Penguins-policy-brief-AI

Policy Brief
An electronic publication of
The Allegheny Institute for Public Policy
 
March 8, 2007 
Volume 7, Number 11
 
==Pittsburgh Arena: A New Plan==
The Penguins have declared an impasse in arena negotiations with government officials. They will now aggressively explore relocation. Is this just another move to strengthen their negotiating position with Governor Ed Rendell, Chief Executive Dan Onorato, and Mayor Luke Ravenstahl. After all if the offer from Kansas City was very attractive and lucrative for the team compared to Pittsburgh, the Penguins would have already taken it. Or could it simply be personal animus that is driving the decision?
In their open letter to the elected officials the team said they were concerned about the delays that will be caused by the Supreme Court appeals filed against the Barden group and the Gaming Control Board over the awarding of the Pittsburgh slots license. This sounds a bit disingenuous. If the Isle of Capri, who had promised to build a new arena, had won the slots license, it is likely there would have been appeals and a similar delay in the project. 
Another complaint made by the team is the state's unwillingness to divulge the interest rates it is using for estimation purposes. The team has financially knowledgeable people who undoubtedly can tell them within a few basis points what the rates are. This too seems an odd reason to call an impasse to negotiations, which obviously isn�t really an impasse since they are planning to talk again.
This long running story of when a new arena will get built and how it will be paid for can be brought to a conclusion. Here's how. Take the Penguins out of the picture and build a new first class arena without them. If they leave town, elected officials can go to the NHL and ask for another team. In a 30 team league with several financially troubled franchises that could use a new arena in a good hockey town, that should not be too hard. It might take a couple of years, but the new arena won't be finished before then anyway.
How to pay for the new arena? All that's missing is a $6 million per year piece of the puzzle. The $7.5 million commitment from the state's slots funded economic development fund will allow bond borrowing of $115 to $120 million at 4.5 to 5.0 percent interest. Barden's $7.5 million will permit $92 million in bonds at an interest rate of 7 percent. An interest premium will have to be paid to borrow against that revenue stream, but that would have been true for the Isle of Capri funding as well. That leaves $85 million to be raised. 
By pledging annual arena non-hockey related revenues of $6.2 million, the $85 million is doable at 6 percent interest. What are the sources of those revenues? They can be realized through naming rights, concessions, rental fees, in arena advertising, pouring rights, luxury boxes, etc. At 100 event dates per year, the $6.2 million figure should be easily attainable. If it is not, one has to ask whether the public should be even bothering with a new arena. After all, one of the oft-repeated arguments for a new arena is that it has so many other uses than hockey.
If the Penguins decide to stay, the Sports and Exhibition Authority (SEA) simply negotiates a mutually agreeable lease. At the very least the SEA should collect enough from the Penguins directly and from increased ancillary revenues from Penguins' game attendance to recover the $6.2 million. The same negotiations would happen if another team comes to replace the Penguins if they decide to leave.
There is ample precedence for using arena revenues to issue bonds. They have been used in Denver (Avalanche and Nuggets) and Miami (Heat). 
Granted, this plan is a departure from what has been under negotiation. The problem with the negotiations is that they seem to go in circles with some new wrinkle or obstacle popping every time an agreement appears to be in sight. At this point, far too much valuable time of the Governor, the Chief Executive and the Mayor and their staffs have been devoted to the process. And that's on top of years of planning and talking about the issue that have effectively been a waste of time for too many people. Now, there is an opportunity to put a stop to it on terms that are at least as favorable to both parties as the original Plan B.
While we would have preferred to see the funding plan we presented in our 2002 report implemented a plan that would have used minimal public dollars and only for legitimate public infrastructure improvements at least this new plan we are proposing is majority funded by non-public money.
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Jake Haulk Ph.D., President 
Frank Gamrat Ph.D., Sr. Research Assoc.
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