Thursday, July 28, 2011

How to Argue with an Arena Skeptic - Updated

(Blogger's Note (From Nick): If you haven't, please enter Rock The Referendum and spend the weekend motivating people to come out and vote on Monday!)

In advance of the upcoming vote, I thought I would update and repackage my “How to Argue with an Arena Skeptic” three-part series because, would you believe, there still are some skeptics out there, my efforts notwithstanding. So here it goes.
1. The Referendum Will Not Result in a $58 Annual Tax on Residents.
Too often arena supporters accept the notion that the arena deal would mean an additional tax of $58 per household and instead argue why that's not a lot of money or that the consequences of the team leaving are worse. Aside from not being particularly effective, the assumption is simply not true. In fact, (as others have noted) the tax impact of the referendum will most likely be much, much less than $58.
The $58 number is based what the total estimated annual debt service of $26 million/year by the county would mean for the average taxpayer. However, this number assumes that the county will borrow and spend $400 million and not receive a penny in return. Sort of like assessing the cost of buying a house (or making any other investment) and focusing only on the fact that you're giving money to some guy and ignoring the fact that some guy is giving you something (namely, a house) in exchange. While the house may or may not be a worth what you're paying, to ignore the value of the house completely is absurd - but this is exactly what the $58/year number does.
So, what will the county receive in exchange for the $26 million/year in debt service?
  • Even if the Isles stink and the arena does poorly, Wang is obligated to pay the county $14 million annually once the building is built. Thus, the county's annual debt service obligation is actually $12 million annually, or approximately $24/year per household. The Office of Legislative Budget Review added another estimated $4.9 million in estimated tax revenue, to lower the burden to $6.7 million annually or $13.80 per household in Year 1 of the new arena.
  • Under the Wang lease, the $14 million payment is a minimum. If 11.5% of arena revenues exceed $14 million, Wang is obligated to pay the county that amount instead. Based on this arrangement, the county estimates that Wang's annual payment will actually be $18.9 million in the first year of the arena’s operations. As I explain here, this estimate is based on the Islanders having attendance levels and ticket prices at around the NHL average and playing no playoff games. Islander fans know that a team featuring Tavares, Okposo, Grabner, Strome, et al. in a new arena (deep breaths) might regularly sell out and advance into the playoffs, but that might not convince an arena skeptic (although you can certainly try!). In any case, $18.9 million in annual payments lowers the county's payment to approximately $7 million. This translates to approximately $14 per household in Year 1 of the new arena.
  • In addition to the revenues under the lease with Wang, the county will also receive tax revenues from both arena sales (tickets, food, parking, etc.) and economic activity generated by the arena (area restaurants, spending by team employees). This number is somewhat difficult to estimate and depends on various assumptions, but the county estimates $9.2 million in tax revenue, allowing the county to realize a $2.2 million profit, or a per household tax savings of $4.4 in Year 1 of the new arena.
  • The county and taxpayers’ burden are almost certain to get smaller each year the arena operates because while the debt service is fixed, revenues will grow due to inflation. This is the basis for Camoin’s conclusion that the arena deal will result in a net profit $27/year per household.
In sum, while the actual cost to taxpayers is unknown, once the arena and ballpark are complete, it will definitely be far less than $58 per year and should allow the county to turn a profit.
2. What Will the Islanders Leaving Town Cost Taxpayers?
One of the main argument arena supporters make is that a “No” vote means that the Islanders will leave the County and the Coliseum will be closed, which will result in a tax increase as a due to lost revenue associated with the Islanders and the Coliseum. Unfortunately, this is one area where supporters often engage in unrealistic bluster regarding the impact of a "No" note. Yes - a shuttered Coliseum would devastate the economy in the immediate area and the eyesore of a decaying Coliseum or an empty Hub would serve as a painful reminder regarding the county's decline. However, while it is difficult to precisely assess the "net" economic hit the county would take, it is unlikely to cause the homeowners' tax bills to increase more than $58/year, the number that the arena plan is said to cost the County.
But, as noted above, the $58/year "Coliseum tax" is a myth. Because the actual cost of the arena plan is far less -- and may even may result in a small decrease in taxes -- it's silly to use the $58/year number as a benchmark.
So what will a "No" vote cost the average homeowner? According to the county’s economic consultant, Camoin Associates, the county will lose at least $7.8 million per year in tax revenue, which translates to $16/year per household. As noted above, this number is difficult to calculate because it seeks to answer a hypothetical question – what would happen to all of the Islanders and Coliseum related economic activity were the team to leave? Would families go to a movie theater in the county? Or watch the Nets in Brooklyn? Or stay home and watch pay per view? Would Katy Perry find another venue in the county to perform in or decide to forgo the county on her next tour? The $7.8 million is based on economic modeling done by Camoin Associates to predict what would happen if the team left and the Coliseum closed, so by nature the number is open to question. However, thus far I haven’t seen any criticism of Camoin’s methodologies or alternative analysis that yields a different result.
While arena supporters might think that $17/year seems like a small amount, to the anti-tax crowd leading the charge against the arena plan, any tax increase is toxic.
The skeptics’ response is “well, what’s the big deal if the Coliseum closed and the team left? Who’s to say that the property won’t be redeveloped for other uses? Wouldn’t real estate developers be chomping at the bit to redevelop this property?” That may be the case, but isn’t that sheer speculation? We don’t know what sorts of plans potential developers might propose, how much revenue they might bring in and whether they will be able to get all of the necessary approvals (including any zoning variance from the Town of Hempstead). Why would reject a plan that is on the table with a willing tenant and permanently chase away the tenant all in the hope of a completely hypothetical Plan B? It’s interesting how arena opponents criticize Mangano’s projections as speculative yet seem to think development will magically materialize in the place of the Coliseum, forgetting the nightmare the Lighthouse Project process was.
But more importantly, what will take the place of the Coliseum? Another shopping mall? Another set of office buildings? The Islanders is a unique institution that creates economic activity within the county by drawing visitors from the region in a way that malls and office parks cannot.
And of course, to an Islanders fan, the cost of replacing the Islanders with a Target, Dave and Busters and an Olive Garden is way, way more than $16 per year. But if you are an arena skeptic, I assume that doesn’t count for much.
The number 1 argument of arena skeptics I find online is “Wang should pay for the arena himself.” Or more accurately “WANG SHOULD PAY FOR THE ARENA HIMSELF!!@!!”
We all know the sorry history here – Wang DID try to fund the arena himself as part of the Lighthouse Project but was stymied by the Town of Hempstead. And many arena plan supporters cite this to skeptics. But skeptics probably don’t care about the back story. We also know that arenas and stadiums rarely get built this days without substantial government help. But, again, that’s not going to convince a skeptic.
The strongest response is as follows: Wang is paying for somewhere between 60% and over 100% of arena costs himself under the lease with the county. Under the lease, Wang is obligated to pay a minimum of $14 million per year for 30 years, or a total of $420 million. The arena costs will initially be funded with $350 million of the $400 million bond issue. Total principal and interest on the $350 million is (using the numbers issued by the legislative budget office) $682.5 million. Thus, assuming Wang only pays the minimum payment under the lease, he will be funding 61.5% of the total cost of the arena ($420 million of $682.5 million). However, if 11.5% percent of arena revenues exceed $14 million, Wang is obligated to pay that amount instead. As discussed here, the county's economic expert, Camoin Associates, using fairly reasonable assumptions, estimates that the the 11.5% revenue share provision will kick in, requiring an $18.9 million payment during the first year of arena operation, to increase each year by 3% to reflect inflation. If these estimates are correct, Wang’s annual payments will total $770.4 million -- actually exceeding the cost of the arena to the county. In fact, even the revenue share amount is $17 million in Year 1, the arena will turn out to be fully funded by Wang. And this doesn’t even take into account Wang’s obligation to fund cost overruns – which would increase Wang’s contribution to the arena cost.
4. Don’t Be Stupid. Use Basic Math. Don’t Slavishly Follow Ideology or Political Leaders. And Robots?? Are You #@^#! Kidding Me?!?
Unfortunately, there may not be enough room on the Internets to respond to every inanity but forth by the Vote No crowd. A sampling will have to suffice:
· We want purty pictures! Seriously, the LI Press complained that there are no architectural renderings of the new arena. As if somehow the shape or coloring of the arena is relevant to what will be voted on on Monday. As if voters somehow have the constitutional right to pass on the how publicly financed building look. As if the Islanders should spend hundred of thousands of dollars to satisfy voters who need to “see” what they are voting on.
· Wang is running away with 88.5% of revenues! This has suddenly become a Vote No talking point – that the county only gets 11.5% of the revenues while Wang gets 88.5%, which translates to hundreds of millions according to the Camoin estimates. The problem is that Wang doesn’t actually get to keep 88.5% of revenues unless he doesn’t want to pay his players and other employees and any other expenses he has. Revenues does not equal profits.
· I don’t believe in publicly funded sports facilities. The word “believe” should be reserved for God, religion and perhaps the team you root for. Applying it to public policy leads to the kind of nightmare currently unfolding in Washington – blindly refusing to accept reality because of political ideology. While it is reasonable to generally be against publicly funded sports facilities, it shouldn’t relieve you of actually looking at the current situation the county is in, the details of the revenue sharing arrangement and what might happen if the Islanders leave.
· Ahhh!! ROBOTS!!! Yesterday, an elderly woman called News 12 to complain that the estimates of new jobs that an arena will bring were exaggerated because the new jobs will be automated. I don’t quite know how to answer that, but it gives me an idea as to who Garth should go after for that top 4 defenseman: