Get Down In The Mud With The Rest Of Us

I wanted to leave Glendale's proposed $100 million subsidy of the purchase of the Phoenix Coyotes hockey team by Matthew Hulzinger behind for a while, but I had to comment on something in the paper yesterday.

The Arizona Republic, which is an interested party given that a good part of their revenues depend on having major sports teams in town, had an amazing editorial on Tuesday.  Basically, it said that Goldwater, who has sued to bock the bond issue under Arizona's gift clause,  needed to stop being so pure in its beliefs and defense of the Constitution and that it should jump down in the political muck with everyone else.

I encourage you to read the article and imagine that it involved defense of any other Constitutional provision, say free-speech rights or civil rights.  The tone of the editorial would be unthinkable if aimed at any other defense of a Constitutional protection.  Someone always has utilitarian arguments for voiding things like free speech protections -- that is why defenders of such rights have to protect them zealously and consistently.  The ACLU doesn't get into arguments whether particular speech is right or wrong or positive or negative -- it just defends the principle.  Can't Goldwater do the same?

My thoughts on the Coyotes deal are here and her.  Rather than dealing with the editorial line by line, which spends graph after graph trying to convince readers that Darcy Olsen, head of the Goldwater Institute, is "snotty,"  here are some questions that the AZ Republic could be asking if it were not in the tank for this deal

  • How smart is it for the taxpayers of Glendale to have spent $200 million plus the proposed $100 million more to keep a team valued at most at $117 million? (several other teams have sold lately for less than $100 million)  And, despite $300 million in taxpayer investments, the city has no equity in the team -- just the opposite, it has promised a sweetheart no-bid stadium management deal of an additional $100 million over 5 years on top of the $300 million.
  • The Phoenix Coyotes has never made money in Arizona, and lost something like $40 million last year.  Why has no one pushed the buyer for his plan to profitability?  The $100 million Glendale taxpayers are putting up is essentially an equity investment for which it gets no equity.  If the team fails, the revenue to pay the bonds goes away.   The team needs to show a plan that makes sense before they get the money -- heck the new owners admit they will continue to lose money in the foreseeable future.     I have heard folks suggest that the Chicago Blackhawks (Hulzinger's home town team) are a potential model, given that they really turned themselves around.  But at least one former NHL executive has told me this is absurd.  The Blackhawks were a storied franchise run into the ground by horrible management.  Turning them around was like turning around the Red Sox in baseball.  Turning around the Coyotes is like turning around the Tampa Bay Rays.  The fact is that the team lost $40 million this year despite the marketing value of having been in the playoffs last year and having the second lowest payroll in the league.  The tickets are cheap and there is (at least for now) free parking and still they draw the lowest attendance in the NHL.  Part of the problem is Glendale itself, located on the ass-end of the metro area  (the stadium is 45 minutes away for me, and I live near the centerline of Phoenix).
  • If taxpayers are really getting items worth $100 million in this deal (e.g. parking rights which Glendale probably already owns, a lease guarantee, etc) why can't the team buyer use this same collateral to get the financing privately?  I have seen the AZ Republic write article after article with quote after quote from Hulzinger but have not seen one reporter ask him this obvious question.  I have asked Hulzinger associates this question and have never gotten anything but vague non-answers.  A likely answer is what I explained yesterday, that Hulzinger is a smart guy and knows the team is not worth more than $100 million, but the NHL won't sell it for less than $200 million (based on a promise the Commissioner made to other owners when they took ownership of the team).  Hulzinger needed a partner who was desperate enough to make up the $100 million the NHL is trying to overcharge him -- enter the City of Glendale, who, like a losing gambler, keeps begging for more credit to double down to try to make good its previous losses.
  • Glendale often cites a $500 million figure in losses if the team moves.  Has anyone questioned or shown any skepticism for this number?  My presumption is that it includes lost revenue at all the restaurants and stores around the stadium, but is that revenue really going to go away entirely, or just move to other area businesses?  If your favorite restaurant goes out of business, do you stop going out to eat or just go somewhere different?
  • We hear about government subsidies to move businesses from other countries to the US, or other states to Arizona, and these tend to be of dubious value.  Does it really make sense for Glendale taxpayers to pay $400 million to move business to another part of the Phoenix metropolitan area?
  • Why do parties keep insisting that Goldwater sit down and "negotiate?"  Goldwater does not have the power to change the Constitutional provision.  Do folks similarly call on the NAACP to "negotiate" over repeal of Jim Crow laws?  Call on the ACLU to negotiate over "don't ask, don't tell"?  This may be the way Chicago politics works, with community organizers holding deals ransom in return for a negotiated payoff, but I am not sure that is why Goldwater is in this fight.  The Gift Clause is a fantastic Constitutional provision that the US Constitution has, and should be defended.
  • Jim Balsillie offered to buy out the team (and move it to Canada) without public help and to pay off $50 million of the existing Glendale debt as an exit fee.  Thus the city would have had $150 in debt and no team.  Now, it will be $300 million in debt and on the hook for $100 million more and may still not have a team in five years when, almost inevitably, another hubristic rich guy finds he is not magically smarter about hockey and can't make the team work in Arizona.   Has anyone compared these two deals?  Private businesses cut losses all the time -- politicians almost never do, in part because they are playing with house money (ours).
  • perlhaqr

    That was impressively naked shilling for wasting tax money to benefit a wealthy few.

  • George Fallar

    People keep insisting that Goldwater sit down and 'negotiate' because they refuse to file suit and instead continue a scorched earth policy through their continuous appearances on US and Canadian airwaves.

    Another question might be why do they insist on granting 'interviews' on Canadian radio? Seems an odd venue for a 'watchdog' group ostensibly concerned solely with protecting Arizona taxpayers.

  • Justin M

    Do some fact checking. You can't even get the potential owner's name correct. Obviously this shines quite a light on your credibility on the subject.

  • Mark

    I didn't read much of this article because I got caught on the first few words. The subsidy value is not 100M. The subsidy is the 100M - the real value of the parking rights(Could be 100M could be as low as 60M), + cost of capital. In reality with the change in the deal that Hulsizer proposed the only remaining subsidy is the COC. The NHL agrees to return the 25M escrow account to COG, and Hulsizers LLC provides guarantee(or guaranty) for the remaining 75M.

    You can argue for or against the deal, but inflating the value of the subsidy is rhetoric and not helpful for the average taxpayer trying to understand the issue.

  • Mark

    Ok I read further. The resistance to sitting down to negotiate represents a key misunderstanding of how contracts are drafted. When writing a contract you are trying to document in a legal way an agreement between two parties. As part of doing this drafts are produced and then reviewed with the parties to ensure the wording of the contract matches both parties understanding of the agreement. This is a lengthy process, because even when two parties agree on a subject they will disagree on how it is written, and discussion gets this resolved.

    Goldwater's decision to not participate in this process is directly prohibitive to trying to get the deal to conclusion. The contract writers are left trying to meet requirements with no measuring stick, and this is nearly impossible. Goldwater's response to this of course would be that they should live up to the law. However as proven this weekend Goldwater's interpretation of the law is different than several other experts on the subject. Arizona's former Attorney general as well as several other lawyer's have reviewed the deal as it stands, and don't see an issue with it and the gift clause. In fact according to the former attorney general the Goldwater Institute had earlier believed that the modification proposed would meet the requirements.

    Goldwater needs to meet with the parties involved so they can identify what issues exactly remain with the contract as written today. The press release that they provided was cryptic at best, referring to dollar figures that had not previously been brought up, and a misunderstanding of the role of LLCs within business. I don't suggest that Goldwater, Hulsizer, and COG can come to an agreement. However, by not even attempting to itemize the issues with the contract wording itself they leave Hulsizer and COG trying to guess what they are thinking, and this seems to change on a daily basis.

  • Mark

    Read one more time and I have one more comment on your first point. The value of the franchise has no impact on the value that Glendale gets from the franchise. The value of the franchise is gauge of the value provided to the owner, and not the value provided to the community it resides in. The value of the franchise to Glendale is 750 direct jobs, and last reported was 550M over 30 years. The 550M can be argued with, but the point remains that team value is not equal to the value of the team to the community so comparing them is pointless.

    I think including this kind of comparison has only two possible reasons, you have no understanding of the subjects that you are talking about, or you are intentionally trying to confuse the reader to prove your point. I sincerely hope that you just don't understand what you're talking about, because otherwise you're selling you're selling your integrity.

    I hope you got a good price.

  • Rock N Rolla

    This has to be the most well written piece of journalism I have read from somebody who is actually directly affected by this situation! Excellent job!!!

  • Mike

    Which NHL franchises have sold for less that $100 million "lately"?

  • Mike

    A few more points:

    I think Darcy Olsen's chosen method of negotiation is as what was stated by the Arizona Republic - snotty press release.

    Seriously, Matt Hulsizer sends a personal letter and she does a spelling correct on it in her press release?

    I too have studied the Arizona Gift Clause as well as the case Goldwater uses for example (Turken v Gordon) as well as (Wistuber v Paradise Valley). It seems the gift clause is still widely open to interpetation.

    You state the Glendale "probably" already owns the parking rights. Yet you don't know and are purely speculating, like 99.9% of your entire blog is.

    Personally, I think if Glendale proves they are legally buying the parking, which shouldn't be hard for them to do, Goldwater has little chance of winning this case in court. Let's not forget, CityNorth was not set aside, the deal remained. I think Goldwater knows this, which is why they've simply tried to kill the deal in the bond market.

    I think if you look at the subsidy Maricopa county is currently contemplating to FirstSolar, it to o would violate the gift clause given one interpretation. Yet where is Goldwater on this subsidy? Nowhere, why? probably not enough face time for Darcy.

    From some of my readings which I think clearly would point to FirstSolar being illegal:

    Widely divergent interpretations of Turken have emerged. On the “generous” end of the spectrum are those who believe that Turken has little or no effect on economic development deals— that the clarified Turken consideration prong can be avoided simply by careful drafting. Practitioners with this “generous” Gift Clause interpretation contend that economic development agreements simply need to recite the new jobs and sales taxes as the consideration given in exchange for the subsidy.

    On the “stingy” end of the spectrum are those who believe that Turken prohibits governments from counting sales tax generation, new jobs, or other “indirect” benefits of an economic development agreement as “consideration.” Practitioners with this “stingy” Gift Clause interpretation will restrict the government subsidy to an amount no greater than the reasonable value of public infrastructure provided by the developer.

  • Kyle

    Wow, riddled with false claims...

    Besides the points Mark brings up, you fail to realize the team has been used as a secondary business in the past. The team has been used to funnel money to other corporations. Recently, Moyes spent millions of unnecessary dollars through Swift Aviation group, rather than using an airline company like the team uses now. Also, the team paid millions of dollars per season to rent office space owned by Moyes, given to him by Ellman, when they could function in a smaller/cheaper space.

    You mention, "The tickets are cheap and there is (at least for now) free parking and still they draw the lowest attendance in the NHL." Last time I checked, the Coyotes are 29th in the NHL in attendance, out of 30 teams, nothing to write home about, but not "last" as you claim.

    You question the "$500 million figure", but you fail to realize the number of fans that travel from other cities to Glendale. That revenue will be moved to other businesses, outside of Glendale. Your argument on this matter is flawed. The restaurant going out of business is nothing like an anchor tenant leaving. Let's look at it this way, if you have a big name grocery store, aka, Fry's, in a shopping center, you will have numerous small shops around it. Sometimes, you have to go to Fry's to pick something up and you stop by a small store because it is convenient. Now, if the Fry's leaves, you might go to a different Fry's which might have a different small store next to it, which is now more convenient. The original small store then suffers and loses revenue, because it has lost the Fry's and may close.

    You must also take into account the number of Canadian retirees and snowbirds that have purchased property or travel here each winter because they can watch hockey, where will they go? LA, Dallas, Florida? Who knows? I don't, but it's something to take into account when determining a projection.

    Glendale's "$400 million subsidy" is purely hypothetical, but prior to offering a subsidy of that amount, the city must make projections as to how much in revenue the company will bring. Even if employees don't relocate to the new city, they still need to eat lunch. Plus, a value is added to the future companies that might relocate to that area as well. Using the Coyote's situation as an example, would the Cardinals have relocated to Glendale? Would Camelback Ranch have been built in Glendale? If none of these teams had come to Glendale, would the hotels been built? Westgate? The restaurants?

    Are you now lumping Goldwater in with ACLU and the NAACP? It sounds like it and if that's the case, the Goldwater Institute instantly becomes a bullying organization with little credibility. Goldwater Institute claims to be a "government watchdog supported by people who are committed to expanding free enterprise and liberty." Which is fine and I have supported the Goldwater Institute in the past, but they are overreaching their bounds in this instance. I would currently consider their actions as "bullying tactics" used by the aforementioned organizations.

    In regards to Balsille, he tried to back door the NHL and purchase the team out of bankruptcy. If the move had been allowed, the City of Glendale would retain only $150 million in debt, but they would still have that $500 million in losses, plus an extra year.

    Also, this talk about the team failing in 5 years is an absolute farce. It took the team almost 14 years to file bankruptcy the first time, which was only done so the team could be sold to Jim Balsille by circumventing the NHL, so, you're projection of 5 years is way off base.

    If the Goldwater Institute was looking out for the tax payers of Glendale, it could have easily notified the City of Glendale privately it's intent to sue prior to the bonds being sold, then if the City chose to sell the bonds follow through. All of the public grandstanding and letters to potential investors is unnecessary and would have left the interest rates lower saving the City in the ballpark of $80 million. But, they didn't and now if the City chooses to sell the bonds, they will have to sell them at a higher rate and make up a greater amount of debt.

    Essentially, this comes down to the short-sided-ness of the Goldwater Institute. Because, GI looks at it as another potential lease could be negotiated, another prospective owner is lurking, or something else could replace the Coyotes, whether it be another hockey team, concerts, other events, but the City of Glendale looks at it as a long-term investment with a very small window.

  • NL

    Sports franchises are popular with politicians because they create many visible winners and few visible losers. The fans, the stadium workers, the businesses that benefit from game traffic, they all win. Aside from positioning themselves as the benefactors of these winners, the politicians also win because it makes their positions seem more prestigious (more important cities have more teams; better to be a politician in an important and rising city).

    All the losers are less obvious and often don't realize that they are losing. The businesses who lost customers don't always realize it. The taxpayers may not notice because stadium bonds (and other bond issues) often aren't simultaneously coupled with tax increases. The welfare/program beneficiaries don't realize that spending may have shifted away from their programs to cover interest on the bonds.

    It's very easy for us to see the beneficiaries of a big league team. More importantly, it's much easier for politicians to claim a role in the success of team-related businesses. Conversely, it's pretty hard for a politician to get any credit for the success of regular, everyday businesses in the community. If given a clear choice, a politician seeking reelection and prestige will choose a path with fewer jobs for which he gets much of the credit over the path with more jobs for which he gets very little credit.

    Plus, sports teams naturally import a lot of rah-rah ferver and vaguely tribal feelings. So people are apt to behave irrationally anyway, even if we set aside public choice theory.

    The strongest argument against the Glendale NHL bailout is that apparently no party is willing to put up its own money in this venture. Glendale is happy to put up the money, because they'd rather owe a billion dollars to a team that stays than owe even $100M for a team that's gone. Sunken costs fallacy.

  • NL

    Edit - fervor*

    Also, I forgot to point out the exception to creating few visible losers is when they eminent domain a neighborhood or businesses to build the stadium. I'm thinking of the Ratner/Nets development in NYC. But there they managed to contain some of the objections by creating low-income housing and co-opting the opposition of ACORN. Even still, the remaining opponents just weren't very politically powerful and couldn't stop the development. The visible winners still outnumber the visible losers.

  • John

    Excellent, don't let that facts get in the way of a good rant.

  • NL

    Kyle said:
    "Sometimes, you have to go to Fry’s to pick something up and you stop by a small store because it is convenient. Now, if the Fry’s leaves, you might go to a different Fry’s which might have a different small store next to it, which is now more convenient. The original small store then suffers and loses revenue, because it has lost the Fry’s and may close."

    Yes, this is merely shifting economic activity, not creating it. Most purchases probably would have happened anyway. But now they happen somewhere else. This is more or less zero sum - until you factor in the price tag of the intervention itself. If the government is investing millions (or maybe hundreds of millions, as with sports teams) then it's negative sum. The overall economy LOST value, wealth was destroyed in the process of shifting it.

    The economy loses overall. Wealth was destroyed in order to bring about a policy that merely shifts wealth, but on average probably doesn't create much wealth. If the result could have reliably been expected to create wealth, then we could rely on developers to pursue the project even without public backing.

  • Ryan

    First off, Kyle, saying your 29th out of 30 for attendance is still not a win. Guess what, your beating Atlanta. The other team that's being discussed in moving circles.

    Now can someone answer me this. Why doesn't Mark just buy the team himself without the help of Glendale?? Seriously, its that simple.

    How about this, you want to save your team. Go out to the games!! Its that simple!! Buy tickets, get friends to buy tickets and go. Go when its not dollar beer night just to prove that you dont care what day it is. You support your team.

    Want an inside scoop...here it is. Goldwater sees that the coyotes have done nothing but lost money. Even when they were one of the top teams last year, they lost money. Why is that?? Oh yeah, kinda hard when your average attendance is just over 9000. I've seen more at a junior hockey game.

    Fact of the matter is Matt sees the money being lost and doesn't want to get fully involved in that part, poor bastard will be broke in 3 years.

    Either way good luck keeping your team.

    One more thought, is it kinda stupid that a city is relying on a team that only uses its arena 40 times a year?? Really??

  • Dave Boz

    Those who favor subsidies for professional sports should remember exactly what they are arguing for: taking money from taxpayers, by force, and giving it to very wealthy people who want something for nothing. You can justify this all you want, but in the end it's an immoral activity, nothing more. Matthew Hulsizer won't buy the hockey team with his own money because... well, because he doesn't want to risk his own cash on his hobby. Go ahead and argue that we ought to fund his hobby. Mr. Hulsizer has a sweetheart, no-bid arena management deal so that his hockey team's losses will be subsidized for a few years. Go ahead and argue the morality of that. You don't think we should put public expenditures out for bid? OK, can I get a no-bid contract to sell gasoline to fuel Glendale's city vehicles for, let's say, $8 per gallon? Why not?

    Pretending that Goldwater is the problem is the sickest part of the arguments. We want our subsidies, you cry, and anybody who gets in our way is underhanded or unethical or grandstanding. Why would Darcy Olsen dare to answer the phone when a radio station from Winnipeg calls? That proves the subsidies are a good idea!

    In the end, Mr. Hulsizer and/or the NHL could easily solve this problem. Hulsizer could buy the team with his own money. Why do you think he won't? We all know the answer, and it is simply that he knows the enormous risk involved, and the likelihood of failure. His nonsensical 'guaranty' is utterly meaningless: the promise of a shell company to pay the rent that he's already obligated to pay. Will his personal wealth be behind any of those make-believe guarantees? Most certainly not! Get the taxpayers to take my risk, he says, and the damned hockey fans cheer and say "Go Yotes go!"

    Go to hell, I say. Subsidies for professional sports are a cancer, and every city that engages in this practice ends up screwing its taxpayers for the benefit of a small number of rich people who don't give a damn about the city or the people who live in it. It's disgusting to watch people cheer for giveaways from Glendale taxpayers to wealthy people who live elsewhere and demand that the local schmucks fund their toys.

  • Mark

    @Dave I think you have some valid concerns regarding subsidies. The proper forum for those subsidies if you're a taxpayer of Glendale is to contact your council member and let them know what you think. If you disagree with their decisions feel free to vote against them during the next election. What Goldwater is doing is something different, it's trying to interfere with the elected officials of Glendale and enforce it's own belief. If you are a taxpayer anywhere you should be concerned about Goldwater. They are building a track record of interfering with elected governments. Taxes may be forced out of our pockets, but the use of those tax dollars should be controlled via elections not through the interference of special interest groups.

  • James H

    "Goldwater’s decision to not participate in this process is directly prohibitive to trying to get the deal to conclusion. The contract writers are left trying to meet requirements with no measuring stick, and this is nearly impossible."

    No measuring stick? How about the AZ Constitution? I think it takes pretty tortured logic to find a way to describe Glendale giving Hulsizer $100M and it not being a gift or subsidy. Yes, I know the parties are working diligently to structure the deal as complicated as possible to get around this. If this is such a safe bet for Glendale, Hulsizer could just get a private loan. To me, it seems like throwing in more money to try to save a previous bad investment. The likely result is Glendale taxpayers covering the cost for many years (unless they move out to another city). I'm glad I don't live there.

    Also, how long would it take to recoup the $100M with owning rights to parking concessions. Careful now, make sure you consider bond interest. I don't think that this adds up, either. If the average attendance is 9000 people per game (and we'll even assume that they all drove by themselves), and parking price is $20, it takes 30 games to cover the interest for a year if the bond is at 5%.

    About negotiating, what terms would the Goldwater Institute even have to negotiate over? A payoff would amount to extortion, and they haven't taken that tack on the other cases. Seriously, fill in the blank, GWI will drop this suit in exchange for __________________.

  • Mark

    @James H

    Please refer my whole post and don't just pick and choose. As proven by the City North case in the very least this section of the Constitution is not easy to interpret. Two courts made two different decisions in that case. In this case several lawyers, including a former AZ AG, have said that the current deal complies with the constitution. Only Goldwater is interpreting it as a violation that's why they need to participate.

    As for the 100M number, please refer to my first comment before throwing that number around, it's just plain not a valid number. If there is a subsidy in this case it's certainly not the whole 100M.

    As I said, in the post that you are referencing, negotiation isn't always about disagreement. It is a necessary process so that everyone can share a common understanding of the deal as written in the contract.

  • Morgan

    @Mark
    The $25M has nothing to do with Hulsizer's deal. That is the City of Glendale's own money that they put in escrow last year to buy another year to find a buyer for the team. As agreed to with the NHL, if a buyer is found they get that money back. Hulsizer is not giving them $25M, the NHL is giving it back. So, it's not $100M-25M = $75M. It's $125M-25M=$100M. Still $100M, plus interest, which pushes $300M in total.

  • Mark

    @Morgan:

    You're both right and wrong. The 25M is the NHL's to give, however the rules of the agreement were that a buyer in Glendale has to be found for it to be retrieved. Without Hulsizer there is no buyer, so while he does not provide the funds the funds are not available unless he buys.

    So you're left with 100-25=$75 with hulsizer or -$25 without him. Now you can argue that Glendale should cut it's losses but I don't want to debate that. You likely have an opinion, and I have an opinion, but that's what politics is about, and that's why we vote. Goldwater doesn't want the voter to have a say in the outcome of this, they want to override the elected officials. That's what everyone should be concerned about, using threat of lawsuit to override voter will.

    This battle certainly isn't about subsidies, because otherwise Goldwater would be drowning in lawsuits. First Solar comes to mind immediately.

  • Todd

    To All:

    I am confused.

    The bonds are for 116 million. No matter how you do the bond calculations between 6 - 9 percent the City of Glendale is on the hook for way more than 116 million. More like 240 million and over depending on the interest rate. So why do people keep referring to the initial bond offering price when that is misleading?

    The parking revenue projections even at the best don't come close to the cost of paying back the bonds and interest even with hulsizer's guarantee.

    How come no one talks about this? No matter what, if these bonds are sold money will come out of taxpayer's pockets and therefore seems illegal. If the deal was just to pay back the initial bonds then the parking study and Hulsizer's deal make sense, but that is not accurate. To be accurate add in the bond interest rate costs and then you get the real picture. $240 million at the bare minimum to cover the bonds.

    How is this not unconstitutional and how then is GWI not doing what is right?

    All the deal supporters please explain this for me?

  • http://www.mainstreetoutloud.com Rudi K

    Simply put: A thoughtful and thought provoking article with precise questions that should require just as clear an answer.

    As I have said before, "This deal smells---it smells like burning money".

  • Rock N Rolla

    @ Todd - Very well put! However, asking the deal "supporters" for an explanation is pointless. All they will say is "Do you know how many jobs will be lost? Do you know the arena will shut it's doors?" That's all they ever say. Totally irrelevant to subsidizing millionaires with the average joe's hard earned taxpayer dollars.

  • http://www.cogfactory.net colson

    Looters. The city. The team's owners. Everyone who supports passing this deal. Looters.

  • Craig

    Mark, the value of the franchise certainly does matter. It highlights how ridiculous this plan is. It's bad enough to throw taxpayer money after pro sports teams, but throwing an amount of money well in excess of what the team is worth is unbelievable. Why doesn't the city just buy the team outright and save some money?

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