The Scent of the City

A year ago, when Sacramento's city staff presented the council with an analysis of the proposed giveaway to the new owners of the Kings, I wondered why it paled, in economic sophistication and concern for the public interest, beside a similar analysis performed for the Maloof family. We now know the answer: Corruption.

In a deposition given in the lawsuit that citizens have filed against the giveaway, James Rinehart, the city's economic development director, testified that the city's staff has made no effort to analyze the economic effect of the subsidy or weigh it against the potential benefits of alternative uses of the money. In fact, Rinehart admitted he had never seen the giveaway term sheet and was unaware of any effort by the city to place a value on the non-cash assets—land, parking spaces, digital signage rights—it proposes to throw into the deal.

Hiram Johnson

So how did the city staff report come to conclude that the giveaway "would have multiple benefits to the City"? Documents discovered in the lawsuit show that those claims of benefits were invented by the subsidy seekers themselves, e-mailed to the city, and, by the magic of cut and paste, placed into the staff report, where the city's elected leaders and the public were defrauded into believing they were reading the considered judgment of the professionals of government. When the city staff spoke, the welfare seekers' lips moved.

If you think this kind of thing is par for the course in government, you're wrong. As a deputy treasurer for the state of California, sitting on boards and financing authorities and overseeing staff work on behalf of the treasurer, I watched professional public servants test the claims of organizations seeking state financing and tax credits and analyze the potential risks and benefits to the public. Their scrutiny was applied routinely and across the board, even to projects and financings three or four orders of magnitude smaller than the proposed Kings giveaway, which at over $300 million, is roughly equivalent to an entire year's worth of pay and benefits for Sacramento's city workforce. For the past three decades I've often seen Sacramento's city council bend to the wishes of the developers, downtown property owners, and unions whose dollars dominate city politics. But until now, the city staff, under honest professionals like former city manager Bill Edgar, usually played things straight.

But the evidence collected thus far in the lawsuit shows that the city management's sins go beyond playing ventriloquist dummy to those looking to boost $300 million out of taxpayer pockets. Staff is also actively obstructing the public's right to know. Councilmember Kevin McCarty testified that he repeatedly asked staff for a valuation of the "sweeteners" the city was throwing at the Kings' superrich owners but was consistently rebuffed. "You're not going to vote for it anyway," McCarty said the staff told him.

This, too, is misconduct. In my time at the State Treasurer's Office, many of California's financing authority boards comprised three officials running for governor: Phil Angelides, Steve Westly, Arnold Schwarzenegger. But in their frequent jockeying and disputes, I can't remember a single instance of the professional staff's withholding requested information from an elected official, even when doing so might result in a different policy result than they or their boss sought. When such things happen in state government, as when parks officials failed to report all their revenue to the governor's finance department, it was rightly considered a scandal.

A century ago Progressives successfully pushed many American cities to adopt the city-manager form of government as an antidote to corruption. The idea was that professional civil servants, disinterested and armed with the social science and economic knowledge coming out of the newly burgeoning universities, would be a source of honest, efficient government. Cities would be freed from the handouts and special deals for politically connected businesses that bribed politicians and financed their campaigns and political organizations. Reform would protect the many against the few.

But Progressives did not imagine what is unfolding in Sacramento: professional managers marching in lockstep with wealthy boodle seekers; ignoring principles of sound public finance; rejecting expert knowledge showing the economic infectiveness of sports subsidies; putting special-interest spin into official reports to masquerade as professional analysis; depriving the public and elected officials of a full accounting of their sweetheart deals; even going so far as to try to frustrate Sacramento citizens' use of the very tools of direct democracy that the Progressive created as the bulwark against special interest giveaways and corrupt government.

The state of the city is fragile: Public services and budgets not recovered five years after the end of the recession. High levels of debt and unfunded liabilities, of violent crime and poverty. Low levels of job growth and the college-educated workers vital to future growth.

But the scent of the city? Ripe with a stench that Hiram Johnson, the reformer, and Lincoln Steffens, the muckraking journalist, would have smelled in their youth in Sacramento—so ripe that maybe the people paid to report on and police these things might even begin to notice again.

The No-Growth Giveaway

Cosmo Garvin and the Sacramento News and Review have written the kind of deep analysis of the arena issue the city needs but hasn't received. He finds what anyone who has followed the sports extortion game would expect: Spending huge amounts of taxpayer dollars in giveaways to basketball arenas has little or no benefit to local economies. The outrageous claims of boosters "aren't real."

But the real news is that Kevin Johnson's team of hired liars have now essentially conceded that Garvin and the economic doubters are right.

They have released a new "study" making the usual bogus claims of the kind Garvin debunks. They say the arena will increase economic output in the region by $11.5 billion over 35 years.

Since this is the holiday season, let's be charitable and assume they are right. How big is $11.5 billion over 35 years?

The Sacramento metropolitan area had an output of $97.6 billion in 2012. If you assume economic growth at a nominal rate of 4 percent a year, the region will produce $8.2 trillion in total output over the next 35 years. Divide the claimed arena boost by total output and you find the claimed "incredible multiplier effect" from the arena would amount to only 0.0014 of the region's output over that 35 years.

How "incredible" is that? It is so tiny you need a microscope to see it. It is the economic equivalent of 11 hours in a year, or the length of two football fields on a drive from the State Capitol to Union Square in San Francisco. In other words, it is exactly what Cosmos Garvin's fine report shows: Arena subsidies bring little or no growth.

And now Kevin Johnson and his cronies have admitted it.

An Arena? Let the Grandkids Pay

After looking over Sacramento’s plan to go deep into debt to fund a giveaway to National Basketball Association, the editors of the Sacramento Bee proclaim it “doable.” The city, they assure their readers, has “the numbers to back it up.”

This conclusion can only mean those editors didn’t read or understand the numbers, because the numbers themselves shout, “Don’t do this!” The numbers describe a city that, despite imposing the highest and most regressive taxes in its region, still suffers from depleted reserves, large unfunded liabilities, and reduced levels of public services.

So how, in the face of that fiscal mess, does Sacramento buy an arena it can’t afford? The numbers say city leaders and the Bee want to make the grandkids pay.

Because city officials aren’t interested in helping citizens understand what they are up to and what the numbers mean, I’ve turned them into this picture:

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The city wants to sell bonds to fund $212.5 million of its subsidy to a new arena for the Sacramento Kings. That’s the red-shaded arena on the graph. It plans to repay the debt with future revenues from parking in the central city.

But there’s a big problem here. The parking revenues are already spoken for. They are used to pay for parking operations and the mortgages on the city’s garages, with the balance going to the general fund for police and other services. There aren’t enough of those dollars to pay for all those things and the arena debt too.

To solve the problem of having more wants than wallet, the city takes the low road: borrow a lot more and delay the obligation to repay far into the future. It plans to take out an extra $91.5 million in debt (the yellow-shaded area in the picture) and use some of that extra borrowed money to pay the interest on the bonds for the first four years. A $212.5 million subsidy to the arena thus becomes $304 million in debt to be paid off over 36 years.

Is this “doable?” Yes. There’s a whole industry of investment banks, financial advisors, and consultants who, for a price, will show how to put together and sell, at very high prices, “doable” debt for cities that want to live beyond their means. (There’s also an industry of people who, for a price, will tell you how sexy you are.)

But it’s doable in the same way that you could take out a home equity loan to add an extra room on your house, then pay the interest on the equity loan by stopping your contributions to your retirement account and pulling a cash advance out of the Visa card until you’ve paid off the car loan and have a few extra dollars. What’s “doable” is often the way to end up poor and bankrupt.

The black line on the graph shows the remaining debt from the deal over time. The city won’t begin making principal payments on that debt until 2022, and full principal payments won’t begin until 2034. The whole debt won’t be repaid until 2050. And repayment of the $212.5 million portion of the debt taken out to subsidize the Kings (the red-shaded area) won’t start until 2038, 22 years after the arena is supposed to open. The grandkids will pay all of it.

If that debt were buying something likely to make Sacramento a better place for them in 2040 or 2050—flood control, schools, bridges, parks, housing—pushing the repayment obligation deep into the future would be one thing. But arenas are more like cars than houses. They begin losing value the day they open. Team owners drive them for 10 or 15 years, then declare them “obsolete.” They demand taxpayers buy them a new one, or at least a complete and expensive overhaul. And cities rarely have the courage to refuse them.

So let’s be clear about what the numbers mean. The city and the Bee want the largest burden of paying for an arena in the present to fall on people in the future who will likely never buy a ticket there because it’s already gone or “obsolete.” (And if you doubt that, go count the number of today’s arenas that were around 30 years ago and never substantially overhauled. It’s zero.)

Instead of being able to use their own resources to pay for the public services and projects they need in their own time, our grandchildren will be paying for a subsidy a previous generation cheered but then put on the credit card—to go along with the unfunded liabilities for pensions and retiree health benefits of city workers.

Isn't that the kind of government irresponsibility we pay newspapers to warn us against? Apparently Bee bigwigs Cheryl Dell, Joyce Terhaar, and Dan Morain are so busy waving pompoms for the owners of the Kings they don't have time to watch out for the future of their community.

Remembering the SF Ballpark Five

Most sports memorabilia recall a favorite game or player. The autographed baseball sitting on my desk is different.

The autographs belong to the group that dubbed itself the SF Ballpark Five — Gregg Lukenbill, then owner and managing partner of the Kings; Maurice Read, his spokesman; and political consultants David Townsend, Jack Davis, and Richard Schlackman. Amid all the huffing and puffing in Sacramento about who or who's not giving money in the fight over the proposed subsidy to the Kings and their wealthy owners, their signatures recall a day when the Kings ownership itself was the shadowy "outside" force siding with taxpayers against sports extortion.

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It was 1989 and the extortionist in question was Bob Lurie, owner of the San Francisco Giants. He was threatening to move the team to Tampa or some other eager town if the taxpayers of San Francisco would not build him a new stadium to replace the wind tunnel known as Candlestick Park. Mayor Art Agnos led the charge with a measure to do just that for the November ballot.

Unfortunately for the extortionists, the San Andreas Fault choose the wrong moment to slip. On October 17 the Loma Prieta earthquake knocked down a portion of the Bay Bridge, damaged San Francisco's Embarcadero Freeway, and destroyed blocks of houses in the Marina District.

Agnos briefly put the ballpark subsidy push on hold but then resumed campaigning. Opponents of the deal replied on the final weekend with a mass mailing suggesting that, what with the earthquake and all, the city might just have more pressing uses of tax dollars than lining Lurie's pockets.

And here's where Agnos dropped the bomb he had been holding in reserve: The opponents' mailer, he charged, was financed by Gregg Lukenbill of Sacramento, who was trying to steal the Giants. "We haven't had any looting after the earthquake until now," Agnos proclaimed. In a front-page editorial the San Francisco Chronicle piled on: "A contemptible, inflammatory and highly inaccurate hit piece... stands exposed as a scheme by Sacramento promoters." (How much importance do newspapers attach to subsidizing the home team? In all my years of reading the Chronicle — through the threat of Cold War nuclear holocaust, the turmoil over the Vietnam War and civil rights, the crimes and impeachment of Richard Nixon, the assassinations of Mayor George Moscone and Supervisor Harvey Milk — that is the only front-page editorial I can recall.)

Lukenbill denied any involvement. And despite Agnos's charges and the Chronicle's ranting, San Francisco voters turned down the subsidy plan.

But Lukenbill was lying.

Maurice Read, his spokesman, and David Townsend, the Sacramento political consultant, had met Davis and Schlackman, managers of the campaign against the subsidy, for lunch in San Francisco on September 29. They learned that the campaign was winnable but needed money for opposition mailers. They relayed the news to Lukenbill, who was deeply committed to building a privately financed stadium to bring the then-LA Raiders and baseball to Sacramento. Lukenbill knew that if the Giants stayed in San Francisco the team could block any competitor from locating in Sacramento, within its monopoly 100-mile territory. To improve Sacramento's chances, he called business associates and asked them to donate to opponents' campaign. One of them, a Woodland steel manufacturer, made a $12,500 contribution reported the day before the election.

"I made a few phone calls to protect Sacramento's interest in potentially getting a baseball team here," Lukenbill admitted months later. "I'm not ashamed of that. I'm proud of it. I want baseball in Sacramento and I'm proud of it and I'm not going to back off of it."

What Lukenbill didn't know was that Agnos and the Giants, their campaign failing in the wake of the earthquake, had been tipped off to his possible involvement within days of the first contact with the opponents, and had been itching to use the "outsider" threat in a last-minute push. Nor did he know that Agnos was a bad loser. The mayor urged San Francisco District Attorney Arlo Smith to prosecute his opponents; Smith, hoping to goose his campaign for state attorney general, complied. He got the grand jury to indict Lukenbill and the rest of the Ballpark Five on the incredible theory that their efforts to help the anti-subsidy campaign constituted a conspiracy to create a campaign committee that had failed to report its existence.

But this is the rare story with many happy endings:

• Having failed four times in five years, first in San Francisco and later in San Jose, to get voters to buy them a new stadium, the Giants, under new ownership, gave up their extortion bid and built their own privately financed ballpark. The team has gone on to win two World Series.
• Having protected their public resources for investments more potent than subsidizing sports owners, San Francisco and San Jose are now among the most economically buoyant big cities in the world.
• When the Ballpark Five reached court, the judge dismissed the case, saying there was no evidence any laws were broken and no grounds for the grand jury's indictment or the district attorney's pursuit of the case.
• Dogged by the judge's conclusion that he had been engaged in a political prosecution and hurt by revelations that he had sought to speed up the case to help his campaign, Arlo Smith was defeated in his campaign for attorney general.

The baseball on my desk freshly reminds that, in politics as in sport, the game is hardball, and though everybody mouths the bromide about "it's how you play the game," the spitball your side throws never seems as wet as the one loaded up by guy in the other dugout.

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Sacramento Bee Misleads on Arena as Tax

On his City Beat blog, Ryan Lillis, city hall reporter for the Sacramento Bee writes that opponents of a subsidy for the NBA Kings arena in the city are misleading voters when they say that it means higher taxes. In fact, the opponents are more right than Lillis.

It is a fundamental principle of public finance that any spending by a government that does not have its own currency must ultimately be paid for by individuals and firms — through taxes, fees, or exactions. As conservative economist Milton Friedman liked to say (in a phrase that liberal economists frequently quote), to spend is to tax.

So, too, with the proposed arena subsidy in Sacramento. The city's$346 million contribution to building the arena is a government commitment of public resources that must be repaid by the city's taxpayers. It's a tax of roughly $700 on every resident of the city.

How exactly that money will be collected is still an open question. Sacramento remains mired in the process that the New York bond analyst who writes online under the pseudonym Bond Girl describes thusly:

Officials then work with their friends in the banking community to craft some borderline-insane financing scheme that involves the city, or some puppet nonprofit established by the city, issuing a combination of tax-exempt and taxable bonds to pay for the new facility. Debt service will be paid from a combination of grossly exaggerated facility revenues and whatever other miscellaneous revenues the city manages to scrape together. (“Hey, how about parking revenues? Our parking garages will be packed once the city’s economy is rejuvenated by the presence of a professional sports team. The facility is practically paying for itself this way.”) Officials will then probably hire some economic (prostitute) consultant to reverse-engineer revenue projections that make the project seem feasible. Maybe the city decides to back the bonds directly.

Whatever "borderline-insane financing scheme" ultimately emerges, one fact will remain: any public resources devoted to the arena could otherwise be used to pay for other city services like police, fire, parks, culture, and libraries, or to reduce taxes. To spend is to tax.

What Lillis neglects to tell us is that the signature gatherer he ignorantly brands as "misleading" is doing no more than paraphrasing what the Bee's own columnist, Dan Walters, has suggested: that the higher Measure U sales tax enacted in 2012 and due to expire in 2019 will be used and extended to pick up the arena bill.

Supporters of the arena subsidy understandably don't like to talk about it as a tax. Mayor Kevin Johnson is demanding that his city, home to the poorest residents in the region, carry the entire burden for a facility that caters predominately to higher-income people. (This may explain why the strongest supporters of the subsidy live outside the city; it's easier to love a tax you don't have to pay.)

And it's even harder to talk about the arena as a tax when your city already has the highest taxes in the region. Only Galt has a sales tax as high as that in Sacramento (8.5%). The city's utility user tax rates (7.0% and 7.5%) are triple those in other parts of the region. These taxes are both highly regressive, hitting the essentials of life—heating, cooling, clothing—that make up a high percentage of the budgets of the poor. The city that's home to many of the region's poor hammers them hardest.

Vigilant and useful journalists would be explaining this to the region. Instead, as in so much of the Bee's cheerleading coverage of the arena subsidy, Lillis brands as "misleading" the very citizens who are raising the right questions about who benefits from the giveaway and what it might mean for the future of a financially and economically troubled city. He owes them an apology, and the Bee owes its customers and city better reporting and analysis.

Talking Head

I’ll be joining David Watts Barton on Capital Public Radio’s Insight, Wednesday, February 29 at 10:00 a.m. and 8:00 p.m, 90.9 FM on the Sacramento area radio dial, to talk about the arena deal and Sacramento’s fiscal crisis.

UPDATE: They switched hosts on the show; Beth Ruyak took the microphone (you can hear the podcast here). And if we needed any evidence of the stakes as I explained them, take a look at what I ran across in the neighborhood on the way home.

The police wouldn’t come

The owner lost a couple of thousand worth of tools and some new, uninstalled appliances. When he reported the crime, the police told him it’s policy not to investigate unless guns or explosives were stolen. And remember, this is before a financially strapped city spends $250 million to subsidize the NBA.