Thursday, 16 July 2015

Arena Subsidies, Comedians, and the Sacramento Lawsuit

It was hard not to think of Attorney Patrick Soluri and his clients after watching John Oliver’s hilarious take on public financing of professional sports stadiums.  These Sacramentans didn’t need a pep talk from a comedian to inspire them to take the City to court over the financing of the Kings’ arena.


I have reviewed a number of documents surrounding Sacramento arena financing and this specific case in recent years, and I have mixed feelings about it.  Like John Oliver (a comedian making a serious point) and virtually every serious economist, I believe these publicly financed arena deals are usually bad policy - often by the cities that can least afford them - and the economic development benefits are typically overblown while the budgetary costs are understated.  There should be a lot more questions of the politicians and team owners who orchestrate these deals.  Unfortunately, it seems there are a lot more accolades and parades (and apparantly a glowing ESPN documentary in Kevin Johnson’s case) than tough questions.

But this lawsuit goes beyond tough questions and alleges a fraud on the public, primarily by giving the Kings’ rights to electronic billboards and a downtown parking garage without making a proper valuation of those assets.  I would agree that the City’s presentation of this part of the deal is deceptive and understates the value that is given away (the city staff that said billboard rights are “only” an opportunity cost since the City general fund is not currently receiving this revenue should be suspended without pay and enrolled in ECON 101).  But hold on, the Kings’ also contributed substantial items to the deal that weren’t given an economic value either - to name one big example - the Kings’ taking responsibility for all cost overruns is hugely valuable - and that is already paying off.

It seems to me that Mayor Johnson and the City were trying very hard to keep the city contribution at a face value of the $258 million since this matched the previously approved deal for the railyard arena under the Maloofs’ ownership.  It is probably true that they hid the value of some things to keep the contribution at that number.  But as I mentioned before, there were unvalued changes on both sides of the ledger.  Notable changes on the cost side include the electronic billboard rights and the downtown garage as the lawsuit points out.  On the benefit side, the new Kings owners took responsibility for cost overruns, and arena lease payments to the City were modified to fixed amounts rather than convoluted structure in the Maloofs’ deal that had a lot of risk for the City.  The arena was moved to the blighted downtown Plaza - where it will provide a lot more value to the City’s revitalization efforts.

My opinion on this arena deal hasn’t changed.  The City’s new arena deal with Ranadive’s group is better than the deal the City had with the Maloofs.  I opposed the Maloof deal, but moved my position to neutral on this one as a result of the improvements.  I am cautiously optimistic about it catalyzing positive change in downtown Sacramento, and it may prove worth the costs.

My larger concern is that the Arena deal will lead to a larger erosion of budget discipline by the City. The arena subsidy does impact its general fund, and it means the City can afford to spend less than it could in the absence of the Arena. But the City Council recently approved budgets that spend beyond the City Managers recommendation, and they are now encouraging a vision for hundreds of millions of dollars for a new performing arts center when a few years ago they couldn’t afford a renovation.  And there are probably more requests coming all the time, because it is politically much harder for electeds to say No after saying Yes to subsidizing a basketball palace for millionaires.

July 24 Postscript:  The judge ruled in the City’s favor today, rejecting the claims of fraud.  While I would not go quite as far as the Judge in some of his criticism of plaintiff’s arguments quoted in the Sac Bee’s article, I think he is correct that there is no fraud here.  In fact, I think the City’s leader listened constructively to some of the criticism of their deal, and that Sacramento’s arena deal actually got better for taxpayers with each iteration of the plan, whereas it seems so many big public projects these days see the costs to the public grow while the benefits shrink as they progress (i.e. Bay Bridge, high speed rail, Delta tunnels). 

About the Author

Ethan Jacob

Author & Editor

I am Ethan Jacob Executive Director of the Center for Business and Policy Research at the University of the Pacific, where I have a joint faculty appointment in the Eberhardt School of Business and the Public Policy Program in the McGeorge School of Law..

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