An Open Letter to Calgarians and the City of Calgary

For those of you not actively following the news in Calgary or #yyccc on twitter, you might not know that the world of municipal public finance in our fair city has been, in a word, explosive of late. For someone like me, who is an expert in municipal public finance (yup, I said it, this gal is an expert, something which some dudes take exception to *eyeroll*) the excitement and attention to what is usually a boring topic has been unbelievable.

As a bit of a backdrop, you may know that due to the oil collapse that began to unfold about five years ago, Calgary’s downtown corporate core has been hollowed out due to fairly heavy layoffs, downsizing, bankruptcies, and the like in the home of the Canadian oil industries corporate headquarters. This has resulted in the assessment of the once shiny office towers to plummet (assessment or valuation of office towers is based on the income they generate and empty office towers do not generate much income). Plummeting assessments means that the City’s property tax spoils from the downtown core have collapsed.

You’d think that would leave the City with a large budget hole, but for reasons that have yet to be made clear, the City, rather than pegging its commercial mill rate to its residential rate as many municipalities do, instead insists on pegging its revenues from commercial properties to a portion of residential. Historically, that was as high as 60% (60% of property tax revenues came from commercial property tax revenues), but the City has since accepted that the revenue balance be 50-50.

Because property tax revenues must, in the City’s mind at least, be made up of 50% from commercial properties, the collapse of the contribution to property taxes from downtown commercial properties has meant the burden has shifted to commercial properties outside the downtown core. And because most commercial leases are what are called triple net leases, this means the leasee (small business owners) is responsible for the property tax bill, which in some cases went up an additional $10,000 or more.

This shocking increase in property taxes to small business owners resulted in a protest, City council scrambled, and is now dipping into the reserve fund $70M and cutting essential services $60M to put off these property tax increases and is forming a Financial Task Force (in addition to a number of other committees) to help it sort out its mess.

This seems like a good time for the City to pause, reflect, take stock, and get its proverbial poop together, does it not? Nope, the time apparently is right for the City to announce a proposed new deal that has it spending nearly $300M on a new hockey arena (sorry, event centre) and tearing down and remediating the site of the old hockey arena (you know, the one shaped like a hat). And because this proposal is so important and the details so complex, Calgarians are only being given until Friday to voice their opinion  before council votes on the deal.

While boosters (oddly the folks who usually rail on about how taxes are so friggin’ high, how public expenditures are stupid, and how governments should just get out of the way of business), are already flouting this deal as savy and the project on time and on budget, despite it being years before shovels hit the ground, your fellow resident and non-resident economists are screaming to say the numbers don’t add up and the details are thin.

To help Calgarians form their opinions to send to council, Trevor Tombe and I wrote a detailed piece that appeared in the Calgary Herald today to help you with some of the details. I am also making public what I wrote and sent to council. Here is what I sent:

I am writing to express my serious reservations regarding the City of Calgary arena deal.

First of all, citizens of Calgary are only being given six days to provide comment on a fairly complex deal, the details of which City staff do not seem to be able to themselves to appropriately develop and release for consideration. The sole rationalization for this timeline is to “capitalize on momentum” which seems like very weak rationalization. It does not seem unwarranted to give citizens to September to allow an appropriate time to weigh all the information, and for the City to correct the misinformation provided.

Second, in terms of the incorrect details provided, the City claims that the benefits of the arena amount to $400M over the next 35 years. Yet this amount is not put into its net present value. Future dollars are not worth the same as present dollars and this stream of payments needs to be properly presented to understand the true costs and benefits.

Third, the City is not properly representing the opportunity costs of this deal. The opportunity costs is the potential gain from other alternatives not chosen. Given that the City is currently considering putting on hold other important capital projects, pursuing budgetary cuts to core public services, needs to address the rebalancing of property tax revenues, and an uncertain economic future, the opportunity costs of these funds is of utmost importance. While some will want to argue that capital budgets are difference from operating budgets, we must consider the impact of capital budgetary decisions on operating budgets. This proposal does not do that.

Fourth, the financial returns are but one considerations. Three broader arguments are also being made by various parties. Do arenas bring economic growth? No, there is broad consensus that that neither the construction nor operation of professional sports facilities are important engines of economic growth. This does not mean that the impact is zero, just smaller than typical economic impact studies suggest. As said by Dr. Matheson, “some academic economists suggest, only partially in jest, that if one wants to know what the true economic impact of a stadium project will be, simply take whatever number the consultants project and then move the decimal point one place to the left.” Do areas contribute to localized revitialization? Perhaps, but it simply displaces economic activity elsewhere. Simply put, the arena shifts activity from one area of the City to another. There may be reasons to favour such a shift, but that justification may be bitter sweet to those businesses that lose out under this policy. Do arena bring public benefits like civic pride? Yes, but the benefits are very small and only support a small taxpayer subsidy.

The overwhelming evidence of limited benefits of arenas suggests the City’s proposal needs to be reconsidered. The fact that it also contains errors, more so.

UPDATE: At around noon July 25, 24 hours before public comments are due,the city FAQ about the arena was updated as reported by Robson Fletcher:

Note clearly that the direct rate of return of the project is -0.6% and 1.4% if both direct and indirect are accounted for. This reflects verbal comments made by the CFO at council Monday night. The benefits are not $400M as original stated but rather a $47M loss assuming all the embedded assumptions are right (and they are probably still overstated the benefits).

Wednesday evening (July 24) Councillor Jeff Davison tweeted out an annotated bibliography on the public and non-economic benefits of event spaces, developed by Councillor Jyoti Gondek and her team:

It was quickly noted by Dr. Brad Humphreys, a key academic expert in this field, that the annotated bibliography provided was incomplete and did not discuss the most important papers that quantify the intangible benefits of pro-sports. He provided an much more complete list here:

It has also been reported that Councillor Evan Woolley has delivered a letter to the City Manager asking for the vote by Council to be delayed until September.

UPDATE: Councillor Jeromy Farkas has joined the call asking for an (not rushed) open and transparent review of the deal

The impact of the first round of City budget cuts ($60M) has now been approved with 115 city staff losing their jobs. I say first round because further budget reductions will be needed in the next budget cycle and we should start seeing these being proposed in November. While some are rejoicing at public servants losing their jobs pointing, to this as evidence that there is fat to trim, such views are, in my opinion, disgusting. I don’t recall there being any such similar commentary as the private sector cut jobs and these are jobs that families in our city, much like private sector jobs, rely on to live. Many more families are now scared and stressed, applauding that is just vile.

Municipal governments continue to be directly responsible for many of the services that are necessary for the daily lives of Canadians. These services that municipalities provide that keep people healthy and safe and happy include roads and transit infrastructure, police and fire services, water distribution, garbage and recycling, land development, recreational facilities, libraries, street lights, and snow clearing, to name just a few. This first around of cuts results in cuts to 48 services areas and 233 fewer city jobs (115 direct job lay offs). It won’t be long before we begin to feel the direct impact of these cuts.

The key questions that the City and boosters have yet to respond to in an adequate fashion are as follows:

  • Given that the real benefits of the arena/events centre are tied to intangibles that the scholar evidence has shown are positive but small, why are the taxpayers expected to front 50% of the costs?
  • Given that the majority of the benefits accrue to the fan and the team and that scholar evidence indicates that the price elasticity of demand for sporting events tickets are relatively inelastic, why is not a larger portion of the cost being put onto a ticket surcharge? After all, since users mostly benefit, shouldn’t users mostly pay? Oh, and who benefits for concession sales and how are these being used to fund the arena/event centre?
  • What capital infrastructure projects are the true opportunity cost of this deal? One of the most important things cities do is move people. The City of Calgary has transit link gaps, a key one of which was to be filled with the Green line. The economic benefits of public transit and moving people are far more solid than from an arena/event centre. And the Green line also brings construction, jobs, and indirect benefits. Why is the Green line being debated yet again with far more attention and focus than the arena/event centre deal and why are we not evaluating the opportunity costs against each other. That is, what are the trade-offs?
  • Now that Council has finally come to grips with the fact that the property tax situation that the City is in is, in fact, structural, and that structural problem will in part need to be addressed with a shift of property taxes to residential property owners as well as consideration of other revenue tools including user fees, regulatory charges and proprietary charges, how will the public react in November when this becomes part of the discussion when the event centre/arena is being discussed in isolation to the overall budgetary situation of the City and the long, long list of capital project.
  • Why is the arena/event centre so vital to the Rivers District revitalization plan?
  • Why now? The current arena was a key part of the Olympic bid and the IOC gave its blessing that the arena was perfectly acceptable for the Olympics. Why is it essential that this deal be signed, sealed and delivered now?

Update July 29: Councillor Jeromy Farkas has publicly announced he will not support the arena.

Councillor Jeff Davison seems to have doubled down and called those of us asking questions about the details of the deal and why this deal (and not, say, a deal that puts more of the costs on the direct beneficiaries of the the arena) as using the same tactics as pipeline opponents and you all should be under no illusion as to our motives.

For shame, Councillor, for shame. It is council that is not providing clear answers to fairly important questions and by not doing so is showing a lack of respect to those footing half the bill. Conflating questions of those seeking information to understand what is being proposed and, importantly, why with opposition is how the public loses trust in public bodies. Something that seems to be happening quickly with Calgary council these days, according to opinion polling.

Councillor George Chahal has now also called for the arena deal to have more time to be considered

 

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4 thoughts on “An Open Letter to Calgarians and the City of Calgary

  1. ” rather than pegging is commercial ”
    probably “pegging its commercial”

  2. And why can’t the Herald put, even in agate print, the three links you gave in the opinion piece.
    Those who read the paper version of the Calgary Herald don’t see the reference links.

    • I am sorry. I do not know. I could have done a reference list. I was not aware it would go into print and was not asked to provide a list of references

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