09/20/12 Risk and the Downtown Arena

The downtown arena debate is a contentious issue among Edmontonians. Opponents of the project often point to the risk for the city that is associated with this kind of spending. So what are the risks?

Costs

The City of Edmonton is slated to pay $125 million of the $450 million cost of the new arena. They will also pay the Oilers $2 million per year for ten years for a marketing/branding partnership. For those keeping score, that's a $145 million investment in a $450 million building.

The Katz Group has asked for a $6 million annual operating subsidy, which is an additional $210 million over the 35 year deal. This part of the deal has not been approved by the City, but for a worst case scenario let's say that it's part of the deal.

The City has also agreed to buy the land for the project at a cost of $24.6 million.

Projects of this size are likely to go over budget, so let's also assume that the arena ends up costing $485 million and that the City and Katz Group split the cost overrun.

That means that in a worst case scenario for the City of Edmonton, they'll be spending around $397 million.

How much does the City have to spend?

From 2012 to 2014 the City has allocated $2.3 billion for infrastructure, or ~$766 million per year [source]. In 2011 alone the City had a $158.5 million budget for community facilities. From 2009 to 2011 the City spent $396.7 million on community facilities, or an average of around $132 million per year.

The City's $125 million portion of the funding model for the arena breaks down like this:

- $45 million from the CRL
- $25 million from new parking revenue
- $35 million redirected from City support for Rexall Place
- $20 million from other current arena related expenditures that will be redirected
[source]

What this means is that $55 million of the cost to the City is going to be spent either way. It will be redirected to the arena project.

$45 million of the money will come from CRL tax revenue generated by the redevelopment of the downtown. Some say that the CRL is not new tax income, but only money that is shifted from one place to another. That's at least partially true, but is it unreasonable to think that the City could get $1.3 million per year in new revenue over a 35 year period?

The City also states explicitly that the CRL and other City sources of funding for the project will not result in an increase in property taxes.

Finally, in Katz's vision, the $6 million operating subsidy is to come from casino gaming.

What about that elusive $100 million from the Provincial Government?

Every year the Province of Alberta allocates money called the Municipal Sustainability Initiative to its municipalities. The City of Edmonton received more than $167 million in MSI money in 2012, and over $160 million in each of the last three years. Projects that are eligible for MSI money include sports facilities, which means that the City would not be out of bounds in redirecting some of that money each year toward the cost of a downtown arena project until the $100 million difference is made up.

Infrastructure

Under the agreement framework the City is committed to spending a combined maximum of $42 million on a pedway bridge across 104th avenue and on connecting the LRT to the arena. These costs are not included in the $450 million building cost, but also amount to a small portion of the City's Capital budget, especially when they are spread out over multiple years.

Risks

The City made it a priority not to increase property taxes as a result of arena construction, so the average taxpayer won't suffer ill-effects. Some of the money that is being redirected to the arena project is being spent already. Moreover, the $6 million operating subsidy - if it comes from casino gaming - shouldn't handcuff the City if it's included in the deal.

An aging Rexall Place either needs massive upgrades that will be 100% publicly financed and carry a price tag in the hundreds of millions, or Edmonton will need a new arena. Renovating Rexall Place does nothing to help shift spending and investment to the downtown. The Katz Group is committed to spending $100 million into the development of the arena district, $30 million of which must be invested prior to the start of construction of the arena.

The City of Edmonton must invest in itself in order to improve and grow. Not including the operating subsidy, the City could end up spending ~$229 million on building the arena, building the 104th avenue pedway, extending the LRT, funding the marketing/branding partnership with the Oilers, and buying the land. That's assuming a cost overrun of $35 million on the arena, half of which is paid for by the City. $20 million of that $229 million is spread out over ten years, and the rest of the cost could also be spread out to help mitigate the financial impact of the project.

It's a lot of money, but it's not likely to bankrupt the City or significantly affect the average taxpayer. For example, Edmonton's new art gallery cost $88 million, with a $15 million investment from the Province and a significant portion coming from the City. The arena project is significantly larger, but also carries greater long term cultural and economic impact for the City and the downtown.

In 1972 the City invested the 2012 equivalent of $79.1 million in what is now Rexall Place. The return on that investment - the Edmonton Oilers chief among them - has been extremely positive. It is now one of only three NHL arenas not capable of seating at least 17,000 fans. The new arena will help sustain the Oilers and many events that will continue to be drawn to Edmonton, and has the added bonus of driving a boost in the downtown core.

Failing to construct the arena will only result in increased construction costs for renovating Rexall Place, or an increase in risk to the City and less favorable financing model if a new arena is eventually built.

The agreement framework isn't perfect, but it's a deal that should move forward. The risks for the City are fairly small because they have a guaranteed arena tenant for 35 years, and will own the building and the land. The risks for the taxpayer are also minimal. In the grand scheme of things the investment could help to transform the downtown, which is little more than parking lots, office towers, and slum. That's a very worthwhile endeavor.