Should the City Invest in the SODO Arena?

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The City Council is considering whether it should approve public financing to support the construction of a new arena south of Safeco Field.  It appears likely that constructing a new arena to bring an NBA basketball team to Seattle can be done without City participation.  The land is zoned to permit its construction, and the developer has purchased that land and lined up several very wealthy investors.

The question before the Council is not whether we think having an NBA team is a good thing, but whether it is necessary and appropriate to use Seattle’s bonding capacity to invest public money (in the form of municipal bonds) for a new arena.  After reviewing the proposed agreement, I have serious concerns about the proposed City involvement.

Eight Councilmembers share many of my concerns, and sent a letter to Chris Hansen [PDF] on July 30 stating:  “Our review has led the majority of Councilmembers to conclude that the agreements do not represent an appropriate balance of public and private benefits, nor do they sufficiently protect the City from the financial risks inherent in the arena’s financing.”  We then laid out a series of issues that would need to be addressed or changed in order for the Council to be prepared to consider City investment.

It may be possible to craft an agreement to move forward that meets all or most Councilmembers’ concerns, but that will take considerable discussion and negotiation.  We expect to work on this over the next few weeks.  All of us would welcome investment in the City and a new basketball team, and are willing to look carefully at these proposals.  However, any agreement must be designed to protect and advance the public interest.

Reasonable people can disagree on what the public interest is.  Councilmembers have a range of opinions on what an acceptable agreement would be, and I am writing to explain my point of view.  I appreciate that not everyone will share my perspective.  Here are my concerns:

1.      This is a different financing structure from that used for Safeco and CenturyLink Fields.  Those financing plans were put in place many years ago, of course, when there were more public dollars available and research on the limited economic benefits of stadia was only just beginning.  In both of those cases, funding came from specific taxes authorized by the legislature (in the case of CenturyLink, it was also approved by voters).  These taxes had less impact on the City’s general fund, which receives taxes from the teams and operations (admissions taxes were used, over the City’s protest, as were some CenturyLink sales taxes).

This proposal takes all of the city taxes which would otherwise go to the general fund to support police, fire, human services, parks, and transportation investments.  The approximately $13 million anticipated to be generated annually could, for example, largely restore funding for the City’s parks system to its pre-recession levels.  Instead, these taxes are diverted to pay the debt on the arena.

Every other business in town pays those taxes.  We make investments in transportation, public safety, and other priorities in order to make the entire community work – and to benefit economic development.  But we don’t put those funds back into any other business as a public investment.  It would make more sense if the proposed public funding had specific new taxes to support it, or if it relied on taxes that most businesses do not pay, such as the admissions tax.  I fear that the precedent of giving up taxes that would support general fund activities sets a precedent that we will rue in the future.

If arena proponents want public funding, they could go to the legislature and propose specific taxes, and take those to the ballot if necessary.  Note that (contrary to public mythology), voters in Seattle actually voted for Safeco Field.  The baseball field lost in other areas of King County.  The football stadium was approved in a statewide vote.

2.      I am not convinced that the proposed arena will make a significant contribution to economic development.  It will bring some new money into Seattle and will divert some other money that people might have spent on other activities.  The economists who have studied this proposal agree (as do studies of every other such project) that the net effect is very small.  Furthermore, I have not been persuaded by the argument that there will be significant tax revenues generated by “ancillary” economic activity in the stadium district following construction of the arena.  The evidence is slim or hypothetical.

3.      As the Seattle Planning Commission said in their report, the proposed arena may cause economic problems by interfering with Port and other industrial jobs.  The Manufacturing Industrial Council and Port have raised legitimate questions about the impact of the arena on transportation and land use in the area.  We will not know how significant these are until there has been a full study when the project goes through environmental review.  I think that there are likely to be impacts, but I also think that these impacts probably can be mitigated.  There will need to be money invested in this mitigation, but the good news is that addressing transportation impacts from the arena will also likely help with other transportation problems.  Under those circumstances, I would support investing public funds for part of these transportation projects.

4.      The investment in this project is fundamentally different from what are cited as comparable investments in places like McCaw and Benaroya Halls.  There is no need to get into the discussion of the relative merits of arts and sports.  The fact is that the arts facilities that the City invests in host nonprofit organizations.  No one is making money off of them – unlike the investors in this proposal.  The McCaw family invested tens of millions of dollars into the renovation of McCaw Hall.  They get no financial return – they get their name on a plaque.

5.      In contrast, Mr. Hansen said no when I asked him if he would organize the proposal as a nonprofit.  In fact, he specifically stated that he is looking for public funds to make him richer.  In his blog response to the question of why he wanted public financing, he put it quite explicitly:

“Public support improves the economics of the project: The first reason why a public contribution is necessary to the Arena project is that it meaningfully improves the economics of the project… the City and County Councils must appreciate that there is a significant difference between operating profitably and earning an adequate return on our investment.” (emphasis in the original)

Mr. Hansen has since stated that he believes that the City will receive a 7.15% annual return on investment.  While City analysts are skeptical about this number, he must believe it to be true.  That suggests that he believes that he is entitled to a significantly larger rate of return, or else he would be willing to replace the public funds at this rate.

6.      The proposed arena is designed to accommodate both basketball and hockey, but the memorandum of agreement provides that there will be only $120 million in public funds used if there is only a basketball team, instead of the $200 million if both teams are secured.  When I asked Mr. Hansen what the difference would be in the arena if a hockey team had not been secured, however, he stated that he would build it the same way.  That suggests that at least $80 million of the proposed public investment is unnecessary, since he can evidently finance the arena without it.  He has never presented a financial plan that lays out what level of public investment he actually needs to make the finances work.

7.      There are questions about the security of City investment in this arena, identified by Council staff and expert consultants.  There are many good policy statements in the MOU, but there are serious questions as to how they will actually be implemented.  For example, the City is listed as having ‘first priority’ for revenues – but that is very different from having ‘first lien’, which entitles the holder to actually be first in line if there is a financial meltdown.  We are told that the banks will have ‘first lien’.  And there is no apparent guarantee from the investors that their personal money would back up the City’s investment if the worst case happened, even though the investors listed have quite large financial resources.  It is not clear why the City should take any such risks, even if the chances of problems are relatively small.

8.      Owning the arena at the end of thirty years does not make up for the possible risk and commitment of City tax revenues.  The City already owns KeyArena, which struggles financially – why would we want to own two?  And no one can guarantee that a ‘state of the art arena’ built now will not be deemed insufficient in 15 years – remember that KeyArena was renovated in 1994, and the Sonics signed a 25 year lease, which they chose to break after only 13 years.  The City thought it was fully protected in that lease, but it turned out to be breakable.  Why will not the same situation occur with this arena?  The Rose Garden, with Paul Allen owning the team, and surely having the financial assets to handle the issues there, still went bankrupt.

The fact is that running arenas is not the City’s core mission.  We have challenges enough with police, human services, electricity, water, and the other areas that are our central responsibilities.

9.      In San Francisco, the Golden State Warriors are building an arena using only private funds.  The City is providing the land – but the land is more of a liability than an asset, requiring an estimated $75 – $100 million to make the piers usable.  If private money can build an arena in one of the most expensive cities in the country, why not in Seattle?

The City can welcome investors building a new arena and we can play our traditional economic development role by supporting that with complementary investment in city infrastructure such as transportation systems, and with regulatory assistance where that is compatible with the public interest.  The investors could finance and own the facility, just like every other for-profit business.  Alternatively, the investors could go to the legislature, get the legislature to approve a new taxing authority, and set up a public facility district to manage the arena.  Both of these are proven models that can work.  The current proposal is a complicated and convoluted arrangement that subsidizes profits for a private investor, takes away tax revenue that should go to the City’s general fund, and leaves the City with a potentially money-losing facility down the road.

I’ve heard from lots of basketball fans and I appreciate their passion.  I will continue to be open to possible changes in the agreement that would address the issues I have cited.  Ultimately, I must make my decision based on my best judgment of the public interest as I see it and as outlined above.