Thin Ice

The $130 million financing plan for the construction of the RiverCentre hockey arena in St. Paul gives new urgency to the old sports adage "Root, root, root for the home team." Because if the expansion Minnesota Wild hockey franchise doesn't come up with a successful team on a consistent basis over the next 25 years, toddlers in St. Paul who wouldn't know Wayne Gretzky from Big Bird are going to feel the arena's financial bite.

By now the broad outlines of the RiverCentre deal are fairly well known. The Wild ownership group headed by Robert Naegele, Jr., is putting up $35 million. Last spring the St. Paul City Council approved a bond issue to kick in another $30 million and hoped the 1998 state Legislature would commit to $65 million in bonds to cover the rest. If the state doesn't come through, the city has guaranteed to the National Hockey League that it will make up the difference. But details of the financial package reveal a number of questionable assumptions that make it a shaky deal for St. Paul taxpayers regardless of what state lawmakers decide.

To begin with, the deal was hastily put together. Just three weeks before the NHL's deadline for accepting bids for new franchises last spring, the Legislature voted down any immediate state funding commitment to help St. Paul land a team, forcing the city to frantically improvise. "Every rabbit that was possibly in the hat has now been pulled out," was Mayor Norm Coleman's description of the last-minute proposal submitted to the league.

Even at this late date, it appears unclear just how much St. Paul officials actually know and understand about the deal. Republican Sen. Gary Laidig of Stillwater claims that Pamela Wheelock, the city's director of economic development, "signed the lease agreement but didn't bother to read it and didn't ask for information." (Calls to Wheelock's office by City Pages went unreturned.) Proponents of the RiverCentre deal such as St. Paul lobbyist Joseph O'Neill and former City Council President Dave Thune claim the best source of information is Joseph Reid, director of the city's Office of Financial Services. Numerous calls to Reid's office finally produced a very generalized two-page synopsis. Further calls asking for more information went unreturned.

Both the Coleman administration and the Wild ownership group have discouraged public scrutiny of the deal. Last month the owners refused to open their financial records to state legislators voting on a $65 million appropriation for the arena unless those elected officials signed a confidentiality agreement. And just last week the St. Paul Pioneer Press reported that the mayor's office had refused to comply with the state's Data Practices Act when the paper requested documents pertinent to a potential conflict of interest between Thune and the M.A. Mortenson Co., the contractor provisionally selected to build RiverCentre in a process that did not include competitive bidding. Only after the potential conflict was exposed and Senate Majority Leader Roger Moe threatened to launch an investigation into the deal did the Wild ownership release any substantive information to the public.

It is, however, known that the vast majority of the public's investment in RiverCentre is to be paid off through a surcharge on tickets for events at the arena. To meet the city's revenue projections, the hockey team must sell enough tickets to fill the building to 90 percent capacity for all its games through the year 2026; otherwise there won't be enough money to pay off the bonds, which are backed by the "full faith and credit"--i.e., the property taxes--of the city of St. Paul. Even the recent financial projections released by the team estimate average attendance at only 83 percent.

"If you look at pro hockey teams that are performing reasonably well on a consistent basis, I think 90 percent is a relatively realistic number," says Chris Hansen, the executive director of the St. Paul Civic Center who is expected to be named to a similar position at the new arena. "As with any professional sports franchise, we are going to have to put a quality product in front of the people. From what I understand, the North Stars drew over 90 percent every year they had a winning season at the old Met Center."

But the North Stars, who left Minnesota in 1993, played in another era, before the huge escalation in player salaries drove up the cost of watching hockey, which now boasts the highest average ticket price (more than $40) of any major team sport. And for most of the North Stars' tenure in Minnesota, they did not face direct competition from the Timberwolves pro-basketball franchise; when the Wild arrive, the Twin Cities will be one of the smallest markets in the nation to feature all four major sports franchises. The Met Center had a smaller capacity than the envisioned RiverCentre and was located in Bloomington, much closer to the demographic center of the metropolitan area. In order to watch the Wild play in St. Paul, residents of the wealthy, "golden crescent" suburbs west of Minneapolis will have to drive as many as 60 miles round-trip in the dead of winter. And finally there's the flip side of Hansen's "winning season" assertion: When the North Stars didn't have a winning season, attendance suffered at the Met--and there weren't many winning seasons in the Stars' last 10 years in town.  

Under the terms of the deal, the Wild ownership group has the authority to manage RiverCentre. The owners will reap all of the concession revenue (estimated to be about $7 per patron) for both hockey and nonhockey events. They'll also take in the parking revenue for all 41 Wild games each season, plus most of the proceeds from sales of naming rights and advertising signage. The city gets $385,000 a year from lease fees on the marquees around the building, plus a smaller, unspecified amount in other signage fees. This money, coupled with the ticket surcharges, is earmarked to pay off the RiverCentre bonds. (The city also gets the parking revenue from nonhockey events at the arena, an amount expected to only slightly exceed what is currently generated from parking at the existing Civic Center.) And that's it. Because the owners shelled out the entire $80 million NHL entry fee, the city won't share in any appreciation in the value of the franchise, nor will taxpayers get a cut of any profits from the NHL's television contracts, merchandise, or future expansion-team entry fees.

Proponents of the deal point out that the owners must pay off the entire cost of the bonds if they wish to leave St. Paul after a 10-year period, in which case the city would be left with a brand-new community building, debt-free. Dave Thune also defends the decision to allow the Wild ownership to manage the facility. The past performance of the St. Paul Civic Center, which has been only marginally profitable, would indicate that giving management to the private ownership group is not a significant financial loss to the city, and, in Thune's words, it "ensures the owners' interest in getting people in the place year-round--it gets them more involved in the deal."

Hansen concurs, adding, "Your building management revolves around your primary tenant, and for RiverCentre that's the hockey team. You might make money on the other stuff, but if anything the hockey events will support the nonhockey events." Either way, the city's gains from nonhockey events will be partially offset by expenses such as increased police presence and the need for municipal cleanup crews.

"Letting a private firm manage the building is probably the right idea--in most cases where sports is the primary tenant that's the way they do it," says Mark Rosentraub, director of the Center for Urban Policy and the Environment at Indiana University and the author of Major League Losers, a book about the public financing of pro-sports facilities. "The troubling part comes when you look at the amount of available revenue in a market of your size: It's too small to support two major facilities plus the Metrodome and all your other smaller venues."

Then there is the matter of the ticket surcharges. Under the terms of the $30 million bond issue, they begin at $1 per ticket and gradually rise to $4 by the year 2030. But no surcharges will be levied on the 750 to 1,000 seats in the arena's luxury boxes, exempting the wealthiest patrons from paying millions of dollars to alleviate the taxpayers' debt. This benefits the Wild owners by keeping them competitive with the Timberwolves in the financially crucial realm of luxury-box sales to corporate clients. But restricting the surcharge may prove an impediment to bringing working-class people into the arena, a scenario less harmful to the owners than to the city, which needs to hit that 90 percent capacity goal. "Once you get through with the [Ticketmaster] charges and the surtaxes, that $10 ticket becomes much less affordable at $15 or $16," Hansen acknowledges.

When he cobbled together his last-minute proposal last year, Norm Coleman assured his City Council that state funding was a near certainty. But given Senate Majority Leader Roger Moe's adamant opposition and the timing of the conflict-of-interest hue and cry about Thune and Mortenson, the city's fallback plan bears scrutiny. As it now stands, should St. Paul be forced to finance the $65 million itself, the city won't be able to do so without cooperation from the team and/or the state. Among the options in the city's plan are to increase the initial ticket surcharge from $1 to $2 and to extend for seven years the sales tax earmarked to pay off the bonds on the St. Paul Convention Center. But under the terms of the agreement with the hockey team, the surcharge cannot be increased by more than 50 cents without the owners' approval, and any extension of the sales tax requires passage by the Legislature. Other revenue options in the mix include a 5 percent annual increase in St. Paul's hotel/motel tax over the next 30 years, and $17 million worth of tax-increment financing over a 10-year period.  

Rosentraub calls the tax-increment money "a hidden tax on businesses in downtown St. Paul" and the lodging tax "a false subsidy: What does a hotel tax have to do with the operation of an arena? In both cases you run the risk of hurting your business competitiveness at the margins."

It was the possibility that St. Paul would be stuck with an additional $65 million in debt from the RiverCentre deal that prompted the Standard & Poor's bond rating service to revise its outlook on the city's future credit rating during its annual review last summer, downgrading it from "stable" to "negative." Michael Forrester, a director in S&P's public financing office and one of the two authors of the review, says the city could be in jeopardy of having its bond rating lowered, which would in turn raise the interest rates on any money it borrows. "If the city used its debt capacity for the purpose of financing the arena, it could hurt its ability to address other needs," Forrester adds, citing as examples streets, various municipal facilities, water and sewer improvements, and economic-development projects in general.

"St. Paul is running out of money," asserts Sen. Sandy Pappas (DFL-St. Paul), who expressed strong reservations about the hockey plan when running for mayor against Coleman last year. "During this session, the city asked the state for more money to develop Harriet Island along the river. And the chair of the committee said, 'Why isn't the city putting any money in? This should be a partnership.' And the head of the city's riverfront commission told him that with the hockey arena and the Wabasha Bridge and the science museum, the city is stretched too thin to engage in any partnerships.

"That's tough," Pappas continues, "because we just had a big study done by the legislative auditor, and one of the recommendations for approving funding was the need for a match by local government. We have big things we want to do in St. Paul. We want to open up the Phalen Corridor for economic development and provide education programs at Como Park and clean up polluted lands and bring in new businesses." But without the leverage of matching city dollars, Pappas says, "it's beginning to look like we can't get it done."

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