A few thoughts for @SykesCharlie (Part II)

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When the conversation got rolling on a new Bucks arena in April of 2014, Milwaukee talk radio commentator Charlie Sykes came out with significant critiques as it related to public financing for a new downtown arena. With the details of a new plan leaking out today, he’s back at it again both on his talk show and at this link via his Right Wisconsin digital platform.

Last year in the spirit of good debate, we did a piece addressing some of his concerns. We’ll take a crack at his concerns raised today with the new financing plan. Before reading this piece, we’d recommend that for background you read our piece from last night – The Elements of The Deal if you have not already done so.

It is a perfectly reasonable opinion to be against any public financing for public sports facilities on the belief that the pro sports leagues should pay for their facilities rather than the taxpayers. In a perfect world the pro teams would indeed pay 100% of the cost of their facilities. The reason they do not is because of the law of supply and demand. There are a limited number of pro sports franchises and a greater number of cities seeking these franchises. Until that equation changes there will always be cities and states trying to “recruit” away pro teams. For cities like New York, there is no risk to them losing their teams because the market there is so large. For cities like Milwaukee, there will always be larger cities putting incentives on the table to steal away our pro sports teams. Frankly if the Packers weren’t set up under a unique community ownership structure almost 100-years ago, they’d have been long gone for greener pastures.

Where we take issue with some of the opinions voiced by Sykes today is that they do not match with the financial facts on the ground. We know Charlie is a reasoned academic up for a good debate, so let’s get started and address some of these concerns.

Sykes: “Start with the bottom line: Taxpayers responsible for $250 million in arena plan…..Now, there is no “jock tax”….. no Bucks “paying their way”

Here Sykes seems to fall back on a misconception that the earlier “Pay Their Way” proposal introduced by Governor Walker was a new tax that was limited only to Bucks players. We aren’t blaming WTMJ personality Doug Russell for this misunderstanding, but after he started using the term “jock tax” on the air last year, it seemed as though many Wisconsinites thought that the State was creating some new type of tax that was going to be leveled solely at Bucks players and that revenues from this tax would be used to pay for arena bonds. This was never the case.

What the term “jock tax” refers to is an existing section of the Wisconsin tax code that has been around for decades. It taxes nonresident entertainers, including athletes, on the income they earn when performing in Wisconsin. Here is the Wisconsin filing guide the State publishes for such people. Many States have similar statutes.  When Jabari Parker plays a game in Los Angeles, he’s paying income tax to the State of California. When Jay Cutler comes to Lambeau Field, he’s paying income taxes to the State of Wisconsin.

The reason this tax is important as it relates to the Bucks is that a year from now, the Bucks player payroll will approach $100 million dollars with expectations it will rise even further based on lucrative new TV contracts the league has signed. So whether Ersan Ilyasova chooses to live in Mequon or in New York, he’s been taxed in the past and will be taxed in the future by the State of Wisconsin on his earnings for playing basketball games in Wisconsin. The same applies to LeBron James as his income is taxed by the State of Wisconsin based on an allocation of his earnings from playing in Milwaukee. In Rich Kirchen’s article today, he cites State figures showing that NBA players paid $6.5 million in Wisconsin income tax in 2014 and are projected to be paying almost $14 million per year by 2024.

Now what happens if the Bucks leave? That projected $14 million in annual State tax revenue goes away for good. This is why Governor Walker has repeatedly said that if the Bucks leave, he’s got a revenue hole in the State budget. His original proposal called for all future tax monies collected from NBA players above the 2014 level of $6.5 million be used to pay interest and principal on arena bonds. That future growth in the NBA player income tax revenues was projected to cover the cost of $220 million in State bonds under the “Pay Their Way” plan. Given that the State will now only be bonding $75 to $120 million of the project, more NBA player tax revenue will accrue to State’s general fund under the new plan.

So it isn’t as if this new plan somehow absolves NBA players from paying State income tax as Sykes seems to imply. The NBA players have always paid these taxes and will continue to “Pay Their Way” regardless of how much the State bonds for. The difference is that now the State will keep even more of that revenue because other parties in Milwaukee are going to pick up a larger portion of the arena cost.

Sykes: “The deal relies on sales taxes — the car rental tax, room tax and a .5% food and beverage tax levied by the Wisconsin District Board. So, yes, Joe Lunch Bucket WILL have to pay for this after all”

For better or worse, Joe Lunchbucket has been paying Wisconsin Center District (“WCD”) tax since 1998. All that is happening is that the Wisconsin Center District will continue to levy this tax after 2028 when the bonds for the Convention Center and Milwaukee Theater are paid off. We aren’t exactly sure though that this particular tax is hitting Joe LunchBucket that hard. Unless Joe LunchBucket is renting cars and staying in Milwaukee hotels frequently, he’s not paying those components of the tax. Further, our guess is that frequent Bucks game attender Aaron Rodgers is paying a lot more of this tax when he takes his crew out for a pregame meal at the Capital Grille than Joe is paying for his meal at the downtown George Webb.

We do know who did pay a great deal of these taxes last month – our friendly Illinois brothers who by the thousands came up to Milwaukee for the weekend to attend the Bucks-Bulls playoff game on Saturday, April 25th. They stayed in our hotels, drank our wine and spent freely here in a nice boost to the local economy. A tax like this is commonplace in most major metropolitan areas precisely because out of town visitors pay a large portion of it.

Sykes: That revenue (WCD taxes) — $93 million — would not be available for 13 years….The polite term for this is “back loading.” I’m guessing if you tried to borrow money on these terms, it would be called something else. 

Do any of you have a 30-year home loan? Was it helpful in allowing you to acquire or build your house?  Have the bank provide you with a repayment schedule and see how much principal you will payoff in the first 13-years of a traditional home mortgage, it won’t be much. The definition of long-term financing whether for your home or an arena project is “back-loading”.  We’ll readily admit that the proposed funding plan does have the WCD start paying off new arena bonds only after the 1998 bonds are retired. But that is being done so that current taxes don’t need to be raised, which is one of the main goals of the funding plan.

If we want to have a debate on the merits of the WCD tax in the first instance, that really needed to happen in 1998 when the taxing authority was granted. We do know this, we actually trust the fresh perspective of the Bucks owners from New York to bring an extremely high quality development to Milwaukee versus letting say Franklyn Gimbel and Lloyd Pettit create and design our civic buildings as they did in the past. The Bucks ownership group has reportedly been to over two-dozen different venues across the country in the past year, bringing the best ideas back to Milwaukee for our project here.

Sykes: “The deal also relies on collecting $80 million in uncollected Milwaukee County debt. Of course, there’s a reason that debt has gone “uncollected,” and there is little reason to expect that the state would be able to collect it dollar for dollar. But it’s a central piece of the deal”

This is a fair critique and the part of the plan with the most political gamesmanship. At the end of the day, the receivables sold to the State by the County might not approach anything near the level of the $4 million a year required by the State to pay on the County’s share of the bonds being issued. For arguments sake, let’s assume the State collects zero on these receivables over the 20-year period of the deal. That means then that either the State withholds a comparable amount of money from the County or the State picks up the repayment tab on $50 million. If the latter then the State will be responsible for approximately $120 million in total debt on the project. This still is a much lower number than the $220 million advanced by Walker and the $150 million advanced at different points by Sen. Fitzgerald and Speaker Robin Vos.

The reason there are some games being played with the County portion is that Chris Abele understands how important the economics of this project are and he’s trying to find a way to provide some County funding without having to involve the County board in a long-drawn out approval process.

Sykes: “The City of Milwaukee – the largest and most obvious beneficiary of the deal – makes the tiniest possible contribution”

AgTom Barrettain, no argument on this one. But if elected officials in both in the City and outside the City wait for Mayor Barrett to solve any City problem, we’re in for a long wait. The deal makes a lot of economic sense even if The Bucks, Governor Walker and Chris Abele can’t get Barrett to step up further.

 

 

Sykes: “Are there no banks and investors, anymore? If this makes sound financial sense why is there a noticeable lack of any private equity other than the $250 million from the owners and Herb Kohl?”

As we noted above, pro sports team have leverage in the free marketplace. Small markets like Milwaukee usually are not able to generate enough revenue to both field a competitive team and fund the entire cost of a new arena. And when you are the NBA and you can easily move your Milwaukee franchise to a much larger and profitable market, you need to have an incentive to stay. We did the same thing for the Brewers with Miller Park, and while certain people still complain about it, by most accounts that project has been home run for the State. And that deal in the end required Bud Selig to pay exactly zero towards the project. Here the Bucks owners are paying for half the cost of a public facility that they will use for less than half the nights it is in use.

Sykes: “No mention of naming rights”

Based on prior reporting by others, it is believed that the $2.5 to $3 million the team would receive annually for naming rights would be dedicated to a repair and replacement fund for the new arena. This isn’t a bad idea, since taxpayers have been hit with bills in years past for a variety of upkeep items with our local public facilities.

As we talk about repair and maintenance, let’s talk about what happens if the Bucks leave. The State will be on the hook for an estimated $100 million in needed repairs and renovations to the BMO Harris Bradley Center, with no anchor tenant to help fund future operations. The BMOBC will turn into a money pit and elected officials will likely need to immediately tap the WCD tax for help. Doesn’t it make a whole lot more sense to build something new, exciting and likely more profitable?

Sykes: “When Vos told Assembly Republicans about the arena deal, during their caucus last night, I’m told that members applauded. Now that they know what he selling, I wonder if they are still celebrating.”

We could make a joke about “crazy tax and spend liberals” like Robin Vos, Scott Walker and Scott Fitzgerald always signing up for boondoggles like the arena project but nothing in their careers or nature suggest that is the case.  What the GOP leadership, Chris Abele and many local business and community leaders from across both sides of the aisle see is the opportunity for a smart investment for our community.Vos+Robin

We have to reiterate a key fact of this project: The Bucks are “takers” under the NBA economic system. They receive a 1/30th allocation of all TV, licensing and international revenues despite the fact the Wisconsin market contributes only a tiny bit of those revenues. Further, as a small market team, the Bucks receive $20 to $30 million per year from the large market teams under the league’s revenue sharing program. What this means is that the Bucks are due to collect in excess of one billion dollars in money over the next ten years that comes not from their operations here in Milwaukee but comes from outside the State of Wisconsin. If the Bucks leave for say Seattle, that billion dollars no longer flows into a corporation headquartered here in Wisconsin. Portions of those monies are no longer taxed by the State of Wisconsin. No longer are portions of that money put into any type of economic multiplier here in Wisconsin.

We note this fact because many arena opponents cite “studies” that show that a new arena has no positive impact and that if a pro sports team were to leave, people would just spend their money on other things. That is true in many situations but not true in our specific situation in Milwaukee. Yes, if the Bucks left, the hypothetical “Bob and Betty” from Whitefish Bay might spend their money at Summerfest versus going to a Bucks game. But that billion dollars flowing into the Bucks from out of state NBA revenues? That’s not being provided by Bob and Betty or anyone in Wisconsin in the first instance. Again, that money and the economic multiplier effect from those revenues coming to a business headquartered in Milwaukee are gone forever.

Milwaukee is a rare case where construction of a new arena to keep a sports team actually is a very good economic deal simply because the Bucks are massive takers of league revenues. And that is before we get to the other positives such as the Bucks owners investing $250 million of their money to build a community asset in the blighted Park East corridor. Charlie, there is no bank that is doing that.

We finish this all to say that we very much respect the opinions of those philosophically opposed to public financing for any pro sports team, but we do ask that if you are going to participate in this particular debate, you invest some time in understanding the economic facts of this project. This is a good economic deal for the State, the County and the City. We’d hate to see our community fumble this opportunity based on emotion and some sort of frustration either with Miller Park from 20-years ago or Barrett’s streetcar project. That would be the proverbial “cutting off our nose to spite our face” action.

The financing structure of this deal and financial benefit of the Bucks are so much greater than what existed with the Brewers and Miller Park in 1995, and even with that, the Miller Park situation turned out to be a big winner. The new arena will as well.

Go Bucks!

Your SOB Editor

2 thoughts on “A few thoughts for @SykesCharlie (Part II)

  1. jeramey@urbanmilwaukee.com'Jeramey Jannene

    Also, for whatever it’s worth, I think Sykes has a point on the 13 years later payments.

    A 30-year mortgage is paid over 30 years, with payments starting immediately. The arena plan would allow interest to build for 13 years with no payments being made (at least according to what’s been made public so far).

    Assuming the deal is in the best interest of the public, it would be cheaper for citizens to begin paying immediately with an increased tax. This would lower the amount of interest that has to be paid off.

    Of course, Sykes would never argue that. That’s a tax increase that a politician actually would have to pass. By avoiding making payments up-front for fear of increasing taxes, politicians are actually making the deal more expensive for taxpayers (they’re increasing taxes without having to say so.)

    Reply
  2. jeramey@urbanmilwaukee.com'Jeramey Jannene

    Sykes is flat out wrong when he says “The City of Milwaukee – the largest and most obvious beneficiary of the deal – makes the tiniest possible contribution”

    The arena pays no property taxes to the city. Nor will the Live district (so a net negative to the city budget on otherwise taxable land).

    Yes, there is promised additional development, but the Park East land would have been developed sooner than later now that the County has finally put it up for sale (so maybe the city sees a small benefit here).

    Sure Bucks patrons pack area bars, restaurants and sometimes hotels, but the city also has to pay for all of the police and public works costs associated with that. In the end, probably a slight benefit to the city. But it’s important to remember that the revenue generated by those establishments flows primarily to the state in the form of sales and income taxes. Increased sales in the end generates marginal value for the city on a direct financial basis.

    The state is the primary beneficiary. They receive the income taxes and get to spend that money as they choose.

    When you actually explore where the money flows, the state is the clear winning entity. Further compounding the issue, the city is highly limited by the state in terms of what it could contribute to the deal even if it were the primary beneficiary.

    Reply

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