The City of Seattle is considering two proposals to develop an NBA/NHL arena. Oak View Group (OVG) has proposed to re-develop Key Arena. The other, hereafter called "SODO," calls for a new arena near Seattle's existing professional baseball and football/soccer facilities in the south of downtown (SODO) district.

On May 19, 2017 the SODO group hired Justin Marlowe, a professor of public finance at the University of Washington, to analyze the public finance dimensions of both proposals. Dr. Marlowe performed that analysis with the assistance of three Master of Public Administration students at the University of Washington: Grant Dailey, Angela Pietschmann, and Alex Schoemann. Ms. Pietschmann and Mr. Schoemann are Certified Public Accountants. This report outlines our methodology and main findings.

This analysis has two objectives. First is to highlight the public finance implications of both proposals. Specifically, we focused on the City tax revenues each proposal would likely generate, and where those revenues would flow. In our view these revenue flows are essential information for anyone considering the overall benefits and costs of both proposals. In the narrative below we also highlight other important public finance details for each proposal, including: non-tax revenues, capital expenditures, operations and maintenance spending, and others. Our second objective is to provide City leaders, and the public, a tool to engage these public finance details more deeply. To that end, we have made our analytical model available, and we welcome feedback.

Our model is simple but comprehensive. It includes more than 100 unique assumptions that drive estimated tax collections. Those assumptions cover ticket prices, concession sales, tax rates, parking patterns, and many other factors. The model then places those tax collections in one of three “buckets”: 1) City General Fund; 2) City Arena Fund; and 3) Redirected. The “City Arena Fund” is the provisional name – taken from the OVG proposal – for the City fund that would account for revenues generated at the Arena but repurposed for Arena maintenance and operations. Revenues flow to the City’s General Fund if the proposer has offered to pay that tax, or if the City transfers residual revenues from the Arena Fund to the General Fund. Redirected revenues flow to the project directly, or are not collected because they are outside the tax’s original intent.

Under a “base case” set of assumptions applied to both proposals, the model suggests the following:

SODO’s estimated contribution to the City General Fund is three times OVG’s. The SODO arena would send an estimated $103 million (inflation- adjusted) of new tax revenues to the City General Fund over 35 years. Under the same base case assumptions OVG would generate just under $34 million. These estimates are also consistent across different scenarios. For example, under an “aggressive” set of assumptions SODO would send just short of $111 million to the General Fund, where OVG would send just short of $47 million. “Aggressive” in this context means more successful teams that could command higher ticket prices, higher attendance at games, and other assumptions that would increase revenues. By contrast, under lower ticket prices, lower attendance, and other “conservative” assumptions, SODO and OVG would send to the General Fund just short of $67 million and just short of $25 million, respectively.

Both plans redirect roughly the same amount of tax revenue. In the base case scenario, the SODO plan redirects approximately $205 million of City admissions tax. The City admissions tax has historically financed the public’s share of capital investments in publicly-owned Seattle sports and entertainment facilities. The SODO group’s position is that collecting that tax on a privately- owned facility puts team owners at a competitive disadvantage relative to markets that do not collect that tax. OVG asks the City to redirect to the City Arena Fund approximately $167 of new City retail sales tax, construction sales tax, admissions tax, parking tax, and the leasehold excise tax. If OVG asks the state and county to redirect their respective portions of those same taxes, then under the OVG plan the total taxes redirected exceed $200 million.

In the base case scenario, the SODO plan redirects approximately $205 million of City admissions tax. The City admissions tax has historically financed the public’s share of capital investments in publicly-owned Seattle sports and entertainment facilities. The SODO group’s position is that collecting that tax on a privately- owned facility puts team owners at a competitive disadvantage relative to markets that do not collect that tax. OVG asks the City to redirect to the City Arena Fund approximately $167 of new City retail sales tax, construction sales tax, admissions tax, parking tax, and the leasehold excise tax. If OVG asks the state and county to redirect their respective portions of those same taxes, then under the OVG plan the total taxes redirected exceed $200 million. OVG’s impact on the City’s finances hinges on revenue sharing. OVG has said it will consider transferring some portion of the revenues from the City Arena Fund to the General Fund once the City Arena Fund has received $40 million of redirected revenues. Our model indicates the City will reach that threshold in approximately year 9, and it assumes an annual transfer to the General Fund equal to 10% of the revenues that flow to the City Arena Fund each year. Of course, the City could negotiate a much higher sharing rate and send more revenue to the General Fund as a result. This assumes, of course, that the Arena Fund revenues are more than adequate to cover the arena’s annual capital spending needs. It also assumes the City Arena Fund would not be the funding mechanism for a major arena renovation. Recent experiences suggest that even with a properly-funded capital spending plan, most NBA facilities require a major renovation 12-15 years after opening, with renovation costs ranging from $50 million (New Orleans) to $192 million (Atlanta). If the City Arena Fund is the funding source for a renovation, those costs would almost certainly exceed OVG’s contribution to the General Fund.

OVG has said it will consider transferring some portion of the revenues from the City Arena Fund to the General Fund once the City Arena Fund has received $40 million of redirected revenues. Our model indicates the City will reach that threshold in approximately year 9, and it assumes an annual transfer to the General Fund equal to 10% of the revenues that flow to the City Arena Fund each year. Of course, the City could negotiate a much higher sharing rate and send more revenue to the General Fund as a result. This assumes, of course, that the Arena Fund revenues are more than adequate to cover the arena’s annual capital spending needs. It also assumes the City Arena Fund would not be the funding mechanism for a major arena renovation. Recent experiences suggest that even with a properly-funded capital spending plan, most NBA facilities require a major renovation 12-15 years after opening, with renovation costs ranging from $50 million (New Orleans) to $192 million (Atlanta). If the City Arena Fund is the funding source for a renovation, those costs would almost certainly exceed OVG’s contribution to the General Fund. SODO would contribute approximately $100 million of property taxes to local governments other than the City of Seattle, especially schools. We focused on City of Seattle tax revenues because we can assume both proposals will advance the tax arrangements with the City outlined in their public statements to date. We are less sure about similar arrangements with King County, the Port of Seattle, Seattle Public Schools, and other overlapping local governments. However, we can be sure that: 1) OVG will not pay property taxes because the renovated Key Arena will remain publicly-owned; 2) SODO will be privately-owned; and 3) SODO has pledged to pay all applicable local property taxes. Seattle Public Schools’ tax rate in 2016 was $2.18 per $1,000 of assessed value, and the State School Fund rate was $2.17 per $1,000 of assessed value, for a combined schools rate of $4.35. At that rate, SODO would contribute $53 million (inflation-adjusted) to public schools over 35 years. Note also that after the state budget passed in late June, the State Schools Fund rate in Seattle will likely increase. Add to that an additional $3.51 per $1,000 for the ports, emergency medical services, and other local taxing jurisdictions, and SODO’s total property tax contribution to governments other than the City of Seattle is approximately $98 million.

We hope this analysis brings valuable information to the robust public debate now under way.

Read the Full Report

Download the Financial Model

Contact us with Questions