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Tuesday, March 28, 2017

City Council Begins Q Deal Deliberations, Cavs' Cheerleaders are No-Shows

Posted By on Tue, Mar 28, 2017 at 5:01 PM

click to enlarge Cleveland City Council on a neighborhood tour in June. - SAM ALLARD / SCENE
  • Sam Allard / Scene
  • Cleveland City Council on a neighborhood tour in June.
Welcome to Cleveland City Council, the show where everything's made up and the points don't matter. That's right, the points are just like the costs associated with the proposed Quicken Loans Arena renovation deal.

Hours before Cuyahoga County Council was expected to vote on the bond sale that will generate $140 million for the project — and about three months before the proposed construction start date, per the Cavs' Len Kemoroski — City Councilpeople fumbled through questions and speeches in an effort to chlorinate the deal's murky financial waters.

"Are you projecting the Cavs will make the playoffs every year?" Councilman Zack Reed inquired of the presenters, a familiar roster which included Komoroski, attorney Fred Nance, and County Financial Adviser (and former Gateway CFO and Board Chair) Tim Offtermatt. "Because you say here — I'm looking right at it — admissions taxes from Cavs' playoff games from 2016 to 2023 will be used to help pay for new renovations rather than existing loans."

(That total, from playoff admissions taxes, has been projected at $8.7 million.)

"Those are numbers that may show up. They may not show up," answered a straight-faced Offtermatt with the uncertainty that has typified this ordeal from the start. "If they do arise, then the city will send those monies directly to [Gateway] for the county bonds."

"So you are projecting that the Cavs will make the playoffs from 2016 to 2023?" Reed pressed.

"If they don't, however, then the debt service of course still needs to be paid," replied Offtermatt, whom even those with severe visual and hearing impairments could identify as a CPA with ease. "[Gateway,] at that point, would look to the various reserves to fund the debt service. And if there was no money in the reserves—"

"Wait, let me slow down," said Reed. "This is not for the debt service. It says here that the admissions taxes on Cavs' playoff games from 2016 to 2023 will be used to pay for the new renovations, not debt service."

"The debt service," clarified Offtermatt, "will be paying principal and interest payments to bond holders. The bonds will generate the funds."

Those bonds, which will facilitate the entire deal, are to be voted on this very evening. Yet our elected leaders still have only a loose (and often inaccurate) grip on the financial scaffolding beneath the deal. It's natural that much of their understanding has been gleaned from reports in the local media, and it's also perhaps natural that portions of those reports have been imprecise, the local media being peopled by reporters and editors who seldom moonlight as bond attorneys.

Councilman Mike Polensek wanted to confirm near the end of the four-hour meeting, just for example, that the $282 million all-in figure he'd read in multiple outlets (on Cleveland.com and in Scene, certainly) was correct. According to Offtermatt, it's not.

Offtermatt said that paying off the $140 million in bonds will cost between $200-$210 million. There will also be between $45 to $50 million in reserves created. Oftermatt estimated a grand total of $250-$260 million.

"But that's all subject to change," he added.

Terrific!

Subject to change may as well be the tagline for the Cavs' propaganda on the deal, which tends to evolve as it adapts to criticisms. The "Q Transformation," as it's called by the Cavs' execs, their negotiators and members of City Council — and which is endlessly advertised during Cavs' TV broadcasts — was initially billed as a 50/50 split between the team and its public partners.

County Executive Armond Budish, flying boldly in the face of fact, continues to cite the deal as a 50/50 proposition and continues to peg the total cost at $140 million. But just about everyone else now realizes that the costs will be much greater, and that a greater share will be borne by the public.

Yet carelessness (if not recklessness) with the deal's numbers is continually on display. The City of Cleveland's official Twitter account sent this out during the council hearing:



That's just not the case. Or if it is, it's a misleading summation. With the playoff admissions tax revenue and the the percentage of the admissions tax that currently goes toward paying off Gateway bonds that will be used for the renovations from June, 2023 through 2034, the city's contribution has been projected at about $97 million.

It's not the case that city and county leaders (and to a lesser extent, the local media) are deliberately misleading the public. Often it's that they are the unwitting puppets or megaphones for the Cavaliers.

The big problem with that arrangement is that the Cavs have demonstrated systematically they will lie up until (and often long after) the moment they are corrected.

Take for example the fact that multiple presenters today — Offtermatt and the city's own finance director Sharon Dumas — repeated the lie that the Cavs would cover all shortfalls on the project.

That's a lie. As was mercilessly dissected at County Council on Feb. 28, the Cavs will only "cover" shortfalls in the sense that they will advance the county the necessary funds after all money in one of two designated reserves has been exhausted. This will be in the form of what's being called "contingent rent." When the reserve is sufficiently replenished, the Cavs will be reimbursed.

And yet the Cavs and their negotiators, and the innocent officials (and careless editorial boards) whom they've duped continue to promote this fiction.

Council President Kevin Kelley, to his credit, after a string of aggressive Tweets from a reporter in attendance at this morning's meeting, clarified the situation. But he emphasized, as the "bottom line," the fact that city would not be on the hook for the shortfalls.

"That's a very good synopsis," Offtermatt said, when Kelley interrupted the meeting to address the point.

What Kelley — or someone — ought to have done is ask why Offtermatt et al. continue to cite this particular point as a measure of the franchise's generosity. Offtermatt literally called the arrangement "unprecedented" today. Despite the fact that this had all been exposed at County Council, thanks in no small part to Jack Schron. It's like the team, and Offtermatt, the man ostensibly advocating on the county's financial behalf, are trying to trick or confuse as many people as possible.

But it's just not true that the Cavs will be covering shortfalls. (An example of a "shortfall" would be if projected tax revenues fall drastically short because LeBron retires and the Cavs fail to make the playoffs for a few consecutive seasons, or even one). As Jack Schron was wont to point out when the Cavs' repeated that lie again and again and again: "The reality is, [the county is] going to be covering those."

Later in this morning's meeting, when asked by Councilwoman Phyllis Cleveland about how this upgrade differs from the Sin Tax, Offtermatt rattled off a list of items the Sin Tax has covered (any capital expense greater than $500,000, per the lease): seating, HVAC, roofing, lighting, "indeed, the scoreboard, which has been talked about."

click to enlarge SAM ALLARD / SCENE
  • Sam Allard / Scene
And yet, less than an hour earlier, Len Komoroski had presented a slide that alleged that the Cavs' had covered "100% of all operating, maintenance, repair, and capital expenses" for the arena's operating life to date.

That is a lie.

The Cavs continue to cite, as a further sign of their peerless magnanimity, their payment of Gateway's (their landlord's) operating expenses. But they don't bother to mention that those payments are wrapped up ("encompassed") in the team's paltry rent. The Cavs also pay no taxes on the structure they inhabit. If they did, as Roldo Bartimole has argued for years, millions of dollars would go to the Cleveland Public School System every year.

click to enlarge SAM ALLARD / SCENE
  • Sam Allard / Scene
The Cavs lie, repeatedly and shamelessly. In the packet they distributed to the press at the December press conference, they exclaimed in a subordinate clause that the team would be paying for "at least 50% of the Transformation project." That is a lie.

When Zack Reed mentioned the Oakland Raiders, and the NFL's 31-1 vote to allow the franchise to move to Las Vegas, Komoroski responded that "this situations is the exact opposite. We have done nothing but invest in this community. And we're here to talk about a scenario: a lease extension.

"The ownership group wants to extend its agreement to stay. To stay," Komoroski continued. "To continue to be able to make the impact that we're making within the community, the investments we're making in the community, in the neighborhoods as well."

But that remark's speciousness knows no earthly bounds. Consider an earlier exchange: Councilman Kerry McCormack asked Fred Nance if it might be possible to extend the lease further still. He suggested that even 10 years (as opposed to seven) would be a better, more sensible deal.

But Fred Nance said it was the best the negotiating team could do. He characterized the negotiations as your standard Craigslist back-n-forth.

"We wanted higher, they wanted lower," he said.

They wanted lower??? But what about Komoroski's description of a franchise desperate to stay and continue making a community impact?

The Cavs lie. They continue to cite the thoroughly debunked $245 million economic impact figure produced by Convention Sports & Leisure International, a consultancy paid by the Cavs to produce the report. Jeff Johnson tore into those numbers today, particularly exercised that the figures were influenced to a large degree by the RNC and were therefore useless as an accurate predictor of future years' economic impact.

The Cavs lie. And yet this is the private partner with whom we are rushing to ratify a complicated financial arrangement that no one yet understands and that can't even be subjected to meaningful amendment.

This was negotiated in private — Jeff Johsnon got the Mayor's Chief of Staff Ken Silliman to confirm that Frank Jackson only entered the negotiations in Nov. 2016, one month before the glitzy press announcement at the Q — and has no contingencies in place if either the city or the county were to vote it down. Watchers of local politics might have expected Silliman to mutter: "We'll cross that bridge when we come to it."

The costs of the project aren't even known. There have been no bids. Last we heard, drawings and designs for the upgrade were about 70 percent complete. The closest thing to a budget were a few limp projections corralled at the request of county council. Polensek mockingly held up the few pages of handouts council had been given and asked for something better "in writing." As the project will be managed by the Cavaliers themselves — not subject to public scrutiny — there are no safeguards built into the investment down the road.

The City Council objections arose from familiar quarters — from Jeff Johnson and Zack Reed, both of whom objected to "mortgaging the general fund" of the future. Johnson said we'd be encumbering "a future mayor, a future city council, future residents" with this burden. Reed told Scene after the meeting that he does not oppose a Q deal. He opposes this deal, because he's anxious to find ways to pay for the upgrade that don't impact general fund dollars.

The most forceful opposition, though, came from Councilman Polensek. After Phyllis Cleveland, Kerry McCormack, Kevin Kelley and Terrell Pruitt asked a series of softball questions, all sort of designed (it seemed) to countervail against the perception of corporate welfare — "We're investing in a facility, not a franchise, right?" McCormack asked — Polensek spoiled the party.

"I want to divert from the political love-fest that's taking place here," Polensek said. "I'm surprised you don't have the Cavaliers' cheerleaders here in the audience. When I look at Ken and Tim and Fred here, it reminds of that movie Poltergeist: They're back."

Polensek leaned on his considerable experience. He is the only member of council who served during the initial conception of the Gateway neighborhood. And he cited the region's perilous economic situation to urge not only patience, but an outright rejection of the subsidy. He also spoke to the vile threats that the Cavs, Budish and Cleveland.com have all made — threats of the franchise's departure if the upgrade isn't immediately ratified.

"I can't speak for anyone else around this table, but I don't wanna hear your threats," Polensek said. "I didn't believe it then and I don't believe it now. As a young man growing up, there were people who were very good at making threats. It was called The Outfit. I resented that group then and I resent any group that comes in and threatens this legislative body."

"We've paid dearly already," Polensek continued. "As an elected official, I was elected to serve. And I gotta tell ya, it aint happening here. You can't keep talking about all this prosperity and then drive 10 minutes where there's poverty and despair and lack of opportunity... We're being asked to commit $88 million for a whooping seven-year extension? Come on. Get serious."

The Development, Planning and Sustainability Committee with meet again next week to continue its deliberations. As of this posting, it remains unclear if the goal of the deal is to allow Cleveland to punch at or above its weight class.

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