Sunday, 28 July 2019

The Drama Continues

Oh, what a tangled web that has been woven. The man to the left is Calgary Mayor Naheed Nenshi, and his public ratings have nosedived faster than the hopes of Flames fans during last season's playoffs. After approving a tentative deal for a new arena for billionaires who own the Calgary Flames that would cost the city $275 million after he and Calgary city council cut $60 million from essential services such as police, fire, and transit, residents in Calgary are a little hot under the collar about where their tax dollars are going.

This isn't an economics blog, but I've stated my opinion, helped by John Oliver, on this blog before. Public funds should never be used to fund public stadiums and arenas because the city almost never sees the return promised by the billionaires. There has not been one professional sports franchise owner who has gone bankrupt while the city in which they play flourishes with cash to spend. Remember this as you read through this piece.

We'll start with the timeline because this saga has been going on for far longer than it should have simply because the Flames refuse to pay for their own home. There have been years of negotiations, name-calling, finger pointing, and hurt feelings on both sides as the city of Calgary and the Calgary Flames argued over how much public money should be up for grabs when it comes to a new arena.

Back in 2017, NHL Commissioner Gary Bettman happened to drop by the city for a speech in front of the Calgary Chamber where he uttered, "It is not an overstatement to say the future stability, viability and continuity of the Calgary Flames, and perhaps the city of Calgary, rests on the achievement of CalgaryNEXT."

If you chortled reading that, you weren't alone because Mayor Nenshi held firm and refused to bow to the requests of the Flames to sweeten an arena deal with public funds. A Mainstreet Research survey in May 2017 showed that "[m]ost Calgarians would support the city getting involved in the construction of a new arena to replace the Saddledome — as long as it doesn't increase their taxes" and, I suspect, see current services cut dramatically. That latter is happening in Calgary, and this comes after many Calgary residents saw a spike in their property taxes in May. In other words, the citizens of Calgary not only are being taxed more, they're getting less services in return after the cutbacks.

Does it still seem right to give $275 million to a group of billionaires?

Back in 2017, the Flames proposed that the city pay $225 million towards a new arena while the city countered with $185 million being offered. The Flames balked at the city's offer while the city rejected the Flames' proposal. So why would Nenshi agree to a $275 million price tag - $90 million more than in 2017 - at this stage of the game?

As part of the deal, the Flames will invest $75 million over 35 years to local sports charities rather than paying the city rent for use of the new arena while the city gets 2% of all revenues generated over the first 35 years. The ticket tax that is included in the deal would amount to approximately $155 million which will flow directly into the city's coffers, but you'd have to think that the property taxes and rent that the city would generate from where the arena and entertainment complex is situated would be worth more than $4.5 million annually, especially if you factor in that the city just raised the property tax rates on businesses. According to a Canadian Press article, "the city says the projected return to Calgarians is $400.3 million over the course of the 35-year agreement with the Flames."

This is where we caution everyone and pump the brakes a little because a ROI (return on investment) of $125.3 million would be a pretty sound investment for the city. However, University of Calgary associate economics professor Trevor Tombe cautions that number isn't even close to being accurate.
"A dollar in 35 years is worth a lot less than a dollar today. Inflation alone eats away half the value of that dollar over the course of three and a half decades.

"They're not at all incorporating these issues around the time value of money. It is just Finance 101. This is not how you do it."

He also points out a $47-million net loss on the project wasn't made public at the news conference last Monday, and that information only came to light when administration was pressed by councillors later that night in chambers.
Hold on a second. If there's a potential $47 million net loss on the project, that's a major difference from the projected $125.3 million that the city calculated. In total, the loss could be as much as $172.3 million if the projection isn't realized and the loss is. That legitimately makes this arena deal a major gamble for the city and leaves the Flames with little risk whatsoever. Did anyone tell taxpayers that they're on the hook for the $12 million needed to demoish the Saddledome or the millions of dollars needed to improve the infrastructure in the area to accommodate the new arena and entertainment complex? Those details are kind of important when it comes to how taxpayer money should be spent.

I hate to be the bearer of bad news, this isn't how this works, Calgary. And as David Staples of the Edmonton Journal wrote very succinctly,
I need to stress, though, that I can't be 100 per cent sure of the Calgary cost-sharing arrangement. The City of Calgary has released all kinds of details crowing about the benefits of the new deal, but appears to be short on crucial details around the arena's financing. That's a huge problem for anyone, and especially Calgary citizens who are trying to form a credible opinion about the project in a short amount of time. The public only found out about this deal on Monday.
According to reports, the vote for this proposed arena and entertainment complex will happen on Tuesday at city council, and it seems a number of councillors feel like this vote hasn't been given the proper time to be fully vetted. Ward 11 Councillor Jeromy Farkas has read through the proposal, and he believes that this deal misses the mark.

"I think it's the Olympics all over again," Farkas told CTV's Jordan Kanygin, referring to the city's exploration of a 2026 Winter Olympic bid that ultimately was defeated. "We have the rushed timeline, the broken promises to consult and I think it really shows that council isn't listening to Calgarians."

I go back to Staples' article in the Edmonton Journal who quotes Edmonton Mayor adviser Chris Henderson in writing,
Henderson noted that Edmonton benefitted from a long and thorough debate with the public. "Sometimes it was a bit painful, but looking back today, it was measured and relatively comprehensive. This is something you need measurable discussion with the public on. Rush this decision and any issue with the deal or the building and the public will point back to this moment in particular. Is the (Edmonton) arena deal perfect? God, no. Did it benefit from a generally exhaustive public discourse? Yes, looking back, it actually did."
There's the key in all this. The citizens of Edmonton were included in the discussion on how their tax dollars were being spent, and ultimately they accounted for 47% of the $483.5 million project to build McDavid's palace. There were some contentious moments throughout that arena debate, but the details were always clear as to who was paying for what and how much each party was investing. The devil is in the details, so to speak, and these details need to be explained and heard by the people of Calgary who appear to be on the hook for a lot of money to make this arena a reality.

Edward Nixon, president of Toronto-based EN Consulting Group, told Sammy Hudes of the Calgary Sun that it's "unusual" for a project of this size to have such a short window for structured public consideration.

"I am surprised," he said. "I don't live there... but it strikes me as not being consistent with best practices."

When city councillors, advisers in other cities, and presidents of consulting firms think this vote is happening too quickly without the right amount of public input, doesn't that set off bells and warning lights for everyone? And what happens if city council comes back with a negative result or wanting a better deal for the citizens of Calgary based on Councillor Farkas' comments at the vote on Tuesday?

"We're not renegotiating," Ken King, vice-chair of Calgary Sports and Entertainment, told the Calgary Sun's Rick Bell. "We are not re-trading the deal. You can't say: OK, we’ve agreed to this, now let's see how far we can push the other party. It is what it is. If we put in more money, they'd be happier. If they put in more money, we'd be happier. It doesn't work that way. An agreement is an agreement. You do not re-trade a deal."

Look, I'm just a blogger. I don't have a say in the vote one way or another, but it seems like Calgary city council and Calgary Sports and Entertainment are trying to fast-track this project. Calgary city council and Mayor Nenshi might be looking at this arena and entertainment complex as way to revitalize the area where it's being built, possibly leading to an economic upturn in Calgary and potentially extending the political careers of councillors and the mayor alike. It's a gamble, but none of those people will be an elected official when the 35-year deal expires and the finality of the return on investment is known.

I guess what I'm saying is that if this arena deal gets passed by city council on Tuesday while your fire, police, and transit budgets are slashed without you, citizens of Calgary, having any official discussion about how your tax dollars are spent in a time where that discussion absolutely should happen, you should really take a long look at your representation at city council. I'm not saying Jeromy Farkas is right, but it does seem that your councillors aren't listening to their constituents about what matters most. When three separate entities are on record saying that the public consultation period on a project as sizable as this one is too little or "unusual" and "not being consistent with best practices," you might want to ask yourself if this is good for the city of Calgary or if it's good for the city councillors of Calgary.

In the end, I'm still entirely in the camp that the use of public funds to finance the arenas or stadiums used by billionaires is a bad deal for the taxpayers who funded the project.

Until next time, keep your sticks on the ice!

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