Public Finance Presentation

By: T.J. Auer

Detroit/Michigan continues local government tradition of subsidizing sports stadia

Michigan Not Detroit?Michigan is issuing “$450 million in 30-year tax-exempt private activity bonds

to pay for construction of the arena itself.”58% of repayment - Downtown Development Authority - $261.5 million42% of repayment - Olympia Entertainment - $188.4 millionhttp://www.crainsdetroit.com/article/20131213/NEWS/131219910/state-would-demolish-joe-louis-under-plan-for-new-hockey-arena

http://www.freep.com/article/20140129/NEWS01/301290158/Red-Wings-arena-Detroit-land

Bonds are sold by the state to raise funds, funds not actually issued by state or city. So, who is paying for the stadium?

Private investors purchase the bonds, assume risk for future gain.

Since private interests purchase bonds many claim these types of arrangements are distinct from public subsidy….

How TIF Works

• Expanded Tax Increment Finance Area

• Theory – the new stadium development will increase business activity and raise surrounding property values

• Practice – Revenue Bonds issued (different from general obligation bond) – A portion (increment) of the

resulting property tax is used to repay bond + interest

TTStadiumSite

StadiumSite

TIF Area

Taxpayers Pay Risk Free

Slope would equal Mill Rate

Property Values

Tax Revenue

BondRepayment

Actually Revenue

Usable Revenue

Site Assembly• Olympia Development (division of Ilitch owned Olympia

Entertainment) spent $50 million purchasing land for approximately half the development site

• Detroit expected to transfer land for other half of the development

• Detroit Downtown Development Authority will be the property’s owner – is this quasi-public body tax exempt?

• Ownership is an important component of this deal• Current question in media regarding taxes for Joe Louis Arena

Detroit loses potential revenue from land sales & possibly future tax revenue

Benefits to the City

• Expected 400 more jobs than Joe Louis Arena• Construction and demolishing jobs • $200 million dollar spin off development would not be owned by DDA• Potential increases in property value in and beyond TIF area• Commitment to a Neighbourhood Advisory Committee – influence/power not yet set

Costs

• Land being assembled for the development site• Demolition costs of Joe Louis Arena – cost to state• future demolition or repurposes of new arena – Red Wings lease is 35 years • Property tax from stadium and property tax increases that go towards bond repayment• Maintenance and Repair – DDA and Olympia share

Why Do Cities Make Stadium Development Deals?

“We are recruiting and retaining talent, and it’s important that we have a competitive facility in order to compete in the National Hockey League, We need your support on this project to keep our team competitive.” – Ken Holland Red Wings GM

• Artificial Scarcity – There are more large cities than teams• the supply of teams is regulated by the leagues• the geographic distribution is controlled by the league

Is this a good deal for Detroit?

Is it a better or worse deal for Detroit given its current distressed state?

Sources

• http://www.freep.com/article/20140129/NEWS01/301290158/Red-Wings-arena-Detroit-land

• http://www.crainsdetroit.com/article/20131213/NEWS/131219910/state-would-demolish-joe-louis-under-plan-for-new-hockey-arena