Rocky Kravetsky is a Winnipeg lawyer. He represented the Save the Eaton's Building Coalition in the legal side of its battles against the City of Winnipeg over the construction of the True North Arena. The Master Funding Agreement was first disclosed to the public when it became, over the city's objections, part of the record in that litigation. Mr. Kravetsky suspects he is one of a very few people who has actually read the Master Funding Agreement.
IN a recent article (And out come the
Artist's conception of proposed football stadium for the Winnipeg Blue Bombers in South Point Douglas.
wolves, Winnipeg Free Press, June 26)
sports columnist Randy Turner has
begun an all-too-familiar campaign
of ridiculing anyone who might dare
to voice opposition to any proposal that
might come forward for a new, government-
subsidized, privately owned football
stadium.
Taking pre-emptive aim at anyone who might have anything to say in opposition to the as yet undisclosed plan, Mr. Turner warns against "prematurely opening up the issue for public debate."
It is exactly that kind of blind boosterism that explains why early, clear and complete disclosure of the details of any proposed stadium deal must be made.
This means the details of the site, the configuration, of other options and, above all, the funding arrangements.
If telling the whole truth to the voters before a final decision is, as Mr. Turner suggests, "to set foot in political quicksand" then there must be something for politicians to fear from the truth.
If the deal that gave us the True North arena is any indication, the taxpayers are about to have a big chunk of their money given away to private owners of a public-use facility without ever having their political leaders give them the straight goods about just how much they are giving away.
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There is, indeed, reason to believe that the True North deal is an indication of what any eventual stadium proposal will look like.
Politicians and media, including the Free Press, already are drawing parallels, even while insisting that there isn't yet any stadium proposal being made. While it is fair to draw conclusions from the True North experience as to any stadium deal based on it, these should be based on the actual facts and not on legend or spin.
If the True North deal is to be a template, it is well to know just what that deal was and to consider whether it is truly a good idea for taxpayers to enter into another deal like it.
Many myths have grown up around the True North deal, most of them the result of a successful spinning of selected facts at the time, without the full and frank disclosure to which the taxpayers are entitled. It is no credit to the politicians -- or the media who repeat them -- that these myths are being dredged up to support yet another massive injection of public funds into a private business.
So first let us examine the "big myth" about private funding.
As recently as June 26, Premier Gary Doer went on the radio and declared that the True North arena was two-thirds funded by the private sector. In the past, the proportion has been said to be as high as 75 per cent.
This has been, from the very beginning of the promotion of that project, the No. 1 talking point. So effective has the spin been that most people still believe that the arena was a privately funded initiative that received a bit of funding from three levels of government to help it get off the ground.
This is just not so.
The fact is that we do not know exactly how much money was spent to build the arena. As a private enterprise, True North never did have to account to the public for how much it actually spent. It is known that the Master Funding Agreement between the city, the province and True North was based on a projected cost of $123.5 million. This included $5 million attributed to the Eaton's site, which one of the partners already owned, with the building still on it. Of that amount, all that the private sector owners of the arena finally committed to contribute to the project was $18 million and the site.
That is it. Full Stop. To build the arena as a publicly owned project in accordance with the projections set out in the Master Funding Agreement, the only additional amount the private owners would have had to put up was that $18 million and an appropriate site.
If it had been built on a vacant site already owned by the government, you could subtract from that the $3 million or so that it cost to tear down the Eaton's building.
For those of you doing the math, the actual share of the cost of the arena funded by the people who are reaping 100 per cent of the profits is less than 15 per cent (19 per cent if you accept that the Eaton's site, with the empty building still on it, was worth $5 million and not the nominal amount declared for land transfer tax purposes).
Now, to be fair, about half of the projected cost was financed by a mortgage leveraged against the initial investment equity (which mortgage is effectively being paid off by taxpayer subsidized cash flow, about which more below).
What this means is that the actual cash invested in the arena was $58.5 million, of which $40.5 million, or 69.2 per cent came from the taxpayers and $18 million, or 30.8 per cent came from the private owners. So, really, the people who get all of the profit and have all of the control of the arena put up less than a third of the capital invested, and, as already noted, only 15 per cent of the total cost.
Put another way, for every $1 invested by the private owners, they got an immediate gift from the taxpayers of $2.25 of equity. That's right. On Day 1 they tripled their money with more to come.
After the "big myth" comes the "continuing myth" -- the success of the project.
No one, except presumably the owners themselves, knows just how successful the True North arena has been, since its private owners don't have to tell anyone anything about their finances. The bits of information that are let out would tend to indicate that the owners are doing quite well.
To attribute that success to the particular building, now known as the MTS Center, and particular location is, of course, absurd. By contract the arena is the only game in town. It is the only facility of its kind and size to serve the city. It is shiny and new and much closer to state of the art than the old arena. It, we are told, hosts large numbers of shows, in addition to Moose games and events like curling championships and hockey tournaments.
The obvious truth, though, is that these events would be held in whatever new arena had been built, at whatever of the several locations then proposed.
What makes the facility a success is that Winnipeggers are willing to attend these events in a modern building, not that this particular arena was built, under this particular deal in this particular spot in downtown Winnipeg.
As to the apparent financial success, keep in mind that in addition to putting up almost 70 per cent of the initial investment in the building, the taxpayers are also subsidizing the arena by a combination of tax rebates, redirected VLT revenue and tax expenditures. The sweetheart part of the deal for the private owners is that they are guaranteed these subsidies for 25 years whether they need them or not.
Even if the arena makes a whopping profit from its own operations, enough to cover its operating costs and return a handsome sum to its owners on their small initial contributions, they still get their taxpayer subsidies, which become just additional profit.
How much are these subsidies?
According to the Term Sheet and other information prepared by government authorities at the time the deal was done, the private owners of the True North arena were to receive direct subsidies of at least $1.5 million annually from VLT revenues, of which at least $1.125 million represents the foregone share that ordinarily would go to the provincial government.
The $1.5 million, remember, is a projected minimum. True North, or its assignee, gets 75 per cent, or $3 million, of the first $4 million of the revenue generated by its 50 VLTs. After $4 million they get the usual 20 per cent.
In addition, it was estimated at the time that another $2.2 million would go to the owners of the arena annually out of business and entertainment taxes that otherwise would be collected and kept by the city.
So, before the first dollar of rent is collected for any event, a minimum of $3.7 million in income every year for 25 years, comes from the province and city.
Remember that $60 million mortgage? It is, not coincidentally, amortized over 25 years. A garden variety mortgage with blended payments including interest at six per cent per annum over that period of time would need about $4.6 million per year to fully service.
Continued on next page
So 80 per cent of the cost of the mortgage -- principal and interest -- is paid every year by these taxpayer subsidies. But the subsidies don't stop there.
An ingenious provision of the Master Funding Agreement required the province to create a special property tax assessment class for the arena site, one that makes the owners liable for property taxes based on 10 per cent of the assessed value of the property. By contrast, farmers pay taxes on 26 per cent of the value of their land, homeowners pay taxes on 45 per cent of the assessed value, and most businesses on 65 per cent.
What this means is that True North pays less than 1/6 of the city property taxes, Winnipeg School Division taxes and provincial education support taxes that would be paid by the owner of any other business property of the same value.
By the way, the $123.5 million arena is assessed for tax purposes at $33.26 million. Perhaps the city's assessment department can explain how something that cost so much, and is apparently so successful, is worth so little when it comes to collecting taxes.
Still, in 2008, the total property tax saving will come to more than $1.1 million. There's the other 20 per cent of the mortgage payment, and then some.
Other magic? In any discussion over taxpayer subsidies the point is always made that there will be spin off benefits from the project. These, we are told, help to justify the subsidy because they represent return to the governments. These arguments, however, simply imbue the project with magical powers.
The argument is still heard, for example, that the returns to the government from taxes earned on the construction phase of the True North arena offset a large percentage of the subsidies. It is as though the subsidies are an investment to get a return from taxing construction contracts, materials and workers' wages.
This kind of argument might be valid when the facility being built is one that, but for the subsidies, might have gone elsewhere. A recent subsidy to a large industrial bakery so that it would build in Winnipeg as opposed to Regina is an example.
But here's the thing. A public use facility to serve the local population isn't going to be built anywhere else. There was going to be a new arena in Winnipeg no matter where it was placed or who owned it.
Certainly, the spin offs from construction are going to be there, but that occurs whether it is taxpayer owned, community owned or privately owned. They will be there whether it is built in Point Douglas, at the Convention Centre, near Polo Park or anywhere else in town.
The point is that the existence of these spinoffs should not cloud reasoned discussions about location, or about the ownership structure.
Do we need the private sector?
But for $18 million out of the total projected cost of $123.5 million, the taxpayers could have owned the new arena.
If that were the case, operating subsidies would only be required over the long term if the facility otherwise failed to break even. They would depend on actual results. Profits, if earned, would go back to the public benefit, first by repaying capital costs.
Of course, in any genuine private enterprise, the reward for risking capital is the profit that it generates if successful.
But when it comes to the proposed new stadium, the question taxpayers have to ask is whether a deal like the one that got us the arena is worth it. Should all control, all profit be ceded to private owners for a relatively small contribution to the initial cost?
Should subsidies be guaranteed, without any demonstration of need?
Given the massive public contribution to the initial investment and the continuing pubic subsidies is this really a case where the owners have taken a risk to justify profit?
Why is there no mechanism for the taxpayers to hold shares and share in the profit to the extent of the proportion of their investment?
The answer to the question who needs the private sector? is clear. It is the politicians.
Listen for five minutes to Premier Doer, or to any politician who supported the arena deal, answering hard questions. Count the number of times the answer is something like: "Well, as you know this was a private sector driven project so really the private sector owners got to decide....[here fill in the blanks -- the site, the size, the number of seats squeezed into a small space, who gets paid what.....].
Not much better political cover than that, now is there.
And there's more. If a government owned the arena, odds are those pesky auditors would insist that the debt be carried on its balance sheet as a liability and the current portion of the debt as a current liability each year.
Move the debt to a privately owned entity and, voila, no government debt, never mind the commitment to keep funding the thing for a quarter of a century.
Subsidize the debt by diverting revenues, instead of by a cash funding commitment and there go the expense and the current liability, right off the financial statements.
Ah, the politics of balanced budgets. It's better to appear fiscally responsible than to actually be fiscally responsible.
But that's where we started. Creative use of numbers can leave one thing looking like another.
Here's the bottom line.
The True North project cost taxpayers $40.5 million up-front and taxpayers are committed to subsidies and tax concessions of about $5 million a year for 25 years, or another $125 million over time.
The private owners put $18 million and made no commitment to make further investments if the project should turn sour, but they get all of the profit.
So, the True North Arena is a huge public works project that was given to private owners for a relatively small contribution toward its cost.
Is that good public policy? If the results of subsequent elections are any measure, the voters appear to have decided that it is. Whether they would have come to that collective judgment if the real deal had been put fairly before them isn't so clear.
When it comes to whatever is finally proposed for a new stadium, if the deal is to be based on the arena precedent, taxpayers should be allowed to see the real numbers and not have to take the spinners at their word.
It is the job of the media to ask the critical questions and to see that the numbers are fairly exposed to public scrutiny. It is one thing to be in favour of a publicly financed new stadium, it is quite another to blindly accept any proposal as though it is the only one possible.
Before the private promoters are declared heroes and before any particular location and any particular deal are embraced, there should be fair disclosure of all of the elements of the deal, and all of the other options.
The people footing the lion's share of the cost should not have to rely on a court order after the fact to get the deal documents out from behind closed doors, as happened with the arena deal.
If their money is to be spent on a stadium, as it continues to be spent on the arena, the taxpayers deserve a fair chance to decide what deal and what project they want.
They deserve the best deal, not the only deal. No myths. No magic.
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