beacon report re: arena costs

Building an Entertainment and Sports Complex in Downtown Sacramento

An Economic Analysis

This publica on was prepared for:

The Sacramento Kings

The intent is to give greater transparency to the economic analysis of the Sacramento Railyard Arena proposal. Theresearch and produc on of the report was conducted exclusively by Beacon Economics.

Beacon Economics, LLC

Christopher Thornberg Jordan G. LevineFounding Partner Economist & Director of Economic Research5777 W. Century Blvd., Suite 895 5777 W. Century Blvd., Suite 895Los Angeles, California 90045 Los Angeles, California 90045310.571.3399 [email protected] [email protected]

For further informa on about Beacon Economics, please contact:

Victoria Pike BondDirector of Communica onsBeacon Economics, [email protected]

Or visit our website at www.BeaconEcon.com.

Reproduc on of this document or any por on therein is prohibited without the expressed wri en permission of Beacon Eco-

nomics, LLC. Copyright ©2012 by Beacon Economics, LLC.

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Executive Summary

Think Big Sacramento was established to spearhead the development of a world-class entertainment and sports fa-cility as part of the larger plan to develop the old railyard in downtown Sacramento. The centerpiece of the massiveurban development would be a brand-new arena that would host the home games of the Sacramento Kings and nu-merous other events over the course of the year. The City of Sacramento has teamed up with the entertainment giantAEG in order to plan and operate the facility. While plans have yet to be fully drawn up, the cost of the arena has beengiven the very specific price tag of $390.5 million. The Kings are being asked to fund slightly under 20% of the upfrontconstruc on and development costs, while the City of Sacramento and AEG would be responsible for the remainingbalance. In addi on to the upfront dollar amount, the Kings would face further costs through the loss of revenuestreams a er comple on of the facility in the form of cket surcharges and revenue sharing with AEG.

Beacon Economics was contracted by the Sacramento Kings to study the underlying assump ons of the financial planbacking the construc on of this Entertainment and Sports Complex (ESC). For the team, these assump ons are edup with the revenue projec ons for games played at the new facility. For the city, the cost of the project is beingfinanced primarily by the mone za on of city parking assets and the sale of city-owned land, as well as with generalfund revenues—revenues that are expected to be backfilled by funds received from the center itself. The public ex-pense is being jus fied by the expected increase in overall economic ac vity in the city resul ng from the new arenaand entertainment complex.

Beacon Economics has looked over the projec ons and has concluded that the team and the city are unlikely to seethese revenue increases. Specifically:

Team Revenues. Ticket revenues will come in roughly 10% to 30% below current es mates because the currentforecast fails to take into account the role that the housing bubble played in the spike in cket sales in 2005 and2006. Likewise, the forecast fails to factor in the loss of non-premium cket revenues resul ng from the addi onof luxury boxes. It is important to note that our es mate considers three different scenarios for the success of theteam in terms of its win-loss record.

Parking Revenues. Es mates of funds earned from the mone za on of parking revenue are on the very high endof the es mates provided to the city from their financial consultant. According to the city’s consultant, the mone-za on could net up to $60 million less. Such deals o en carry addi onal risk even a er a deal is signed. The City

of Chicago is currently dealing with the a ermath of the priva za on of its parking opera ons. There are ongoinglawsuits with the operators of the system, and the city is facing a poli cal backlash from a public that is upset overthe loss of control.

Land Sales. The city expects to raise $18.5 million from the sale of land assets, most of which will come fromland sales around the current arena. While the city maintains that these es mates are conserva ve, it is worthpoin ng out that this land is under the same restric ons that are currently preven ng the overhaul of the exist-ing facility—namely, the FEMA-imposed sanc ons due to the degrada on of the levees that protect the area fromflooding.

Revenue Backfill. Themone z on of the parking assets will leave a $9million gap in the general fund budget for thecity. The shor all will be significant, because the city is already facing a budget gap of $15 million, despite havingendured large declines in spending in recent years. The plan calls for these revenues to be backfilled through a sur-

Building an ESC in Downtown Sacramento 1

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charge on cket sales and other facility opera ons. Unfortunately, these es mates are based on the same overlyop mis c figures. In other words, it’s highly unlikely that these revenues will in fact be raised in en rety, leadingto further problems for the city’s budget. Moreover, there is no allowance made for the fact that any addi onalspending for the new entertainment complex a er construc on begins, or any failure to realize proposed revenuesources, will reduce spending elsewhere in the city, curbing overall services to Sacramento residents.

Construc on Risks. The city has minimized the risks that are involved with large-scale projects such as these. Thereis a growing movement to prevent the use of public funds for a new arena. The railyard itself is poten ally con-taminated with hazardous waste. Plans for the stadium have yet to be drawn up. And now that the redevelopmentagency that was in charge of the project has been phased out by the change in state policy, how will the addi onalfunds needed to develop the necessary infrastructure be found if proposed revenue sources are not realized? Allof these issues imply that the arena and surrounding development will take longer to develop and cost more thanis currently budgeted, and the hole in the general fund from the mone za on of city parking assets will be un-backfilled for that much longer.

A review of these assump ons suggests that the arena proposal does not pencil out for either the team or the city.Even under the current plan, both en es are being pushed right to the edge from a financial standpoint, with li leroom for error. When the expected revenues fail to materialize, both will end up severely financially distressed. Giventhe current budget difficul es faced by the city, such poten al outcomes cannot be ignored—as the lessons of Stock-ton, California, and Harrisburg, Pennsylvania, demonstrate. As such, we would not recommend that they enter intothis deal as it stands in its current form.

The intent of this report is to present Beacon Economics’ analysis of the Sacramento railyard arena project. As such, itis important for us to clear up a few mispercep ons about our analysis that have arisen since our recommenda onswere made public.

First, we are not asser ng that the arena should not be built. Being based in Los Angeles, we see firsthand the value ofa world-class entertainment des na on in helping to revitalize a downtown area. But it does not follow that develop-ment plans can sidestep the need tomeet basic criteria regarding financial viability. The City of Los Angeles contributedonly $75 million to the Staples Center and for that commitment received some por on of the parking revenues thatwould be generated. From our perspec ve, the deal between the Kings and the City of Sacramento could be saved,but the plans need to be scaled back in order to fit within a more realis c set of expecta ons regarding revenues.Alterna vely, the current plan might be able to proceed if addi onal revenues can be found to help underwrite thecosts. One such source could be addi onal private investment from developers of the surrounding railyard land whostand to benefit if the proposed ESC would indeed reap increased economic benefits from the development. Howeverthis begs the ques on, if the new ESC were readily perceived as a profitable venture, why haven’t other developerscome forward with an investment of their own?

Second, this study does not in any way address the long-run viability of the Kings within the greater Sacramento re-gion. The fact that the region is part of the 20th largest media market and in the top 30 metropolitan areas in terms ofpopula on would suggest that the viability of a professional sports franchise within the area should not be an issue.

When Beacon Economics was created in 2006, integrity was and con nues to be the fundamental value of the orga-niza on. We do not sell our opinion. All clients are told up front that our research is data driven and might not showthe results that clients wish to hear. We endeavor to provide honest answers, given the evidence available. We are


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always willing to hear opposing viewpoints and accept addi onal informa on, including evidence regarding revenueassump ons for the arena project. If new informa on rises to the level necessary for us to change our assessment,this report will be revised accordingly.

In summary, we do not deny that a new arena and entertainment center is a great idea for the Kings and the Cityof Sacramento. But governments, like households, must learn to make plans on the basis of financial reali es. Theassump ons being used to jus fy this plan don’t pan out. So either the project needs to be shrunk to levels the cityand team can afford or other sources of revenue need to be located and used.

Introduction

The Kings have played in their current arena, Power Balance Pavilion (PBP), since 1988, making it one of the oldest inthe Na onal Basketball Associa on (NBA). The structure has much in the way of deferred maintenance and has fewof the ameni es considered to be almost mandatory in a newer facility—club seats, for example. It has been knownfor some me that the facility will either need a major retrofit or the team will need to move to a new loca on.¹

ESC Development/Construc on Costs

Start-Up Expenses $2,500,000Sales and Marke ng $850,000ESC Land Acquisi on $18,917,543ESC Site Development $3,150,000Design and Professional Services $17,825,959Legal and Governmental Services $1,100,000Project Administra on $14,094,973Construc on $257,836,846Systems and Equipment $30,200,000Permits, Tes ng, Fees, Taxes, and Special Assessments $16,135,980Insurance, Financing, and Transac on Costs $9,500,000Owner Con ngency $18,409,688

Uses of Funds - Total $390,520,988

Source: City of Sacramento City Council Report 2012-00231

City leaders have clearly been infavor of the la er op on. WhileSacramento has been growing ata rapid pace, most of this growthhas been on the periphery ofthe metropolitan region. There hasbeen the desire to revitalize thedowntown region of the city, start-ing with the development of a newEntertainment and Sports Complex(ESC), with a new arena as its cen-terpiece—a venue for the Kings aswell as for numerous other events.

The City of Sacramento, the Sacra-mento Kings as represented by theNBA, and the Anschutz Entertain-ment Group (AEG) have been intalks for the development of justsuch a structure to be located in the old railyard adjacent to downtown. The current proposal for the development ofthis new ESC involves a financing plan that would cost a total of $390.5 million dollars. The specific costs are brokendown in the tables below:

¹Renova ng PBP may be possible, but it is acknowledged to be difficult because of current building restric ons in the Natomas area ofSacramento where it is located. The Federal Emergency Management Agency (FEMA) has decer fied the Natomas basin levees, which haltedall new construc on in the area on lands that are below the current flood plain. It isn’t yet clear how this issue might be dealt with by the localgovernment and the team if the decision to proceed down this path is made.


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The City of Sacramento will be the primary source of funds for the upfront construc on and development costs of thecenter, contribu ng $255.5 million. Of this amount, $230 million is expected to be raised through the mone za onof the city’s parking assets. Importantly, this sale will leave a $9 million gap in the general fund, since that is approxi-mately the net annual contribu on parking provides to the city according to the es mates from city staff. These fundsare expected to be backfilled through a variety of sources. The majority of the remaining balance for the city is tocome from the sale of land assets. The rest of the funds to cover the upfront construc on and development costs willcome from the team itself as well as from the ESC operator—AEG.

Funding Sources

City Contribu on $255,525,000Capital Campaign/Other $3,000,000Sacramento Kings $73,250,000ESC Operator $58,750,000

Sources of Funds - Total $390,525,000

Source: Sacramento City Council Report 2012-00231

The amount of money the City of Sacramento wouldcontribute to the project is not insignificant. Theoverall budget for the city is about $1 billion. The an-nual general fund budget—funds not ed to specificpurposes—is slightly over $300 million. As such, thisstadium is going to cost the city close to one full yearof discre onary spending. This, of course, does notinclude other secondary costs—such as reconstruct-ing the infrastructure around the railyard, addressingunforeseen development costs (e.g., the poten al tobe on the hook for environmental cleanup or the need to take care of historical ar facts), and other expenses thato en arise with such development efforts.

In comparison to some other recently built arenas for NBA franchises in Houston, Oklahoma City, and Orlando, theproposed costs for building a new ESC in downtown Sacramento trumps their respec ve price tags, both in terms ofthe overall cost as well as in terms of the per capita public spending. It isn’t clear why this project is so expensive.

With respect to the arena project, there is no free lunch. Whether the city is finding new sources of revenue to fi-nance the project or diver ng exis ng resources to it, these are public dollars being used to support the construc on.As such, no ma er how clever the financing plans are, there are only four ways that such expenditures can be offset.

Profits from opera ng the facility

Higher taxes or fees on residents and businesses

Reduced spending on other budget items

Expanding the overall tax base by increasing local economic ac vity

It is no secret that Sacramento, like many ci es across the state and na on, is facing budgetary problems. Generalfund revenues have shrunk by $75 million over the past four years—nearly a 20% decline. Libraries, safety, parks,and infrastructure investments have all been sharply cut back. The current budget acknowledges an es mated deficitof over $25 million for the next two years. The regional economy has not bounced back—the area s ll has a highunemployment rate and a depressed housing market. And, of course, Sacramento is dealing with many of the samelong-run stressors that ci es across the United States are grappling with—mainly, the growing costs of pensions andother benefits for employees.


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NBA City City County Date Cost Public Public Funding Per Capita Per CapitaPopula on Popula on Built ($ Mil) Funded (%) Source City County

Sacramento 470,000 2015 390 65 City $539Charlo e 610,949 2005 265 100 City $434Atlanta 470,688 1999 214 91 - $413Memphis 672,277 927,644 2004 250 83 City/County $154 $112Miami 386,417 2,496,435 1999 194 59 County $23New Orleans 454,863 1999 110 100 - $242Oklahoma City 531,324 2002 89 100 City $168San Antonio 1,256,509 1,714,773 2002 186 84 County $62Houston 2,016,582 4,092,459 2003 235 100 City/County $58 $29Dallas 1,213,825 2001 420 30 City $104Indianapolis 784,118 1999 183 43 - $100Los Angeles 3,844,829 1999 375 19 City $19

Source: U.S. Census and the Na onal Sports Law Ins tute of Marque e University Law School

The City of Sacramento is expected to raise funds largely by mone zing the parking system—something that manyci es have done in recent years with varying degrees of success. The city currently receives roughly $9 million in an-nual revenue from the parking system. The loss of funds to the general fund from selling off parking revenues areexpected to be backfilled through profits on the opera on of the new ESC through special cket surcharges for bothKings games as well as for other events. In other words, on the surface, it sounds as if the facility won’t cost the citydirectly.

Of course this isn’t right. The value of the parking system to investors, or the city if they choose to leverage futurerevenues through debt financing, is not the current annual profits, since those could not jus fy the assumed price ofthe system. Rather, it is because these private investors, or the city, are expected to invest in the system in a varietyof ways that can increase the profitability of these assets. These addi onal revenues are truly a public subsidy for theproposed ESC, as these funds could instead be used to backfill the current shortages in the general fund and helprestore funding to cri cal public services rather than go toward the construc on of a public arena.

The argument here must be, then, that either city residents prefer the city-owned arena to the provision of otherservices, or that the arena will provide enough of a boost to the local economy so as to make up for this impliedsubsidy. Because this benefit will not be collected for a number of years, one has to wonder whether this is the rightme to make such a long-term investment—even if the arena ul mately provides a posi ve net present value to the

city—given the inability for a municipal en ty to borrow to cover short-run deficits. It isn’t just the city that is takingon risk. The teamwill be leaving its current facility, which it owns outright, to operate within the new structure. Whilethe team recognizes the need for a be er home, it is also expected to make a substan al up-front investment in thefacility—a cost that is expected to be offset over me by a substan al increase in cket revenues. While the team willbe able to play in the arena ”rent free,” it is worth no ng that they will con nue to be responsible for covering mostof the costs of opera ng the arena during the games, such as paying for security, for example.

As already noted, this report is not intended to put forward the view that the city should not build an arena. This isul mately a choice for the city residents and the owners of the Kings to make. Our role is to focus on the underlying


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assump ons being used and to assess the viability of the project as a financial investment by the public and the team.This report outlines the poten al risk of building this new ESC from five different perspec ves.

Ticket revenues for the team and city

Mone za on of parking opera ons and long-term parking opera ons

Other poten al unfunded liabili es during the construc on phase

Poli cal uncertain es regarding public funding

Long-run economic effects of the facility on the city’s economy

With respect to the first two items, our worries are that the city and team will not experience the currently es matedrevenues from the sale of the parking opera ons or from the cket revenues from the new facility. For the city, eithercase would imply that it would have to find addi onal funding to finance the arena—either through higher taxes orby shrinking expenditures elsewhere. For the team, a smaller revenue base would, at a minimum, hurt the ability ofthe owners to rebuild the team so that it might yet again make its way into the playoffs. At worst, it would threatenthe financial viability of the team.

There is also the issue of the railyard itself. It is not clear to us from the public records at our disposal how much ofthe proposed budget is for the arena structure and how much is for the infrastructure around the arena necessary tomake it ready for the expected traffic related to game and non-game events. We also do not see how the city will havethe resources to handle poten al risks prior to construc on, such as problems with the land itself, unexpected costsor delays from environmental reviews, or even the poten al for a referendum on the public moneys making it ontothe ballot and being voted down. All of these could seriously delay the project, pu ng the revenue flows farther intothe future or ending the en re project a er a substan al investment had already been made.

As it currently stands, this proposed deal for building a new ESC in downtown Sacramento is a big risk for the City ofSacramento and for the Kings. These risks are being glossed over by the long-run promises of economic growth, but inour assessment the es mates of the overall posi ve impact on the economy are overblown. While the economic im-pact report commissioned by the city paints a nice picture of the economic ac vity that will be generated, the reporthas fundamental flaws that bias the results upward.

Could the es mates come in as planned? There are always uncertain es, both posi ve and nega ve, with respect toprojec ons. But a basic analysis shows the projec ons to be based on, charitably, best-case scenarios or, not so char-itably, a wing and a prayer. Rather than hoping for the best but planning for the worst, this arena proposal plans onthe best while ignoring the worst. Our advice to the team and the city is simple—the deal as it is currently structuredwill almost certainly create future financial problems for both en es. As such, either addi onal sources of revenueneed to be brought in to address these risks or the scale of the project should be reduced, such that the revenues thatcan realis cally be expected to emerge will be able to support the expense.

Ticket Revenues and the General Fund Backfill

The es mates of the revenues to be earned by the team and the City of Sacramento at the new facility are our firstconcern. The es mates for gate receipts at the Kings games alone are being predicted to almost triple rela ve to the


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current season, which is, we believe, a far too aggressive figure. Most of the gate receipts go to the Kings as one ofthe larger sources of revenue that supports the team.

But it isn’t just the team that is exposed to risk if cket sales should not live up to the forecast. The City of Sacramentois expec ng a substan al por on of the parking revenue backfill in the general fund to occur from a endance at thearena. There are special cket surcharges for both Kings games and non-basketball events, as can be seen from thefollowing breakdown of the expected backfill. Of the $9 million of expected backfill, over $7 million comes directlyfrom opera ons at the arena. The city is highly exposed to whether the arena proves to be a profitable business in-vestment. In general, an asser on like this always makes economists worry—a er all, if the new arena is going tobe such a wonderful profit-making ac vity, why isn’t it able to be fully or largely funded by private capital instead ofpublic funding?

Backfill Solu ons Amount

City Parking Revenues from Non-King Events $965,000Ticket Surcharges on King Events $2,640,000Ticket Surcharges on Non-King Events $1,100,000ESC Generated Possessory Interest Tax - City $850,000Property Taxes Paid by the New Premium Parking Facility - City $50,000ESC Taxes (Sales/U lity User) - City $300,000City Profit from ESC Opera ons $1,000,000Digital Signage $200,000

Subtotal $7,105,000

Parking System $1,895,000

Total $9,000,000


It is necessary to note thatthe remaining balance of thebackfill—almost $2million an-nually—is expected to comefrom parking revenues. Thisby itself raises ques ons—fromour reading of the documentsall the parking revenues thecity current collects seem tobe included in the plan tomone ze city parking assets.Whether these funds are com-ing from the assets involvedin this transac on or fromother sources is s ll unclearto us. The amount involved issmall rela ve to the city bud-get, but it does represent how all these es mates are made off of best-case scenarios and in some cases even then afudge factor is put in.

We don’t have the ability to fully vet the forecasts for non-game events and expected revenues for the city, sincefinding data on the financial success of comparable facili es is difficult at best. Later in this report, we examine somecase studies that illustrate how such public investments hardly ever live up to their ini al hype. We do, however, havethe ability to directly consider the forecast for revenues at Kings games. As we shall demonstrate, these are highlyoverblown and, in our opinion, cast doubt on all of the proposed funding sources dependant on increased cket rev-enues.

Before we dig into the financial analysis, it is important to note that our es mates here focus on cket revenues, notgame a endance. Those who have taken Beacon to task over our assessment of the arena plans have consistentlydefended their numbers as moderate—only a modest increase in the number of people at the stadium. But a en-dance per se does not pay for teams and stadiums— cket sales do, and revenues are the focus of our examina on.The connec on between cket revenues and a endance is further complicated by the fact that the Sacramento Kings


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regularly make charitable contribu ons throughout Sacramento in the form of donated ckets.² For this reason, wefocus our analysis on cket revenues themselves, which are at the heart of thema er, as opposed to total a endance,which is not the same as total paid a endance.

At a cursory glance, the projec ons for cket revenues don’t seem too implausible. Ticket revenues for the Sacra-mento Kings peaked during the 2005–06 season, and the projec ons for the opening season at the new arena wouldput total revenues at roughly 22% more than this benchmark³, including the team’s take, the city’s surcharge, andAEG’s por on of the premium seats. Given the fact that the new facility will have premium club sea ng, unlike PBP,this may not seem too op mis c.

Of course, rela ve to revenue figures for the current year, the projec ons do look out of sync. Even a er adjus ngfor the shortened season, the projec ons are over 2.5 mes the current totals. The standard reasoning is that thecurrent figures reflect the poor performance of the team. In other words, if the owners build a be er team, they willbe rewarded with higher revenue es mates. Unfortunately, the win-loss record in a given year does not correlate wellwith actual cket revenues in the same year. The team saw its peak years at the start of last decade—several yearsbefore there was a peak in revenues. And during the peak years of revenues, the team’s win-loss record was below.500. An increase in revenues in any given year just can’t be en rely a ributed to the team’s performance in that sameyear.

Again, defenders of the arena plan claim that the a endance projec ons are based on modest increases in actuala endance at the games. This may well be the case—but modest projec ons in actual cket buyers turning into verylarge increases in revenues requires individual a endees to be paying much more for each seat. According to city offi-cials, the ESC is expected to bring a li le over 15,000 fans per Kings game, which, according to their figures, is less thanthe average a endance during the past 20 years of sellouts (17,300), and more than this year’s average a endanceof 14,508 for the 2011-2012 season. However this average a endance is not the same as average paid a endance,which is much lower due to charitable dona ons as previously men oned.⁴

The problemwith this is that the city is projec ng both lower cket sales and higher cket revenues thanwere realizedat their respec ve peaks. Ticket sales and cket revenues are two different measures, so it remains unclear how thecity can jus fy such high revenue projec ons if sales do not see a similarly sized increase.

In fact, the peak in cket revenues coincided not with the team’s winning percentage but rather with the run-up to thehousing bubble and the overheated economy. The high degree of correla on between the team’s cket revenues andeconomic indicators (such as total nonfarm employment in the Sacramento metropolitan sta s cal area and medianhome prices), points to the historical fact that people had a lot more money to spend in the me period of high cketrevenues. A er the housing bubble burst and the Great Recession came into full swing, the cket revenues declinedjust as employment and other economic indicators declined. The Sacramento MSA was hit harder during the GreatRecession than other metropolitan areas in California. Economic recovery will help rebuild the revenue stream, but,short of another housing bubble, we cannot foresee such spectacular increases in cket sales, even with premiumseats added in.

²Sacramento Kings³Sacramento Kings⁴Sacramento Kings


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100

200

300

400

Hom

e Pr

ices

($ 0

00s)

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016Year

Ticket Revenue Current Revenue Projections Home Prices

Source: DataQuick and Sacramento Kings

Kings Ticket Revenues and Sacramento Home PricesTo demonstrate how these numbers are too high,Beacon Economics developed a forecast model forrevenues that might be received at the new arena.The model is based on the history of economic ac-vity in the area with respect to employment, home

prices, and taxable sales. Themodel also took into ac-count the win-loss record of the team. There is a cor-rela on between the percentage of games the Kingswon in the previous few years (but not the currentyear) and cket revenues in the current year. Coinci-dentally, the decline in the Kings’ win-loss record pre-ceded the overall economic decline. This illustratesthe “perfect storm” that led to record-high cket rev-enues: not only was the economy overheated, withconsumer spending reaching record-high levels, but the Kings were winning games at a record-high percentage just afew years prior.

Our forecast model for cket revenue only works for non-premium seats however, since PBP currently has no pre-mium luxury box sea ng. To account for the premium seats, wemade two adjustments. First, as opposed to assuminga 100% sale of club sea ng, we instead use the league average of 85%. Second, we also have to account for the canni-baliza on of non-premium seat revenues for such club seats—a er all, the folks who are most likely to move to thesenew seats are those who now likely occupy some of the highest-priced floor seats in the exis ng arena. Thus, we needto consider the degree to which the sales of new seats will subtract from sales of normal seats to accurately arrive atan es mate of total cket revenue.

.2.4

.6.8

Perc

ent o

f Gam

es W

on

1998 2000 2002 2004 2006 2008 2010Year

Ticket Revenue Win/Loss Record

Source: Sacramento Kings

Sacramento Kings Ticket Revenuesand Win Loss Record

How much of a rebound might the Kings expect interms of cket sales? Much in the same way theSacramento MSA was hit harder during the GreatRecession than other metropolitan areas in Califor-nia, the Kings cket revenues saw a greater per-centage decline from peak to trough than the rev-enues of other small market teams. From the peak inthe 2005–06 season to the 2010–11 season, averagenon-premium gate receipts fell 57%, the largest de-cline seen among small market teams over the sameme period. The only other small market teams withcket revenue declines close to this were the Indiana

Pacers (53%) and the Memphis Grizzlies (40%). A erthese teams, the largest percentage decline was 17%by the New Orleans Hornets.

Compared to the metropolitan areas of the other small market teams, Sacramento also saw the largest drop in totalnonfarm employment from the 2005–06 season to the 2010–11 season. Addi onally, Sacramento is experiencing a


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slower economic recovery than the other metro areas. From the 2009–10 season to the 2010–11 season, Sacramentoemployment con nued to decline by 1.1%⁵, the largest percentage decline for the small market teams, while most ofthe metropolitan areas of the other teams realized employment gains. ⁶

Yet expec ng the demand for ckets to rebound solely with an employment recovery is incorrect. According to ourresearch, home prices in the area were an important driver of cket revenues. California, in general, and Sacramento,in par cular, saw some of the greatest increases and subsequent crashes in home prices in the na on. From 2002 to2006, the median price in Sacramento rose from below $200,000 to almost $400,000. A er the crash, from the thirdquarter of 2007 to the second quarter of 2009, Sacramento median prices for exis ng homes declined 47%.⁷ To putthis in perspec ve, the metropolitan sta s cal areas of the other small market teams saw declines of 20% or less.⁸The wealth effect here cannot be underes mated. With the average homeowner being given $200,000 in equity ina four-year period, there is li le guesswork involved in determining what drove cket sales to Kings games. Notably,taxable sales were driven to very high levels at the same me.

Percent Change in Ticket Revenuesand MSA Total Nonfarm Employment

Ticket EmploymentRevenues

Small Market 05-06 to 05-06 to 05-06 toTeams 10-11 10-11 10-11

Orlando Magic 129% -3.60% 1.10%Portland Trailblazers 139% -2.20% 1.40%Oklahoma City Thunder 92% 1.30% 1.80%Utah Jazz 56% 2.10% 1.40%Cleveland Cavaliers 27% -7.60% 0.50%San Antonio Spurs 0% 6.50% 1.30%Denver Nuggets -1% -0.10% 1.10%Milwaukee Bucks -15% -4.00% 0.90%Charlo e Bobcats -16% 1.30% 2.00%New Orleans Hornets -17% 7.90% 0.70%Memphis Grizzlies -40% -6.80% -0.50%Indiana Pacers -53% -2.00% 1.10%Sacramento Kings -57% -9.60% -1.10%

Looking forward, how realis c is it that theKings will see record-high cket revenues againin the next five years? As previously noted, toanswer this we have carried out our own fore-cast of total cket revenues using a mul vari-ate regression model incorpora ng macroe-conomic data from the Sacramento MSA aswell as our forecast of future economic ac v-ity in California. Given the high correla on be-tween economic performance and past cketrevenues, this approach yields a forecast basedon economic fundamentals in the Sacramentoregion and state overall.

One major caveat in any forecast of cket rev-enues, however, is the Kings’ win-loss record.While we found that revenues are stronglycorrelated with economic performance in theSacramento MSA, we also found that the win-loss record in the years prior to a given sea-son was likewise heavily correlated with cketrevenues. In other words, implicitly built intoprojec ons based on previous history is the as-sump on that the Kings will win more games before the economy improves. To account for this, we have run threedifferent forecast scenarios that vary depending on the future win-loss record for the Kings.

⁵California Employment Development Department⁶U.S. Bureau of Labor Sta s cs⁷IHS Global Insight⁸IHS Global Insight


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The first scenario assumes a win percentage of 32% for the next five years, which is slightly be er than the 2010–11season and represents the average performance over the last several years. The second scenario has the win percent-age increasing un l it reaches 50% in the 2015–16 season, and the third scenario has the win percentage increasingun l it reaches 70% in the 2015–2016 season.

Lastly, there is the reduc on in non-premium sea ng purchases because some fans will move to the premium seatsavailable at the new facility. We use two es mates here—the best-case scenario is that 20% of expected premiumseat revenues are subtracted from the non-premium seats. In the second scenario, we expect a 50% cannibaliza onrate.

The results are quite stark. In the best-case scenario—with limited cannibaliza on, a solid economic recovery, and awin-loss record of 70% (one of the best ever recorded for the Kings)—our forecast shows that revenues for the Kingswould s ll come in roughly 10% lower than the current projected totals. If we look at a scenario in which the teamdoes not succeed in bouncing back and experiences a higher rate of cannibaliza on, the revenues come in almost 30%lower than the projected totals.

Ticket Revenue Forecast Results

W-L 32% W-L 50% W-L 70%

20% cannibaliza on -23.8% -15.7% -9.2%50% cannibaliza on -28.1% -20.1% -13.5%

Source: Beacon Economics

This has direct implica ons for the City of Sacramentoas well. As noted, a por on of the backfill in thegeneral fund comes directly from a 5% surcharge oncket sales. Only in our best-case scenario does the

city receive close to this amount. Under all the otherscenarios the city receives less.

As noted, we have li le ability to consider the otheres mates for the number of shows and the poten alrevenue that may be generated for the city. But if these numbers are as op mis c as the revenue projec ons for theKings, then clearly there is a problem for the city, as the backfill they are imagining will never be fully met.

Funding Assumptions: Risks to Residents and the General Fund

Under the proposed plan, the $390.5million in required funding for the newESCwill come from three primary sources.The City of Sacramento will be responsible for $255.5 million of this sum. The city has proposed a series of city-ownedland sales and a parking mone za on plan to raise the vast majority of this figure.

In their proposed deal, the city has stated that it could raise an es mated $18.5 million from revenue generated bythe sale of city-owned land. The land, which includes four separate parcels, has been valued at a total of $30.7 million.However, because it may take several years for the land sales to generate revenue, owing to several issues, includingthe changing market condi ons and environmental constraints, the city has es mated that the revenue generatedfrom land sales will total $18.5 million. Nearly two-thirds of the city-owned land that is part of this revenue package isin the Natomas region of Sacramento, which is currently subject to a building moratorium imposed by FEMA that willremain in effect un l the levees surrounding the area are recer fied. The metable behind this process is unknown,and though the $18.5 million figure is a conserva ve es mate, it s ll may be too high with this restric on in place.


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Perhaps even more concerning is the uncertainty inherent in the parking mone za on plan regarding the amount ofrevenue Sacramento can expect from its implementa on. Using a market, financial, and condi on assessment of thecity’s parking assets conducted by Walker Parking Consultants, Bank of America Merrill Lynch (BOAML) carried out apreliminary valua on of the mone za on plan for the City of Sacramento. In their report BOAML used two valua onmethods: a discounted cash flow analysis (DCF), their primary valua on method, and a selected precedent transac-on analysis (SPTA). Both valua on methods show a wide range between the best- and worst-case scenarios the city

could face, from $170 million to $215 million using the DCF method, and from $175 million to $245 million using theSPTA method. Whether the city decides to pursue a priva za on of the parking system or create a public en ty andleverage the future value of the parking assets through debt financing, this range in values will s ll reflect what thecity can expect to receive from either plan.

The City of Sacramento has indicated that $230 million of the $255.5 million funding for the new ESC, or 90% of thefunding sources, will come from their parking mone za on plan. It is worth men oning that BOAML’s primary val-ua on method, DCF, fell $15 million short of the $230 million the city has claimed will be available for use towardthe new ESC. And this was in BOAML’s best-case scenario for that valua on method. In the worst-case scenario, thecity would fall $60 million short of revenues needed to finance the new ESC, which is 400% of current es mated citybudget deficits. It is currently unclear why the city determined that BOAML’s secondary valua on method, SPTA, wasmore appropriate to base their expecta ons on, or why they planned on receiving the $230 million that was on thehigh end of the range for the SPTA method. What is clear, however, is that the taxpayers of Sacramento face consid-erable risk of being le with a substan al financial obliga on should the new ESC proposal move forward and the fullbalance of funds promised from the parking mone za on plan fail to materialize.

Lastly, there is the issue of the mone za on itself. In recent years, numerous ci es have tried such schemes, withvarying degrees of success and failure. One such example is the City of Chicago, which in 2008 priva zed four city-owned parking garages in the downtown area. This deal was met with widespread cri cism from the beginning fromChicago ci zens, and the dissa sfac on has only grown stronger as there have been sharp increases in parking ratessince the deal was enacted. Currently, the City of Chicago is facing two separate claims totaling $27.5 million by thegroup of investors who run Chicago’s parking meters—Chicago Parking Meters LLC. The first of these claims, for $13.5million, is over parking revenues that the private investors have lost due to free parking that is provided for disableddrivers. The second claim, for $14 million, stems from the parking revenue that is lost when meters are taken out ofservice for fes vals and street repairs. ⁹

Construction Issues

Beyond the problems with the revenue projec ons discussed in the previous sec ons, there are other hurdles asso-ciated with the ESC project that need to be addressed. These concerns range from environmental and land issues,historical and cultural issues, to general public support. This sec on will focus on the risks that could arise from thesepoten al problems.

According to the term sheet proposed by the city, building a new ESC in downtown Sacramento is subject to a Cal-ifornia Environmental Quality Act (CEQA) review. The CEQA requires state and local public agencies to iden fy the

⁹DanMihalopoulos and Chris Fusco, “Chicago Parking Meter CompanyWants MoreMoney; Mayor Balks,” Chicago Sun-Times, May 4, 2012.


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significant environmental impacts of projects they will undertake, as well as any alterna ves and mi ga on measuresthatwill reduce or eliminate those impacts. Furthermore, this projectmay also be subject to review under theNa onalEnvironmental Policy Act. The metable the city has given for pre-development (the phase for these reviews), is 12 to14 months—which may or may not be enough me for these reviews to be completed. Also, the City of Sacramentoacknowledges in their proposed plan that though the soil at the site has been remediated to a commercial/industriallevel, ground water and vapor intrusion issues have not been addressed. Since these requirements do not put a melimit on the length of their respec ve review processes, these reviews could take longer than indicated in the city’sproposed schedule—possibly delaying the scheduled opening of the ESC for the 2015–2016 NBA season.

In the proposed term sheet, the city states that it will apply for environmental streamlining for the ESC project. How-ever, it is unlikely that any sort of excep on will be granted for this project. Unlike the Farmers Field example in LosAngeles, where Governor Brown signed off on legisla on allowing any legal challenges to the stadium’s environmen-tal review to be expedited, the construc on of the Sacramento ESC does not come with any guarantees of having anet-zero carbon footprint and also relies heavily on public funding. Just as there are poten al environmental issuesassociated with the land designated for the proposed ESC, there are also historical and possibly cultural aspects tobe considered. The loca on of the ESC would be at the historic railyard, which was once part of the Transcon nentalRailroad. The railyard is currently undergoing a redevelopment project in hopes of revitalizing the historic site and thedowntown Sacramento area, including the construc on of a new intermodal transit center.

According to the City of Sacramento’s original financing plan for the Sacramento railyard redevelopment project, thecity was going to raise $222 million of the $745 million needed to fund the project through parking revenue, MeasureA funds, other fees, and redevelopment funds.¹⁰ Specifically, the redevelopment funds would be raised through taxincrement financing, a method in which property taxes within redevelopment project areas can be used to finance re-development projects; the railyard falls in such an area. However, now that community redevelopment agencies havebeen eliminated in California, this moneywill no longer be available for future redevelopment projects throughout thestate. Although this ruling does not necessarily mean that the project is dead, as it does not affect current work beingdone at the site, redevelopment fundswere considered a source of funding for future aspects of the project—includinghousing.¹¹ The status of the funding of this redevelopment project remains unclear at the moment, but it is believedthat aspects of the railyard project will be altered or even cut completely. According to Sacramento City Manager andformer execu ve director of the California Redevelopment Associa on John Shirey, the loss of redevelopment dollarsmeans that the railyard project will face a slower development process, and some aspects of the project will not cometo frui on.¹² How this funding issue will affect the building of the ESC, or any of the necessary infrastructure upgradesthat go along with its construc on, is unknown and will remain an important ques on as the details of the ESC arefinalized.

The city does address the fact that the proposed loca on of the ESC does face certain constraints in their proposedterm sheet, but the extent to which those constraints could hamper development remains unknown. A major part ofthe railyard redevelopment project is the building of an intermodal transit facility. How exactly the facility will coexistwith the construc on of the ESC remains to be seen. One aspect that is known, however, is the fact that more land willbe needed for the railyard to support the proposed ESC and an intermodal transporta on hub. According to a panel

¹⁰City of Sacramento, Economic Development Department, Railyard Business Terms, Financing Plan, Economic and Fiscal Impact, December4, 2007.

¹¹KCRA.com, “Calif. Supreme Court: Redevelopment Agencies Can Be Cut,” KCRA, December 30, 2011.¹²ibid


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of experts from the Urban Land Ins tute’s Rose Center for Public Leadership in Land Use, these two structures couldfit in the southern part of the railyard, but in order to accommodate the future use of the transporta on hub, moreland to the east of the construc on area would need to be acquired. ¹³

The proposed site of the ESC may also have cultural significance a ached to it. Based on an analysis done by ICFInterna onal, the city has recognized the poten al for discovering historic archeological sites (e.g., Na ve Americansites) in the area where the ESC is to be built. However, they also state that the likelihood of discovering anything of“significance” is rela vely small, and if anything were to be discovered, disrup on to construc on would be minimaldue to the small significance of any possible findings. When previous historic discoveries at the site have been made,they were reviewed and caused current renova on construc on to be delayed for a period of three to four days. Tothis point, all discoveries have been declared “non-significant” and have not caused any serious delays to construc-on. The chance of a significant discovery is unlikely according to ICF Interna onal, but, if it were to occur, a discovery

could cause construc on of the ESC to be markedly slowed.

There are other issues pertaining to the infrastructure development needs of the railyard area that have yet to bespecifically addressed. The city has acknowledged in their proposed deal that though there are a substan al numberof parking spaces within a half-mile of the proposed ESC, further study regarding the usage and loca on of availableparking spaces for ESC events needs to be conducted. Moreover, the city must address the provision of premiumparking needs. The city does an cipate developing a new 1,000-space premium parking facility to serve premium seatholders and has received a le er of intent from Taylor/CIM Redevelopment Company, LLC who hope to develop thefacility. This proposal includes using $5 million in MOPA funds in predevelopment costs of the parking facility.¹⁴

Total predevelopment costs were es mated to total approximately $13 million for the cost of planning, design, en-vironmental review, and infrastructure—with 50% coming from the City of Sacramento, and with the Kings and AEGeach contribu ng 25% of the costs. A breakdown of the costs can be seen in the table below.

Predevelopment Costs Associated With Proposed ESC

Sources Amount Uses

Sacramento Kings $3,250,000AEG $3,250,000 Legal expenses, site and buildingCity of Sacramento design, engineering, project- MOPA Fund $5,000,000 administra on, environmental review- Parking Fund $1,500,000 and other necessary expenses.Total $13,000,000


Other infrastructure projects that will be funded par ally by the ESC project budget include the building of new trafficsignals, the extension of exis ng roads in the downtown area, and the reloca on of exis ng sewer and water mainsserving the downtown area. These addi onal infrastructure projects for the ESC would be built in the future as therailyard project progresses further. The funding for these projects is to come from a combina on of sources including

¹³Daniel Rose Center for Public Leadership in Land Use, “ULI Panel Finds Benefits to Loca ng Sports Complex in Railyards If Designed Well,”Urban Land Ins tute, August 9, 2011.

¹⁴Master Owner Par cipa on Agreement (MOPA) funds are funds that are set aside for downtown development projects and are intendedto facilitate planning and implementa on of projects in downtown Sacramento.


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Measure A land sale, the ESC project budget, and railyard development. However, as the funding for future devel-opment surrounding the railyard project is facing some uncertain es due to the slashing of redevelopment fundsthroughout the state, the ques on arises as to how this will affect ESC infrastructure funding.

Beyond possible delays to construc on, any other addi onal costs beyond what is proposed in the current deal couldprevent the project from being completed on me and on budget, and could leave the city open to li ga on. A sim-ilar situa on took place in the early 2000s with the building of Petco Park in San Diego. In 1998, San Diego votersapproved the building of a new baseball stadium for the San Diego Padres baseball team. Voters originally approveda $225 million cap on city funding for the project, but the city later increased the cap to $299 million. This helpedfuel a charge of various legal cases brought upon the City of San Diego, with one of the earliest lawsuits involving aformer city councilman who sued the City of San Diego for going $74 million over the budget pitched to voters. Muchof the li ga on was the result of a former city councilwoman, Valerie Stallings, pleading guilty to two misdemeanorsfor failing to report gi s she received from Padres owner JohnMoores. Plain ffs alleged that the rela onship betweenStallings and Moores tainted the city’s nego a ons with the team and thus the contract on which the public voted.The various legal cases San Diego was forced to address delayed the opening of Petco Park by two years, with thestadium opening in 2004 instead of the planned year of 2002.In addi on to the delay of opening the stadium, finalconstruc on costs were $45 million over budget.¹⁵

Though construc on-related cost overruns will be covered by Turner Construc on according to the city, this SanDiego example may prove relevant for other non construc on-related cost overruns. Any overruns that may occurdue to surrounding infrastructure, environmental reviews, or historical findings at the site may be separate from ac-tual construc on-related cost overruns. If this is the case, does the city have the addi onal funds to cover such costs?

Public sen ment regarding the building of the proposed ESC has been tepid at best. While many taxpayers in the Cityof Sacramento are in favor of keeping the Kings in Sacramento, they are not, however, in favor of using city funds tofinance a new arena. Sacramento residents are well aware of the city’s fiscal situa on and would much rather see theproposed $255.5 million the city intends to raise for the ESC to bring back laid off police officers and invest in areaparks and schools.

Of the $255.5 million the City of Sacramento is commi ng for the ESC, $230 million is to be raised through a parkingmone za on plan. In a recent survey of Sacramento voters, over 70% of respondents said they are opposed to usingthe funds raised through the parking opera on to fund an arena for the Kings.¹⁶ In an effort to fight the proposeddevelopment plan, a group of Sacramento taxpayers have started an ini a ve, which if passed would require a publicvote before any city funds are devoted to the building of the ESC. Based on prior history in Sacramento regarding tax-payers and funding a new arena, odds are that this deal would be struck down. Previous ballot measures to use publicfunds for building a new ESC, Measures Q and R, were put to public vote in Sacramento in 2006 and were voted downby a resounding margin. Specifically, Measure Q’s purpose was to determine if any new sales tax revenues approvedby Sacramento voters could be used to fund an ESC. Measure R, if passed, would have raised Sacramento County salestax by 0.25%, with the revenue to be used for general governmental purposes. Measure Q failed by a margin of 71%to 29%, while Measure R failed with an 80% to 20% margin.

¹⁵Mark Hitchcock, “Welcome to PETCO Park: Home of Your Enron-by-the-Sea Padres: The Story of the Controversy Surrounding the PublicFunding of San Diego’s PETCO Park and the Legal Efforts to Stop the Construc on,” Berkeley Law (2010):1–33.

¹⁶EMC Research, “Telephone Survey of Sacramento, CA, Likely June 2012 voters,” January 23–25, 2012.


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Another possible concern for Sacramento taxpayers is the use of the Community Facili es District Act (also known asMello-Roos). This act allows any county, city, special district, school district, or joint powers authority to establish aMello-Roos Community Facili es District (CFD), which allows for the financing of public projects through imposing aspecial tax on property owners who reside in the CFD. The good news for Sacramento taxpayers is that in order for thecity to establish a CFD, a two-thirdsmajority of voters living in the proposed CFDmust approve its forma on. However,if implemented, Sacramento taxpayers would be on the hook for financing part of the ESC development through thisspecial tax. ThoughMello-Roos has not been proposed as a funding source of the ESC, it was men oned as a poten alsource in the city’s original financing plan for the Sacramento railyards redevelopment project.¹⁷ As redevelopmentdollars are no longer a source of funding, the CFD Act may come into play as the city looks for alterna ve financingplans for redeveloping the railyard.

The building of the ESC presents significant challenges to the city with respect to predevelopment issues and supportfrom city taxpayers. Costs could poten ally be inflated and melines could be pushed back. Without public support,the project could fall through altogether if the proposed ini a ve to prevent the use of public funds for ESC construc-on is passed.

Current Fiscal Challenges and the Arena Boost60

080

01,

000

1,20

0$

Milli

ons

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Year

Revenues Expenditures

Source: California State Controller

Sacramento City Revenues and Expenditures

The proposed new arena in the downtown Sacra-mento railyard poses a variety of challenges forthe City of Sacramento’s fiscal health. The city’s fis-cal posi on is already tenuous—the Great Reces-sion hit Sacramento par cularly hard. From the peakin 2006–07, revenues declined more than 28% by2010–11, falling from more than $1 billion (with thehelp of somedebt issues in 2006–07) to just $830mil-lion by 2009–10 according to the State Controller’sOffice. The City of Sacramento’s budget documentsshow that revenues fell by another 1.4% in 2010–11.At the same me, the fiscal budget has gone fromsurplus to deficit in the wake of the downturn. In2003–04, the City of Sacramento ran a $19.9 millionsurplus, but budget shor alls have increased into the$40 million range over the past few years, and the city is currently projec ng another $15 million shor all for the2011–12 fiscal year. Total outstanding debt has also increased from $567 million before the bubble to almost $800million currently.¹⁸

¹⁷City of Sacramento, Economic Development Department, “Railyard Business Terms, Financing Plan, Economic and Fiscal Impact,” December4, 2007.

¹⁸California State Controller, City of Sacramento.


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In addi on, the unemployment rate in the Sacramento region remains in the double digits, at 11.2%,¹⁹ and given thearea’s concentra on in government employment, a sector which is not forecast to turn the corner quickly, a rapid eco-nomic recovery is not expected for the City of Sacramento. Given these budget shor alls and the lackluster economicrecovery thus far, local policymakers may be bi ng off more than the revenue base can chew. If the ESC fails to bringin the projected revenue the city is predic ng, then the city will be at risk of pu ng addi onal stress on an alreadydepressed market.

The $255.5 million contribu on required from the city represents more than 10 years of deficit financing at currentrevenue and expenditure levels. Cuts to local services from police, fire, and educa on have been harsh, and Sacra-mento has seen expenditures decline by more than $200 million per year rela ve to peak.²⁰ The fire department hasreduced employment by 49 full- me posi ons over the past year. The Police Department has also eliminated 240 jobssince 2009–10. In addi on, 860 full- me city jobs have been cut in Sacramento.²¹ Further, city officials have recentlystated that nearly 100 police officers and firefighters could be laid off soon due to city budgetary issues.²²

City of Sacramento Full-Time Employment Numbers

Fiscal Fire Police CityYear Department Department Employees

2011-12 589 890 4,0832010-11 638 1,067 4,4122009-10 632 1,130 4,6352008-09 631 1,096 4,943

Source: City of Sacramento

In this context, this $255.5million in spending is likelyto create a significant poli cal conflict, and Sacra-mento residents have already expressed a strong de-sire to block their tax dollars from funding a new ESC,preferring the funds to go toward public services orpublic improvement projects. Spending money on anESC will affect the local quality of life to the extentthat these resources could be used to backfill someunderfunded local assistance programs, educa on,or infrastructure projects.

In addi on to the already tenuous fiscal situa on, theprojec ons of the increase to local economic ac vity underlying the projected economic impact of the ESC are likelyoverstated. According to the Capitol Public Finance Group (PFG), the new arena is es mated to a ract 3.1 million vis-itors per year and result in annual spending of $93.6 million.²³ This analysis assumes an average a endance of 17,300for the 45 Kings home games and 15,000 for other events held at the new complex. It further assumes that visitorswill spend an average of $20 on food and beverage, other retail, and transporta on costs, and that 10% of the visitorswill stay overnight and spend an addi onal $102 on food, retail, and lodging. While this may sound like a boon to theregion, we have to take a close look at the assump ons behind this analysis.

Take cket sales as an example. With 17,300 in projected average a endance under a new ESC, these es mates repre-sent a 10% increase over the peak levels of a endance that the team has been able to achieve during the past 10 to12years. The comparison to current a endance figures provides an even starker contrast. With an average non-premiuma endance figure of 14,500 this season, the projec ons represent a nearly 20% increase in a endance over currentlevels.

¹⁹California Employment Development Department.²⁰California State Controller.²¹City of Sacramento, FY 2011–2012 Budget.²²Ryan Lillis, “Mayor Urges Sacramento Public Safety Unions to Agree to Pension Changes,” Sacramento Bee, May 1, 2012.²³Capitol Public Finance Group, LLC, “The Economic Engine Report: An Economic Analysis on the Regional Impact of an Entertainment and

Sports Complex,” June 30, 2011.


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Tickets for spor ng events are what economists refer to as income-elas c goods because they tend to be luxuriesfor those who consume them and are thus highly impacted by considera ons of income and wealth. This suggeststhat the surge in a endance between 1999 and 2007 was driven in part by the surge in home prices and the conse-quent increase in perceived wealth that accompanied the housing bubble. Unfortunately, this surge in housing-fueledwealth is a thing of the past, and home values, when they do begin to rise again, are expected to do so at a far moretepid pace that tracks income growth (certainly well below 10% per year). This calls into ques on the ESC’s ability toa ract that level of a endance without another housing bubble, given that the current unemployment rate remainsover 11%.

Another principal concern we have with Capitol PFG’s analysis is that they have not taken into account how much ofthe annual spending is “new money”—that is, how many out-of-town visitors the new arena will a ract that ordinar-ily would not have a ended a King’s game or other performance event. Currently, a endance is averaging just over14,500 at PBP. As such, these folks are already impac ng the economy through a endance and consequent enter-tainment spending and should not be considered when assessing the impact of the new ESC. Only the new a endees,who would be a ending King’s games they would otherwise not have a ended in the absence of the new ESC, shouldbe counted toward the project’s economic impact. Thus, basing the projected impact on the full 17,300 visitors in thenew ESC poten ally overstates the economic impact by applying average spending amounts across 14,500 folks whoare already spending those dollars locally. As a result, the expected growth in economic ac vity might not materialize.

Case Studies of Other ESC’s and/or Stadiums

Many other ci es across the state have been facing tough fiscal mes due to the ramifica ons of the financial melt-down and the collapse of the housing bubble. In 2008, the City of Vallejo was forced to declare bankruptcy, owingin part to expensive pension plans for city workers and declining tax revenues. The City of Stockton, which is a mere50 miles south of Sacramento, is on the verge of declaring bankruptcy itself due to overspending on public employeecontracts and, among its many ills, the building of a new sports arena and ballpark. The arena and ballpark were partof a redevelopment project on the waterfront area of Stockton, which cost the city over $125 million to complete.²⁴Specifically, the arena cost $64 million to build—with $38 million coming from bonds.²⁵ With the arena not drawingthe revenues hoped for by the city, the city is le with a significant debt to repay—only adding to its myriad fiscalhardships. According to Stockton’s FY 2011–2012 Budget, even a er elimina ng 25% of city staff in FY 2010–2011,the city is s ll expec ng to face a $37 million general fund opera ng budget deficit.²⁶ In Stockton, home prices andproperty tax revenues, which were two of Stockton’s bright spots during the housing boom, were le devastated af-ter the bubble burst. Stockton faces staggering deficits due to declining revenues and is finding it difficult to fund itslong-term obliga ons.

San Diegans are also dealing with the ramifica ons of overly op mis c assump ons regarding the economic effectof Petco Park on the local economy. Local business owners say, “our revenue increased tremendously,” but they add“It’s been that way for some me, although, since the ballpark came into being, every year our revenue has come

²⁴Peter Hecht, “Stockton, Facing Bankruptcy, Asks How It Got to This Point,” Sacramento Bee, February 28, 2012.²⁵Na onal Sports Law Ins tute of Marque e University Law School.²⁶City of Stockton, FY 2011–2012 Annual Budget, August 25, 2011.


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down a li le bit.”²⁷ These revenue declines have occurred despite projec ons that showed strong growth in economicac vity in perpetuity. Marney Cox, the chief economist for the San Diego Associa on of Governments notes that thereis “pre y good evidence out there from studies that have been done that show that large investments in those en-tertainment kind of parks are almost a wash for local areas, if not slightly nega ve.”²⁸ San Diegans have also realizedthat a fancy new stadium does not negate the impact of the team itself or of general economic ac vity. Ul mately,according to UCSD professor Steve Erie, “[Petco Park] is hailed as an iconic model for other places to emulate. All thatwe're poin ng out is that its public benefits are not as great as the supporters have ballyhooed and the public costshave been substan al.”²⁹

Outside of California, the story of the arena project in the City of Glendale in Arizona is a par cularly vivid cau onarytale. The Phoenix Coyotes, a professional hockey team, moved to Glendale in 2003 into the newly constructed Job-ing.com Arena (formerly known as Glendale Arena) a er concluding that Phoenix’s America West Arena was not agood venue for hockey. Since moving fromWinnipeg in 1996, the Coyotes have never made a profit. Poor a endancecombined with con nually slumping team revenues and the arena’s distance from the more affluent neighborhoodshave made this arena a financial disaster for Glendale. In 2009, the Coyotes declared bankruptcy and were taken overby the NHL. Since then, the City of Glendale has paid $25 million per year to keep the team in Arizona while newownership is sought.³⁰ This $25 million, combined with the cyclical effects on revenues associated with the Great Re-cession, have created severe fiscal challenges for an area that, like Sacramento, was already suffering from the effectsof a large housing bubble and subsequent collapse.

Defenders of the proposed ESC deal have pointed to the Kansas City example as evidence that the deal can be suc-cessful even if the city moves forward with the ESC without the Kings as the anchor tenant. However, a deeper lookshows that the Kansas City story is not quite the same as Sacramento’s, and the Sprint Center has put fiscal stress onthe city’s budget. Along with the building of the Sprint Center in Kansas City, a new conven on center, performing artscenter, and a retail and entertainment district were developed simultaneously. Generated revenues from the SprintCenter have failed to live up to projec ons, and as such have caused Kansas City to set aside $12.8 million from its2012–13 budget to cover the deficit, which is expected to remain for years to come.³¹

Considering that the City of Sacramento is already strapped for funds and has yet to recover from the housing marketcollapse, the above examples serve as a warning of the poten al consequences of making an unwise fiscal decisionregarding the building of the ESC. The city is gambling with this investment. If it fails, it will put enormous stress onthe city’s finances in the near and distant future.

Conclusion

The proposed plan to build and develop an Entertainment and Sports Complex in downtown Sacramento is full ofrisks that in the long run have the poten al to hurt the City of Sacramento, the Kings, and the NBA. From a revenueperspec ve, a development perspec ve, and fiscal perspec ve, the proposal, as it currently stands, exposes the city to

²⁷Ka e Orr, “Has Petco Park Been a Good Investment?” KPBS.org, January 26, 2010.²⁸Ka e Orr, “Has Petco Park Been a Good Investment?” KPBS.org, January 26, 2010.²⁹Liam Dillon, “Why San Diegans Are to Blame for the City’s Problems,” Voice of San Diego, September 30, 2011.³⁰Sean Gen lle, “‘They misled us’: Glendale Mayor Wants $20 million from NHL,” Spor ng News, April 4, 2012.³¹Foon Rhee, “Is Kansas City a Model for Sacramento, or Is It a Warning?” Sacramento Bee, April 23, 2012.


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significant risks that have hauntedmany other ci es in California and around the country. The city is already strugglingwith high unemployment and a weak housing market. The building of an ESC has the poten al to exaggerate theseproblems.

In order for the ESC to meet the proposed revenue projec ons, it would have to surpass the levels achieved duringthe housing boom. Given the current economic outlook for the Sacramento area, these figures do not seem feasible,and city taxpayers will be forced to pick up the pieces for years to come if this plan fails to meet expecta ons. In theend, all par es involved here at risk—the City of Sacramento, the Kings, and the NBA. This proposed plan calls foran economically and fiscally depressed city to put up over a quarter of a billion dollars. Furthermore, it also calls forthe Kings to bring in revenues exceeding those of its peak revenue-genera ng years. Lastly, the NBA will be at risk forapproving a plan that will put undue financial stress on one of its small-market ci es and franchises.


B E About Beacon Economics

About Beacon EconomicsBeacon Economics is an independent economic research and consul ng firm with offices in Los Angeles and the SanFrancisco Bay Area. The firm's interna onally recognized forecasters were among the first and most accurate predic-tors of themeltdown in the U.S. mortgagemarket—and among a rela vely small handful of researchers who correctlycalculated the depth and breadth of the financial and economic crisis that followed. The firm focuses on providing ob-jec ve, fact-based economic studies and analy cs, long- and short-term economic forecasts, public policy analysis,and balanced counsel to those making financial, business, and economic decisions. Beacon Economics has servedas the lead economic advisor to the California State Controller since 2008 and its Founding Partner is Chair of theController's Council of Economic Advisors.

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