Boy howdy has the Nashville Predators deal turned into a mess, yet again.
Now, the city and at least some of its citizens are mired in a discussion over whether or not the team and the Sommet Center should get any more money to help local bidders buy the Predators and keep the team here. This is the result of prematurely released initial ideas the local group presented to the city for renegotiating the arena lease. It's highly unusual for the first blush at a deal to be revealed.
Now the naysayers of public assistance for professional sports teams have more fodder. As a result, the local bidders, with David Freeman, chief executive officer of 36 Venture Capital essentially in the lead role, are being viewed as thieves in their own town because they are seeking additional public assistance, possibly at a cost of $3 million to taxpayers, to keep the team here. The cost may actually be a touch lower.
In return, they have offered to take on the risk of additional operating losses, though their plan is to improve the arena's performance significantly so those losses never occur. In fact, they hope to receive an incentive payment from Metro on new growth generated. Their objective is simply not to lose money with the Predators and the arena. If they do make money, they've pledged to donate the money to area charities, not put it in their pockets.
The debate, however, is rife with financial figures that can be easily skewed one way or another, creating a case of "where you stand depends on where you sit." For anyone who has sought to make sense of it all, it can be a mind numbing, eye-blurring exercise to sift through years of Metro budgets and analysis trying to piece together the numbers. There's a little bit of "hide the ball" with the arena, notably the fact that taxpayers haven't been paying for all of the arena's operating losses. Tourists have been helping for several years and they will pay for most of the losses this year.
Suffice to say, there's plenty of room for confusion. And, with confusion, the possibility exists for creatively interpreting figures for public consumption.
Central to the discussion is what it costs the city to have the Predators here now. The scary number tossed out there in this latest round of issues is the $13 million "subsidy" that has been characterized as being for the team. It comes from Metro's rolling annual report titled "Professional Sports Cost," a possibly misnamed document since most of that $13 million isn't for the Predators but covers the annual debt service on the arena. Metro budget figures show the debt service is about $10.3 million on bonds issued to build the Sommet Center, a deal covered by a specific portion of property taxes that Davidson County taxpayers approved a dozen years ago. So it's bit difficult to see how that cost can constantly be used against the team.
To be fair, there is an argument that the debt service is for the Predators since the arena was built with the mission of attracting a professional sports team and is akin to the debt service on LP Field for the Tennessee Titans. But if the Predators left, the city would still have to pay that debt service and the arena potentially could be more of a burden on taxpayers since state sales taxes rebates would be lost.
In that Professional Sports Cost document (available as an Excel spreadsheet at this link), the arena net cost was nearly $13.1 million for the last fiscal year, which ended on June 30. In the previous year, the number was just over $12.1 million. This year's $1.5 billion budget shows that the net figure is just under $13.1 million. By comparison, LP Field's net cost was $9.3 million in fiscal 2006, $9.1 million last fiscal year and is budgeted for $8.7 million this year.
About $1.8 million of the arena's annual debt service covers $20 million in bonds the Metro Sports Authority floated in the early 1990s for the franchise fee to get the team here. If the team left, it would have to pay back the remaining principal on those bonds, essentially paying them off.
The $13.1 million is calculated by taking the total arena costs, which includes debt service and Metro's expense for covering operating losses, and subtracting the revenues. Last fiscal year, the total cost came to nearly $17.8 million with revenues reaching nearly $4.7 million. Those revenues include rental income, operating income, ticket surcharges and state and local sales tax rebates.
During Mayor Bill Purcell's administration, the subsidy for covering operating losses each year has been a sticking point between Metro and the Predators. When built, the arena was supposed to be a break-even proposition. Since the Predators arrived, the arena's operating loss has been used as an example of how taxpayers subsidize both the Predators and the arena.
That operating-loss subsidy is a bit of a murky figure. It shows up as a line in Metro's budget, and the figure has moved up and down over the years. In 2006, the actual figure was $3.6 million, according to the budget. For fiscal 2007, the budgeted amount was $4.1 million. The current fiscal year's budgeted amount is $818,100.
Before jumping into why this year's figure is so low, it first should be noted that the actual subsidy is considered to be higher. Metro's cost document puts the number at about $4.8 million in fiscal 2006 and $5.7 million for the last fiscal year. This year, it shows that the amount is expected to be $5.6 million. The figures include the performance fee Metro pays arena management along with the operating working capital.
In trying to figure out a more exact number to form their proposal, the local bidders and Metro apparently agreed on $4.2 million as the appropriate figure for the operating losses.
Hotel tax subsidy
Interestingly, over the past several years, Davidson County taxpayers haven't been footing the entire bill for the arena's operating losses. Visitors to Nashville have been picking up a large chunk of the tab. As the debt on the current convention center was winding down, Metro Finance Director David Manning shifted part of the arena’s cost to the hotel occupancy tax fund, which was helping pay off the current convention center.
In fiscal year 2007, Metro was authorized to transfer nearly $1.6 million from the fund. The same amount came in 2006. In fiscal 2005, the figure was $1.5 million. This year, now that the convention center has been paid off, $4.8 million has been budgeted to come out of the fund, leaving the $818,100 to be covered by the general fund.
"This is an explicitly authorized use of the money under state law," Manning wrote in an e-mail response to questions. "It will be up to the next mayor and council to determine if it continues to be a source of funding for the arena."
That means the folks trying to build a new convention center downtown will have to get that stream cut off to the arena. Those funds have been planned for use as part of the funding mechanism to pay for the proposed new convention center. In that case, the burden will fall squarely back on taxpayers, potentially giving naysayers even more fodder in their fight.
The exercise of calculating the cost of the bidding group's proposal to the taxpayer can be as equally challenging as determining the true the cost of the arena to taxpayers.
As part of bidding group's idea, Metro would pay the team $6.5 million to manage the arena. That would be significantly higher than the $265,000 fee now and the performance fee Metro pays arena management, which has been around $100,000. But that proposed fee would include the agreed upon historical operating loss of $4.2 million plus an additional $2.3 million. Part of that fee would be offset by sales tax and ticket surcharge revenue Metro keeps up to the baseline year.
Here's where that $3 million hit on the taxpayers gets tricky, because it doesn't appear to be $3 million. It looks like the actual figure is under $2.5 million. Manning's analysis had put the figure at $5 million but the local bidders whittled it back to the $3 million because some of the figures he used weren't money the city receives now.
Since Metro was already paying $365,000 in management fees, that reduces the $2.3 million to $1.9 million.
The number pushes back up with annual debt service for bonds issued for capital improvements the bidders have requested for the arena. The local bidders want work done to the suites, the rehearsal hall and the heat and cooling system. Manning estimated that number to be $6.9 million. He estimated annual interest of $554,000, pushing the total to just under $2.5 million.
The arena's heating and cooling popped up as an issue for the bidders when they saw the size of the bill, more than $250,000 a year. Downtown's new District Energy System heats and cools the arena along with other downtown buildings. For years, sources have said that the arena's contract with DES, in effect, helps subsidize part of the debt service on that facility by paying an inordinately high bill relative to other downtown buildings.
Manning's analysis had projected an amount for the attendance payment proposed by the bidders in which Metro would pay for any tickets for attendance under the 14,000 average per night. That figure was based on last season's attendance, which was below 14,000. If the team hits it's goal, that wouldn't be a cost to taxpayers. So the nearly $1 million tagged to that payment gets stripped from the analysis.
The analysis also contained projections on revenue growth in ticket surcharges and sale taxes, $268,828 and $831,165, respectively, that would make up the incentive payment. Under the existing agreement, those funds would help cover arena operating losses. Since they wouldn't be under a new agreement, those funds are considered a cost to taxpayers. Again, it's not money the city receives now, nor would it come in if the Predators were gone.
Complicated? You bet. All of it is. And to think, that a new mayor and council will have to make sense of this in short order once in office in late September.
For the naysayers, this gives them an opportunity to get deeper in the weeds and perhaps forget they are on a small patch of ground in a vast field.
See separate story: Preds bidders lease proposal strikes familiar chord