Taxpayers, however, as indicated in the previous section of the report, may have contributed only $12.6 million, or 3.81 percent, of the cost of the project if the cost was $330 million. If the smaller percentage applies, clearly the Staples Center qualifies as exceptionally taxpayer friendly, which conforms to the theory that large markets require less taxpayer support in building sports facilities.
As I noted, moving to a new arena in the nation's media capital was a very good deal for Forest City.

What L.A. traded

Baade writes of the Disposition and Development Agreement (DDA):
In essence the DDA’s assurance that the City of Los Angeles will not incur any debt service came at the expense of the Developer receiving virtually all of the significant revenue streams the new arena generated. Specifically the arena naming rights ($116 million), revenues from luxury seating revenues (luxury loges and club seats), membership fees for the Grand Reserve Club, sponsorship deals, and $9.6 million per year in parking revenues go to the Developer. It would not be misleading to say that the City of Los Angeles traded some uncertain revenue for the certainty of not having debt service expenses.

What were the direct costs and benefits to Los Angeles of the Staples Center as
articulated in the DDA? As previously noted, the City of Los Angeles provided $71.1
million for the construction of the Staples Center. The annual debt service payment for the $38.5 the City borrowed amounted to approximately $3.8 million. The author has not been able to identify a complete description of expenses the City incurs to operate the facility (additional police protection, transportation, garbage collection, etc.), but all operation and maintenance expenses, to include set-asides for capital improvements, have to be considered in accurately assessing the net, direct financial contribution of the Staples Center to the City of Los Angeles.
In other words, if naming rights were counted as a subsidy--and only in a few jurisdictions (I believe) do municipalities keep a share--the equation might be different.

The direct benefits

Baade cites direct benefits, including the lease of the Staples Center site (there's a $1/year lease for the AY arena) and debt-service for City-owned property; taxes from ticket sales; the City’s share of parking revenues; and net additional property taxes (the payments in lieu of taxes in Brooklyn go to pay the arena construction); and incremental sales taxes, business license taxes, and utility taxes.

He writes:
Summarizing this information, the City has received or will receive $3,850,863.35
in benefits in excess of direct costs per year over the life of the agreement with the
Developer according to the various agreements between the City and Developer.
The indirect benefits

He writes:
Indirect benefits emanate primarily from increased sales tax receipts induced by the operation of the arena. The Staples Center may account for some increases in property taxes through increased property values in its environs and utility taxes may increase through greater utility use, but experience and the conventional wisdom argue that stadium-induced changes in income-insensitive revenues are relatively small. The estimation of indirect benefits, therefore, focuses on changes in sales tax receipts.

...The .3 percentage point increment can be crudely identified as the contribution from the Staples Center, and in absolute dollar terms a .3 percent increase equals $1.04 million. This figure approximates the taxable sales increase presented in Table 4 of $35.56 million multiplied by the city’s portion, 2.0 percent, of the 8.25 percent rate governments impose collectively on taxable sales. The 2.0 percent tax imposed by the City on the $35.56 increment in taxable sales yields a value of $.711 million.

...If it is assumed that all other taxes would increase by .3 percent as a consequence of the Staples Center, then completing an arithmetic exercise using these crude statistics, it is estimated that the Staples Center annually contributes $6 million to the City of Los Angeles coffers. Of course, as noted previously, there is no reason to expect that property taxes in the Staples Center environs or other relatively income- insensitive taxes would increase by a percentage that equals the increase for income-sensitive sales taxes.
The costs

He estimates new costs:
Projecting for the entire year, increased costs for transportation workers to provide for the increased demand induced by Staples Center activities equaled approximately $180,000. A crude estimate for incremental police, sanitation, and transportation expenses to service events at the Staples Center was set at $540,000 or three times $180,000. The incremental expenses were projected to grow by 3.91 percent per year, the rate of growth of the Employment Cost Index from 1983 through 2001. It should be noted that in estimating the net present value of benefits from the Staples Center, it has been tacitly assumed that the City would not have generated property taxes or rent from the property, which the Staples Center utilizes, over the life of the agreement. For each incremental increase of $100,000 in property taxes or rent the net present value of the Staples Center declines by $1.2 million.
A conservative conclusion

Baade concludes that there is likely a benefit, but it depends which numbers you use, which means more analysis is needed:
[T]he present value of the estimated increases in tax revenues... less incremental operational costs to the City of Los Angeles is $49.234 million over the twenty-five year life of the agreement. If the money generated from the City’s portion of parking revenues and ticket sales is all net new revenue to the City, then the discounted present value of net benefits represents a 290.7 percent return on an investment of $12.6 million ($49.234 - $12.6/$12.6 x 100 = 290.7 percent). On the other hand, if all the parking and ticket surcharge revenues claimed by the City simply represent revenues that would have been generated at other venues, then the subsidy is $71.1 million, which exceeds the present value of revenues collected by $21.87 million. Furthermore, an increase in the estimated incremental operating costs of $100,000 per year results in a reduction in the net present value of the facility of approximately $2 million per year. A more accurate accounting and monitoring of City-borne costs of operation, particularly as it relates to security post 9/11 is critical for determining the economic efficacy of the Staples Center and other such projects. The same sort of exacting analysis needs to be applied to the incremental indirect benefits.
It depends on the assumptions

Baade recognizes that some numbers are still tough to pin down:
In summary there is ample reason to believe that the Staples Center has generated a positive return for the City’s investment. The size of the return from the perspective of the taxpayers depends once again on the extent to which the City’s share of parking fees and ticket tax revenues are new, and the extent to which the value created through the operation of the Staples Center remains in the City.
For the first question, however, there's more evidence:
There are reasons to expect that a large portion of the incremental parking and ticket tax revenues were new to the City when the Staples Center began its operation. Four of the five professional sports tenants (Lakers, Kings, Sparks, and Avengers) are new to the City of Los Angeles. The Lakers, Kings, and Sparks relocated from the Great Western Forum located in the City of Inglewood, and the Avengers began play in the Staples Center during their inaugural 2000 season.
Policy implications

What does this mean for other cities? Baade writes:
The policy implications are clear. Cities have to be very conscious of how projects they subsidize promote or discourage local value added. The key to development has to do with the ability of the project to sustain spending in the local community rather than simply having the spending that occurs pass to hands outside the area. Residency requirements and taxes on local earnings are two ways to promote local development. If these methods are viewed as too likely to discourage development, then methods for encouraging developers to partner with the community more intimately should be undertaken explicitly in fashioning the memorandum of understanding between the developer and the community.
Why is that important? Because the area was depressed (unlike the AY site). Baade quotes another author, Matthew Parlow:
The South Park neighborhood which hosts the Staples Center, was blighted and in need of economic revitalization. The seventy block (sic) area of downtown Los Angeles was marked by empty parking lots, boarded-up warehouses, and “For Lease” signs which adorned most office building in the neighborhood. Twenty-five percent of this area, which one local reporter described as “predominantly sleepy and often seedy,” was comprised of parking lots, while another 25% of the land remained vacant and undeveloped. Moreover, although 90% of the 270 apartments were rented, much of the ground retail space was empty. Given these dilapidated conditions in South Park, City officials sought to revitalize the area.

Wait, there were empty buildings and lots on the Atlantic Yards site, weren't there? Yes, but it was a six block area. Now with an adjacent historic district.

A lingering warning

Baade offers some guidance to those who present gauzy projections regarding sports facilities:
If prospective estimates are to be used in assessing the merits of subsidies for sports facilities, then they should, at the very least, be filtered through retrospective analyses for cities of a similar economic character to lend some context or supportive evidence.
Regarding Atlantic Yards, we could do that already. All the optimistic studies--from the developer's consultant Andrew Zimbalist, the NYC Economic Development Corporation, the Empire State Development Corporation--depend on a full buildout of the project in a decade. No alternative numbers were offered, based on a slower, or less complete, buildout. Thus the extant numbers are all suspect.

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