Gift Clause? Nope.

December 28, 2012

Now that the final attempt at a referendum to kill the Phoenix Coyotes has failed, there remain few hopes for the opponents of the Coyotes. Something that has been bandied about social media is the threat that Goldwater Institute will sue the City of Glendale once all parts of the sale of the Coyotes and the arena lease deal are consummated.

The threatened “gift clause” suit has been in the air since Matt Hulsizer was in town to support the deal championed by lame duck Glendale mayor Elaine Scruggs. Goldwater used the “gift clause” against the Phoenix CityNorth project, triggering clarification of the state Constitution by the Supreme Court on January 25, 2010. Click here for a concise discussion of the gift clause.

Click here to read the email sent by Ken Jones to the City of Glendale people regarding his lack of signatures and his threat of intervention by Goldwater Institute.

Wistuber Test

The Court clarified the parameters for the “Wistuber test” to determine if a government payment to a private party complies with the “gift clause” if it (1) has a public purpose and (2) is not grossly disproportionate to what is received in return. The government payment in this case is the arena lease management fee paid to Hockey Partners to run the city owned arena. The payment averages out to roughly $15M per annum over the period of twenty years.

Hockey Partners will provide $2.75 to $3 per ticket sold to Glendale. That portion of the agreement will offset the fee paid to Hockey Partners by Glendale by $2M or more each year of the agreement, reducing the “average fee” over the course of the agreement from $15M to a maximum $13M. The city will also share in the revenue from arena naming rights, but since that’s such a variable number let’s leave that out of the calculation.

The first “prong” of the test is a no brainer, obviously there is a public purpose to manage a city owned arena. The second prong is what Goldwater would hang their hat on, specifically the “grossly disproportionate” statement. The Court held that “the objective fair market value of what the private party has promised to provide in return for the public entity’s payment” may be considered to determine whether the payment can be considered “grossly disproportionate”, excluding things such as potential revenue increases from sales taxes because the Coyotes are the anchor tenants of the arena.

Obviously, the way to determine what is “grossly disproportionate” is to examine what is a “normal” government subsidy provided to arena managers and hockey team owners. I am neither privy to private agreements nor a professional researcher. We should assume that Hockey Partners has invested considerable time gathering the necessary information and, of course, Greg Jamison has connections that have ALL the information for any given team. We should also assume that the current arena lease deal, negotiated over a period of 18 months or so with full knowledge of the “gift clause” threat, is structured to widely avoid the “grossly disproportionate” pitfall.

Anaheim Ducks

The City of Anaheim owns the Honda Center (Duck Pond to hockey fans) and contracts with Anaheim Arena Management, LLC (AAM) to run their arena. AAM owns the Anaheim Ducks, so this arrangement is similar to that of Glendale. The market is also similar, being a “non-traditional” hockey market.

The facility management agreement between Anaheim and AAM is a thirty year deal that will expire in 2033. Click here to read the copy I have. I’m not great at reading contracts, but it appears that AAM will receive $12M per annum for their services. A luxury suite is provided to Anaheim, as one is to Glendale.

Winnipeg Jets

The rehashed Atlanta Thrashers, the Winnipeg Jets, garner a ton of government support despite the protestations of their supporters. Annual government incentives, including gambling revenues, that will be paid to the True North (the owners of the Jets) will be in the vicinity of $11M Canadian. Click here for a story about it.

Various levels of government also ponied up $40.5M to help build the MTS Centre, obviously that would be more in 2012 dollars, for True North. While they were at it, the government kicked in another $11.5M to build a practice rink for True North, the MTS Iceplex. So, the total construction cash handed to True North comes to a cool $52M.

Note that the money for the naming rights for both places goes into the True North pockets while Hockey Partners is sharing the naming right money with Glendale.

Nashville Predators

The Preds play in the Bridgestone Arena which is owned by the Sports Authority of Nashville and Davidson County. The arena is operated by Powers Management LLC, a subsidiary of the Predators. A new agreement was inked in June, 2012. The structure of the deal the Preds have with Nashville is significantly different from the Coyotes deal, but the amounts of government money involved is similar.

The direct management fee paid to the Predators is only $1M, down from $2M. The interesting part of the deal is that it’s based off operating LOSSES to the sports authority being capped at $4.2M. Because the Preds can KEEP any shortfall less than the $4.2M cap, it potentially increases the management fee.

There is incentive potential of $2.7M for the Preds with additional increases in future years and there is Metro tax money supporting the Predators to the tune of $6.1M.

The guaranteed money the Predators receive from running the arena goes down from $2 million to $1 million. But incentive potential goes up from $2 million to $2.7 million, with additional increases in future years.

Hockey related sales tax revenue apparently goes to the Preds, while $2.2M of annual “non-hockey” sales tax revenue will now go to the Sports Authority. I’m not sure whether or not any “non-hockey” sales tax revenue goes to the Preds, the implication is that it would.

Edmonton Oilers

The Oilers are up in the air now, almost literally, Their team owner Daryl Katz is threatening to move the team that finished second to last in the NHL last year to greener pastures. He has already asked for $6M per annum from the city in addition to his demands related to building him a new arena. Right now the negotiations are open again, I think, but Katz really hadn’t laid all his demands on the table yet although he is in trouble for his purported $300k perhaps illegal campaign contributions. Why would he have made those contributions? Read this if you wish to pursue this story further.

Red Wings

The Michigan state Senate approved a bill this month that would allow the use of tax dollars from the Detroit Downtown Development Authority to support a new development plan. At stake is about $12.8M that has, until recently, been used to pay down general obligation bonds. Once the bonds were paid off, the $12.8M would have been spent on education expenses.

Coincidentally, Red Wings owner Mike Ilitch announced his plans for a $650 million multiuse development which would, of course, include a new arena for the Red Wings to replace the aging Joe Louis Arena that Ilitch has been angling to vacate for years. It should be no surprise that the timing of Ilitch’s announcement and the state Senate approving a bill that could put $12.8M per annum in his pocket was planned.

Besides the above $12.8M of government money that seems certain to line the pockets of the Red Wings owner, there’s another bit of government handout that Ilitch has been reaping for years. His company, Olympia Entertainment, leases the Joe Louis Arena and Cobo Hall from Detroit. A stipulation of that lease is that he is to share with the city 25% of all cable TV revenue for live events. He hasn’t paid that bill for THIRTY TWO YEARS, since 1980. An internal city document estimates that Detroit is owed $71M for the cable tab.

Besides the above, Olympia’s lease with Detroit expired in 2010. Since then, they have essentially been squatters in “Hockeytown” and they haven’t paid the city millions for concessions, rent, property taxes and other revenue. Once a dollar amount is arrived at for those things, it can be added to the government payment to the Red Wings. Read this if you want to pursue the story further.

Do Not Wisturb

I’m sure somebody has the time and energy to dig up more arena lease agreements and government subsidies related to NHL teams. Depending on the size and success of the market, the amounts are different but remarkably similar. Clever messing around with tax incentives and other ways of supporting teams make it difficult to determine with certainty what a “real” figure should be. There are too many variables for me, certainly.

What seems clear, though, is that the net amount being transferred from the City of Glendale coffers to Hockey Partners to run the city building is well within acceptable parameters throughout the league and, thus, not close to “grossly disproportionate” as a fee for a service.