Do Sports Facilities Make Downtown Cleveland "Strong?"

By Roldo Bartimole

The claim is that we need more public investment to keep Cleveland strong. Does the evidence prove this? You know the answer.

On Sunday April 6 the Plain Dealer ran an article based on a study done for the Cleveland Cavaliers. It was meant to measure the value of sports facilities to our community.

Hiring a firm whose business essentially serves the industry it is asked to assess suggests you don’t really want a straight answer. You seek a rigged game.

The truth is the study done by a Texas based firm Conventions, Sports & Leisure International, and promoted on the Plain Dealer’s front page represents the assessment of a business that advises about the building and renovating of arenas, stadiums, convention centers and more. It speaks to and for its client base.

The Cavalier management hired a firm supported by sports facilities to ask whether such ventures were economically productive. It got the answer it wanted.

The study estimated that more than $2.7 billion was added to the downtown economy and another $1.4 billion to the region.

In other word, the public financing was a big success. So the public should vote more subsidies.

The Plain Dealer decided the “study” was worthy of a striking front page using scarce space of 12 inches deep by four columns width in its Sunday edition. A large graphic of 210 small basketballs dramatized the points the report sought to make. It was an impressive display of the paper’s editorial position in favor of the tax. The basketballs represented jobs, taxes paid and economic activity claimed by the teams.

It is the firm’s business to serve the builders of sports facilities. Why would it ever tell clients, “It’s not worth it?”

Its study ignored vast public investments as engines of progress. It disregarded evidence of decay and failures downtown.

The study gives the client, in this case, sports owners wanting a 20-year, $290 million tax to be voted May 6, an A-plus in delivering progress. The truth is less convincing.

The PD story did quote from some economists who looked askance at the contention of success by the study financed by the Cavaliers owner Dan Gilbert.

Heywood Sanders, professor of public affairs at the University of Texas, San Antonio and an expert on convention centers and their economic impact upon cities, in an e-mail questioned the lack of backup material on the points made. “… the ‘economic impact’ arguments of the consultants simply act to shift the real question away from other public priorities and the benefits from sports facilities. It’s a great deal for the consultants, and the teams look like they are actually a community plus.” How convenient.

Huge public costs endured by Cleveland and Cuyahoga County for these sports facilities are ignored. It also ignores significant other public subsidies to other downtown projects.

What the PD hasn’t done and should have been doing for years is totaling what the community has spent already for these three sports franchises, all private businesses. Then let the public vote with awareness.

First, the costs for the facilities themselves. The prime financing was a 15-year sin tax. You might have thought it would end there.

Actually, it was not sufficient since the construction costs were significantly higher than originally estimated. The baseball stadium was estimated to cost $75 million. It ended costing $180 million. The arena was given a $75 million price tag but ultimately cost $157 million. Cuyahoga County had to add funds with unvoted bond issues beyond the sin tax, as noted below.

The first 15 years of the sin tax on cigarettes, wine, beer and alcohol, which the promoters of an extension of the tax say correctly, amounts to only pennies or nickels on each purchase. However, it raised an astounding $240.5 million. The true cost. On some of these purchases restaurants and retailers tag on the 8 percent sales tax. This really adds millions more in taxes.

A 10-year extended sin tax an added $113 million has collected by December, 2013. We expect another $12 to $13 million this year. It will continue through August, 2015 at about $1-million more a month, or another $9-million next year. That suggests an addition of $20 million bringing the total to about $133-million in the second 10-year period.

So for the 25 years of the sin tax, citizens will have paid $240.5 million and $133 million or some $373.5 million in pennies and nickels. How they roll in. The taxes, of course, are regressive, meaning they weigh more heavily on ordinary citizens.

No one in the news media compiles these numbers so that the public can get a feel for just how much this is taking out of the economy of Northeastern Ohio, mostly Cuyahoga County. You can’t spend the money twice.

Surely, that money could be spent elsewhere to benefit other businesses and city priorities, such as police, fire, health, recreation and neighborhood improvements.

But the costs hardly end there for taxpayer support of these sports teams. And their enormously wealthy owners.

We are still paying for Gateway overruns. This never seems to be acknowledged. In addition to sin tax. Each January 15 the County pays for two bond issues voted by Tim Hagan, Mary Boyle and Jim Petro. The bonds were for $75-million and $45-million. The $75 million bond was enacted in a 30 second meeting. The three commissioners walked into the public meeting, read a summary of the legislation and they each immediately voted “Yes,” and swiftly adjourned the meeting. In another public meeting, Hagan choose to invite construction workers there to support the sin tax into his office “for coffee” just when it was the public’s turn to comment. He and the workers left the room.

Such contempt for the public and voters.

Since 1995 bondholders have been paid each January 15 some $8 to $10 million. As part of these payments, Cuyahoga County has paid from its general revenue fund a total of $128,364,407 since 1995. In addition revenue from the city’s admission tax and the county bed tax have diverted another $45,463,717 more to bondholders from public coffers. The payments will continue through 2023.

In addition, the County and city each have repaid Gateway loans from the Cleveland Foundation of $2-million plus and each paid $3,750,000 to the State of Ohio for Gateway loans made to meet overruns on the arena construction.

Cuyahoga County also paid contractors $11.5 million for overruns on the arena construction.

Then there is the Browns Stadium. No official figure has ever been issued of the actual cost of the lakefront stadium. Most believe it cost more than $300 million to construct. It is now called First Energy Stadium. Some $102-million naming rights to be paid by First Energy go solely to the Browns. The city shares no naming rights revenue from the source though it owns the stadium and the land it sits upon.

In 2009 when I checked the city had paid $102,823,947 to bondholders. In 2010 the city refinanced bonds to the tune of another $183 million. The prospectus said the city in addition to paying bondholders had to pay $850,000 to the capital fund in 2010 through 2020. By 2021 the contribution jumps to $5.9 million and slightly higher in succeeding years until 2025 when it hits $7.5 million.

However, last year the Browns and city agreed to further capital expenditures for stadium improvements. The city pledged $2 million a year for the next 15 years. Another $30 million.

Browns stadium costs are paid via taxes voted by City Council, without a vote of residents. These taxes were levied for 29 years as follows:

– A city parking tax of 8 percent estimated to raise $213,000,000.

– A 2 percent increase in admission taxes estimated to bring in $36,000,000.

– A $2 car rental fee expected to produce $18,000,000.

– Tax revenues from the second sin tax dedicated some $110 million to the football stadium.

More came from other sources.

The State of Ohio provided $37,050,000; RTA contributed $3,000,000; the Northeast Sewer district, $2,246,760; and free use of city lakefront land valued at the time as $19,007,400. There were always suspicions that other city work was done gratis.

The Browns pay rent of only $250,000 a year without even a clause to reflect inflation increases over 30 years. In the final year renting the old stadium, Art Modell paid the city $637,144, almost three times the present rent some 20 years later. Further the city now pays more in property taxes on the land than Jimmy Haslam pays in rent. The city also pays the insurance on the stadium, which rose to $180,000 annually after 9/ll.

The other factor never really discussed is the lost tax revenue due to the sports facilities tax exemption. After promising voters in 1990 no tax abatements, Cleveland Mayor Michael White and County Commissioner Tim Hagan successfully lobbied the state legislature to totally exempt all sports facilities from paying property taxes forever. County property taxes go mostly to Cleveland schools. The sin tax promoters originally promised an additional $15 million a year to the Cleveland schools. This promise was never met. Property tax revenue is also lost in smaller amounts by the county, city and city libraries each year.

To give a feel for the loss of tax revenue due to sports facilities these figures suggest the impact.

In 2012, I asked for County figures on the value of the sports facilities and the totals for exempted taxes. Here they are:

– Progressive Field – value $172-million with exempted taxes of $904,050,000 for the year. (Gateway did pay tax on land at $134,309 in 2012).

– Quicken Arena – valued at $134-million with exempted taxes of $706,650,000. (Gateway did pay tax on land at $47,887 in 2012).

– Browns Stadium – $285-million value with exempted taxes of $1,496,205. (The city, which owns the land beneath the stadium, the only portion taxable, paid $83,822.55 in 2012).

Multiply these figures by decades of exemption and you realize what a bonanza of tax relief has been given for sports here.

Significant losses of public revenues should be considered when assessing the success of such projects. None of this is mentioned in the report to Dan Gilbert. The Plain Dealer also ignored this crucial public issue.

The other major problem with Issue 7 for the sin tax is the lack of transparency. The teams have not told us how they expect to use the money. The hint is that the millions of dollars are needed to insure the integrity of the buildings. But major items on the list seem to be larger, fancier scoreboards, which produce advertising revenue for the team owners. Nothing for the city or county.

And if the past is any hint of what’s to come there’s likely to be much misspent money.

For example, Gateway built into then Jacobs field a two-level, 900-seat restaurant and bar at a cost of $5.1 million. It became the largest restaurant in downtown Cleveland. It was fully furnished by Gateway from the cooking equipment to the spoons, forks & knives for diners. Another $2 million upscale restaurant was built into the arena, also fully furnished. Neither pays property taxes giving them another advantage over other restaurants, which not only pay taxes but have to pay for their furnishings.

Further, the Cleveland Indians enjoyed a $7-million office structure with $900,000 of furniture and equipment. The structure was not specified in the lease agreement but I was told at the time that it hid an unsightly ramp as the reason for its construction. My suggestion of shrubbery to hide the ramp fell on deaf ears. The offices included by request of the team owner an 18 foot by five foot boat-shaped conference table with an inserted metal emblems of Chief Wahoo and special wooden inserts resembling the stitching of a baseball.

Although warned by the supplier it wasn’t suitable, the Indians insisted on a certain Italian marble for its loge coffee tables. At a cost of $330,000, Gateway brought marble from Lucca, Italy. The supplier told me, “They asked for the marble, we provided it,” despite warning it was improper to use as table tops. The dark green marble tops soon began to crack. The team complained.

The Gund brothers, who owned the Cavs when the arena was built, had loges (team owners got two free loges each in their respected facilities) spent $600,000 to have them converted to living quarters. Gateway officials learned of the expenditure and the Gunds eventually paid for the alterations.

But there is more to examine to determine whether these and other projects pay off for taxpayers. The consultants failed to examine other public subsidies within downtown in their positive claims attributed to sports.

To insure adequate parking for the sports facilities the city built two parking garages financed at some $42 million in bonds. Since the teams were allowed free access to hundreds of garage parking spaces, the garages were significant money-losers. The garage built on Gateway land also enjoys exemption of property taxes. The city pays for the deficits.

The public also finance a walkway for fans at a cost of $13 million; a waterfront RTA rapid at a cost of $69 million, totally locally financed because RTA was urged to do it quickly, spurning federal funding that could have paid the major share of the cost. The line operates at a significant loss. RTA had to abort its operation for a time because of the red ink.

Although the report for the Cavalier organization credits the arena with spreading “economic growth throughout downtown Cleveland,” it ignores significant decline and ignores other massive public subsidies for downtown.

The area of E. 4th Street, just north of the Gateway complex, continually is highlighted as proof of Gateway’s success.

However, rarely do these glowing reports balance with the public costs. For example, the House of Blues on Euclid but part of the E. 4th development received financing, backed by the city to the tune of $12.8 million and a reduction in property tax value to other Euclid Avenue to help further subsidize East 4th Street.

Chris Warren, former Cleveland economic development chief now a consultant to the city, claimed that the city put more than $10 million in infrastructure, beautification, loans and tax credits into E. 4th.

However, massive subsidies often seem more to simply shift business from one part of downtown to another. The claims of major gains often really are simply location shifts in economic activity.

Right across the street from the E. 4th successes, the city’s grand architectural gem The Arcade, also heavily subsidized, has failed badly despite huge public investment: a $1 million low interest loan from the city; $2 million from Cuyahoga County; $7 million in property tax relief; a $7.1 million federal historic tax credit; a $9.6 million conservation easement donation; $1.5 million low interest loans from the Cleveland and Gund Foundations and $500,000 in other foundation loans. (Despite these subsidies a walk through The Arcade April 10 revealed it embarrassingly devoid of retail business with numerous vacancies)

(Similarly, the Halle’s building on Euclid, which received millions of dollars in subsidies and next to the Wyndham Hotel, recipient of more millions in government subsidies, was nearly devoid of retail, the space on its first floor given over to sections of cushioned chairs with a sign, “free spot” to sit. Retail had disappeared).

Maybe the best example of this misapplied credit goes to the late Dick Jacobs, owner of the Cleveland Indians when Gateway was constructed. Jacobs interests bought the old Cleveland Trust complex of buildings at E. 9th Street and Euclid Avenue, a couple of blocks from Gateway’s baseball stadium.

Surely, he expected new development there because of Gateway. However, we know that in 2005 he sold the empty complex of buildings to Cuyahoga County for $22 million. The County has held the land and endured heavy costs for a decade. The County now will build its offices there in what was once the financial center of Cleveland. (My jaunt downtown revealed that Euclid Ave., north of this area, not only is store after store mostly empty with doors chained locked and dirty windows to reveal debris inside from E. 12th to E. 9th. It has the look of abandonment. The south side has renovations proceeding. This, years after the heavy investment in public transportation on Euclid Ave.

Jacobs’s interests might also prove the economic activity can’t always be predicted. In the late 1980s Jacobs received heavy subsidies for the Public Square Marriott Hotel and Key Center – 100 percent tax abatement for 20 years worth more than $100 million and the city added $17 million in government loans at zero interest and the principal not payable for 20 years out.

Shortly after that Jacobs received from City Council the exact same sweet deal for another bank tower and Hyatt hotel on the west side of Public Square. A number of occupied buildings filled that space. They were emptied of tenants and demolished but neither bank building nor hotel has been built in the nearly 25 years since. The land remains a surface parking lot on city’s Public Square.

Downtown has become popularized by the movement of young people to the city’s center. This cannot be a bad thing.

However, too much emphasis has been given to large subsidies – as most new or converted housing is tax abated – as an equitable method of encouraging this movement. But the forgiven taxes must be made up by others city taxpayers who pay property taxes. Further, some of the conversions have been from office buildings where people formerly were employed.

No one seems to ask the major question: Who pays and who benefits?

We don’t know yet how much money the team owners and business community are putting into TV ads and other methods of pushing this new tax. The teams and corporates have met to petition black churches via Pastor and Mission. I’m told the ministers noticed that these people come when they need something. Another way they are reaching out in poverty areas is clearly shown by Angie Schmitt’s Rustwire blog piece with a dramatic photo of the cheap approach. She slams the hypocrisy hard.

With the sports teams the subsidies are clear in city after city. The owners and players benefit and the taxpayers mostly pay.

It’s time for a change and I would like to see Cleveland be strong and send the message out to other cities that there are more important things – say educating our children – than spending scarce public resources on wealthy sports owners and players.

My solution now would be to sell these sports facilities built with heavy public subsidies to the teams for $1 each. Then they could operate as most businesses do – by paying their own bills. They should now be on their own.

 

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