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Thursday, December 20, 2012

The Extinction of Common Sense

Oakland, California, the fifth-most crime ridden city in America, faced a $32 million budget deficit last year. It closed the gap by dismissing a fourth of its police force, more than 200 officers.

Untouched was the $17.3 million that the city pays to stage 10 games a season for the National Football League’s Oakland Raiders and to host Major League Baseball’s Athletics in the Coliseum. The funds cover debt financing and operations and are supplemented by $13.3 million from surrounding Alameda County, based on data compiled by Bloomberg from public records.

“If someone calls 911, you’re looking at an indeterminate amount of time before an officer can respond,” says Barry Donelan, 40, a sergeant who is president of the Oakland police union. “Citizens are suffering.” Reversing a renewed rise in violent crime is out of the question, he says.
Now the city is under pressure to replace the 46-year-old structure to keep the Raiders. The team’s owners may move to nearby Santa Clara and share an under-construction, $1.2 billion venue with the San Francisco 49ers, or to Los Angeles, where the City Council has backed a $1.5 billion stadium hoping to lure the NFL. Losing the Raiders would leave Oakland with about $145 million in debt, which originated 17 years ago in part to bring the team back from Los Angeles.

‘Didn’t Work’

“The 1995 deal didn’t work from a financial perspective for any party to the deal -- city, county or Raiders,” says Amy Trask, chief executive officer of the Raiders. “That shouldn’t stop us from trying to reach a deal that works for everyone.”
Oakland mirrors dozens of other U.S. cities and states whose taxpayers provide publicly owned facilities and financial subsidies to teams in the NFL, the most popular U.S. sports league with more than $9 billion in annual revenue. Jacksonville, Florida, also fired police officers and cut services while lowering the Jaguars’ rent 11 times since 1993 and deferring $12.3 million in rent payments.
Taxpayers have committed $18.6 billion since 1992 to subsidies for the NFL’s 32 teams, counting the expense of building stadiums, forgone real estate taxes, land and infrastructure improvements, and interest costs on public bonds, according to data compiled by Bloomberg. Eighteen of the teams are owned by billionaires.
Even clubs using privately financed buildings such as New Jersey’s MetLife Stadium, where the New York Giants and Jets play, receive tens of millions of dollars in subsidies in the form of land and infrastructure spending.

$10 Billion

Publicly financed stadiums for all U.S. major-league sports, including soccer, cost taxpayers about $10 billion more than forecast when accounting for the costs of land, infrastructure, operations and lost property taxes, according to a study of all 121 facilities in use during 2010 by Judith Grant Long, who teaches urban planning at Harvard University. The NFL has the highest public price tag, with taxpayers putting up about 87 percent of the expenses for NFL stadiums, she writes in her 2012 book, “Public/Private Partnerships for Major League Sports Facilities.”
Competition among cities for a limited supply of teams will probably mean even more sacrifice by taxpayers, she writes. Cities including Atlanta, San Diego and St. Louis -- in addition to Oakland -- are considering replacing their football stadiums.

Relocation Threats

“News that Los Angeles is building a stadium with no team in place is providing the straw man for a new round of relocation threats,” Long writes. “The midnight move of the Cleveland Browns to Baltimore in 1995 was ground zero for the effective use of relocation threats based on stadium woes, and started a relocation-threat frenzy that infected all of the major leagues for the years to come.”
Public officials across the country regularly support stadiums by drawing on sales and property taxes and by imposing levies on hotels and rental cars. In Indiana, subsidies for a stadium and a convention center account for a third of state debt, according to a Fitch Ratings report. Officials raised hotel taxes to 9 percent from 6 percent and doubled rental-car levies to 4 percent and food and beverage taxes to 2 percent to pay for the Indianapolis Colts’ building.
Hamilton County, Ohio, sold Drake Hospital to the University of Cincinnati this year for $15 million to cover a deficit related to the Cincinnati Bengals’ football stadium. Bengals spokesman Jack Brennan didn’t respond to an e-mail seeking comment.

Taxpayer Subsidies

The $18.6 billion of taxpayer subsidies to the NFL reflect costs and investments since 1986, when a new era of publicly funded stadium construction began in response to new laws on the use of municipal bonds for professional sports. The data were compiled from thousands of pages of documents related to bonds, financial disclosures and other public records.
The total includes $7.1 billion for stadium construction, $6.5 billion in forgone property taxes and $4.3 billion for interest costs. Land acquisition and infrastructure expenses beyond those wrapped up in the stadiums account for the rest. The data don’t account for revenue that flows back to cities or states from the buildings, covering some costs. Long estimates the average state or city receives net payments after expenses of about $9 million over a 30-year lease for all stadiums and arenas -- or about $300,000 a year.
“There is never a good reason for taxpayer monies to subsidize for-profit entertainment businesses, especially extremely high-profit entertainment or sports businesses that are largely unaffordable to the vast majority of citizens,” said Leo Hindery Jr., managing partner of InterMedia Partners LP and founder of the YES Network, a regional sports cable television channel in New York controlled by the Yankees. “I don’t believe in state-sponsored finance of private enterprise at all.”

Al Davis

NFL clubs have invested $6 billion in stadiums since 1992, said Brian McCarthy, a spokesman for the NFL.
“We understand that every community carefully weighs its financing options,” McCarthy said. “It is up to these communities to make their own best decisions on which projects to finance and how.”
Oakland’s history with the Raiders goes back to 1960, when the team was set up in an expansion of the American Football League, now part of the NFL. Al Davis, originally head coach and general manager at the age of 33, became the team’s majority owner in the 1970s. The Raiders routinely sold out during that decade and won two Super Bowl championships.
After Davis couldn’t persuade the city and county to make revenue-enhancing improvements to the stadium, he moved the team in 1982 to the Los Angeles Coliseum. The team won another Super Bowl in 1984. That arrangement lasted until 1995, when Davis announced that the Raiders were going back to Oakland. The Los Angeles structure wasn’t generating enough income, he said.

Moving Costs

Oakland and Alameda County loaned $63.9 million to the Raiders as part of the move, to cover relocation and operating costs and a training facility. The money was part of $197.7 million that the Oakland-Alameda County Coliseum Authority borrowed, including some for changes sought by the Athletics and the city.
“The bonds cover far, far more than the improvements just for the Raiders,” said Trask, the team’s CEO.
Seventeen years later, that deal is sapping the finances of the city of 390,724, across the bay from San Francisco. The city and county have limited options to recover the loan because mandatory payments are limited to amounts received from parking, concessions and rent, according to stadium authority documents.
With interest, the amount owed by the Raiders on its loans now totals $124.8 million, according to a financial statement for the coliseum authority, as revenue from the stadium hasn’t generated enough to cover all costs. Taxpayers must continue repaying the original debt, which with refinancings now totals about $145 million, according to financial records.

Team’s Payments

The team pays $525,000 a year, along with 50 percent of the take from concessions and parking, for interest on the loan, Trask said. The outstanding principal is secured by the Raiders’ 20-acre headquarters and training facility near Oakland International Airport. The property would revert to public ownership if the team left town. The Raiders also will pay about $1.5 million in 2012 in rent and other revenue unrelated to the loan. Since 1995, the team has paid “hundreds of millions” from seat-license fees, premium seating and other building revenue, she said.
“Every year we pay a tremendous amount of money, some of which is deemed repayment, some of which is revenue they receive as a result of us playing in the facility,” Trask said. “When you add together everything the city and county received pursuant to our agreement and through the past 17 years, it’s literally hundreds of millions.”

New Stadium

When Davis died last year, ownership of the team went to his widow, Carol, and son, Mark, who became the general manager. Mark Davis told the NFL Network in October that the coliseum is beyond repair and the Raiders’ best option would involve staying in Oakland and building a new stadium at the present site. While the team has talked with the 49ers, it has no plans to share a venue, he said.
“I think there’s a very strong recognition that they need a new stadium,” NFL Commissioner Roger Goodell said in October. “They are complicated projects. They have not only financing challenges, but how you do it in the context of the overall development and priorities of the community.”
In 1998, the city entered a separate interest-rate swap, tied to the coliseum debt, with Goldman Sachs Group Inc. (GS) It generated an upfront payment of $15 million that was used to help fund stadium improvements, said Rebecca Kaplan, a member of the city council who was elected in 2008, long after the financial arrangement to bring the Raiders back. Swaps are contractual exchanges of interest payments designed to insulate a borrower against surges in yields that rise and fall with market rates.

Goldman Swap

In this case, Oakland left the swap in place in 2008 when it converted underlying variable-rate debt to fixed-rate, even though it no longer needed the arrangement to lock in borrowing costs. While the swap has generated $37 million of present-value savings, yields have fallen, forcing Oakland to pay $4 million a year to Goldman Sachs. The agreement doesn’t end until July 2021, even if the team moves away. Getting out of the deal would cost $16 million that the city doesn’t have.
“Oakland got sold a bill of goods,” Kaplan says. “The deal with the Raiders turned out to be a bad deal because it didn’t bring in sufficient revenue for the city.”
Craig Kocian, the city manager at the time who has since retired, didn’t respond to a telephone call seeking comment on the arrangement. Tiffany Galvin, spokeswoman for Goldman Sachs, declined to comment.

‘Judgment Error’

“The interest-rate swap seems to me to have been just another judgment error,” said Roger Noll, a professor emeritus of economics at Stanford University. The loan to the team was mainly a subsidy, he said by e-mail. “The authority seems to have done pretty well at making the coliseum subsidy to the Raiders very complex in order to minimize political resistance to the deal when it was made.”
Oakland and Alameda County over the past five years split $132.5 million of operating costs and debt service related to the stadium, according to financial reports. Stadium revenue doesn’t cover that amount, according to city disclosures.
Oakland, an industrial port city, has long been known for its gang violence and other crime. Last year it became the base for long-running protests by the Occupy movement, putting increased demands on police. Oakland was fifth among U.S. cities in crime last year, behind Flint, Michigan; Detroit; Camden, New Jersey; and St. Louis, according to the 2011 Crime Rankings based on FBI data, published by Congressional Quarterly.

200 Cops

By 2011, Oakland had already trimmed spending over three years by $170 million, cutting 150 city workers to cope with revenue curbed by lingering effects of the recession. The subsequent budget cuts reduced the police force to 630 officers from 837 in 2009, according Donelan, the union president. The cops also took pay cuts, he said.
This year, the number of murders in Oakland has risen 16 percent; rapes, 24 percent; and burglaries, 43 percent, according to a city crime report. The average response time to emergency calls in Oakland has slowed to 17 minutes this year, the San Francisco Chronicle reported in August.

Budget Limited

Public officials who do deals to subsidize pro football “don’t understand that government budgets are limited, so that if you say the government is going to do this activity with its funds, it necessarily has to not do something else,” said Dennis Coates, an economics professor at the University of Maryland in Baltimore.
When forgone property taxes, interest and other expenses are included, Oakland’s total subsidy comes to $343.3 million over 30 years.
As in other cities, the costs of Oakland’s stadium debt spread beyond the community, affecting taxpayers across the U.S. Holders of municipal bonds such as those sold for the coliseum aren’t taxed on the interest income they receive. That means the Treasury will forgo about $41 million in tax revenue through 2025 on Oakland stadium debt, data compiled by Bloomberg show.
Nationwide, $17 billion of debt issued to build stadiums since 1986 will cost the federal government about $146 million this year and $4 billion by the time all the issues mature in 2047, based on data compiled by Bloomberg for 2,700 securities.

Less Wealthy

In Jacksonville, where the Jaguars have deferred rent and negotiated lower payments, the city sold naming rights to the municipal stadium in 2010 to EverBank Financial Corp. (EVER) The team’s owner at the time, Wayne Weaver, demanded and got the city’s $4 million share of the transaction, according to city documents. Jaguars spokesman Dan Edwards declined to comment.
While the residents of cities such as Oakland may derive some benefit from having an NFL team, poorer taxpayers end up shouldering a disproportionate share of the subsidies, according to the University of Maryland’s Coates.
“Using lottery funds means taxing the poor to entertain people who can pay for $80 seats,” Coates says. “A sales tax is predominantly paid by less wealthy people. A hotel tax, or rental-car tax, all that does is make you less competitive in drawing out-of-town visitors.”
Meanwhile, the argument that taxpayer subsidies for NFL owners help create jobs doesn’t hold up, according to studies by Coates, Harvard’s Long and Stanford’s Noll. Rather, the presence of stadiums leads to a shift in spending away from other activities, their research shows. Residents are hurt as cities steer funds away from health, safety and other forms of entertainment, according to Coates.

Four Wins

In Oakland, fans have been disappointed by a decade of losing, even with the financial support from the city and the county. The Raiders haven’t been to the playoffs since the 2002 season and this year have won just four games while losing 10. Last week’s home finale against the Kansas City Chiefs narrowly avoided a local TV blackout because of low ticket sales.
The city is developing proposals aimed at keeping the Raiders, as well as the A’s and the Golden State Warriors of the National Basketball Association. Although the Warriors announced plans to move to a new arena in San Francisco, Oakland’s idea is to develop a coliseum district that would include new structures for each team as well as hotels, housing and restaurants, according to city records.
Oakland needs to limit the cost and liability for taxpayers while ensuring the development will increase sales tax and other revenue, said Kaplan, the city councilwoman. She has been active in the discussions as a member of the public works committee. The city already has the land for the sports venues and other facilities in the area of the coliseum, she says.
“We have a good playbook of what not to do,” said Kaplan. “Our goal the next time is to do it right.”

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