Thoughts on the new arena deal

On Wednesday, Edmonton City Council voted 10-3 in favour of an amended framework to construct a new downtown arena. Mayor Stephen Mandel said the words that many an Oilers fan with arena fatigue wanted to hear:

It’s 100 per cent. A deal is done.

With all due respect to the mayor, the deal actually isn’t done and it won’t be unless everything goes as hoped by the parties on March 7. That and some other comments about the revised agreement after the jump.

The city’s update on the revised arena deal is available from the city’s website and serves as the primary source for the points made below.

The deal is not done, because there’s still $114 million in funding that needs to be secured. The city hopes to pick up $7 million each from the federal and provincial governments to fund a related community rink and $100 million from the provincial government to pay for the arena construction. Mandel sounded optimistic that the March 7 provincial budget would make it clear that the money was coming and also exactly where it was coming from, but until it’s actually announced this isn’t a done deal.

With that said, that extra $100 million seems more likely now, given finance minister Doug Horner’s comments in the piece linked in the last paragraph:

It would be fair to say we’re looking at something all municipalities would have access to. We’re not funding directly corporations to build facilities.

Putting those comments another way: ‘We can’t be seen to be directly funding corporations, so instead of just cutting a check for Katz we might put together a new program that will sprinkle money all over the place and allow the City of Edmonton to cut that check.’

As for the complete funding breakdown, here’s the chart from the city’s report:

All told, $333 million of the $601 million total budget for the project is currently expected to come from public coffers. The ticket tax will be levied by the city both on the new arena and at Rexall; the rate for that tax will be determined by Katz’s people. Katz’s contribution will be “paid as rent over 35 years” – meaning that for the next 35 years, the money the Oilers pay to play in the new arena will be used to pay off Katz’s portion of the arena’s construction costs.

One interesting change: the ticket tax is being expanded to include an additional annual contribution of $1.5 million to pay for “major capital rehabilitation and replacement.” In other words, Katz will still pay for major repairs and renovations, but he’s now doing it out of the ticket tax, ensuring there’s money available for those costs. This is beneficial for the Katz group because it also raises the taxes on events at Rexall, heightening the difficulty for the latter facility to remain competitive.

What happens if costs rise again? Katz Group will be responsible for any increases in the price of the Winter Garden; the city’s contribution is capped at $25 million. On the arena, presumably the 50/50 rule would apply for most items, but not for all. As one example, if changes to the east wall are required because Katz Group’s plans for development around the arena change, “the City will be responsible for the cost.” The city will also pay for the community rink, including picking up that extra $14 million if the provincial and federal governments don’t contribute $7 million each.

In exchange for $333 million in public dollars, as well as taking out the loans to cover the initial construction (which will be paid off by “rent”) taxpayers get:

  • A 35-year location agreement with the Oilers
  • A guaranteed $100 million in development around the arena (the Journal article quoted above says the Katz Group currently plans $2 billion in development around the arena, but the deal only guarantees $100 million)
  • Municipal property tax payments which are capped at $250,000 annually (assuming they reach the cap every year for the next 35 years, this comes out to a little less than $9 million).
  • Access to the arena for four weeks a year, for community purposes only (i.e. the City can’t use it commercially) and with “food, beverage and other revenues” going to the Katz group for those four weeks.
  • An obligation to pay $2 million/year for advertising for the next decade

Put it all together and essentially this deal sees a huge amount of financial risk falling on the city. The only way this deal makes any kind of sense is if the development around the arena explodes; there have been all kinds of rosy projections on that front but the reality is that the future is uncertain, and that no matter what happens with that development, the city will still need to pay for the arena. It’s a dangerous gamble because of the stakes involved – if all goes as hoped, the city is a better place for it, but if things go poorly than one-third of a billion dollars will have been sunk with no hope of recouping a portion of that money.

The other benefit for the city is that the Oilers are going to be around for a long time – both because of the location agreement and because this new deal is going to make the team even more profitable than it already is.

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  • Spurzey

    Are you not leaving out a rather big detail. The deal calls for the city to put up $219 million for the Arena portion to be raised through a community revitalization levy.

    So in a way, the ticket tax and CRL are mainly borne by consumers not the taxpayer. The CRL is a risk if the additional taxes that would be raised are insufficient.

    • While I don’t specifically mention the CRL, the summation about risk is directly concerned with it.

      I have misgivings about the way the case for the CRL has been presented. The CRL is essentially what is known elsewhere as tax-increment financing (TIF). It’s generally sold as a no-brainer – enhance future revenues by using future revenue growth to pay for tax-generating construction now.

      In reality, TIFs are far more complex than that. I’ve spent a lot of time studying up on TIFs since it became evident that the City was going to use one here, and while there are undeniable positives, there are problems as well. For example:

      TIF’s sometimes capture non-TIF generated revenue. As a simple example, property prices go up thanks to inflation anyway, and sometimes those increases get lumped in with TIF’s, meaning that money which would otherwise have gone into general revenue gets redirected into TIF subsidies. Other times, development that would have happened anyway sees it’s tax money go towards the TIF rather than to general revenue, where it otherwise would have gone.

      City services to TIF districts generally increase, and the bigger the TIF gain the bigger the increase. Those increased service costs aren’t generally paid for by the taxes in the TIF district – which they normally would be. Instead, they’re covered by tax payments from other areas of the city, meaning that non-TIF districts end footing the bill for a lot of new costs that aren’t always included in TIF calculations.

      TIF’s are almost always sold as free money, but the reality is far more complex than that. So rather than say ‘Edmonton won’t need to pay any more taxes because the money is all coming from the CRL!’ all I’m saying is that the city is betting that the sum total benefit of the revitalization downtown is going to outweigh the sum-total cost – of which the arena is the biggest, most obvious example but far from the only one.

      It’s a significant risk, and I don’t think it’s fair at this point to say that the city won’t be redirecting tax dollars to help pay for the consequences of this decision.