Corporate Welfare and the Thin Edge of the Wedge

The other day, the City of Glendale approved a deal which has the city subsidizing (more in a second) the buyers of the Phoenix Coyotes hockey team to get them to actually stay in town rather than move to Seattle.  The deal is arguably better than deals it was offered in the past (it gets shares of parking and naming rights it did not have before) and may even be a rational deal given where it is today.

But that is the catch -- the phrase "where it is today."  At some level it is insane for a city of 250,000 people to pony up even more subsidies for a team that has the lowest attendance in the league.  The problem is that the city built the stadium in the first place -- a $300 million dollar palace for a metropolitan area that already had a major arena downtown and which was built (no disrespect to Glendale) on the ass-end of the metropolitan area, a good 90 minute round trip drive for the affluent Scottsdale and east-side corporate patrons who typically keep a sports franchise afloat.

Building this stadium was a terrible decision, and I and many others said so at the time.  But once the decision was made, it drove all the future decisions.  Because the hockey team is the only viable tenant to pay the rent in that building, the city rationally will kick back subsidies to the team to keep it in place to protect its rent payments and sales taxes from businesses supported by the team and the arena.  The original decision to build that stadium has handcuffed Glendale's fiscal situation for decades to come.  One can only hope that cities considering major stadium projects will look to Glendale's and Miami's recent experiences and think twice about building taxpayer funded facilities for billionaires.

The deal the other night to keep the team went down in the only way it could have.  As I had written, the NHL was insisting on selling the team for its costs when it took it over in bankruptcy, which were about $200 million, which was well north of the $100 million the team was worth, creating a bid-ask gap.  Several years ago, the city tried to just hand $100 million to a buyer to make up the gap, but failed when challenged by the Goldwater Institute.  The only real avenue it had left was to pass the value over to the buyers in the form of an above-market-rate stadium management contract.

And that is what happened, and I guess I will say at least it was all moderately transparent.  The NHL came down to a price of $175 million, still $75 million or so above what the team is worth.   The City had already sought arms-length bids for the stadium management contract, and knew that a fair market price for that contract would be $6 million per year.  It ended up paying the buying group $15 million per year for the 15-year contract, representing a subsidy of $9 million a year for 15 years.  By the way, the present value of $9 million over 15 years at 8% is... $75 million, exactly what was needed to make up the bid-ask gap.  Again, I think the city almost had to do it, because the revenue stream it was protecting is likely higher than $9 million.  But this is the kind of bad choices they saddled themselves with by building the stadium in the first place.

  • ISH @ Mininerd

    Seriously, at what point in the original process did even the most die-hard, dyed-in-the-wool, former red diaper baby of a Keynesian city official not think to themselves, "Y'know... hockey really ain't all that popular in the southwest. Maybe this isn't a good idea..."

  • Dave Boz

    I think the value of the team in its present location is actually zero, or less than zero. It is almost guaranteed to lose money, year after year. However, it has far greater value in another location. The buyers are almost certainly going to move and/or sell the team in a few years, in order to realize the greater value in (for example) a Canadian city. This is why there is a 5-year out clause in the lease. The chances of the team surviving longer than that in Glendale are pretty close to nil. But the taxpayers will have paid another $50 million in subsidies, on top of what they have already paid. It's a damned shame, but that arena was a dead loss the moment it was built. A perfect example of why sports teams won't pay for their own arenas: who can you extort when you own the place?

  • Matthew Slyfield

    Probably right after they started laying the foundation for the stadium. However, another economic concept that politicians don't seem to be able to understand is that you don't count sunk costs when making financial decisions. They spent all that money and they have to have something to show for it even if that means spending 10 x more money.

  • Matt Landry

    How many hockey fans are there in Glendale, anyway? Or all of metropolitan Phoenix, for that matter?

    I mean, at least in Seattle there are people who _play_ hockey without being paid for it, and even more who like to _watch_ hockey. So there's at least a _chance_ that a hockey team there could be a profitable enterprise. Whereas it seems like in Glendale, any possible arrangement is just going to be a case of somebody or other throwing good money after bad.

  • Hockey Fan in Seattle

    Congrats Yotes fans on keeping your team. I least we hockey fans in Seattle get Hockey Night In Canada our local cable. Can't say enough good things about that. Regarding the Yotes, better hope they have a decent team in next few years or the city council might be just delaying the inevitable. As the post points out the story would have been very different if the arena was build on the east side of the city. Anyway enjoy the team and good luck.

  • Incunabulum

    There's all of about 10 hockey fans *total* in southern AZ let alone Phoenix. Why you would put a hockey team smack dab in the middle of a place where no-one ever grows up playing hockey is beyond me.

  • rst1317

    "One can only hope that cities considering major stadium projects will look to Glendale's and Miami's recent experiences and think twice about building taxpayer funded facilities for billionaires." - Coyote Blog

    Unfortunately the the e state of MN and city of MPLS didn't even think once when it came to gifting the Vikings a new stadium

  • Benjamin Cole

    The City of L.A. does everything wrong. But it will not build a stadium for the NFL.
    Ergo, we have not had a NFL teams in years and years.
    I would like to say "great,' but....secretly maybe we should cave in and built them their damn stadium...

  • MNHawk

    Don't worry. Suckers in bars doing pull tabs, er, make that suckers that pay nearly $10 per pack for smokes, instead of stocking up out of state, will pay for it, which is like the stadium being free.

  • MNHawk

    More like a wedgie for the people of Glendale.

  • ISH @ Mininerd

    The American population has been shifting south and southwest for a few decades now, so I could see the potential for opening a hockey franchise the the region. After all, no one up here in the land of the Original Six expected Los Angeles, San Joses, Anaheim, Dallas, Carolina, or Florida to ever attract much of a fanbase. They did.

    In a fair market, investors risking capital to move into a new market is a tried and true process. If it works, it can pay off handsomely. If it fails, you can lose your shirt. The problem here is a perfect illustration of the obvious flaws in letting the government subsidize private enterprise: they built it and no one came. In a fair market, the backers would cut their loses and take a bath.

  • Not Sure

    There's more than ten. They're just not Coyotes fans, ;)