Thursday, March 3, 2011

Crunching the numbers on the Quebec City arena. Conclusion: somebody got hosed

My latest, appearing in tomorrow's National Post:

On Tuesday, Quebec City announced that it was going ahead with the construction of a new, $400 million arena, to host an NHL team that Quebecor’s Pierre-Karl Peladeau hopes to bring to the city. The same day in Regina, the city and the province of Saskatchewan turned the wheel in the other direction, announcing that they were shelving plans for a $430 million, retractable roof stadium, whose main tenant would have been the CFL’s Saskatchewan Roughriders. Both projects have repeatedly demanded federal money, demands that Ottawa for months deftly avoided saying yes to without ever saying no. On Wednesday, the Conservative government finally said no. The right decision—but as Quebec City showed, municipalities and provinces are quite capable of blowing taxpayer dollars with or without Ottawa’s help.

American pro sports franchises and politicians are past masters at the game of using public money to support private teams. But in Canada, the game is rarely played. The Toronto Maple Leafs, Montreal Canadiens, Vancouver Canucks and Ottawa Senators are private businesses, playing in private arenas built with private money. Even the publicly-owned Scotiabank Saddledome in Calgary and Rexall Place in Edmonton have relatively limited taxpayer involvement. Billionaire owners going cap-in-hand to government is long standing practice in the US, but it’s a new trend in Canada.

This week, Quebec City mayor Regis Lebeaume played the game like a pro. He insisted that the new arena would almost certainly not cost taxpayers a cent, but would instead turn a profit while sparking urban renewal, boosting the economy, raising tax revenues and curing leprosy.

Ignore the magician’s hands and keep your eyes on the prize: the arena’s $400 million price tag.

The math goes something like this: Quebecor is buying the naming rights to the arena, paying $63.5 million if it hosts an NHL team, and less if it doesn’t. A group of local fans kicked in another $13 million. Subtract those amounts from $400 million, and that leaves the taxpayer on the hook for more than $320 million worth of construction costs (All figures before cost overruns). If government borrowed the money—-and given that Quebec is deep in deficit and the most indebted province in Canada, every cent going in to the arena is borrowed—-the debt service cost, based on Quebec City’s repayment schedule, would be $26 million a year. Quebecor, which has agreed to a long-term lease on the arena, will pay $5 million a year in rent, less if it fails to land an NHL team. In other words, under the most optimistic scenario, Quebecor is paying $5 million a year for an arena that will cost at least $26 million a year to finance.

But Quebec City taxpayers will not be picking up most of the arena’s tab. The bulk of the money, $200 million, is coming from the province. The mayor’s claims about the arena’s future “profitability” treat these funds not as a loan or an investment, but a donation. Ditto for $50 million that the municipal government is kicking in as an up-front lump sum. Both contributions from taxpayers are accounted for as free money. In Quebec City’s fantasy arena accounting, a quarter billion dollars just fell from the sky.

The stadium math in Regina is just as iffy. The CFL’s Saskatchewan Roughriders, who would be the main tenant in any new facility, currently play at the old Mosaic Stadium. Their rent? According to the Riders’ annual report, a maximum of $200,000 per year. Projected cost of the new stadium? $430 million. I’ll wait here while you crunch the numbers.

The thing is, the Riders are already a very successful team. Playing at Mosaic Stadium, they pulled down more than $30 million in revenue in 2009-10, and turned a profit of $3.1 million. By CFL standards, this is outstanding. To make money playing 10 home football games a year, the team doesn’t need a new stadium, and certainly not a $430 million Cadillac with a sunroof. The Riders can’t afford even a fraction of that cost. But do they and their fans and many politicians want a new stadium? Of course. Why wouldn’t they? If somebody else picks up the car payments, Joe Lunchbucket can drive to his job at the gravel yard in a gold-plated Bentley.

There are other Canadian teams whose situation looks an awful lot like that of the Riders. The Edmonton Oilers, for example. Owner Darryl Katz has been lobbying ever more loudly for taxpayers to help build a newer, bigger, more expensive downtown arena to replace Rexall Place. The Oilers may want a new arena, but as with the Riders, need is a whole other story. The Oilers already sell more tickets, and at higher ticket prices, than almost every American NHL team. The Oilers do not appear to have a revenue problem. What they have is an expenditure problem—-the problem being that many American NHL teams (and even more franchises in the NFL, MLB and NBA) are subsidized by taxpayers, through sweetheart deals allowing them to play almost rent free. That reduces team expenses and boosts profits.

The future of the arena finance game was on display this week in Quebec City. A new precedent has been set. Taxpayers, watch your wallets.

Tony Keller is a visiting fellow at the Mowat Centre for Policy Innovation. His study, “The Hoser Effect and the new economics of the NHL” will be released next week.


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