The Edmonton City Council passed a bill yesterday authorizing a package amounting to $480 million in funding for construction of a new arena in downtown Edmonton. This appears to end more than 5 years of bickering over the financing of this proposed new arena. This $480 million dollars in financing is assumed to cover the entire construction costs of the facility, excluding land and other related infrastructure like roads, sewerage, and utilities. The details of the financing are almost too complicated to cover in a blog post, as the financing mix consists of a mish-mash of local, provincial, and private funds from ticket taxes, property taxes, capital improvements funds, and maybe even loose change from the couches in city hall.
Since at least March 2008, the maintained assumption was that this new arena can be built for $450 million. That cost estimate was in a document, “City Shaping,” produced by the Leadership Committee for a New Sports/Entertainment Facility for Edmonton in early 2008. “City Shaping” contained no supporting details for this facility cost estimate. I have seen a heavily redacted version of a 2007 feasibility report by HOK on the proposed new Edmonton arena, but it also contains no useful details about the expected cost of the facility. I do not know anyone who has seen the supporting documents for the 2008 $450 million facility construction cost estimate. Like every other sports facility construction subsidy debate I have observed over the last 15 years, the first cost estimate that appears in the media becomes the focus of the debate. That first estimate assumes a mythical stature. In the case of Edmonton, the mythical $450 million cost estimate has been the focus of a five year debate on the financing of the proposed new arena. A few months ago, the estimate was increased to $480 million, in recognition that things could have gotten more expensive over the last 5 years.
I have a couple of thoughts on this agreement as I prepare for a round of radio and TV spots today and tomorrow here in Edmonton. First, now that the city has come up with $480 million in funding, what are the chances that the structure can be built for $480 million? In my opinion, it is extremely unlikely that $480 million will be the final cost of the structure. The final cost will almost certainly be more. The original $450 million estimate is now more than 5 years old. Arena construction costs are primarily things like steel and concrete, and lots of labor costs. Raw materials prices are notoriously volatile, but I looked around the Stat Can web site for some information on construction cost changes. Since 2007/2008, the cost of inputs from steel foundries increased about 17%, concrete has increased about 13%, and union construction labor costs in Edmonton increased 15%. So it seems reasonable to assume that building a $450 million structure spec’ed out in 2008 would cost about 15% more in 2013; $450×1.15 = $517.5 million. That means the current financing package is still short $37.5 million, assuming that the original 2008 estimate of the structure cost was accurate.
But the 2008 structure cost estimate came from the team, and previous literature indicates that the initial cost estimates that come to the surface in these situations is a low-ball estimate. Since the team owner is extracting a subsidy from the government, the standard negotiating tactic is to throw out a low-ball first offer, get the local government to agree to that figure, and let the public officials deal with the inevitable cost over-runs. Here is a link to a recent Bloomberg article summarizing the results in Judith Grant Long’s excellent book, Public/Private Partnerships for Major League Sports Facilities. She concludes that the final cost of a new sports facility is about 25% more than the initial cost estimate. If the final cost of the new Edmonton arena is 25% more than the 2008 cost estimate, then Edmonton is still more than $80 million short in financing for the facility.
I have spoken with a number of public officials in Edmonton over the last 6 years about the proposed new arena. Every time I raised the issue of cost over-runs, the response was always “we will let a contract for $450 million that explicitly states all cost over-runs beyond the contract price will be paid by the builder, not the city.” My response was always: good luck getting a general contractor to agree to those terms. We will soon see how easy it is for the city to strike such a deal with a general contractor. After that, we will see who pays for the cost over-runs.
I also have some questions about the Community Revitalization Levy (CRL) that represents an important portion of the funds for the new arena. A CRL is the Canadian equivalent of a TIF District. It generates revenues from the increased property taxes that can be attributed to the new arena. Property tax revenues increase because the property values surrounding the new arena increase. According to the Edmonton Journal article linked to above, part of the final financing deal was that an additional”$15 million will be paid by the city through an increase to the community revitalization levy.” The CRL has been a part of the arena financing deal for years. Yesterday the city Council managed to find an additional $15 million in revenues from the CRL. I don’t understand how a CRL can be a variable source of public financing. CRLs generate incremental tax revenues because of increases in property values. The government cannot control property price increases. They can control the property tax rate and the assessed value of the property. But if they could have raised an additional $15 million from the CRL when it was proposed as part of the financing package years ago, why wasn’t the CRL contribution higher back then?