Tory Gattis’ Open City of Opportunity

Houston’s next urban boondoggle?

metrorail6As with most major metropolitan areas, Houston has its share of urban boondoggles.

Let’s see now.

First and foremost, Houston has the financial black hole known as Metro Light Rail, which will continue to require enormous subsidies for decades to come.

But Houston also has the $100 million Bayport Cruise Ship Terminal, which has never docked a cruise ship since its completion in 2008.

Of course, who could overlook the continuing dither over what to do with Houston’s expensive and obsolescent Astrodome?

Or the Harris County Sports Authority’s problems servicing the junk debt it issued in connection with financing the construction of Houston’s Reliant Stadium for the NFL Texans?

And don’t forget the City of Houston’s decision to build a downtown convention center hotel that is almost certainly a huge money-loser, as well as the City’s ill-advised financing of several smaller downtown hotel projects and Metro’s dubious real estate development deals.

Which brings us to the most recent boondoggle — the local governments’ decision to throw about $50 million or so into the construction of a minor-league soccer stadium.

With that track record, I guess I shouldn’t be surprised with anything that local politicians might cook up as the next urban boondoggle.

But really. Financing of grocery stores?

Public Choices

cincinnati-paul-brown-stadium2This Reed Albergotti/Cameron McWhirter/WSJ article provides an absolutely devastating account of the way in which Hamilton County, Ohio political leaders pledged an enormous portion of the county’s resources to pay most of the cost of a new stadium for the NFL’s Cincinnati Bengals:

At its completion in 2000, Paul Brown Stadium had soared over its $280 million budget–and the fiscal finger-pointing had already begun.

The county says the final cost was $454 million.  .  .  .

But according to research by Judith Grant Long, a Harvard University professor who studies stadium finance, the cost to the public was closer to $555 million once other expenditures, such as special elevated parking structures, are factored in. No other NFL stadium had ever received that much public financing. [.  .  .]

On top of paying for the stadium, Hamilton County granted the Bengals generous lease terms. It agreed to pick up nearly all operating and capital improvement costs–and to foot the bill for high-tech bells and whistles that have yet to be invented, like a "holographic replay machine." No team had snared such concessions in addition to huge sums of public money, Journal research shows.

To help finance its stadiums, Hamilton County assumed more than $1 billion in debt by issuing its own bonds without any help from the surrounding counties or the state. As debt service ratchets up, officials expect debt payments to create a $30 million budget deficit by 2012.

"The Cincinnati deal combined taking on a gargantuan responsibility with setting new records for optimistic forecasting," says Roger Noll, a professor of economics at Stanford University who has written about the deal. "It takes both to put you in a deep hole, and that’s a pretty deep hole."

The stadium’s annual tab continues to escalate, according to the county’s website. In 2008, the Bengals’ stadium cost to taxpayers was $29.9 million, an amount equivalent to 11% of the county’s general fund.

Last year, it rose to $34.6 million–a sum equal to 16.4% of the county budget. That’s a huge multiple compared to other football stadiums of the era that similarly relied on county bonds for financing. Those facilities have cost-to-budget ratios of less than 2%. [.  .  .]

The Bengals had said that with a new stadium, the team’s revenue would increase, allowing it to sign better players, win more games and attract more fans to the area. In 2000, the new stadium’s first year, the Bengals had the same record they’d had the previous year, 4-12. Since then, the team has managed just two winning seasons in the new facility. Its attendance levels have actually dropped.

Houstonians might be tempted to shake their collective heads at how badly Bengals management took Hamilton County to the cleaners in the stadium financing negotiations. But then we are forced to confront that Houston has more than its share of similar boondoggles, such as the financial black hole known as Metro Light Rail, the $100 million Bayport Cruise Ship Terminal (which has never docked a cruise ship since its completion in 2008), the continuing dither over what to do with the obsolescent Astrodome, the Harris County Sports Authority’s problems servicing the junk debt it issued in connection with financing the construction of Reliant Stadium for the Texans, and – most recently – the City of Houston and Harris County’s dubious decision to throw about $50 million or so into the construction of a minor-league soccer stadium.

The expenditure of a billion or two of public money on building a lightly-used light rail system and stadiums for privately-owned businesses has real consequences, such as leaving inadequate funds available to make the improvements to Houston’s flood control system, road infrastructure and other improvements that actually improve the safety and welfare of Houstonians.

As I’ve pointed out before, the relatively small interest groups that benefit from urban boondoggles have a vested interest in preventing citizens from ever examining those threshold issues. The primary economic benefit of such public projects is highly concentrated in a few interest groups, such as representatives of minority communities who tout the political accomplishment of shiny toy rail lines while ignoring their constituents need for more effective mass transit; environmental groups striving for political influence; engineering and construction-related firms that profit from the huge expenditure of public funds; and real-estate developers who profit from the value enhancement provided to their property from the public expenditures.

As Peter Gordon has wryly-noted: "It adds up to a winning coalition."

Unfortunately, once such coalitions are successful in establishing a governmental policy subsidizing such urban boondoggles, it is virtually impossible to end the public subsidy of the boondoggle and re-deploy the resources for more beneficial projects.

How do these interest groups get away with this? The costs of such boondoggles are widely dispersed among the local population of an area such as Houston, so the many who stand to lose will lose only a little while the few who stand to gain will gain a lot. As a result, these small interes
t groups recognize that it is usually not worth the relatively small cost per taxpayer for most citizens to spend any substantial amount of time or money lobbying or simply taking the time to vote against such boondoggles.

But would citizens react differently if their leaders advised them that their lack of action in the face of an urban boondoggle might prevent the funding of much more beneficial projects?

No one knows for sure. But I’d sure like to see local political leaders engage in some truth-in-advertising before the financing of such boondoggles is placed before the voters.

We all might just be surprised.

Bubble Monuments

boondoggle-logo2Well, Houston has its share of boondoggles, such as the Metro Light Rail, the $100 million Bayport Cruise Ship Terminal (which has never docked a cruise ship since its completion in 2008) and the continuing dither over what to do with the obsolescent Astrodome.

But I have to admit, in terms of sheer number and scope, Houston’s boondoggles don’t come close to matching those of Las Vegas (H/T Calculated Risk). Check out the photos.

I wonder if a bus tour of these mothballed projects has been put together yet?

Expensive Toy Trains

Houston Metro-1Cory Crow posted a good overview this past Friday on how Houston’s Metropolitan Transit Authority has failed to develop and operate a transit system that meets the special needs of the Houston metropolitan area (Metro’s debacles have been frequent topics on this blog, most recently the here and here).

Cory’s post coincided with this Richard White/NY Times op-ed in which he previews one of the themes of his new book on the financing and construction of the the 19th-century transcontinental railroads – that governmental guaranty of the bonds used to finance the construction meant that “if there be profit, the [private] corporations may take it; if there be loss, the government must bear it.” As White notes, that dynamic is again at play with regard to the Obama Administration’s high-speed rail proposals:

Proponents of the transcontinental railroads promised all kinds of benefits they did not deliver. They claimed that the railroads were needed to save the Union, but the Union was already saved before the first line was completed. The best Western farmlands would have been settled without the railroads; their impact on other lands was often environmentally disastrous. For three decades California commodities could move more cheaply, and virtually as quickly, by sea. The subsidies the railroads received enriched contractors and financiers, but nearly all the railroads went into receivership, some multiple times; the government rescued others.

As more astute members of Congress came to recognize, the subsidies were a mistake. .  .  .

After 1872, the country turned against the subsidizing of large corporations. It was a little late. Fraud and failure left a legacy that would lead to four decades of government attempts to get back what had so carelessly been given away. In the 1890s, Congress was still trying to recover money from the Pacific Railway.

Yet here we are again. The Obama administration proposed a substantial subsidy, $53 billion over six years, to induce investors to take on risk that they are otherwise unwilling to assume. Such subsidies create what the economist Robert Fogel has called “hothouse capitalism”: government assumes much of the risk, while private contractors and financiers take the profit.

The reality is that virtually all light rail systems and most high-speed rail systems are unsustainable without massive federal subsidies, which are hit and miss, at best. Besides, the financial benefit of these rail systems are highly concentrated in only a few interest groups. Unfortunately, those groups do not include one that is comprised of a substantial number of users.

A strategy of "build as much light rail as possible now and then figure out how to pay for it later" is not a coherent transit plan for the Houston metropolitan area.

What is it going to take for Houston’s local governmental leaders to understand that?

The NFL Bubble

NFL LOGO -2_2Earlier posts here and here noted the real possibility that the problems that the Harris County Sports Authority is currently experiencing in paying the debt incurred in the construction of various stadiums in Houston may be a sign of a bubble in the professional sports business that is about to burst.

S. M. Olivia of the Ludwig von Mises Institute picks up on that theme in analyzing the very real possibility that National Football League owners may elect to lock-out NFL players because of stalled negotiations over a new collective bargaining agreement:

The NFL encapsulates, perhaps better than any other single business entity, the popular conceptions — and misconceptions — about capitalism and the nature of markets. The league is the epitome of statist “crony” capitalism. Its franchise operators demand huge government subsidies for stadiums while jealously guarding its prerogatives as a “private” business. Governments (and their media enablers) largely go along with this because they’ve been led to believe the NFL’s popularity is so immense that no respectable city can go without a franchise.

Professional football is the ethanol of the entertainment industry. Since 1990, nearly every NFL franchise has either opened a new stadium, made substantial renovations to existing stadiums, or is currently in the process of obtaining a new stadium. Over this 20-year period the league’s franchises obtained over $7 billion in taxpayer subsidies raging from direct taxes to publicly backed bonds. Ten stadiums are 100% government-financed, while another 19 are at least 75% government-financed. Every single franchise receives some amount of government subsidies. [ .  .  .]

[The ongoing NFL-NFLPA dispute is]  .   .   . simple really: The owners overspent on unnecessary stadiums, and now they want the players to work more for less pay to help pay down the debt. That’s your entire labor dispute in one sentence. The league expects — nay, demand — the NFLPA to act like a local government in a stadium dispute and simply give the franchise operators what they want for little or nothing in return. Maintaining the “owners'” social standing is of paramount importance. [ .  .  .]

The NFL produces three things: stadium debt, intellectual property, and bureaucracy. None of these things should be confused with “free market” values. The league is a prime example of what happens when you mix politically influential egos with easy credit and a media environment that largely promotes economic ignorance. You have the perfect boom business.

But all booms eventually end. NFL acolytes — and they are presently the majority — will insist, as Homer Simpson once did, that “everything lasts forever.” One media writer I correspond with insisted to me recently the NFL will be even more popular in 20 years then it is today. Go back to 1991 and think about all of the businesses you could have said that about, incorrectly, at that time.

That’s not to say professional football will cease to exist, nor even that the present labor situation will yield some disaster beyond imagination. What I am saying is that all the positive, pie-in-the-sky press in the world can’t alter economic reality. The NFL isn’t just a house of cards. It’s a house of cards built atop a pile of toxic waste. The only thing keeping the house from sinking is a support structure composed of television contracts.

But the networks face their own economic challenges, and unless you can guarantee that Fox, ESPN, CBS, et al., will be stronger then they are now in 2031, then you can’t say with any confidence the NFL will survive and thrive indefinitely. The league is built on consumption, and when you adopt that model, eventually you’ll eat yourself out of your $1.3 billion house and home.

My sense is that the NFL owners will endure a public relations debacle if they force a work stoppage, particularly if they allow it to last a long time.

For one thing, the entertainment market is far different and more diverse now than it was during prior NFL work stoppages. Thus, the market for entertainment has many alternatives to the NFL.

Moreover, the market appreciates the grave injury risk that the players endure far better than it did during prior NFL work stoppages. The public is unlikely to side with wealthy owners who are attempting to force players to take more economic risk in the face of that injury risk.

Funny thing about those financial bubbles – they are far easier to see in hindsight.

The sad reality of Metro

metro-map-2012-revisedMetropolitan Transit Authority CEO George Greanias makes his best case for building expensive light rail systems here. It’s all about investing for what will eventually be a “first-class public transit system.”

But there is also the here and now. And the stark reality is that light rail systems are utterly unsustainable without massive federal subsidies, which are hit and miss, at best.

Metro is in desperate need of leadership that will develop a transit plan for the Houston area based on something other than a strategy of “build as much light rail as possible now and then figure out how to pay for it later.”

Greanias does not appear that he will be providing such leadership.

So it goes with Metro.

A lesson on using other people’s money

Well, maybe it’s not all so bad after all that the Harris County Sports Authority used junk debt to finance construction of Reliant Stadium. Check out what’s going on in St. Louis (H/T Craig Depken):

Eight years ago, as the St. Louis Cardinals aimed to build a new baseball stadium, team owners signed an agreement with the city worth millions of dollars a year in tax breaks.

In exchange, the team agreed to a series of annual perks for the region’s residents – 100,000 free tickets, 486,000 seats for under $12 and $100,000 in donations to recreation for disadvantaged youths.

The Cardinals also agreed to give the city a cut of profits made if any portion of the team was sold.

Then, last year, owners sold a sizeable chunk of the Cardinals – more than 13 percent. Now, a group of anti-public-stadium advocates is alleging that the team owes the city hundreds of thousands of dollars.

And, despite another multimillion-dollar budget gap anticipated for the coming year, the city isn’t checking into it. City officials acknowledge that they have never really kept tabs on the agreement.

.    .     . Several city officials, including Barb Geisman, the former deputy mayor for development, said there was no reason to double-check. They trust the Cardinals.

Which reminds me of what the late Milton Friedman used to say about the dynamics of using other people’s money:

“There are four ways in which you can spend money.”

“You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money.”

“Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost.”

“Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch!”

“Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get.”

“And that’s government .   .   .”

A Question for Kent Friedman

Reliant StadiumHarris County Sports Authority Board Chairman J. Kent Friedman is not concerned that the Sports Authority has had to dip into its cash reserves for the first time in order to make a debt service payment on the junk debt it issued to finance construction of Reliant Stadium:

Friedman said paying off a 30-year mortgage in five years could produce a windfall.

"The savings on that is staggering" as the authority avoids years of interest payments, Friedman said. "The Sports Authority, and, by extension, the community, will be a lot better off if we can pay these bonds off early."

Which raises the question that, if such is the case, why did the Sports Authority finance the bonds over 30 years in the first place?

What’s most interesting about this situation is the change that it reflects in regard to public financing of stadiums. JP Morgan Chase has evaluated the situation and concluded that tax revenues dedicated to the bonds are so risky in the future that it is better off forcing the Sports Authority to dip into reserves and pay off the bonds in five years.

Could the fact that Harris County continues to dither over the mothballed Astrodome – which still is subject to over $30 million in bond indebtedness – have something to do with JP Morgan Chase’s decision?

Or is JP Morgan Chase simply hedging its risk regarding another bubble?

Metro, Proposition 1 and competing costs

News-Shelby-Buffalo-Bayou-Park-flood-May-2015_110239Given the regularity of gully-washers in Houston, flood control is something near and dear to the heart of any Houstonian.

So, the Renew Houston organization reasons, who could possibly be against Proposition 1 in the upcoming election? That’s the referendum that seeks to raise about $8 billion of dedicated taxes over the next couple of decades to fund flood control projects and other infrastructure improvements.

Well, I doubt many Houstonians oppose improving flood control and other reasonable infrastructure improvements. But reasonable folks can certainly differ over how to pay for it. And more precisely, whether local governments have already committed limited tax dollars to boondoggles such as the Metro light rail system that should have been used for the more beneficial projects that Proposition 1 proposes.

Metro’s defenders – many of whom are supporters of Proposition 1 – typically rely on the 2003 referendum as the primary basis for their continued support of the light rail boondoggle.

But the problem with the 2003 referendum and Proposition 1 is that they ask voters to approve large public projects in a vacuum while ignoring Peter Gordon’s three elegantly simple questions regarding economic choices:

1) At what cost?

2) Compared to what? and

3) How do you know?

For example, let’s assume that voters in 2003 had been informed that the expenditure of a billion or so of public money on building a lightly-used light rail system has real consequences, such as leaving inadequate funds available to make the improvements to Houston’s flood control system and infrastructure that Proposition 1 now proposes.

No one knows for sure, but my bet is that voting results would have been dramatically different if the foregoing alternative had been a part of the 2003 referendum.

Unfortunately, the relatively small groups that benefit from urban boondoggles have a vested interest in preventing the voters from ever examining those threshold issues. The primary economic benefit of such public projects is highly concentrated in only a few interest groups, such as representatives of minority communities who tout the political accomplishment of shiny toy rail lines while ignoring their constituents need for more effective mass transit; environmental groups striving for political influence; engineering and construction-related firms that profit from the huge expenditure of public funds; and real-estate developers who profit from the value enhancement provided to their property from the public expenditures.

As Professor Gordon wryly-notes “It adds up to a winning coalition.”

Unfortunately, once such coalitions are successful in establishing a governmental policy subsidizing boondoggles such as the Metro light rail system, it is virtually impossible to end the public subsidy of the boondoggle and deploy the resources for more beneficial projects.

How do these interest groups get away with this? The costs of such boondoggles are widely dispersed among the local population of an area such as Houston, so the many who stand to lose will lose only a little while the few who stand to gain will gain a lot. As a result, these small interest groups recognize that it is usually not worth the relatively small cost per taxpayer for most citizens to spend any substantial amount of time or money lobbying or simply taking the time to vote against a boondoggle such as a light rail system.

But would the citizenry react differently if they knew that their lack of action in the face of an urban boondoggle might prevent the funding of much more beneficial projects?

Writing about Phoenix’s new light rail system, which is just as uneconomic as Houston’s, Warren Meyer analogizes the funding of these systems to dubious household purchases:

[The] Phoenix light rail reminds me of a home I visited recently that had a $50,000 super-size 100-inch flat screen TV. That TV was gorgeous. Everyone who saw it immediately fell in love with it.  It worked flawlessly, and everyone at the party wanted one. In fact, it was probably the greatest, most sensible and successful purchase of all time .   .   . as long as one never considered the cost.  This is exactly how light rail seems to get evaluated.

In building a light rail system, did Houston buy an expensive flat-screen TV with funds that would have been better utilized taking care of the drainage problem in the back yard? Or are things going so well at work for Houston that it can do both?

We will soon find out.