Money ball | Public financing for the Bucks arena entails hidden costs

Polling shows that voters strongly oppose public funding for a new Milwaukee Bucks arena complex. Yet elected officials forge ahead with the project, which could put taxpayers on the hook in myriad ways that lie buried beneath piles of hype and denial.

New Bucks owners Marc Lasry, Wesley Edens and Jamie Dinan have pledged $150 million to the project and former owner Herb Kohl has pledged $100 million. The new owners now are pressuring elected officials to contribute at least $250 million from taxpayers to complete the complex, which will cost at least $500 million, according to estimates.

But throw in financing costs, tax incentives, property-tax exemptions and other freebies, and the public could be on the hook for up to $1 billion in subsidies.

While the owners promise Milwaukee residents pie-in-the-sky rewards in the form of  increased economic activity and more jobs, the payoff equation is lopsided. The new venue would handsomely reward the Bucks, a for-profit business, with free rent and a large percentage of every dollar collected from all enterprises located within the expansive proposed complex (in 2014, the Bucks received 41.6  percent). But the taxpayers, who would bear the lion’s share of expenses, would receive no ownership stake in the team — a detail that belies the project’s billing as “public-private partnership.” This “partnership” entails  taxpayers investing in a rapidly depreciating asset (a building) that supports a greatly appreciating asset (a major-league franchise). 

City, county costs

The Bucks want the city and county to kick in from $50 million to $100 million in direct cash, free land and buildings and other subsidies. The county has indicated it would donate vacant Park East land. The proposed arena site, which is due north of the Bucks’ current home, is on vacant BMO Harris Bradley Center land, which already is owned by the public. (The Bradley Center owns almost all the land between North Fourth and Sixth Streets and State Street to Juneau Avenue.)

Mayor Tom Barrett recently proposed giving the Bucks additional land — the former Sydney Hih site — at Third Street and Juneau Avenue, valued at $1.1 million. He’s also proposed providing infrastructure support worth $17.5 million through a tax-incremental financing district and a block-long, multi-use parking complex.

That 980-space parking structure generated $920,000 in parking revenue last year for the city. It’s in a prime location — directly across from the new arena site and next to the tony Moderne residential high-rise and a dining/nightclub district. It includes two large storefronts. The city built the structure in 1988, reportedly for $25 million, and officials say it’s meticulously maintained and debt-free.

But a proposed Bucks plan shows the parking complex demolished and redeveloped. Replacement parking facilities would be built elsewhere, adding to arena costs.

The city would forgo the nearly $1 million in annual income that it currently receives from the existing facility.

The parking garage offers an excellent case in point of how ever-increasing taxpayer subsidies have crept into the project. The Bucks proposal encompasses 27 acres, nearly twice the Bradley Center’s current footprint. But the city-owned parking complex is not needed for an expanded arena footprint, when there’s vast undeveloped acreage both west and north of the proposed arena site, much of it already publicly owned by the Bradley Center. The value of that public land is not even mentioned as part of taxpayers’ contributions.

Gov. Scott Walker wants the new arena to follow the model of the Bradley Center — a state-owned facility managed by a  tax-exempt authority. That would cost an estimated $450 million over 30 years in  lost property taxes, according to a report by Bruce Murphy in Urban Milwaukee. The public also may well end up covering ongoing management costs and maintenance shortfalls. The city currently pays the Bradley Center $175,000 annually for its upkeep and state taxpayers have paid $10 million for arena repairs since 2009.

Lease terms give the Bucks a share of every concession, along with catering, suite leases and merchandise sales for all arena events, not just Bucks games. In fiscal 2014, the Bradley Center paid the Bucks $4.7 million on gross revenues of $11.3million. The Bucks also receive any Bradley Center surpluses, while the public authority struggles to cover deficits (and has not kept up).

As a mechanism for funneling state money into the project, Walker has proposed issuing $220 million in state bonds. Legislators believe the governor’s plan ultimately will cost $380 million after tacking on interest. They propose limiting bonding to $150 million.

‘Stars in their eyes’

Even when subsidies are disguised and direct taxes avoided, economists say that public financing is nearly always a losing proposition. Nonetheless, for myriad reasons, municipalities continue the handouts. 

Hope and hype that an arena will spur more nearby development were expressed when the Bradley Center was built in 1988. Mostly, that did not happen, although downtown development has been booming since the recession ended. 

Now Lasry and Edens, who are big-time real estate developers, say they will invest in private development, including a nearby team practice facility. A 2013 City of Milwaukee report noted that sports economist Andrew Zimbalist warns “professional sports have been historically unreliable when it comes to making such local investments.”

Although cities often provide tax incentives to businesses to encourage redevelopment, subsidies often take many years to be recouped. In contrast, huge sports-venue footprints exempted from property taxes deplete a budget permanently. And, it’s not uncommon for taxpayers to pay much more for a sports venue than is initially negotiated (as, famously, with Miller Park). Some cities are still paying for sports palaces when they’re being pressured to replace them.

Journalist Neil deMause, co-author of Field of Schemes, a book and website about sports-venue funding, reports that one reason governments keep giving sports teams sweetheart deals is that public officials are completely outmaneuvered when negotiating with pro-sports reps. Basically, teams ask for the moon, knowing they can always backtrack.

However, public officials often simply acquiesce, surprising even hard-bargaining owners. Jim Nagourney, a 30-year negotiator of sports-venue deals, told deMause that cities are “always poorly represented” and often “get stars in their eyes.”  In the “most scandalous” deal Nagourney helped negotiate, he told deMause, “We put in all these ridiculous things and the city (St. Louis) did not have the sense to say no to any of them.” Nagourney says this always happens, because cities use in-house attorneys to negotiate these deals. Team officials understand all the issues and where the money is — concessions, advertising, TV rights and so on — while city attorneys do not. 

Teams threatening to leave town has become a routine bargaining chip, even though teams rarely follow through with the threat, according to deMause’s decades-long research of sports venues. DeMause calls it extortion and says the gambit works very effectively, since cities do not call team owners’ bluffs.

In Milwaukee’s case, Bucks owners keep dangling the NBA’s threat of relocating the team. Seattle is reportedly eager to get another NBA team. DeMause says that politicians’ fear of losing a team usually trumps public opposition and empirical data by economists.

Politicians often go to great lengths to get new sports venues financed. For example, in a deal negotiated in 1996 by former Brewers owner and MLB Commissioner “Bud” Selig, the City of Milwaukee agreed to give $1 million annually to Miller Park. This payout continues, even though the city receives no property taxes from the stadium, the Brewers or any ancillary enterprises, including parking and franchised restaurants. 

Many economists assert that team owners should finance their own new digs. The owners of several teams, including the San Francisco Golden State Warriors, are doing just that.

Some NBA teams are now valued at $2 billion and stratospheric TV deals will reportedly make every NBA team worth at least $1 billion within a decade. With those numbers, why aren’t government leaders demanding that Bucks owners invest much more, if not the full freight? And why not ask Herb Kohl to donate more? He bought the team for $18 million in 1985 and profited from free rent and eye-popping revenue shares before selling it last year for $550 million. Other arena tenants, including Marquette University and AHL’s Admirals, pay hefty rent — in MU’s case, it’s $20,000 per game.

Mayor Barrett has offered to relinquish at least $1 million a year in parking and ownership of prime real estate. However, that lost revenue may soon be forgotten (out of sight, out of mind), and thus not become a source of annoyance to city officials who have to make up for it. As long as public subsidies are not paid outright in cash, they’re easier to rationalize and accept. But the public costs are the same.

A 2013 report by the City of Milwaukee’s Legislative Reference Bureau noted “proponents of public financing for sports venues have often abandoned the ‘economic impact’ argument and contended the value of sports venues is the added prestige gained by the host city from having a professional sports team in town.”

Just don’t try to take that warm-and-fuzzy feeling to the bank.

Thumbs-down on state arena funding

Only 17 percent of Wisconsin voters back proposed state funding of $150 million to support a new arena complex for the Milwaukee Bucks, according to a recent Marquette University Law School poll. In the Milwaukee metro area, opposition to the funding stands at 67 percent, compared with 88 percent of residents outside of Milwaukee.

For the record

“The highest-cost (stadium) deals include Indianapolis’ Lucas Oil Stadium, where the National Football League’s Colts play; Paul Brown Stadium in Cincinnati, home of the Bengals; and the Milwaukee Brewers’ Miller Park in baseball. In those cases, the public share of costs, once ongoing expenses are included, exceeds 100 percent of the building’s original price tag.”

— Aaron Kuriloff, quoted in Bloomberg News reviewing Public/Private Partnerships for Major League Sports Facilitiesby Judith Grant Long.