http://www.sacbee.com/content/opinion/story/14280783p-15089104c.html
Daniel Weintraub: Arena deal exaggerates payments by Kings
By Daniel Weintraub -- Bee Columnist
Published 12:01 am PDT Sunday, July 23, 2006
Sacramento's civic leaders were giddy last week with news they had brokered a deal with the NBA's Sacramento Kings to build a downtown arena that would keep the team in the state capital for another 30 years.
The centerpiece of the deal was described as the Kings' commitment to pay 26 percent to 30 percent of the arena's cost, with the rest of the money coming from a quarter-cent sales tax that the voters will be asked to approve in November.
But for people who are skeptical of using public money for private gain, including sports venues, the folks promoting this deal got off to a bad start, because their description of the Kings' contribution is wildly inflated. The project's promoters either don't understand basic economics, or they are trying to fool the public. Either way, their misrepresentation of the terms should raise questions about the entire arrangement.
The Kings will not be paying anywhere close to 30 percent of the cost of building the arena. They won't be paying even half that much.
Here's the problem: The deal's sponsors are comparing two very different kinds of numbers. One is the upfront cost of building the arena, which will fall entirely on the taxpayers. The other is the Kings' contribution to the project, which will be spread over 30 years.
Anyone who has ever bought a house and didn't pay cash knows that you cannot simply add up a stream of monthly payments over 30 years to equal the cost of the home you are going to buy. You have to figure in the interest.
The reason you pay interest is that the value of a dollar today is worth far more than a dollar 30 years from now, because a dollar in hand today can be invested to produce income over time.
This concept is known as the present value of money, and it applies to the Kings deal even though they are not borrowing any money. Any amount to be paid in the future must be discounted to find its equivalent value today.
But the promoters of the arena have not done that. They have said that the arena will cost a minimum of $470 million, and that the Maloof family, the owners of the Kings, will pay $122 million of that. Then they have added in another $20 million that the Kings will set aside in a fund for maintenance of the arena after the building is open. Thus their math: $142 million from the Kings out of a total cost of $470 million equals 30 percent.
The Kings' contribution, however, is not worth $142 million today, or even $122 million, because it will be paid over 30 years.
In fact, the present value of their $122 million contribution is just $61 million, assuming an interest rate of 5 percent, which is conservative.
And so, at a maximum, the team's share of the construction costs should be described as 13 percent -- or $61 million out of $470 million. But the Kings' share will remain fixed even if the arena costs more. If the project's tab comes in at the upper end of the range of estimates, or $542 million, the Kings' share would be only 11 percent.
The promoters want us to include as part of the Kings' contribution the $20 million the team will set aside in a maintenance fund. That money isn't going toward the construction, and so it shouldn't be counted as part of this calculation. But if you want to count it as part of the Kings' share, it also needs to be added to the total cost of the project.
Looked at that way, the Kings' contribution would be a maximum of 17 percent, and 14 percent if the arena construction costs reached the upper end of the range of estimates.
Bottom line: As a share of the project, the Kings' contribution is about half as large as the promoters of the proposal were saying last week.
That's not a very good way to start a campaign to persuade the voters to raise their taxes and give the money to millionaires in shorts.
About the writer: The Bee's Daniel Weintraub can be reached at (916) 321-1914 or dweintraub@sacbee.com.
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NOTE: I posted this because I think it's important we know what the opposition is saying. If this starts a debate, let's please keep it civil and, if it's about this article, keep it in this thread. Thanks, everyone.
Daniel Weintraub: Arena deal exaggerates payments by Kings
By Daniel Weintraub -- Bee Columnist
Published 12:01 am PDT Sunday, July 23, 2006
Sacramento's civic leaders were giddy last week with news they had brokered a deal with the NBA's Sacramento Kings to build a downtown arena that would keep the team in the state capital for another 30 years.
The centerpiece of the deal was described as the Kings' commitment to pay 26 percent to 30 percent of the arena's cost, with the rest of the money coming from a quarter-cent sales tax that the voters will be asked to approve in November.
But for people who are skeptical of using public money for private gain, including sports venues, the folks promoting this deal got off to a bad start, because their description of the Kings' contribution is wildly inflated. The project's promoters either don't understand basic economics, or they are trying to fool the public. Either way, their misrepresentation of the terms should raise questions about the entire arrangement.
The Kings will not be paying anywhere close to 30 percent of the cost of building the arena. They won't be paying even half that much.
Here's the problem: The deal's sponsors are comparing two very different kinds of numbers. One is the upfront cost of building the arena, which will fall entirely on the taxpayers. The other is the Kings' contribution to the project, which will be spread over 30 years.
Anyone who has ever bought a house and didn't pay cash knows that you cannot simply add up a stream of monthly payments over 30 years to equal the cost of the home you are going to buy. You have to figure in the interest.
The reason you pay interest is that the value of a dollar today is worth far more than a dollar 30 years from now, because a dollar in hand today can be invested to produce income over time.
This concept is known as the present value of money, and it applies to the Kings deal even though they are not borrowing any money. Any amount to be paid in the future must be discounted to find its equivalent value today.
But the promoters of the arena have not done that. They have said that the arena will cost a minimum of $470 million, and that the Maloof family, the owners of the Kings, will pay $122 million of that. Then they have added in another $20 million that the Kings will set aside in a fund for maintenance of the arena after the building is open. Thus their math: $142 million from the Kings out of a total cost of $470 million equals 30 percent.
The Kings' contribution, however, is not worth $142 million today, or even $122 million, because it will be paid over 30 years.
In fact, the present value of their $122 million contribution is just $61 million, assuming an interest rate of 5 percent, which is conservative.
And so, at a maximum, the team's share of the construction costs should be described as 13 percent -- or $61 million out of $470 million. But the Kings' share will remain fixed even if the arena costs more. If the project's tab comes in at the upper end of the range of estimates, or $542 million, the Kings' share would be only 11 percent.
The promoters want us to include as part of the Kings' contribution the $20 million the team will set aside in a maintenance fund. That money isn't going toward the construction, and so it shouldn't be counted as part of this calculation. But if you want to count it as part of the Kings' share, it also needs to be added to the total cost of the project.
Looked at that way, the Kings' contribution would be a maximum of 17 percent, and 14 percent if the arena construction costs reached the upper end of the range of estimates.
Bottom line: As a share of the project, the Kings' contribution is about half as large as the promoters of the proposal were saying last week.
That's not a very good way to start a campaign to persuade the voters to raise their taxes and give the money to millionaires in shorts.
About the writer: The Bee's Daniel Weintraub can be reached at (916) 321-1914 or dweintraub@sacbee.com.
--------------------------------------------------
NOTE: I posted this because I think it's important we know what the opposition is saying. If this starts a debate, let's please keep it civil and, if it's about this article, keep it in this thread. Thanks, everyone.
