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An Economic Analysis

Building an Entertainment and Sports Complex in Downtown Sacramento

This publica on was prepared for:

The Sacramento Kings

The intent is to give greater transparency to the economic analysis of the Sacramento Railyard Arena proposal. The research and produc on of the report was conducted exclusively by Beacon Economics.

Beacon Economics, LLC

Christopher Thornberg Founding Partner 5777 W. Century Blvd., Suite 895 Los Angeles, California 90045 310.571.3399 Chris@BeaconEcon.com

Jordan G. Levine Economist & Director of Economic Research 5777 W. Century Blvd., Suite 895 Los Angeles, California 90045 424.646.4652 Jordan@BeaconEcon.com

For further informa on about Beacon Economics, please contact:

Victoria Pike Bond Director of Communica ons Beacon Economics, LLC 415.457.6030 Victoria@BeaconEcon.com

Or visit our website at www.BeaconEcon.com.

Reproduc on of this document or any por on therein is prohibited without the expressed wri en permission of Beacon Economics, LLC. Copyright 2012 by Beacon Economics, LLC.

Executive Summary
Think Big Sacramento was established to spearhead the development of a world-class entertainment and sports facility as part of the larger plan to develop the old railyard in downtown Sacramento. The centerpiece of the massive urban development would be a brand-new arena that would host the home games of the Sacramento Kings and numerous other events over the course of the year. The City of Sacramento has teamed up with the entertainment giant AEG in order to plan and operate the facility. While plans have yet to be fully drawn up, the cost of the arena has been given the very specic price tag of $390.5 million. The Kings are being asked to fund slightly under 20% of the upfront construc on and development costs, while the City of Sacramento and AEG would be responsible for the remaining balance. In addi on to the upfront dollar amount, the Kings would face further costs through the loss of revenue streams a er comple on of the facility in the form of cket surcharges and revenue sharing with AEG. Beacon Economics was contracted by the Sacramento Kings to study the underlying assump ons of the nancial plan backing the construc on of this Entertainment and Sports Complex (ESC). For the team, these assump ons are ed up with the revenue projec ons for games played at the new facility. For the city, the cost of the project is being nanced primarily by the mone za on of city parking assets and the sale of city-owned land, as well as with general fund revenuesrevenues that are expected to be backlled by funds received from the center itself. The public expense is being jus ed by the expected increase in overall economic ac vity in the city resul ng from the new arena and entertainment complex. Beacon Economics has looked over the projec ons and has concluded that the team and the city are unlikely to see these revenue increases. Specically: Team Revenues. Ticket revenues will come in roughly 10% to 30% below current es mates because the current forecast fails to take into account the role that the housing bubble played in the spike in cket sales in 2005 and 2006. Likewise, the forecast fails to factor in the loss of non-premium cket revenues resul ng from the addi on of luxury boxes. It is important to note that our es mate considers three dierent scenarios for the success of the team in terms of its win-loss record. Parking Revenues. Es mates of funds earned from the mone za on of parking revenue are on the very high end of the es mates provided to the city from their nancial consultant. According to the citys consultant, the moneza on could net up to $60 million less. Such deals o en carry addi onal risk even a er a deal is signed. The City of Chicago is currently dealing with the a ermath of the priva za on of its parking opera ons. There are ongoing lawsuits with the operators of the system, and the city is facing a poli cal backlash from a public that is upset over the loss of control. Land Sales. The city expects to raise $18.5 million from the sale of land assets, most of which will come from land sales around the current arena. While the city maintains that these es mates are conserva ve, it is worth poin ng out that this land is under the same restric ons that are currently preven ng the overhaul of the existing facilitynamely, the FEMA-imposed sanc ons due to the degrada on of the levees that protect the area from ooding. Revenue Backll. The mone z on of the parking assets will leave a $9 million gap in the general fund budget for the city. The shor all will be signicant, because the city is already facing a budget gap of $15 million, despite having endured large declines in spending in recent years. The plan calls for these revenues to be backlled through a surBuilding an ESC in Downtown Sacramento 1

charge on cket sales and other facility opera ons. Unfortunately, these es mates are based on the same overly op mis c gures. In other words, its highly unlikely that these revenues will in fact be raised in en rety, leading to further problems for the citys budget. Moreover, there is no allowance made for the fact that any addi onal spending for the new entertainment complex a er construc on begins, or any failure to realize proposed revenue sources, will reduce spending elsewhere in the city, curbing overall services to Sacramento residents. Construc on Risks. The city has minimized the risks that are involved with large-scale projects such as these. There is a growing movement to prevent the use of public funds for a new arena. The railyard itself is poten ally contaminated with hazardous waste. Plans for the stadium have yet to be drawn up. And now that the redevelopment agency that was in charge of the project has been phased out by the change in state policy, how will the addi onal funds needed to develop the necessary infrastructure be found if proposed revenue sources are not realized? All of these issues imply that the arena and surrounding development will take longer to develop and cost more than is currently budgeted, and the hole in the general fund from the mone za on of city parking assets will be unbacklled for that much longer. A review of these assump ons suggests that the arena proposal does not pencil out for either the team or the city. Even under the current plan, both en es are being pushed right to the edge from a nancial standpoint, with li le room for error. When the expected revenues fail to materialize, both will end up severely nancially distressed. Given the current budget dicul es faced by the city, such poten al outcomes cannot be ignoredas the lessons of Stockton, California, and Harrisburg, Pennsylvania, demonstrate. As such, we would not recommend that they enter into this deal as it stands in its current form. The intent of this report is to present Beacon Economics analysis of the Sacramento railyard arena project. As such, it is important for us to clear up a few mispercep ons about our analysis that have arisen since our recommenda ons were made public. First, we are not asser ng that the arena should not be built. Being based in Los Angeles, we see rsthand the value of a world-class entertainment des na on in helping to revitalize a downtown area. But it does not follow that development plans can sidestep the need to meet basic criteria regarding nancial viability. The City of Los Angeles contributed only $75 million to the Staples Center and for that commitment received some por on of the parking revenues that would be generated. From our perspec ve, the deal between the Kings and the City of Sacramento could be saved, but the plans need to be scaled back in order to t within a more realis c set of expecta ons regarding revenues. Alterna vely, the current plan might be able to proceed if addi onal revenues can be found to help underwrite the costs. One such source could be addi onal private investment from developers of the surrounding railyard land who stand to benet if the proposed ESC would indeed reap increased economic benets from the development. However this begs the ques on, if the new ESC were readily perceived as a protable venture, why havent other developers come forward with an investment of their own? Second, this study does not in any way address the long-run viability of the Kings within the greater Sacramento region. The fact that the region is part of the 20th largest media market and in the top 30 metropolitan areas in terms of popula on would suggest that the viability of a professional sports franchise within the area should not be an issue. When Beacon Economics was created in 2006, integrity was and con nues to be the fundamental value of the organiza on. We do not sell our opinion. All clients are told up front that our research is data driven and might not show the results that clients wish to hear. We endeavor to provide honest answers, given the evidence available. We are

Building an ESC in Downtown Sacramento

always willing to hear opposing viewpoints and accept addi onal informa on, including evidence regarding revenue assump ons for the arena project. If new informa on rises to the level necessary for us to change our assessment, this report will be revised accordingly. In summary, we do not deny that a new arena and entertainment center is a great idea for the Kings and the City of Sacramento. But governments, like households, must learn to make plans on the basis of nancial reali es. The assump ons being used to jus fy this plan dont pan out. So either the project needs to be shrunk to levels the city and team can aord or other sources of revenue need to be located and used.

Introduction
The Kings have played in their current arena, Power Balance Pavilion (PBP), since 1988, making it one of the oldest in the Na onal Basketball Associa on (NBA). The structure has much in the way of deferred maintenance and has few of the ameni es considered to be almost mandatory in a newer facilityclub seats, for example. It has been known for some me that the facility will either need a major retrot or the team will need to move to a new loca on. City leaders have clearly been in favor of the la er op on. While Sacramento has been growing at a rapid pace, most of this growth has been on the periphery of the metropolitan region. There has been the desire to revitalize the downtown region of the city, starting with the development of a new Entertainment and Sports Complex (ESC), with a new arena as its centerpiecea venue for the Kings as well as for numerous other events. ESC Development/Construc on Costs Start-Up Expenses Sales and Marke ng ESC Land Acquisi on ESC Site Development Design and Professional Services Legal and Governmental Services Project Administra on Construc on Systems and Equipment Permits, Tes ng, Fees, Taxes, and Special Assessments Insurance, Financing, and Transac on Costs Owner Con ngency $2,500,000 $850,000 $18,917,543 $3,150,000 $17,825,959 $1,100,000 $14,094,973 $257,836,846 $30,200,000 $16,135,980 $9,500,000 $18,409,688

The City of Sacramento, the Sacramento Kings as represented by the Uses of Funds - Total $390,520,988 NBA, and the Anschutz EntertainSource: City of Sacramento City Council Report 2012-00231 ment Group (AEG) have been in talks for the development of just such a structure to be located in the old railyard adjacent to downtown. The current proposal for the development of this new ESC involves a nancing plan that would cost a total of $390.5 million dollars. The specic costs are broken down in the tables below:

Renova ng PBP may be possible, but it is acknowledged to be dicult because of current building restric ons in the Natomas area of Sacramento where it is located. The Federal Emergency Management Agency (FEMA) has decer ed the Natomas basin levees, which halted all new construc on in the area on lands that are below the current ood plain. It isnt yet clear how this issue might be dealt with by the local government and the team if the decision to proceed down this path is made.

Building an ESC in Downtown Sacramento

The City of Sacramento will be the primary source of funds for the upfront construc on and development costs of the center, contribu ng $255.5 million. Of this amount, $230 million is expected to be raised through the mone za on of the citys parking assets. Importantly, this sale will leave a $9 million gap in the general fund, since that is approximately the net annual contribu on parking provides to the city according to the es mates from city sta. These funds are expected to be backlled through a variety of sources. The majority of the remaining balance for the city is to come from the sale of land assets. The rest of the funds to cover the upfront construc on and development costs will come from the team itself as well as from the ESC operatorAEG. The amount of money the City of Sacramento would contribute to the project is not insignicant. The Funding Sources overall budget for the city is about $1 billion. The anCity Contribu on $255,525,000 nual general fund budgetfunds not ed to specic Capital Campaign/Other $3,000,000 purposesis slightly over $300 million. As such, this Sacramento Kings $73,250,000 stadium is going to cost the city close to one full year ESC Operator $58,750,000 of discre onary spending. This, of course, does not Sources of Funds - Total $390,525,000 include other secondary costssuch as reconstructSource: Sacramento City Council Report 2012-00231 ing the infrastructure around the railyard, addressing unforeseen development costs (e.g., the poten al to be on the hook for environmental cleanup or the need to take care of historical ar facts), and other expenses that o en arise with such development eorts. In comparison to some other recently built arenas for NBA franchises in Houston, Oklahoma City, and Orlando, the proposed costs for building a new ESC in downtown Sacramento trumps their respec ve price tags, both in terms of the overall cost as well as in terms of the per capita public spending. It isnt clear why this project is so expensive. With respect to the arena project, there is no free lunch. Whether the city is nding new sources of revenue to nance the project or diver ng exis ng resources to it, these are public dollars being used to support the construc on. As such, no ma er how clever the nancing plans are, there are only four ways that such expenditures can be oset. Prots from opera ng the facility Higher taxes or fees on residents and businesses Reduced spending on other budget items Expanding the overall tax base by increasing local economic ac vity It is no secret that Sacramento, like many ci es across the state and na on, is facing budgetary problems. General fund revenues have shrunk by $75 million over the past four yearsnearly a 20% decline. Libraries, safety, parks, and infrastructure investments have all been sharply cut back. The current budget acknowledges an es mated decit of over $25 million for the next two years. The regional economy has not bounced backthe area s ll has a high unemployment rate and a depressed housing market. And, of course, Sacramento is dealing with many of the same long-run stressors that ci es across the United States are grappling withmainly, the growing costs of pensions and other benets for employees.

Building an ESC in Downtown Sacramento

NBA City Sacramento Charlo e Atlanta Memphis Miami New Orleans Oklahoma City San Antonio Houston Dallas Indianapolis Los Angeles

City Popula on 470,000 610,949 470,688 672,277 386,417 454,863 531,324 1,256,509 2,016,582 1,213,825 784,118 3,844,829

County Popula on

Date Built 2015 2005 1999 2004 1999 1999 2002 2002 2003 2001 1999 1999

Cost ($ Mil) 390 265 214 250 194 110 89 186 235 420 183 375

Public Funded (%) 65 100 91 83 59 100 100 84 100 30 43 19

Public Funding Source City City City/County County City County City/County City City

Per Capita City $539 $434 $413 $154 $242 $168 $58 $104 $100 $19

Per Capita County

927,644 2,496,435

$112 $23

1,714,773 4,092,459

$62 $29

Source: U.S. Census and the Na onal Sports Law Ins tute of Marque e University Law School

The City of Sacramento is expected to raise funds largely by mone zing the parking systemsomething that many ci es have done in recent years with varying degrees of success. The city currently receives roughly $9 million in annual revenue from the parking system. The loss of funds to the general fund from selling o parking revenues are expected to be backlled through prots on the opera on of the new ESC through special cket surcharges for both Kings games as well as for other events. In other words, on the surface, it sounds as if the facility wont cost the city directly. Of course this isnt right. The value of the parking system to investors, or the city if they choose to leverage future revenues through debt nancing, is not the current annual prots, since those could not jus fy the assumed price of the system. Rather, it is because these private investors, or the city, are expected to invest in the system in a variety of ways that can increase the protability of these assets. These addi onal revenues are truly a public subsidy for the proposed ESC, as these funds could instead be used to backll the current shortages in the general fund and help restore funding to cri cal public services rather than go toward the construc on of a public arena. The argument here must be, then, that either city residents prefer the city-owned arena to the provision of other services, or that the arena will provide enough of a boost to the local economy so as to make up for this implied subsidy. Because this benet will not be collected for a number of years, one has to wonder whether this is the right me to make such a long-term investmenteven if the arena ul mately provides a posi ve net present value to the citygiven the inability for a municipal en ty to borrow to cover short-run decits. It isnt just the city that is taking on risk. The team will be leaving its current facility, which it owns outright, to operate within the new structure. While the team recognizes the need for a be er home, it is also expected to make a substan al up-front investment in the facilitya cost that is expected to be oset over me by a substan al increase in cket revenues. While the team will be able to play in the arena rent free, it is worth no ng that they will con nue to be responsible for covering most of the costs of opera ng the arena during the games, such as paying for security, for example. As already noted, this report is not intended to put forward the view that the city should not build an arena. This is ul mately a choice for the city residents and the owners of the Kings to make. Our role is to focus on the underlying
Building an ESC in Downtown Sacramento 5

assump ons being used and to assess the viability of the project as a nancial investment by the public and the team. This report outlines the poten al risk of building this new ESC from ve dierent perspec ves. Ticket revenues for the team and city Mone za on of parking opera ons and long-term parking opera ons Other poten al unfunded liabili es during the construc on phase Poli cal uncertain es regarding public funding Long-run economic eects of the facility on the citys economy With respect to the rst two items, our worries are that the city and team will not experience the currently es mated revenues from the sale of the parking opera ons or from the cket revenues from the new facility. For the city, either case would imply that it would have to nd addi onal funding to nance the arenaeither through higher taxes or by shrinking expenditures elsewhere. For the team, a smaller revenue base would, at a minimum, hurt the ability of the owners to rebuild the team so that it might yet again make its way into the playos. At worst, it would threaten the nancial viability of the team. There is also the issue of the railyard itself. It is not clear to us from the public records at our disposal how much of the proposed budget is for the arena structure and how much is for the infrastructure around the arena necessary to make it ready for the expected trac related to game and non-game events. We also do not see how the city will have the resources to handle poten al risks prior to construc on, such as problems with the land itself, unexpected costs or delays from environmental reviews, or even the poten al for a referendum on the public moneys making it onto the ballot and being voted down. All of these could seriously delay the project, pu ng the revenue ows farther into the future or ending the en re project a er a substan al investment had already been made. As it currently stands, this proposed deal for building a new ESC in downtown Sacramento is a big risk for the City of Sacramento and for the Kings. These risks are being glossed over by the long-run promises of economic growth, but in our assessment the es mates of the overall posi ve impact on the economy are overblown. While the economic impact report commissioned by the city paints a nice picture of the economic ac vity that will be generated, the report has fundamental aws that bias the results upward. Could the es mates come in as planned? There are always uncertain es, both posi ve and nega ve, with respect to projec ons. But a basic analysis shows the projec ons to be based on, charitably, best-case scenarios or, not so charitably, a wing and a prayer. Rather than hoping for the best but planning for the worst, this arena proposal plans on the best while ignoring the worst. Our advice to the team and the city is simplethe deal as it is currently structured will almost certainly create future nancial problems for both en es. As such, either addi onal sources of revenue need to be brought in to address these risks or the scale of the project should be reduced, such that the revenues that can realis cally be expected to emerge will be able to support the expense.

Ticket Revenues and the General Fund Backll


The es mates of the revenues to be earned by the team and the City of Sacramento at the new facility are our rst concern. The es mates for gate receipts at the Kings games alone are being predicted to almost triple rela ve to the
Building an ESC in Downtown Sacramento 6

current season, which is, we believe, a far too aggressive gure. Most of the gate receipts go to the Kings as one of the larger sources of revenue that supports the team. But it isnt just the team that is exposed to risk if cket sales should not live up to the forecast. The City of Sacramento is expec ng a substan al por on of the parking revenue backll in the general fund to occur from a endance at the arena. There are special cket surcharges for both Kings games and non-basketball events, as can be seen from the following breakdown of the expected backll. Of the $9 million of expected backll, over $7 million comes directly from opera ons at the arena. The city is highly exposed to whether the arena proves to be a protable business investment. In general, an asser on like this always makes economists worrya er all, if the new arena is going to be such a wonderful prot-making ac vity, why isnt it able to be fully or largely funded by private capital instead of public funding? It is necessary to note that the remaining balance of the Backll Solu ons Amount backllalmost $2 million anCity Parking Revenues from Non-King Events $965,000 nuallyis expected to come Ticket Surcharges on King Events $2,640,000 from parking revenues. This Ticket Surcharges on Non-King Events $1,100,000 by itself raises ques onsfrom ESC Generated Possessory Interest Tax - City $850,000 our reading of the documents Property Taxes Paid by the New Premium Parking Facility - City $50,000 all the parking revenues the ESC Taxes (Sales/U lity User) City $300,000 city current collects seem to City Prot from ESC Opera ons $1,000,000 be included in the plan to Digital Signage $200,000 mone ze city parking assets. Whether these funds are comSubtotal $7,105,000 ing from the assets involved Parking System $1,895,000 in this transac on or from Total $9,000,000 other sources is s ll unclear Source: Sacramento City Council Report 2012-00231 to us. The amount involved is small rela ve to the city budget, but it does represent how all these es mates are made o of best-case scenarios and in some cases even then a fudge factor is put in. We dont have the ability to fully vet the forecasts for non-game events and expected revenues for the city, since nding data on the nancial success of comparable facili es is dicult at best. Later in this report, we examine some case studies that illustrate how such public investments hardly ever live up to their ini al hype. We do, however, have the ability to directly consider the forecast for revenues at Kings games. As we shall demonstrate, these are highly overblown and, in our opinion, cast doubt on all of the proposed funding sources dependant on increased cket revenues. Before we dig into the nancial analysis, it is important to note that our es mates here focus on cket revenues, not game a endance. Those who have taken Beacon to task over our assessment of the arena plans have consistently defended their numbers as moderateonly a modest increase in the number of people at the stadium. But a endance per se does not pay for teams and stadiums cket sales do, and revenues are the focus of our examina on. The connec on between cket revenues and a endance is further complicated by the fact that the Sacramento Kings
Building an ESC in Downtown Sacramento 7

regularly make charitable contribu ons throughout Sacramento in the form of donated ckets. For this reason, we focus our analysis on cket revenues themselves, which are at the heart of the ma er, as opposed to total a endance, which is not the same as total paid a endance. At a cursory glance, the projec ons for cket revenues dont seem too implausible. Ticket revenues for the Sacramento Kings peaked during the 200506 season, and the projec ons for the opening season at the new arena would put total revenues at roughly 22% more than this benchmark, including the teams take, the citys surcharge, and AEGs por on of the premium seats. Given the fact that the new facility will have premium club sea ng, unlike PBP, this may not seem too op mis c. Of course, rela ve to revenue gures for the current year, the projec ons do look out of sync. Even a er adjus ng for the shortened season, the projec ons are over 2.5 mes the current totals. The standard reasoning is that the current gures reect the poor performance of the team. In other words, if the owners build a be er team, they will be rewarded with higher revenue es mates. Unfortunately, the win-loss record in a given year does not correlate well with actual cket revenues in the same year. The team saw its peak years at the start of last decadeseveral years before there was a peak in revenues. And during the peak years of revenues, the teams win-loss record was below .500. An increase in revenues in any given year just cant be en rely a ributed to the teams performance in that same year. Again, defenders of the arena plan claim that the a endance projec ons are based on modest increases in actual a endance at the games. This may well be the casebut modest projec ons in actual cket buyers turning into very large increases in revenues requires individual a endees to be paying much more for each seat. According to city ocials, the ESC is expected to bring a li le over 15,000 fans per Kings game, which, according to their gures, is less than the average a endance during the past 20 years of sellouts (17,300), and more than this years average a endance of 14,508 for the 2011-2012 season. However this average a endance is not the same as average paid a endance, which is much lower due to charitable dona ons as previously men oned. The problem with this is that the city is projec ng both lower cket sales and higher cket revenues than were realized at their respec ve peaks. Ticket sales and cket revenues are two dierent measures, so it remains unclear how the city can jus fy such high revenue projec ons if sales do not see a similarly sized increase. In fact, the peak in cket revenues coincided not with the teams winning percentage but rather with the run-up to the housing bubble and the overheated economy. The high degree of correla on between the teams cket revenues and economic indicators (such as total nonfarm employment in the Sacramento metropolitan sta s cal area and median home prices), points to the historical fact that people had a lot more money to spend in the me period of high cket revenues. A er the housing bubble burst and the Great Recession came into full swing, the cket revenues declined just as employment and other economic indicators declined. The Sacramento MSA was hit harder during the Great Recession than other metropolitan areas in California. Economic recovery will help rebuild the revenue stream, but, short of another housing bubble, we cannot foresee such spectacular increases in cket sales, even with premium seats added in.

Sacramento Kings Sacramento Kings Sacramento Kings

Building an ESC in Downtown Sacramento

To demonstrate how these numbers are too high, Kings Ticket Revenues and Sacramento Home Prices Beacon Economics developed a forecast model for revenues that might be received at the new arena. The model is based on the history of economic acvity in the area with respect to employment, home prices, and taxable sales. The model also took into account the win-loss record of the team. There is a correla on between the percentage of games the Kings won in the previous few years (but not the current 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 year) and cket revenues in the current year. CoinciYear dentally, the decline in the Kings win-loss record preTicket Revenue Current Revenue Projections Home Prices ceded the overall economic decline. This illustrates Source: DataQuick and Sacramento Kings the perfect storm that led to record-high cket revenues: not only was the economy overheated, with consumer spending reaching record-high levels, but the Kings were winning games at a record-high percentage just a few years prior. Our forecast model for cket revenue only works for non-premium seats however, since PBP currently has no premium luxury box sea ng. To account for the premium seats, we made two adjustments. First, as opposed to assuming a 100% sale of club sea ng, we instead use the league average of 85%. Second, we also have to account for the cannibaliza on of non-premium seat revenues for such club seatsa er all, the folks who are most likely to move to these new seats are those who now likely occupy some of the highest-priced oor seats in the exis ng arena. Thus, we need to consider the degree to which the sales of new seats will subtract from sales of normal seats to accurately arrive at an es mate of total cket revenue. How much of a rebound might the Kings expect in terms of cket sales? Much in the same way the Sacramento MSA was hit harder during the Great Recession than other metropolitan areas in California, the Kings cket revenues saw a greater percentage decline from peak to trough than the revenues of other small market teams. From the peak in the 200506 season to the 201011 season, average non-premium gate receipts fell 57%, the largest decline seen among small market teams over the same me period. The only other small market teams with cket revenue declines close to this were the Indiana Pacers (53%) and the Memphis Grizzlies (40%). A er these teams, the largest percentage decline was 17% by the New Orleans Hornets.
100 200 300 Home Prices ($ 000s) 400

Sacramento Kings Ticket Revenues and Win Loss Record


.4 .6 Percent of Games Won .8

1998

2000

2002

2004 Year

2006

2008

2010

Ticket Revenue Source: Sacramento Kings

Win/Loss Record

Compared to the metropolitan areas of the other small market teams, Sacramento also saw the largest drop in total nonfarm employment from the 200506 season to the 201011 season. Addi onally, Sacramento is experiencing a

Building an ESC in Downtown Sacramento

.2

slower economic recovery than the other metro areas. From the 200910 season to the 201011 season, Sacramento employment con nued to decline by 1.1%, the largest percentage decline for the small market teams, while most of the metropolitan areas of the other teams realized employment gains. Yet expec ng the demand for ckets to rebound solely with an employment recovery is incorrect. According to our research, home prices in the area were an important driver of cket revenues. California, in general, and Sacramento, in par cular, saw some of the greatest increases and subsequent crashes in home prices in the na on. From 2002 to 2006, the median price in Sacramento rose from below $200,000 to almost $400,000. A er the crash, from the third quarter of 2007 to the second quarter of 2009, Sacramento median prices for exis ng homes declined 47%. To put this in perspec ve, the metropolitan sta s cal areas of the other small market teams saw declines of 20% or less. The wealth eect here cannot be underes mated. With the average homeowner being given $200,000 in equity in a four-year period, there is li le guesswork involved in determining what drove cket sales to Kings games. Notably, taxable sales were driven to very high levels at the same me. Looking forward, how realis c is it that the Kings will see record-high cket revenues again in the next ve years? As previously noted, to answer this we have carried out our own forecast of total cket revenues using a mul variate regression model incorpora ng macroeconomic data from the Sacramento MSA as well as our forecast of future economic ac vity in California. Given the high correla on between economic performance and past cket revenues, this approach yields a forecast based on economic fundamentals in the Sacramento region and state overall. Percent Change in Ticket Revenues and MSA Total Nonfarm Employment Ticket Revenues Small Market Teams Orlando Magic Portland Trailblazers Oklahoma City Thunder Utah Jazz Cleveland Cavaliers San Antonio Spurs Denver Nuggets Milwaukee Bucks Charlo e Bobcats New Orleans Hornets Memphis Grizzlies Indiana Pacers Sacramento Kings 05-06 to 10-11 129% 139% 92% 56% 27% 0% -1% -15% -16% -17% -40% -53% -57% Employment 05-06 to 10-11 -3.60% -2.20% 1.30% 2.10% -7.60% 6.50% -0.10% -4.00% 1.30% 7.90% -6.80% -2.00% -9.60% 05-06 to 10-11 1.10% 1.40% 1.80% 1.40% 0.50% 1.30% 1.10% 0.90% 2.00% 0.70% -0.50% 1.10% -1.10%

One major caveat in any forecast of cket revenues, however, is the Kings win-loss record. While we found that revenues are strongly correlated with economic performance in the Sacramento MSA, we also found that the winloss record in the years prior to a given season was likewise heavily correlated with cket revenues. In other words, implicitly built into projec ons based on previous history is the assump on that the Kings will win more games before the economy improves. To account for this, we have run three dierent forecast scenarios that vary depending on the future win-loss record for the Kings.

California Employment Development Department U.S. Bureau of Labor Sta s cs IHS Global Insight IHS Global Insight

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The rst scenario assumes a win percentage of 32% for the next ve years, which is slightly be er than the 201011 season and represents the average performance over the last several years. The second scenario has the win percentage increasing un l it reaches 50% in the 201516 season, and the third scenario has the win percentage increasing un l it reaches 70% in the 20152016 season. Lastly, there is the reduc on in non-premium sea ng purchases because some fans will move to the premium seats available at the new facility. We use two es mates herethe best-case scenario is that 20% of expected premium seat revenues are subtracted from the non-premium seats. In the second scenario, we expect a 50% cannibaliza on rate. The results are quite stark. In the best-case scenariowith limited cannibaliza on, a solid economic recovery, and a win-loss record of 70% (one of the best ever recorded for the Kings)our forecast shows that revenues for the Kings would s ll come in roughly 10% lower than the current projected totals. If we look at a scenario in which the team does not succeed in bouncing back and experiences a higher rate of cannibaliza on, the revenues come in almost 30% lower than the projected totals. This has direct implica ons for the City of Sacramento as well. As noted, a por on of the backll in the general fund comes directly from a 5% surcharge on cket sales. Only in our best-case scenario does the city receive close to this amount. Under all the other scenarios the city receives less. Ticket Revenue Forecast Results W-L 32% 20% cannibaliza on 50% cannibaliza on -23.8% -28.1% W-L 50% -15.7% -20.1% W-L 70% -9.2% -13.5%

Source: Beacon Economics As noted, we have li le ability to consider the other es mates for the number of shows and the poten al revenue that may be generated for the city. But if these numbers are as op mis c as the revenue projec ons for the Kings, then clearly there is a problem for the city, as the backll they are imagining will never be fully met.

Funding Assumptions: Risks to Residents and the General Fund


Under the proposed plan, the $390.5 million in required funding for the new ESC will come from three primary sources. The City of Sacramento will be responsible for $255.5 million of this sum. The city has proposed a series of city-owned land sales and a parking mone za on plan to raise the vast majority of this gure. In their proposed deal, the city has stated that it could raise an es mated $18.5 million from revenue generated by the sale of city-owned land. The land, which includes four separate parcels, has been valued at a total of $30.7 million. However, because it may take several years for the land sales to generate revenue, owing to several issues, including the changing market condi ons and environmental constraints, the city has es mated that the revenue generated from land sales will total $18.5 million. Nearly two-thirds of the city-owned land that is part of this revenue package is in the Natomas region of Sacramento, which is currently subject to a building moratorium imposed by FEMA that will remain in eect un l the levees surrounding the area are recer ed. The metable behind this process is unknown, and though the $18.5 million gure is a conserva ve es mate, it s ll may be too high with this restric on in place.

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Perhaps even more concerning is the uncertainty inherent in the parking mone za on plan regarding the amount of revenue Sacramento can expect from its implementa on. Using a market, nancial, and condi on assessment of the citys parking assets conducted by Walker Parking Consultants, Bank of America Merrill Lynch (BOAML) carried out a preliminary valua on of the mone za on plan for the City of Sacramento. In their report BOAML used two valua on methods: a discounted cash ow analysis (DCF), their primary valua on method, and a selected precedent transacon analysis (SPTA). Both valua on methods show a wide range between the best- and worst-case scenarios the city could face, from $170 million to $215 million using the DCF method, and from $175 million to $245 million using the SPTA method. Whether the city decides to pursue a priva za on of the parking system or create a public en ty and leverage the future value of the parking assets through debt nancing, this range in values will s ll reect what the city can expect to receive from either plan. The City of Sacramento has indicated that $230 million of the $255.5 million funding for the new ESC, or 90% of the funding sources, will come from their parking mone za on plan. It is worth men oning that BOAMLs primary valua on method, DCF, fell $15 million short of the $230 million the city has claimed will be available for use toward the new ESC. And this was in BOAMLs best-case scenario for that valua on method. In the worst-case scenario, the city would fall $60 million short of revenues needed to nance the new ESC, which is 400% of current es mated city budget decits. It is currently unclear why the city determined that BOAMLs secondary valua on method, SPTA, was more appropriate to base their expecta ons on, or why they planned on receiving the $230 million that was on the high end of the range for the SPTA method. What is clear, however, is that the taxpayers of Sacramento face considerable risk of being le with a substan al nancial obliga on should the new ESC proposal move forward and the full balance of funds promised from the parking mone za on plan fail to materialize. Lastly, there is the issue of the mone za on itself. In recent years, numerous ci es have tried such schemes, with varying degrees of success and failure. One such example is the City of Chicago, which in 2008 priva zed four cityowned parking garages in the downtown area. This deal was met with widespread cri cism from the beginning from Chicago ci zens, and the dissa sfac on has only grown stronger as there have been sharp increases in parking rates since the deal was enacted. Currently, the City of Chicago is facing two separate claims totaling $27.5 million by the group of investors who run Chicagos parking metersChicago Parking Meters LLC. The rst of these claims, for $13.5 million, is over parking revenues that the private investors have lost due to free parking that is provided for disabled drivers. The second claim, for $14 million, stems from the parking revenue that is lost when meters are taken out of service for fes vals and street repairs.

Construction Issues
Beyond the problems with the revenue projec ons discussed in the previous sec ons, there are other hurdles associated with the ESC project that need to be addressed. These concerns range from environmental and land issues, historical and cultural issues, to general public support. This sec on will focus on the risks that could arise from these poten al problems. According to the term sheet proposed by the city, building a new ESC in downtown Sacramento is subject to a California Environmental Quality Act (CEQA) review. The CEQA requires state and local public agencies to iden fy the
Dan Mihalopoulos and Chris Fusco, Chicago Parking Meter Company Wants More Money; Mayor Balks, Chicago Sun-Times, May 4, 2012.

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signicant environmental impacts of projects they will undertake, as well as any alterna ves and mi ga on measures that will reduce or eliminate those impacts. Furthermore, this project may also be subject to review under the Na onal Environmental Policy Act. The metable the city has given for pre-development (the phase for these reviews), is 12 to 14 monthswhich may or may not be enough me for these reviews to be completed. Also, the City of Sacramento acknowledges in their proposed plan that though the soil at the site has been remediated to a commercial/industrial level, ground water and vapor intrusion issues have not been addressed. Since these requirements do not put a me limit on the length of their respec ve review processes, these reviews could take longer than indicated in the citys proposed schedulepossibly delaying the scheduled opening of the ESC for the 20152016 NBA season. In the proposed term sheet, the city states that it will apply for environmental streamlining for the ESC project. However, it is unlikely that any sort of excep on will be granted for this project. Unlike the Farmers Field example in Los Angeles, where Governor Brown signed o on legisla on allowing any legal challenges to the stadiums environmental review to be expedited, the construc on of the Sacramento ESC does not come with any guarantees of having a net-zero carbon footprint and also relies heavily on public funding. Just as there are poten al environmental issues associated with the land designated for the proposed ESC, there are also historical and possibly cultural aspects to be considered. The loca on of the ESC would be at the historic railyard, which was once part of the Transcon nental Railroad. The railyard is currently undergoing a redevelopment project in hopes of revitalizing the historic site and the downtown Sacramento area, including the construc on of a new intermodal transit center. According to the City of Sacramentos original nancing plan for the Sacramento railyard redevelopment project, the city was going to raise $222 million of the $745 million needed to fund the project through parking revenue, Measure A funds, other fees, and redevelopment funds. Specically, the redevelopment funds would be raised through tax increment nancing, a method in which property taxes within redevelopment project areas can be used to nance redevelopment projects; the railyard falls in such an area. However, now that community redevelopment agencies have been eliminated in California, this money will no longer be available for future redevelopment projects throughout the state. Although this ruling does not necessarily mean that the project is dead, as it does not aect current work being done at the site, redevelopment funds were considered a source of funding for future aspects of the projectincluding housing. The status of the funding of this redevelopment project remains unclear at the moment, but it is believed that aspects of the railyard project will be altered or even cut completely. According to Sacramento City Manager and former execu ve director of the California Redevelopment Associa on John Shirey, the loss of redevelopment dollars means that the railyard project will face a slower development process, and some aspects of the project will not come to frui on. How this funding issue will aect the building of the ESC, or any of the necessary infrastructure upgrades that go along with its construc on, is unknown and will remain an important ques on as the details of the ESC are nalized. The city does address the fact that the proposed loca on of the ESC does face certain constraints in their proposed term sheet, but the extent to which those constraints could hamper development remains unknown. A major part of the railyard redevelopment project is the building of an intermodal transit facility. How exactly the facility will coexist with the construc on of the ESC remains to be seen. One aspect that is known, however, is the fact that more land will be needed for the railyard to support the proposed ESC and an intermodal transporta on hub. According to a panel
City of Sacramento, Economic Development Department, Railyard Business Terms, Financing Plan, Economic and Fiscal Impact, December 4, 2007. KCRA.com, Calif. Supreme Court: Redevelopment Agencies Can Be Cut, KCRA, December 30, 2011. ibid

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of experts from the Urban Land Ins tutes Rose Center for Public Leadership in Land Use, these two structures could t in the southern part of the railyard, but in order to accommodate the future use of the transporta on hub, more land to the east of the construc on area would need to be acquired. The proposed site of the ESC may also have cultural signicance a ached to it. Based on an analysis done by ICF Interna onal, the city has recognized the poten al for discovering historic archeological sites (e.g., Na ve American sites) in the area where the ESC is to be built. However, they also state that the likelihood of discovering anything of signicance is rela vely small, and if anything were to be discovered, disrup on to construc on would be minimal due to the small signicance of any possible ndings. When previous historic discoveries at the site have been made, they were reviewed and caused current renova on construc on to be delayed for a period of three to four days. To this point, all discoveries have been declared non-signicant and have not caused any serious delays to construcon. The chance of a signicant discovery is unlikely according to ICF Interna onal, but, if it were to occur, a discovery could cause construc on of the ESC to be markedly slowed. There are other issues pertaining to the infrastructure development needs of the railyard area that have yet to be specically addressed. The city has acknowledged in their proposed deal that though there are a substan al number of parking spaces within a half-mile of the proposed ESC, further study regarding the usage and loca on of available parking spaces for ESC events needs to be conducted. Moreover, the city must address the provision of premium parking needs. The city does an cipate developing a new 1,000-space premium parking facility to serve premium seat holders and has received a le er of intent from Taylor/CIM Redevelopment Company, LLC who hope to develop the facility. This proposal includes using $5 million in MOPA funds in predevelopment costs of the parking facility. Total predevelopment costs were es mated to total approximately $13 million for the cost of planning, design, environmental review, and infrastructurewith 50% coming from the City of Sacramento, and with the Kings and AEG each contribu ng 25% of the costs. A breakdown of the costs can be seen in the table below. Predevelopment Costs Associated With Proposed ESC Sources Amount Uses Legal expenses, site and building design, engineering, project administra on, environmental review and other necessary expenses. Sacramento Kings $3,250,000 AEG $3,250,000 City of Sacramento - MOPA Fund $5,000,000 - Parking Fund $1,500,000 Total $13,000,000 Source: Sacramento City Council Report 2012-00231

Other infrastructure projects that will be funded par ally by the ESC project budget include the building of new trac signals, the extension of exis ng roads in the downtown area, and the reloca on of exis ng sewer and water mains serving the downtown area. These addi onal infrastructure projects for the ESC would be built in the future as the railyard project progresses further. The funding for these projects is to come from a combina on of sources including
Daniel Rose Center for Public Leadership in Land Use, ULI Panel Finds Benets to Loca ng Sports Complex in Railyards If Designed Well, Urban Land Ins tute, August 9, 2011. Master Owner Par cipa on Agreement (MOPA) funds are funds that are set aside for downtown development projects and are intended to facilitate planning and implementa on of projects in downtown Sacramento.

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Measure A land sale, the ESC project budget, and railyard development. However, as the funding for future development surrounding the railyard project is facing some uncertain es due to the slashing of redevelopment funds throughout the state, the ques on arises as to how this will aect ESC infrastructure funding. Beyond possible delays to construc on, any other addi onal costs beyond what is proposed in the current deal could prevent the project from being completed on me and on budget, and could leave the city open to li ga on. A similar situa on took place in the early 2000s with the building of Petco Park in San Diego. In 1998, San Diego voters approved the building of a new baseball stadium for the San Diego Padres baseball team. Voters originally approved a $225 million cap on city funding for the project, but the city later increased the cap to $299 million. This helped fuel a charge of various legal cases brought upon the City of San Diego, with one of the earliest lawsuits involving a former city councilman who sued the City of San Diego for going $74 million over the budget pitched to voters. Much of the li ga on was the result of a former city councilwoman, Valerie Stallings, pleading guilty to two misdemeanors for failing to report gi s she received from Padres owner John Moores. Plain s alleged that the rela onship between Stallings and Moores tainted the citys nego a ons with the team and thus the contract on which the public voted. The various legal cases San Diego was forced to address delayed the opening of Petco Park by two years, with the stadium opening in 2004 instead of the planned year of 2002.In addi on to the delay of opening the stadium, nal construc on costs were $45 million over budget. Though construc on-related cost overruns will be covered by Turner Construc on according to the city, this San Diego example may prove relevant for other non construc on-related cost overruns. Any overruns that may occur due to surrounding infrastructure, environmental reviews, or historical ndings at the site may be separate from actual construc on-related cost overruns. If this is the case, does the city have the addi onal funds to cover such costs? Public sen ment regarding the building of the proposed ESC has been tepid at best. While many taxpayers in the City of Sacramento are in favor of keeping the Kings in Sacramento, they are not, however, in favor of using city funds to nance a new arena. Sacramento residents are well aware of the citys scal situa on and would much rather see the proposed $255.5 million the city intends to raise for the ESC to bring back laid o police ocers and invest in area parks and schools. Of the $255.5 million the City of Sacramento is commi ng for the ESC, $230 million is to be raised through a parking mone za on plan. In a recent survey of Sacramento voters, over 70% of respondents said they are opposed to using the funds raised through the parking opera on to fund an arena for the Kings. In an eort to ght the proposed development plan, a group of Sacramento taxpayers have started an ini a ve, which if passed would require a public vote before any city funds are devoted to the building of the ESC. Based on prior history in Sacramento regarding taxpayers and funding a new arena, odds are that this deal would be struck down. Previous ballot measures to use public funds for building a new ESC, Measures Q and R, were put to public vote in Sacramento in 2006 and were voted down by a resounding margin. Specically, Measure Qs purpose was to determine if any new sales tax revenues approved by Sacramento voters could be used to fund an ESC. Measure R, if passed, would have raised Sacramento County sales tax by 0.25%, with the revenue to be used for general governmental purposes. Measure Q failed by a margin of 71% to 29%, while Measure R failed with an 80% to 20% margin.

Mark Hitchcock, Welcome to PETCO Park: Home of Your Enron-by-the-Sea Padres: The Story of the Controversy Surrounding the Public Funding of San Diegos PETCO Park and the Legal Eorts to Stop the Construc on, Berkeley Law (2010):133. EMC Research, Telephone Survey of Sacramento, CA, Likely June 2012 voters, January 2325, 2012.

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Another possible concern for Sacramento taxpayers is the use of the Community Facili es District Act (also known as Mello-Roos). This act allows any county, city, special district, school district, or joint powers authority to establish a Mello-Roos Community Facili es District (CFD), which allows for the nancing of public projects through imposing a special tax on property owners who reside in the CFD. The good news for Sacramento taxpayers is that in order for the city to establish a CFD, a two-thirds majority of voters living in the proposed CFD must approve its forma on. However, if implemented, Sacramento taxpayers would be on the hook for nancing part of the ESC development through this special tax. Though Mello-Roos has not been proposed as a funding source of the ESC, it was men oned as a poten al source in the citys original nancing plan for the Sacramento railyards redevelopment project. As redevelopment dollars are no longer a source of funding, the CFD Act may come into play as the city looks for alterna ve nancing plans for redeveloping the railyard. The building of the ESC presents signicant challenges to the city with respect to predevelopment issues and support from city taxpayers. Costs could poten ally be inated and melines could be pushed back. Without public support, the project could fall through altogether if the proposed ini a ve to prevent the use of public funds for ESC construcon is passed.

Current Fiscal Challenges and the Arena Boost


The proposed new arena in the downtown Sacramento railyard poses a variety of challenges for Sacramento City Revenues and Expenditures the City of Sacramentos scal health. The citys scal posi on is already tenuousthe Great Recession hit Sacramento par cularly hard. From the peak in 200607, revenues declined more than 28% by 201011, falling from more than $1 billion (with the help of some debt issues in 200607) to just $830 million by 200910 according to the State Controllers Oce. The City of Sacramentos budget documents show that revenues fell by another 1.4% in 201011. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Year At the same me, the scal budget has gone from Revenues Expenditures surplus to decit in the wake of the downturn. In Source: California State Controller 200304, the City of Sacramento ran a $19.9 million surplus, but budget shor alls have increased into the $40 million range over the past few years, and the city is currently projec ng another $15 million shor all for the 201112 scal year. Total outstanding debt has also increased from $567 million before the bubble to almost $800 million currently.
600 $ Millions 800 1,000 1,200

City of Sacramento, Economic Development Department, Railyard Business Terms, Financing Plan, Economic and Fiscal Impact, December 4, 2007. California State Controller, City of Sacramento.

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In addi on, the unemployment rate in the Sacramento region remains in the double digits, at 11.2%, and given the areas concentra on in government employment, a sector which is not forecast to turn the corner quickly, a rapid economic recovery is not expected for the City of Sacramento. Given these budget shor alls and the lackluster economic recovery thus far, local policymakers may be bi ng o more than the revenue base can chew. If the ESC fails to bring in the projected revenue the city is predic ng, then the city will be at risk of pu ng addi onal stress on an already depressed market. The $255.5 million contribu on required from the city represents more than 10 years of decit nancing at current revenue and expenditure levels. Cuts to local services from police, re, and educa on have been harsh, and Sacramento has seen expenditures decline by more than $200 million per year rela ve to peak. The re department has reduced employment by 49 full- me posi ons over the past year. The Police Department has also eliminated 240 jobs since 200910. In addi on, 860 full- me city jobs have been cut in Sacramento. Further, city ocials have recently stated that nearly 100 police ocers and reghters could be laid o soon due to city budgetary issues. In this context, this $255.5 million in spending is likely to create a signicant poli cal conict, and Sacramento residents have already expressed a strong desire to block their tax dollars from funding a new ESC, preferring the funds to go toward public services or public improvement projects. Spending money on an ESC will aect the local quality of life to the extent that these resources could be used to backll some underfunded local assistance programs, educa on, or infrastructure projects. City of Sacramento Full-Time Employment Numbers Fiscal Year 2011-12 2010-11 2009-10 2008-09 Fire Department 589 638 632 631 Police Department 890 1,067 1,130 1,096 City Employees 4,083 4,412 4,635 4,943

Source: City of Sacramento

In addi on to the already tenuous scal situa on, the projec ons of the increase to local economic ac vity underlying the projected economic impact of the ESC are likely overstated. According to the Capitol Public Finance Group (PFG), the new arena is es mated to a ract 3.1 million visitors per year and result in annual spending of $93.6 million. This analysis assumes an average a endance of 17,300 for the 45 Kings home games and 15,000 for other events held at the new complex. It further assumes that visitors will spend an average of $20 on food and beverage, other retail, and transporta on costs, and that 10% of the visitors will stay overnight and spend an addi onal $102 on food, retail, and lodging. While this may sound like a boon to the region, we have to take a close look at the assump ons behind this analysis. Take cket sales as an example. With 17,300 in projected average a endance under a new ESC, these es mates represent a 10% increase over the peak levels of a endance that the team has been able to achieve during the past 10 to12 years. The comparison to current a endance gures provides an even starker contrast. With an average non-premium a endance gure of 14,500 this season, the projec ons represent a nearly 20% increase in a endance over current levels.
California Employment Development Department. California State Controller. City of Sacramento, FY 20112012 Budget. Ryan Lillis, Mayor Urges Sacramento Public Safety Unions to Agree to Pension Changes, Sacramento Bee, May 1, 2012. Capitol Public Finance Group, LLC, The Economic Engine Report: An Economic Analysis on the Regional Impact of an Entertainment and Sports Complex, June 30, 2011.

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Tickets for spor ng events are what economists refer to as income-elas c goods because they tend to be luxuries for those who consume them and are thus highly impacted by considera ons of income and wealth. This suggests that the surge in a endance between 1999 and 2007 was driven in part by the surge in home prices and the consequent increase in perceived wealth that accompanied the housing bubble. Unfortunately, this surge in housing-fueled wealth is a thing of the past, and home values, when they do begin to rise again, are expected to do so at a far more tepid pace that tracks income growth (certainly well below 10% per year). This calls into ques on the ESCs ability to a ract that level of a endance without another housing bubble, given that the current unemployment rate remains over 11%. Another principal concern we have with Capitol PFGs analysis is that they have not taken into account how much of the annual spending is new moneythat is, how many out-of-town visitors the new arena will a ract that ordinarily would not have a ended a Kings game or other performance event. Currently, a endance is averaging just over 14,500 at PBP. As such, these folks are already impac ng the economy through a endance and consequent entertainment spending and should not be considered when assessing the impact of the new ESC. Only the new a endees, who would be a ending Kings games they would otherwise not have a ended in the absence of the new ESC, should be counted toward the projects economic impact. Thus, basing the projected impact on the full 17,300 visitors in the new ESC poten ally overstates the economic impact by applying average spending amounts across 14,500 folks who are already spending those dollars locally. As a result, the expected growth in economic ac vity might not materialize.

Case Studies of Other ESCs and/or Stadiums


Many other ci es across the state have been facing tough scal mes due to the ramica ons of the nancial meltdown and the collapse of the housing bubble. In 2008, the City of Vallejo was forced to declare bankruptcy, owing in part to expensive pension plans for city workers and declining tax revenues. The City of Stockton, which is a mere 50 miles south of Sacramento, is on the verge of declaring bankruptcy itself due to overspending on public employee contracts and, among its many ills, the building of a new sports arena and ballpark. The arena and ballpark were part of a redevelopment project on the waterfront area of Stockton, which cost the city over $125 million to complete. Specically, the arena cost $64 million to buildwith $38 million coming from bonds. With the arena not drawing the revenues hoped for by the city, the city is le with a signicant debt to repayonly adding to its myriad scal hardships. According to Stocktons FY 20112012 Budget, even a er elimina ng 25% of city sta in FY 20102011, the city is s ll expec ng to face a $37 million general fund opera ng budget decit. In Stockton, home prices and property tax revenues, which were two of Stocktons bright spots during the housing boom, were le devastated after the bubble burst. Stockton faces staggering decits due to declining revenues and is nding it dicult to fund its long-term obliga ons. San Diegans are also dealing with the ramica ons of overly op mis c assump ons regarding the economic eect of Petco Park on the local economy. Local business owners say, our revenue increased tremendously, but they add Its been that way for some me, although, since the ballpark came into being, every year our revenue has come

Peter Hecht, Stockton, Facing Bankruptcy, Asks How It Got to This Point, Sacramento Bee, February 28, 2012. Na onal Sports Law Ins tute of Marque e University Law School. City of Stockton, FY 20112012 Annual Budget, August 25, 2011.

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down a li le bit. These revenue declines have occurred despite projec ons that showed strong growth in economic ac vity in perpetuity. Marney Cox, the chief economist for the San Diego Associa on of Governments notes that there is pre y good evidence out there from studies that have been done that show that large investments in those entertainment kind of parks are almost a wash for local areas, if not slightly nega ve. San Diegans have also realized that a fancy new stadium does not negate the impact of the team itself or of general economic ac vity. Ul mately, according to UCSD professor Steve Erie, [Petco Park] is hailed as an iconic model for other places to emulate. All that we're poin ng out is that its public benets are not as great as the supporters have ballyhooed and the public costs have been substan al. Outside of California, the story of the arena project in the City of Glendale in Arizona is a par cularly vivid cau onary tale. The Phoenix Coyotes, a professional hockey team, moved to Glendale in 2003 into the newly constructed Jobing.com Arena (formerly known as Glendale Arena) a er concluding that Phoenixs America West Arena was not a good venue for hockey. Since moving from Winnipeg in 1996, the Coyotes have never made a prot. Poor a endance combined with con nually slumping team revenues and the arenas distance from the more auent neighborhoods have made this arena a nancial disaster for Glendale. In 2009, the Coyotes declared bankruptcy and were taken over by the NHL. Since then, the City of Glendale has paid $25 million per year to keep the team in Arizona while new ownership is sought. This $25 million, combined with the cyclical eects on revenues associated with the Great Recession, have created severe scal challenges for an area that, like Sacramento, was already suering from the eects of a large housing bubble and subsequent collapse. Defenders of the proposed ESC deal have pointed to the Kansas City example as evidence that the deal can be successful even if the city moves forward with the ESC without the Kings as the anchor tenant. However, a deeper look shows that the Kansas City story is not quite the same as Sacramentos, and the Sprint Center has put scal stress on the citys budget. Along with the building of the Sprint Center in Kansas City, a new conven on center, performing arts center, and a retail and entertainment district were developed simultaneously. Generated revenues from the Sprint Center have failed to live up to projec ons, and as such have caused Kansas City to set aside $12.8 million from its 201213 budget to cover the decit, which is expected to remain for years to come. Considering that the City of Sacramento is already strapped for funds and has yet to recover from the housing market collapse, the above examples serve as a warning of the poten al consequences of making an unwise scal decision regarding the building of the ESC. The city is gambling with this investment. If it fails, it will put enormous stress on the citys nances in the near and distant future.

Conclusion
The proposed plan to build and develop an Entertainment and Sports Complex in downtown Sacramento is full of risks that in the long run have the poten al to hurt the City of Sacramento, the Kings, and the NBA. From a revenue perspec ve, a development perspec ve, and scal perspec ve, the proposal, as it currently stands, exposes the city to
Ka e Orr, Has Petco Park Been a Good Investment? KPBS.org, January 26, 2010. Ka e Orr, Has Petco Park Been a Good Investment? KPBS.org, January 26, 2010. Liam Dillon, Why San Diegans Are to Blame for the Citys Problems, Voice of San Diego, September 30, 2011. Sean Gen lle, They misled us: Glendale Mayor Wants $20 million from NHL, Spor ng News, April 4, 2012. Foon Rhee, Is Kansas City a Model for Sacramento, or Is It a Warning? Sacramento Bee, April 23, 2012.

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signicant risks that have haunted many other ci es in California and around the country. The city is already struggling with high unemployment and a weak housing market. The building of an ESC has the poten al to exaggerate these problems. In order for the ESC to meet the proposed revenue projec ons, it would have to surpass the levels achieved during the housing boom. Given the current economic outlook for the Sacramento area, these gures do not seem feasible, and city taxpayers will be forced to pick up the pieces for years to come if this plan fails to meet expecta ons. In the end, all par es involved here at riskthe City of Sacramento, the Kings, and the NBA. This proposed plan calls for an economically and scally depressed city to put up over a quarter of a billion dollars. Furthermore, it also calls for the Kings to bring in revenues exceeding those of its peak revenue-genera ng years. Lastly, the NBA will be at risk for approving a plan that will put undue nancial stress on one of its small-market ci es and franchises.

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About Beacon Economics

About Beacon Economics


Beacon Economics is an independent economic research and consul ng rm with oces in Los Angeles and the San Francisco Bay Area. The rm's interna onally recognized forecasters were among the rst and most accurate predictors of the meltdown in the U.S. mortgage marketand among a rela vely small handful of researchers who correctly calculated the depth and breadth of the nancial and economic crisis that followed. The rm focuses on providing objec ve, fact-based economic studies and analy cs, long- and short-term economic forecasts, public policy analysis, and balanced counsel to those making nancial, business, and economic decisions. Beacon Economics has served as the lead economic advisor to the California State Controller since 2008 and its Founding Partner is Chair of the Controller's Council of Economic Advisors.

Services
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Contacts
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