City says Sacramento arena would be economic powerhouse; subsidy critics disagree

Economic engine or hopeless boondoggle?

Mayor Kevin Johnson and the Sacramento Kings say the new downtown sports arena – and the city’s proposed $258 million subsidy – would revitalize Sacramento’s central business district and create an economic bonanza worth $11.5 billion. Their critics say those economic estimates are vastly overstated, and cite academic studies that say sports facilities simply draw money from elsewhere in the community and create little in the way of new wealth.

The fight over the arena remains intense, even after the city clerk on Friday rejected a June ballot measure that would force a vote on the city’s subsidy, citing legal flaws in the petitions supporting the measure. It’s possible her decision could be challenged in court.

If the arena project proceeds, one thing is clear: Its economic success or failure will depend largely on what happens outside the building, and whether bringing the Kings downtown leads to a surge of new restaurants and other business establishments.

“The building has to act as a catalyst for development for this to work,” said Roseville economic consultant Cathleen Dominico of Capitol Public Finance Group, author of a recent arena study commissioned by a political group tied to the mayor and the Kings.

Her study bears this out. It says the city-owned arena, scheduled to open in the southeast corner of ailing Downtown Plaza, would generate $11.5 billion in economic impact over 35 years. But it also says that roughly half the projected economic benefit would come from businesses – bars, hotels and other commercial development – that don’t yet exist and aren’t guaranteed to materialize. That includes hundreds of millions of dollars in so-called ancillary development planned by the Kings for the rest of Downtown Plaza, as well as new development that Dominico predicts would emerge elsewhere in downtown Sacramento, beyond the mall’s boundaries.

“The key to this is actually the ancillary development,” Dominico said. “Spinoff developments ... restaurants and bars that haven’t been built yet.”

Opponents of the arena subsidy say the city’s financing plan – based largely on borrowing against future parking garage revenue – poses risks to the city’s budget, which currently receives about $9 million a year in parking profits. These critics also take issue with the projected economic benefits, saying predictions of new restaurants and other commercial development are speculative and overly optimistic.

In particular, they say none of the spinoff development is guaranteed to happen. The tentative “term sheet” between the city and the Kings, approved by the City Council last spring, says only that the team will spend $189 million on the arena. It doesn’t obligate the Kings to develop the rest of Downtown Plaza.

The team filed preliminary plans with the city in November to build a 1.5 million-square-foot complex, including a hotel, office tower, shopping center and apartment building, but hasn’t released a timetable for construction.

“There’s absolutely no assurance they’re going to build that,” said taxpayer activist Craig Powell, who worked on the petition drive to put the subsidy question on the June ballot. “They could have just as easily said, ‘We’re going to build four hotels and six office towers,’ for all the assurance that brings.”

Critics point to a recent memo from City Treasurer Russ Fehr predicting the city will get $2.7 million a year in new taxes once the project is built out. They say that’s a meager return on an investment that will cost the city about $19 million a year in principal and interest payments. The city says arena revenue and the city’s parking operations will repay the debt.

“It’s a horrendous financial deal ... and the return on investment is inadequate,” said City Councilman Kevin McCarty, who opposes the subsidy. He said the projected tax revenue is a more realistic assessment of the project’s worth than “pie-in-the-sky economic impact studies.”

City Hall officials see it differently.

“The objectives of the project are broader than a dollar-for-dollar cash return, no different than when the city invested in museums, the Crocker,” said Assistant City Manager John Dangberg. “It’s about having a downtown that serves the entire region in terms of entertainment, in terms of business. ... When you look at successful cities around the world, their downtown cores are successful.”

Kings President Chris Granger said it’s “likely” the ownership group, led by Bay Area tech executive Vivek Ranadive, will develop some other portions of Downtown Plaza while the arena is under construction. The arena is supposed to open in 2016.

“We have every incentive to push this along as fast as we can,” said Granger, adding that the Kings are counting on “economic synergy” between the arena and the ancillary development. “The arena crowd feeds the ancillary development and the ancillary development feeds the arena.”

‘Incremental benefit’

Already, the prospect of a new arena is boosting downtown real estate. Investor Richard Rich said he and a partner recently bought the Fruit Building, a 10-story office tower next to Downtown Plaza, with the arena in mind. They plan to pour $4 million into renovating the building and have received inquiries from retailers about taking space on the ground floor.

Potential tenants “have already bubbled up,” Rich said. “It’s very possible that a restaurant-lounge will be part of the long-term plan here.”

Assessing the arena’s potential economic payoff requires sifting through complicated economic models that try to predict how and where people spend their discretionary incomes.

Dominico’s study says the arena would bring 1.6 million visitors a year to downtown Sacramento, where they would spend $230 million in bars, hotels and the like. When inflation is factored in, that would eventually total $11.5 billion over 35 years, according to the analysis. The figures don’t include money spent inside the arena itself.

Her study also calculated a “net” impact, subtracting an estimated $205 million a year that would be spent on sports and entertainment in greater Sacramento anyway, even if the new building didn’t materialize. That leaves $25 million a year, for a total of $1.2 billion over 35 years with inflation factored in, a measure of the new money that the arena is projected to bring to the community.

Academic economists are skeptical about claims that arenas bring in new money, and Sacramento’s project is no exception. They say sports facilities for the most part divert consumer dollars from other entertainment activities in other parts of the community. Without a team, people would spend their money on other pursuits.

Sports economist Roger Noll, a professor emeritus at Stanford University, said “a city the size of Sacramento” can expect no more than $10 million to $15 million a year in new money from its arena.

“It’s simply what I have seen in other kinds of cities,” said Noll, who reviewed Dominico’s study at The Bee’s request. “There is a small, incremental benefit. But it is small, and it would not justify a huge government investment.”

City officials reject that argument. While it’s true that a Kings game might take money that could go to other activities, they said the presence of a new arena would increase overall spending.

“Will people spend more money on entertainment if there are more and exciting opportunities locally? I think so,” Dangberg said.

Migrating money

As it is, city officials say too much money flows out of town because the Kings’ existing facility, the aging Sleep Train Arena, increasingly is bypassed by the major tours. “All the big shows where people have to go to Tahoe, Reno, San Francisco, San Jose – those entertainment dollars aren’t being spent locally,” Dangberg said.

And city officials say the situation would worsen if the downtown arena isn’t built and the NBA follows through on its threat to move the Kings to another city if the new arena isn’t open by 2017. Even more money would leave town, they say.

Kings fan Jeremy Rose can attest to the argument that Sacramentans have options in other nearby cities.

In 2008, he gave up his season tickets as the team’s fortunes soured. He saved about $3,000 a year, much of which he spent in the Bay Area instead of Sacramento.

“I was going to San Francisco more,” said Rose, who became a Kings ticket holder again in 2012. “I went to a lot more Giants games.”

There’s no question, however, that moving the Kings from Natomas to the central city would divert dollars from elsewhere in the community. Malabar American Cooking, a popular restaurant near Sleep Train Arena, does an additional $1,500 a night in sales when the Kings have a home game, and more than $3,000 when there’s a concert. Restaurant manager Robert Smith expects much of that to disappear if Sleep Train gives way to a downtown arena.

While the restaurant has a built-in clientele and would survive the move, “there’s definitely a loss there,” Smith said.

Malabar’s loss would be Randy Paragary’s gain. The owner of three restaurants within a few blocks of Downtown Plaza, he said the arena and related development are “going to be a tremendous shot in the arm for us.”

Sacramento officials make no apology for attempting to pull dollars downtown from other parts of the region. They say a downtown arena can generate a commercial and cultural hub that can’t be duplicated in a suburban-style setting like the Kings’ current home in Natomas.

“We’re trying to get spending in our downtown,” Dangberg said. “We’re not bashful about that at all.”

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