On July 22nd the City of Calgary, Calgary Sports and Entertainment Corporation (CSEC), the Calgary Stampede and Calgary Municipal Land Corporation (CMLC) announced they have agreed on a $550 million deal to construct a new event centre to replace the aging Saddledome.
New West Public Affairs’ Keith McLaughlin, former Chief of Staff to Alberta’s Minister of Municipal Affairs, takes a deep dive on the deal and comments on what comes next in the following analysis.
How did we get here?
For several years, Calgary Flames ownership and NHL commissioner Gary Bettman have been expressing the need for Calgary to replace the aging Saddledome. In August 2015, the Flames kickstarted the political and public discussion on a new event centre with a $890 million proposal to build CalgaryNEXT – a massive sports facility that would replace the Saddledome, McMahon Stadium, and build a new recreational fieldhouse in the city’s West Village along the Bow River.
CalgaryNEXT was a visionary proposal wrought with complications. First, there were environmental concerns. The proposed location of CalgaryNEXT is located in a floodplain and is contaminated with creosote. The estimated cost to clean up the site is measured in the hundreds of millions of dollars. CSEC’s proposal was silent on the remediation costs meaning that the real cost of CalgaryNEXT was going to be well over $1 billion.
Second, the CalgaryNEXT proposal was reliant on a new Community Revitalization Levy (CRL) for the West Village like the one that was used to redevelop the city’s East Village. CRLs allow municipalities to borrow against future property tax revenues to help pay for infrastructure required to spur new development in a specific area. The problem was that an analysis by CMLC, who manages the East Village CRL, indicated that at most a CRL in the west would generate $430 million – well shy of the over $1 billion needed to properly clean the site and construct the facility.
Third, the CalgaryNEXT proposal had some cultural and planning problems because it wasn’t supported by the Stampede and was inconsistent with the City’s vision for the downtown west end. The Calgary Stampede has long held the position that a replacement to the Saddledome should be situated in East Victoria Park, and the City – while in favour of revitalizing the west end – preferred to build a cultural and entertainment district with the new BMO centre and event centre as anchor tenants in Stampede Park.
By June of 2016 the CalgaryNEXT proposal was effectively dead and Ken King, President of CSEC, agreed to explore a plan B location within Victoria Park. For almost a year, discussions stayed behind closed doors but by the spring of 2017, CSEC started to become restless with the pace of negotiations and began commenting in local media that without a deal on a new arena they would consider relocating the Calgary Flames.
Negotiations famously collapsed just weeks before the October 2017 municipal election when CSEC walked away from the negotiating table blaming Mayor Naheed Nenshi for the ongoing impasse. The political powerplay by King was largely seen to be an effort to assist Nenshi’s main challenger Bill Smith in the upcoming election. Nenshi ultimately won re-election and while both sides continued to favour reaching a deal on a new events centre, the relationship was tainted by real animus, and the newly vindicated mayor was happy to wait for CSEC to come back to the table, their powerplay having failed.
By May of 2018, councillors tired of the waiting game between the Mayor’s office and CSEC established a council subcommittee to lead development of a proposal and funding framework for a new events centre. Talks intensified in March of 2019 when Barry Munro, an experienced negotiator of large financial deals for EY, agreed to volunteer his time and mediate between City administration, CSEC, the Stampede and CMLC in an effort to reach a deal.
Munro was able to help the parties find consensus and make the deal that was presented to Calgarians on July 22nd. Both the City and the Flames ultimately moved off some longstanding positions and Ken King credited Munro with helping all parties better understand their counterparts’ needs and perspectives to get the deal done.
Anatomy of the deal
Both sides made concessions to get this deal done. In 2017, the City pitched a three-way split of a $555 million arena with the City and Flames each pitching in $185 million with the reminder being covered by a ticket tax on every event. CSEC was adamant that a ticket surcharge should be properly understood as Flames revenue. Ken King’s argument being that it is CSEC’s operations that fill the seats and dollars collected through a ticket surcharge was simply forgone revenue of the Flames. CSEC countered with a proposal with Flames ownership ponying up $275 million with the City contributing $225 million, through an extension of the Calgary Rivers District CRL. The City preferred to fund the BMO centre expansion through a CRL extension and rejected this deal as well.
The new deal sees the City and CSEC split the costs of a $550 million event centre 50/50. The City ups its upfront contribution considerably from the 2017 proposals to $275 million but it does offset this by getting control of the ticket surcharge (or facility fee in City parlance) that will help repay $155 million of the City’s contribution over 35 years. The City will also get a cut of naming rights to the new facility and negotiated $75 million in support for local community sports that CSEC will pay over 35 years.
Conceding the ticket tax was the largest compromise by CSEC but they also let go of their plans to fund their arena through a CRL. In return, CSEC contributes no more than the $275 million maximum they were prepared to contribute in 2017, pays no municipal property tax on the events centre (because ownership is still the City’s), and receives a hell of a deal on the ability to purchase valuable parcels of land at depressed prices where the Enoch sales house and Victoria Park bus barns currently sit. Recall, sports corporations like CSEC are increasingly just as much real estate companies as they are in the business of pro sports, and this is a potentially huge get for their property portfolio.
A good deal for the City?
At the council presentation on July 22nd, the City produced a roundly criticized infographic that projected the return for the $275 million upfront investment at $400 million dollars over 35 years. In addition to ticket tax revenue and naming rights mentioned above, this figure included $138 million in incremental tax lift (once current Rivers District CRL expires) and $19.4 million in street-facing retail property taxes over 35 years. As many on Twitter pointed out, the City’s figures are incredibly misleading (and let’s hope not purposely so). This is because the figures fail to account for the time value of money. The value of $275 million in 2020 is worth a lot less than $400 million in 2055.
Thanks to some pestering of City admin from Councillor Peter Demong, we now know that with all the ticket surcharge, naming rights, and new property tax revenue included and with time value of money accounted for, that Calgary taxpayers come out negative $47 million in net present value as a result of this deal. Put another way, if Calgary taxpayers didn’t fork over $275 million for the event centre and just let the money sit in the bank accruing interest, they’d be at least $47 million better off in 35 years.
During debate, Mayor Nenshi correctly pointed that the City is not a private corporation, it is a public entity and asked his colleagues to consider whether the non-financial benefits – that of community and social benefits of the project are worth $47 million in today’s dollars. City negotiators were stubborn to the principle that public funds must be used for public benefit. They made sure an outdoor community gathering place to hold assemblies, concerts, festivals and amateur sport are part of the proposed deal, and that the City gets 5 days each year to host non-commercial events at the event centre.
Is this a good deal for City taxpayers? Consider the following facts and context. Economists have studied public financing of professional sports facilities and have found time and again, that the public investment is rarely, if ever, recovered in economic spinoff benefits. Cities never outright win these deals from an ROI perspective – there is always a subsidy. A contextual fact in this situation is that this Calgary council was going to make a deal with the Calgary Flames. The unrecovered cost of this deal to taxpayers is $47 million. Are the community benefits worth $47 million? – time will tell, but there have most certainly been worse deals made with professional sports franchises.
Next steps in Council’s hands
Council will revisit the event centre item on July 29th. The timing and optics of the proposed deal couldn’t be worse. At the same time council is considering fronting $275 million to the Calgary Flames ($290 million when you factor in the Saddledome demolition), they are cutting the City’s operating budget by $60 million in fiscal year 2019 which will include reductions to transit, EMS, police, fire and services to vulnerable Calgarians. Despite the differences between capital and operating budgets, critics will rightly question council’s priorities to dump a truck load of money at the feet of the CSEC’s billionaire owners while services for everyday Calgarians are reduced.
The optics are compounded by the tight timeline in which council is being asked to approve or refuse the deal. The four partners – City administration, CSEC, the Stampede and CMLC – are recommending council approve the deal on July 29th just one week after Calgarians learned of its details. Another aspect is that the deal is non-negotiable for council. This is not a framework proposal for council to negotiate from. As much as Councillor Evan Wooley dislikes the inclusion of selling the Enoch and Victoria Park bus barn lands to CSEC, and as much as Councillor Druh Farrell would like to see more assurances that this deal will support the Arts Commons construction, the terms of the negotiated agreement between the four partners are not up for revision – less council risk scuttling the proposal. The deal is the deal.
The question before council on July 29th is to either allow an up or down vote on the proposal or to delay that vote until September – after the summer break. A motion brought forward by Councillors Wooley and Jeromy Farkas to delay a vote on the proposal until September was defeated at the July 22nd meeting. Wooley and Farkas had suggested they needed more time to absorb the deal and consult with Calgarians. Most councillors are content to listen to Calgarians over the next week before they decide to approve or reject the deal now, or punt the decision to the fall.
The deal needs eight council votes to pass. There are already four “yes now” votes from Councillors Jeff Davison, Ward Sutherland, Sean Chu and Joe Magliocca (upon publication, Councillor Magliocca’s office reached out to say he was still consulting constituents in his ward before making a decision) meaning the deal is halfway to the votes it needs on the 29th. There are several other supportive councillors who are open to voting yes on the 29th but are taking the week to gauge the reaction from Calgarians. This “yes-now-or-in-the-fall” group includes Mayor Nenshi, Councillors Jyoti Gondek, George Chahal, Gian-Carlo Carra and Sean Keating. The proposed deal thus has at least 9 supportive councillors with Councillors Demong, Diane Colley-Urquhart and Ray Jones as unknowns and Councillors Farkas, Wooley, and Farrell as possible no’s.
Unless there is a strong public outcry surrounding the budget optics or lack of consultation on the new event centre deal, expect around a two-thirds majority of council to approve it on July 29th.
Need public affairs support? Keith McLaughlin is an expert on municipal governance and public policy. Get in touch with him anytime at email@example.com