The Oilers’ stadium debate, soft-sounded after the CBA signing and re-floated yesterday, is barely beginning. There’ll be plenty of time for comment, especially since the EIG would be brave to float a proposal for City money during Council’s December budget debates (which already feature significant property tax increase), or during an election year (2007).
The owners and their friends deserve credit for avoiding the ransom-politics that defined 1990s location battles. But there seems no question that the debate over the Oilers’ future arena (where should it be located? who should pay?) is off to a muddy start. Bad facts breed poor arguments. At the risk of over-writing, here are five things I’d like to get on the table – or in some cases off the table and never to be seen again.
1. During the stadium debate, friends of the Oilers will claim economic benefits that are exaggerated or non-existent.
During the Oiler ownership crisis of 1997-98 the role was played by Rick LeLacheur, backed by a “Tourism Economic Assessment Model” provided by the Conference Board of Canada. Replete with multipliers and tertiary effects, and downplaying substitution effects (a dollar spent on a ticket is a dollar not spent at a different local business), the model allowed LeLacheur to make an astounding claim. The Oilers, he said, “contributed” $75 million to Alberta’s economy in the 1996-97 season, including $63 million in Edmonton and $20 million in taxes to all levels of government.
Anyone care to wager how large the benefit claim will be this time? My guess is $175 - 200 million – more than enough to justify a modest civic investment in the infrastructure needed to ensure the team continues to thrive. But as others have noted, there’s now a wealth of academic studies that debunk or qualify the building/franchise – economic benefit link. These include the Rappaport-Wilkerson finding that:
“Proponents of using public funds to finance stadium construction argue that the benefits from increased economic activity and increased tax revenue collection exceed the public outlays. But independent economic studies universally find such benefits to be much smaller than claimed. So does it makes sense for metro areas to use public funds to attract and retain major league sports franchises? The answer is definitely not if benefits are limited to increases in economic activity and tax revenue collection. A strong case can be made, however, that the quality-of-life benefits from hosting a major league team can sometimes justify the large public outlays associated with doing so.”To the advocates of public funding for the new arena I have this challenge: make your case based on quality of life, or civic pride or anything, anything except the claim that a new building will cause the city and its citizens to reap an economic reward for their investment.
2. It’s true that the EIG took a risk in 1998. But they’ve been appropriately rewarded.
Cal Nichols is a stand-up guy. So are the rest of the EIG (well, the Edmonton Journal’s retiring publisher Linda Hughes is more of a stand-up gal). But unlike their hagiographers I do not believe the Oilers’ ownership is engaged in a noble economic self-sacrifice.
Let’s begin with a fact. The members of the Edmonton Investors Group did not pay $70 million for the team in 1998. Their equity investment was $35 million – the minimum allowed under league rules. The rest was borrowed.
So when Forbes puts the team’s value at $146 million, up from its 1998 assessment of $67 million, it’s clear that the members of the EIG have done well. Based on Forbes’ estimate that the team carries a $28 million debt (implying an equity value of $118 million), the EIG have seen their equity position increase 2.37 times – an average ROE of 16% a year for eight years.
There are qualifiers, of course. The Forbes’ valuations are not the same as balance sheets, cash flows and income statements. Only the owners know how well they’re doing, and we all know there were some lean years in 2002-03. But as far as we can tell, the business has always covered its cost of debt capital, and none of the owners expected this to be a dividend-paying enterprise (neither do the owners of Berkshire Hathaway). So the best way to judge their financial well-being is their equity return. What’s the beta on an equity position in a pro-sports franchise? I’ve no idea. But I’m on solid ground saying that a 16% ROE, or anything close to it, is a return that’s commensurate with the equity risk the owners undertook.
3. The “big-city / big-revenue” competitiveness worries are dead. Or should be.
In most competitive markets, having your business generate "big-city revenues" while other competitors have lower revenues would give you relatively more money to invest in your enterprise, or more money to flow to the bottom line. But the NHL is not a normal market.
The market is distorted by the player’s fixed share of hockey-related revenues, and by the revenue sharing system.
Under a CBA the biggest cost – player salaries – is a fixed-proportion of league-wide revenue. Earn more revenue and you'll ultimately pay more in salaries and more in transfers through the sharing system. Earn insufficient revenue, and your shortfall will be made up by revenue sharing. As Tom Benjamin neatly summed up, ten NHL teams, including the Oilers, were net contributors to the league's revenue-sharing system. The teams at the top of the heap paid around $10 million into the system; those at the bottom received equally substantial amounts, with $12 million going to Nashville.
The Oilers are near the salary ceiling today. A lack of revenue is not what constrains them from adding more high-end talent. Unlike the '90s, there are no "big city" teams outspending the local boys. More money in the door would not mean more money for talent, except insofar as the new revenue increased the league's total revenues and then moved the salary cap band. It would mostly mean more money in the owners’ pockets.
Can a well-run, high-revenue team still get ahead? Yes. You can still be more profitable than your peers, and have a financial cushion against setbacks. You might also have more money to engage in monument building, but presumably you’d only do that if the returns justified the expense, in which case your poorer cousins could make the same investment on borrowed funds.
Bottom line: the Oilers have all the revenue they need to field a team that’s competitive on the ice. A new building will not help them field a more talented team.
4. The EIG already receives a significant direct and indirect public subsidy from City taxpayers.
Time for a recap. The EIG struck a solid bargain in 1998. They accepted the terms of the Location Agreement and agreed to lease Northlands Coliseum for $1 a year until 2004. In return, they received:
- all concession revenues for Oilers games,
- parking revenues north of 118 Avenue,
- $2.2 million of the $2.8 million ticket surcharge that formerly went to the City,
- ownership of the naming rights to the building (the rights were sold to Skyreach for $1.2 million a year, and later to Rexall).
Do the math: under the agreement the municipal government was providing the team with a direct cash transfer of $4.6 million a year (ticket surcharge and net cost of the facility), and incurring an opportunity cost from the foregone revenues associated with naming rights, parking, concessions and a market-rent. And by keeping the building under third-party ownership, the EIG sidestepped the property tax bill. It’s worth noting that Northlands pays the City just $1 per year for the land lease for all its facilities.
Despite the threat of the team’s imminent departure if the EIG deal didn’t go through, the arrangement won only a narrow majority vote from City Council.
Since then, not much as changed. A major renovation was completed at the arena in 2001. It included 11 new suites, the score clock, seat replacements, television lighting and roof work. The costs were shared between Northlands and the Oilers. Northlands also receives federal and provincial infrastructure grants.
Meanwhile the Northlands agreement with the City has been extended to 2013. Under the current terms, the City has agreed to index its $2.2 million contribution to inflation – so the cost to taxpayers is already set to increase. And the EIG’s deal with Northlands has been extended to 2014, continuing the flow of concession, parking, advertising, sponsorship, suite sales, ticket surcharges and Oiler game revenue to the team. The EIG agreed under its new deal to contribute $878,166 per year towards operating costs (a payment that’s also indexed) and pay $270,272 a year for the new scoreboard (if they move, the payment is reduced).
My take: if we’re going to talk about public funding for a new building, let’s include in the discussion all the forms of public money that taxpayers are investing through the current deals.
5. The CBA gives the owners a strong incentive to find external financing for a new building.
The CBA spends 25 pages on the definition of hockey-related revenue (HRR). It is heart of the deal – the base for calculating the dollar figure that drives what the player’s will earn collectively and individually under the cap system. At current revenue levels the players get 54% of the total. If the league brings in $50 million more in ticket sales the players get $27 million and the owners get $23 million.
No definition is exhaustive, but the definition of HRR is meant to cover virtually every source of revenue received by a team or the league, and if significant new revenue sources are discovered during the agreement, the owners and players are supposed to negotiate them into the HRR definition.
But there are exceptions built into the deal, and they’re what will drive the owners to find every last source of public financing they can for the stadium project.
For example, teams only have to include 65% of revenue from luxury box sales in club-affiliated arenas in the definition of HRR (100% of luxury box ticket sales are included). There are 39 suites and 10 skyboxes today. If the owners can add 10 more and lease them for a total of $1 million a year they’ll get to pocket $350,000 before thowing the rest into the league-wide HRR calculation. All other things being equal, they should also retain the $299,000 that’s their share of the HRR value. Keeping 65% of the money is a lot better than keeping 46%.
As sweet as that is, it’s not where the big money is. The HRR also excludes revenue from the sale or leasing of real estate. If the EIG owned or controlled the building and were able to rent it out to other entities or for events, that revenue is protected for the owners.
But the bonanza is getting someone else to pay for the land, stadium and infrastructure around it. Why? Because it’s not counted as hockey-related revenue.
HRR does not include:
“50(1)(b)(xv) Any thing of value received in connection with the design or construction of a new or renovated arena or other Club facility including, without limitation, receipt of title to or a leashold interest in real property or improvements, reimbursements of expenses related to any such project, benefits from project-related infrastructure improvements, or tax credits or abatements, so long as such things of value or other revenues are not reimbursements for any operating expenses of the Club."You won’t hear a criticism of the EIG from me. They are only doing what any other rational actor would do: responding to incentives. There is probably no stronger incentive for owners than the creation of revenues that don’t count as HRR. If you’re going to make the effort to earn a dollar, would you rather end up with a dollar or with 46-cents? Just don't expect me to give up that dollar without a fight.