Thursday, June 22, 2006
Debate FedExForum Reality, Not Mythology
The current controversy about the FedExForum garage is quickly becoming about more than why plans were changed and how $6.3 million in federal funds were lost.
There are resurrected questions about the contract between Memphis and Shelby County Governments and the Grizzlies. There are shots taken at owner Michael Heisley by fans made mad by some of the team’s mistakes in the care and feeding of its customers. There is the expected political distancing by elected officials who were there and voted for the contract for the new arena.
All of this smoke runs the risk of obscuring any light that can be shed on the spark that ignited the fire in the first place – $6.3 million that was not spent in compliance with the guidelines for the federal program where the money originated before being channeled through Tennessee Department of Transportation.
That said, we’ll wade in any way. When our friends at the Memphis Flyer editorialize that the contract with the NBA team was “one-sided” and a “Faustian bargain,” it just feels like mythology is replacing reality when it comes to the history of the project.
So let’s rewind the tape.
Back in 2001, some of Memphis’ most directly engaged, civic-minded business leaders learned that there was a chance to land a professional basketball team in Memphis, a fulfillment of this city’s long-held dream and the antidote to the beating that our civic ego had taken in pursuit of the National Football League.
They heard that the Vancouver Grizzlies was looking to move. They contacted Michael Heisley, not the other way around, to ask if Memphis could be considered. Like it is in the world of professional sports franchises, there’s no warm, fuzzy feelings that lead a team to move to a new city. It’s nothing but clear-eyed financial benefit, frequently expressed in the public commitment to provide an NBA-quality arena that can be a revenue center to help make the absurd business model of the NBA work.
There is nothing unique about this, because Memphis’ experience is consistent with what happens in almost every city. (It’s worth noting that the team and the so-called local NBA pursuit team weren’t even demanding a new arena, because they were prepared to have The Pyramid upgraded to NBA standards. That’s when it was suggested by the county mayor, not Mr. Heisley, that for slightly more, a new arena could be built.)
It’s worth remembering another often forgotten fact these days: Memphis was competing with another city for the Grizzlies, and so Memphis and Shelby County weren’t just negotiating against the Grizzlies, but negotiating against a rival city.
From the beginning, negotiations between city, county and the Grizzlies were testy and emotional. At their first meeting, the Grizzlies laid out their requirements to move to Memphis. Local government didn’t respond to their list and instead presented their own list of demands. The team’s negotiators left the room to talk, and quickly walked out of the building and flew out of Memphis.
No one in the halls of government panicked and got on the phone to put things back together. City and county negotiators, of which I was one, had made a list of “deal breakers” that were nonnegotiable. Failure to agree on any of them would collapse the talks from the public side. So, when the Grizzlies walked out of the room, Memphis and Shelby County Governments concluded that it saved them a lot of time, because it didn’t look like the team would agree to the public conditions any way.
Through the mediation of a third party, the teams were reassembled to see if there was a way to restart the negotiations. Again, city and county negotiators listed their deal breakers, and over the next month, one by one, they were accepted, but not without the charges and countercharges that are part of any negotiation. Eventually, the big issues that had been deferred while the others were addressed were essentially all that was left: the Grizzlies paying the operating losses for the new arena and the team making a long-term commitment to stay in the arena and in Memphis.
Local government had been told by pro sports consultants and colleagues in other governments that a city our size would not win these two key concessions, and frequently, it looked as if they would kill any chances for a contract.
It was in the context of the Grizzlies’ accepting operating losses – estimated now at upwards of $5 million a year – that the non-compete clause was put on the table. No one with any business sense – much less an NBA team owner - would take on the obligation of paying the operating costs and not look to protect their downside in the form of competition from other buildings that could easily undercut rental rates for the newer, more expensive arena.
It was a lesson that city and county had learned painfully when The Pyramid opened without closing the Coliseum. That old arena – already paid for and with no official concessionaire or parking company – was adept at underbidding the newer building, accomplishing nothing so much as driving up the operating subsidy of The Pyramid year after year and putting more money in the pockets of promoters.
It was thought in 2001 and it’s still the case today that it’s in the long-term best interest of taxpayers for FedExForum to succeed, and in that vein, the non-compete clause was agreed to in return for the Grizzlies taking on the operating losses. In other words, the option was for taxpayers to pay more than $5 million a year for the operating deficit of the building, and it would probably have been higher. After all, sponsorships and advertising agreements are skills that government doesn’t possess and or ill-equipped to perform or oversee.
So, the cost of eliminating the non-compete clause would have been more than $5 million for the Forum, about $2 million for the operating deficit at The Pyramid and the $1 million deficit at the Coliseum. In other words, local government could have taken on a total of $8 million in operating deficits and all so promoters could make more money from their events.
That said, negotiators on all sides understood that the noncompete clause was not intended to block events from coming to Memphis, only to give the Forum first option to make them work there. That the Grizzlies took the position most advantageous to them in interpreting the contract should surprise no one, but over time, the application of the non-compete provisions are settling into the philosphy of the negotiations.
Debating The Merits
While it’s never out of bounds for people to question the public benefits of the arena project, or whether this is the best use of $250 million or whether research proves that professional sports underdeliver as an economic engine, the malignant notion that city and county governments simply agreed to whatever the Grizzlies demanded is just wrong.
As for the financing of the arena – which the Grizzlies had no part in developing (like the garage funding, they didn’t care where it came from, as long as they got the facilities built), in retrospect, it seems clear that the financing would have been better if it had not included PILOT payments from MLGW.
That said, lost in the fog of opinions is this fact: the preponderance of the financing on the arena come from user-related fees like the sales tax rebate from NBA events and the arena's seat use fee and from sources like the Tourism Development Zone that only could have been spent on an arena or convention center.
In other words, it’s a fair discussion to debate whether the political and civic leadership should have spent their energies pursuing the team and building a new arena, but keep in mind that the vast majority of the revenues paying for FedExForum could not be spent on anything else.
Looking back, a number of letter writers seem to believe this project was rammed through the public process with little public support for it. It’s worth remembering that the publicly-funded poll demanded by arena opponent Commissioner Walter Bailey, to his dismay, showed that a majority of people in this county supported the arena financing plan.
The Power Of Rhetoric
As we say, there is room to debate the facts, and there is the obligation to get the answers about how the Forum garage plans were changed without federal approval and in violation of the federal regulations.
But hopefully, we can keep in mind that if the Mud Island experience taught us anything, it is that we have the power to make FedExForum a failure. It happened to Mud Island on the day long ago when the Memphis City Council, putting distance from the project they had approved, called it a failure. From that day on, it was.
Let’s investigate the garage controversy until full accountability is reached. Let’s debate the public value of professional sports. Let’s discuss whether local government has its priorities wrong.
Let’s just try to remember that we won. We got the professional sports team that we had sought for more than 20 years, we got a long-term commitment from it to this city, we got it to pay the considerable operating losses of the new arena and we did it with no larger percentage of property taxes in the Forum project than city and county governments put into AutoZone Park.
Posted by Smart City Consulting at 7:34 PM