Category Archives: Economics – Urban Boondoggles

The Chron’s continuing soccer stadium drumbeat

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dynamo soccer stadium2 In this post from last week on the proposed downtown soccer stadium, I observed that the Chronicle should simply declare that it supports the public financing of the stadium and quit attempting to rationalize that such financing makes economic sense.

Well, based on this Glenn Davis/Chronicle column, it looks as if the Chronicle took me up on my suggestion.

Actually, Davis’ column is about as good a rationalization for the public financing of the soccer stadium as you will come across. He eschews the economic-benefit ruse and instead contends that it’s worth spending public money on the Dynamo because the club represents the city well internationally, particularly in Mexico and Central America. On the other hand, Davis stretches by suggesting that "the team deserves its own stadium [because it] would elevate the sport and city even more in the eyes of the world."

Just to be clear — there is nothing inherently wrong with public financing of sports stadiums. Davis might even have a valid point that it’s worth using public funds to invest in the Dynamo to bolster Houston’s image internationally, although it would seem that at least some consideration should be given to alternative investments before coming to the conclusion that financing a soccer stadium is the best way to achieve that goal. But let’s at least have truth in advertising during the remaining public discussion on this issue — the marginal economic benefit of a soccer stadium to the community is simply not a good reason to finance it publicly.

Suspending reality on financing the soccer stadium

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Houston Dynamo stadium 050908 Look, I realize that the reasoning in support of public financing for the proposed Houston Dynamo soccer stadium has not been particularly rational. But this Chronicle article takes the cake in terms of suspending reality. Chron reporters Bernando Fallas and Bill Murphy breathlessly suggest that financially-troubled Texas Southern University — which is currently seeking $40 million in emergency legislative funding simply to keep the lights on — is a serious player to make up at least a portion of the gap between the private and public financing on the deal:

Forget soccer-specific. The Dynamo would be thrilled to call their proposed stadium football-specific or even fútbol-specific.

Either way would be accurate — soccer is known as football almost everywhere else in the world — if the Dynamo can get Texas Southern University to join negotiations with the city of Houston toward the construction of a $105 million facility just east of downtown that would be home to the two-time defending MLS champions and TSU athletics, primarily the Tigers’ football team.

By the looks of things, TSU is prepared to do just that.

Two weeks after he first expressed interest in the project and a couple of meetings and phone conversations later, newly appointed TSU athletic director Charles McClelland said the school is willing to invest in the construction of the 22,000-capacity stadium in exchange for the rights to use it. [.  .  .]

Of course, the article is utterly devoid of details, such as how TSU is going to find any money to throw at this deal, much less make a multi-million dollar investment in it. Heck, the TSU athletic director and the Dynamo’s president haven’t even met yet, so it doesn’t even appear that Dynamo management takes TSU’s involvement seriously. Why don’t the Chronicle editors just come out and say that they really want the city to finance the downtown soccer stadium and spare us such vapid articles as this one? Gosh, it’s gotten so bad that even normally common sense bloggers are giving in to this silliness.

Meanwhile, J.R. Taylor over at PoliSci@UST runs circles around the Chronicle’s reporting on the soccer stadium financing with this well-reasoned post that actually addresses facts regarding public financing of stadiums. Yet another example of how the blogosphere is trumping the mainstream media in terms of providing coherent analysis of important issues.

Examining stadium subsidies

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dynamo at robertson As if on cue for the soccer stadium financing issues currently being discussed on the local scene, Dennis Coates provides this excellent op-ed in The American on the dubious nature of municipal stadium subsidies:

Clearly, stadiums built with public funds have evolved over time. No longer are they built to honor the sacrifices of American soldiers. No longer are they built to be flexible venues capable of hosting a great variety of events. And no longer does the public sector determine the appropriate price to charge private enterprise for use of this publicly supplied resource. Today, sports stadiums are largely the private domain of for-profit businesses that the public sector subsidizes, often with special taxes. [.  .  .]

Over time, both the purpose and the real cost of public support for stadiums and arenas have changed. It may be that the subsidies state and local governments provide for stadium and arena construction and operation are justified by the community benefits those facilities provide. But the evidence says otherwise. [.  .  .]

My own research, conducted with economist Brad Humphreys .  .  . finds that the professional sports environment—which includes the presence of franchises in multiple sports, the arrival or departure of teams, and stadium construction—may actually reduce local incomes. For example, we found that the overall sports environment reduced per capita personal income, a finding that was new in the economic literature at the time we published it (1999). We also found that, in many local economies, wages and employment in the retail and services sectors have dropped because of professional sports. [.  .  .]

Of course, even if the benefits of stadiums and arenas cover the subsidies, the subsidies still may not be sound policy. First, there may be enormous variation in the distribution of the consumption and public-good benefits. It is clear that not all citizens in a community benefit equally from the presence of professional sports franchises in their city. Indeed, because the tax revenues used for the subsidies are often generated from lotteries and sales taxes whose burden falls disproportionately on the poor, while the consumption benefits go mostly to relatively wealthy sports fans, the net benefits are distributed regressively. Second, we should consider the net benefits to the community of alternative uses of the funds spent subsidizing sports facilities. Good policy means using the money where the net benefit is greatest, not simply where the net benefit is positive. That’s something state and local governments should keep in mind before pledging millions of dollars to fund the next new stadium project. And it’s something Congress should remember when evaluating the future of U.S. tax policy.

Are you listening, Mayor White?

Mayor White’s management

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mayorwhite 042208 Help me out here. I’m really trying to understand the basis of the perception among a large number of Houstonians that Mayor Bill White is an effective manager.

For example, this earlier post summarized Mayor White’s dubious decision-making in regard to having the city buy expensive and not particularly well-located downtown land for the new Houston Dynamo soccer stadium. Not only did the city already own nearby property that is a better location for the stadium, Mayor White pushed through the land acquisition despite not having a binding commitment from the soccer club owners on the amount of their contribution to the cost of the stadium’s construction.

Given the foregoing, who except Mayor White was surprised last week when Major League Soccer (which is really just a minor soccer league) sent a letter to the Dynamo owners that was (again, surprise!) passed along to Mayor White that threatens to relocate the Dynamo if a satisfactory stadium deal isn’t reached? For good measure, MLS and Dynamo officials informed the city that the estimated price of the stadium has increased from $90 million to $105 million and that some MLS cities have contributed as much as 90% of the cost of similar stadiums.

So, what was Mayor White’s reaction? Tell these minor leaguers to take a hike to Corpus Christi or Beaumont? Apologize to the citizens for having the city lay out $15-20 million for property that it doesn’t need? Promise that he won’t get taken to the cleaners again in negotiations with minor league sports club owners? No, Mayor White did his best tough guy imitation:

"I’ve gotten a little bit of a reputation, probably deserved, that I don’t respond well to threats," he said. "I smiled."

If Mayor White is smiling, then imagine what the MLS and Dynamo officials are doing after the way in which those minor leaguers have had their way with Mayor Bill in these negotiations?

The only good news about all this is that the $50-75 million that the city will probably end up dropping over this soccer stadium boondoggle represents only about a couple of months of losses of this much larger boondoggle, which — you guessed it — Mayor White strongly supports. And those aren’t the only questionable management decisions that the Mayor has made during his tenure (for example, see here, here, here and here).

How much longer can Houston afford Bill White?

Remember Kelo?

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Brooklyn NEts Check out this recent Second Circuit decision (H/T to Robert Loblaw) as an example of how the appellate courts are applying the U.S. Supreme Court’s controversial 2006 decision in Kelo v. New London. Kelo allows the state to seize private property to facilitate private re-development as a legitimate form of "public use" under the U.S. Constitution.

Kelo has been widely criticized for creating perverse incentives for politically well-connected real estate developers to exercise their political clout where negotiation with private property owners didn’t generate the developers’ desired result. The Second Circuit case involves the huge redevelopment plan in downtown Brooklyn that will primarily benefit Bruce Ratner, a wealthy New York real estate developer. In addition to the ubiquitous office buildings and high-rise condos involved in such deals, the redevelopment will include a new arena for the New Jersey (soon to be Brooklyn) Nets NBA basketball club. Although most of the property to be contributed to the development is public land, the redevelopment plan also requires the state to seize several tracts of private property through exercise of its eminent domain power.

The private property owners sued and argued that the state’s claim of public benefit is a facade, as the Second Circuit puts it, "to benefit Bruce Ratner, the man whose company first proposed it and who serves as the Project’s primary developer. Ratner is also the principal owner of the New Jersey Nets. In short, the plaintiffs argue that all of the ‘public uses’ the defendants have advanced for the Project are pretexts for a private taking that violates the Fifth Amendment."

The Second Circuit upheld U.S. District Court dismissal of the property owners’ claims, explaining that the massive private benefits to Ratner do not trump the state’s judgment that the project will also benefit the public. Moreover, even though the costs to the property owners may far outweigh the public benefits, the Second Circuit concludes that type of cost/benefit analysis is irrelevant under Kelo:

At the end of the day, we are left with the distinct impression that the lawsuit is animated by concerns about the wisdom of the Atlantic Yards Project and its effect on the community. While we can well understand why the affected property owners would take this opportunity to air their complaints, such matters of policy are the province of the elected branches, not this Court.

Given such dubious "public" ventures as this, the implications of the foregoing interpretation of Kelo are downright frightening.

The "leadership" of Bill White

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mayorwhite 022908 Let me see if I’ve got this straight.

On one hand, private businessmen invest millions in buying a run-down property and following the city’s existing laws and regulations in preparing to build the Ashby high-rise, a large-scale residential redevelopment similar to dozens of others that dot Houston’s landscape. When neighbors of the development object to the scale of the development relative to the surrounding neighborhood, Mayor White orders one of the city’s approvals relating to traffic ingress and egress to be revised to delay or undermine the development altogether.

On the other hand, Mayor White proposes that the city spend at least $15-20 million to buy six blocks of downtown Chinatown property at a premium price for a soccer stadium that will block more east-west thoroughfares in a part of downtown where Minute Maid Park, the George R. Brown Convention Center and the Toyota Center already block a large number of such thoroughfares. Moreover, Mayor White is pushing this deal through City Council even though the city already owns six blocks nearby that is a better location for the soccer stadium (it wouldn’t block any additional east-west thoroughfares and wouldn’t require a major modification to another boondoggle). Meanwhile, the city has no financial commitment from the local soccer team even to build the stadium.

This is making the Harris County Commissioners’ dithering over the Astrodome hotel project look downright prudent in comparison.

 

The Hollywood Dome?

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astrodome 022608 It is a reflection of how low my expectations have sunk for rational decisions from Harris County officials. I actually felt a sense of relief that officials do not appear to be taking this seriously:

Lights, camera, action: Dome needs a makeover

The Astrodome was a stage for baseball and football prima donnas to strut their stuff, but it could become a forum for Hollywood stars.

At least that’s what would happen if the Houston Association of Entertainment Professionals gets its way.

The association, a new, non-profit group representing film industry workers, has heard that not all county officials support the Astrodome convention hotel plan and has come up with an alternate proposal — turning the Dome into a film production studio.

"It would bring an entire new economy to Houston," said association president Elise Hendrix. "We should make a home for the film-making industry."

Astroturf and stadium seating would give way to studio space where sets could be built, a film-processing operation that could produce dailies, a 100,000-square-foot, underground sound stage and offices.

Hendrix pitched her idea to the Houston Film Commission, an arm of the Greater Houston Convention and Visitors Bureau, last week.

But she and other association members may appear light on the gravitas needed to have their plan taken seriously. Hendrix, 25, is a professional makeup artist who left the University of Louisiana at Lafayette before graduating. She was a fashion design and merchandising major.

The association doesn’t have a web site, only a page on MySpace.

But Hendrix said the association is courting investors who would put up the estimated $50 million to $200 million needed to gut the Dome and turn it into Astrodome Production Facilities. She declined to name investment groups that she is courting.

Willie Loston, director of the Harris County Sports and Convention Corp., which oversees Reliant Park, said the association hasn’t contacted him about the proposal.

"Great," he said after learning of it. "They got some money?" [.  .  .]

Given the speculative nature of the Astrodome Hotel boondoggle project, and assuming that the County powers have decided that razing the Dome is political suicide, why aren’t County and Texas Medical Center officials figuring out a way to renovate the Dome into the premiere medical training and education facility in the world? Just a thought.

An interesting headline choice

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reliant-astrodome%20Google%20Earth.jpgKevin Whited and Cory Crow continue to express amazement at the delusional nature of county officials and the Houston Chronicle over the proposed Astrodome hotel project that is now in its fourth year of being bandied about. The latest Chronicle effort to breath life into this boondoggle is this weekend article that carries the following headline:

“Dome plan could bring in millions”
“Report also says hotel would have 72 percent occupancy rate”

More realistically, the headline could have read as follows:

“Dome plan could cost County millions”
“Report says that hotel would have only 72 percent occupancy rate”

All depends on one’s point of view, eh?
Given my extensive blogging on this boondoggle, I won’t go into all the reasons why converting the Astrodome to a destination hotel is unlikely to happen without a large public subsidy. Suffice it to say that if private financing for Astrodome hotel could not be arranged over the past several years when the market for such financing was quite good, then it’s not going to happen in the foreseeable future now that credit and equity markets have pulled back from such speculative investments. So, if this deal is going to proceed, then get ready to provide a bountiful public subsidy for it.
However, one name mentioned in the Chron story reminded me of an instructive legal matter I handled back in the mid-1980’s. The matter involved an Astrodome-area hotel that had been promoted to investors and built immediately before the bottom fell out of the local commercial real estate market when the price of oil and gas tumbled to record lows at the end of 1985. I ended up representing the promoters, who had guaranteed a large portion of the construction financing on the hotel.
During the year or so that my clients owned the hotel, it never came close in any month to generating enough revenue to cover the operating expenses of the hotel, much less generating anything for my clients to use to pay debt service on the construction financing. Not surprisingly, the bank eventually foreclosed on the hotel. The promoters and investors lost their entire investment in the hotel.
Guess who the consultant was who prepared the glowing feasibility study that helped persuade my clients to promote and finance that boondoggle?
Yup. John Keeling.

Bill King’s “Let’em ride free plan”

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metrocar%20021208.jpgLongtime Houstonian Bill King is a common sense fellow who serves on the Transportation Council, a group of elected officials and agency staffers that sets priorities for transportation spending in the 13-county Gulf Coast region. In this Chronicle op-ed from over the weekend, he reviews the Metro light rail system’s horrific ridership numbers (previous posts here) and concludes that — given the massive sunk costs invested in the light rail system — the ridership numbers are so bad that it makes economic sense to attempt to increase ridership by simply allowing riders to use the system free-of-charge:

Today, the Metropolitan Transit Authority reports slightly under 300,000 daily “boardings.” Because of transfers, it is a little bit of guesswork to determine how many commuters are actually using transit. But it is probably something in the 120,000-130,000 range. For every commuter we can convince to take a train or bus to work, we get one car off our roads. That means less congestion and fewer emissions and collisions. Clearly a good thing.
Metro has developed a far-ranging, multibillion-dollar plan dubbed Metro Solutions that it hopes will increase transit ridership. Phase 2 of that plan consists of five light rail lines and will cost about $2.2 billion. The ultimate cost will undoubtedly be higher. Metro projects that its Phase 2 lines will have about 140,000 daily boardings. However, these lines will replace existing bus service along the same routes, so not all of the boardings will represent an increase in transit ridership. The net increase on the Main Street line from switching to light rail has been about 19 percent.
If this ratio holds on the Phase 2 lines, we should pick up an increase in daily boardings of about 20,000 to 30,000 or something like 10,000 to 12,000 new transit riders. This is a very small increase compared to well over 1 million daily commuters in Houston.
The traffic models indicate that this relatively small increase will be about offset by the lost street lanes the rail lines will use and the scores of new street level crossings. As a result, there will be no meaningful reduction in traffic congestion from the Phase 2 lines. [. . .]
. . . Metro recovers a very small percentage of its costs through fares. In fiscal year 2006, Metro only collected about $54 million in fares compared to $435 million in operating expenses, or only about 12 percent. That is because Metro gets the overwhelming majority of its funds from a 1 percent sales tax. And Metro is currently enjoying a boom in its sales tax revenues. In the past two years, sale tax receipts have increased by approximately $84 million and are on track this year to increase almost another $40 million. Metro currently is sitting on nearly $400 million in cash, receivables and short term investments.
Also, Metro spends about $5 million a year collecting its fares and advertising, expenses that could be dramatically reduced if fares were eliminated. So eliminating fares would probably only cost us around $50 million annually. [. . .]
Elimination of fares is not an end game solution. There is still a pressing need for expanded transit service throughout the region. But going to a fare free system may be a way to jump-start a new transit paradigm. With a larger transit constituency, public support for new programs may grow.
The nice thing about the idea is that it is not irrevocable. If it does not result in the hoped for benefits, we can always reverse course and try something else. Houston’s transit program has been log-jammed for years with no end in sight. Personally, I am ready to try something different, even if it is a little “out of the box.”

Bill King is a good sport and I give him credit for attempting to make the best of a terrible investment. He is not attempting to justify the construction of Phase 2 of the light rail system by eliminating fares (that would be impossible); he simply references Phase 2 to make the point that eliminating fares would have a bigger impact on ridership at a much lower cost. Most of the benefit of his proposal would probably come from eliminating fares on the Park & Ride system and using the system’s unused bus capacity.
However, thinking “outside the box” in the face of these numbers (10-12,000 more daily light rail transit riders in return for a $2.5 billion investment?) calls for something far more than just “let’em ride free.” Indeed, you could quadruple that increase in daily ridership and it would still be an extremely poor return on investment of public funds.
A more appropriate response in the face of such a poor cost/benefit ratio is to cut the losses altogether, halt the light rail project where it stands and either return the public capital at Metro to the taxpayers or use the funds on something that will truly benefit a substantial portion of the area citizens (flood control or more flexible area-wide bus transit, maybe?). Just how much money will Houston’s political leaders allow Houston-area residents to blow before exhibiting true leadership on the colossal light rail boondoggle?
Update: The Chronicle’s transit columnist, Rad Sadlee, comments here on King’s op-ed.

Pro Dome? Or just anti-Emmett?

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dome%20020508.jpegI understand that Ed Emmett is not the Chronicle’s favored candidate for Harris County Judge. But isn’t it a bit odd for the Chron to be fanning criticism of Emmett for showing rare leadership over the pie-in-the-sky Astrodome hotel redevelopment deal (previous posts here)?
Look, this is really very simple. No equity investor or financial institution in their right mind is going to invest upwards of half a billion dollars to redevelop the Dome into a convention hotel. If there were such investors, they would have stepped up in the over three years that this proposal has been floating about town and the financial markets. The fact that the Astrodome hotel would not even have the primary right to use the Reliant Park space that it sits upon for over a month out of the year (roughly 22 days for the Houston Live Stock Show & Rodeo and another dozen or so days for the Texans) only makes the hotel proposal more speculative in nature. That several County Commissioners continue to think that it’s a good idea to pursue the Astrodome hotel project does not make it one. Rather, it simply shows why they are County Commissioners and not businesspeople responsible for creating jobs and turning a profit.
And reliance on a poll of Houstonians to keep the Astrodome hotel dream alive is just plain silly. Sure, most Houstonians would like to preserve the Dome. It’s a landmark and an architectural treasure. But I doubt that poll revealed to its participants that mothballing the Dome over the past three years has already cost the County $12-15 million that could have been spent on improving roads, flood control or park improvements. Similarly, that poll almost certainly did not disclose to its participants the financial risk that the County would be taking if an Astrodome convention hotel craters, as many such hotels tend to do. If a poll is taken with such information supplied to its participants, then my bet is that the number of Houstonians wanting to preserve this financial black hole would diminish rapidly.
Emmett is showing leadership in moving the decision-making process on the Dome along. The Chronicle is playing politics in criticizing him for it. Set a reasonable deadline for proposals, consider them and then either move forward with one that makes financial sense or raze the Dome and build a parking ramp for Reliant Park that would generate revenue to pay off the bonded indebtedness that remains on the Dome. That may not be the sexist thing alternative, but it’s the responsible thing to do.