Friday, April 7, 2017

Q Deal Admissions Tax Revenue Projections Could be Dangerously Off the Mark

Posted By on Fri, Apr 7, 2017 at 12:33 PM

click to enlarge SAM ALLARD / SCENE
  • Sam Allard / Scene
The number most often associated with the city of Cleveland's contribution to the proposed Quicken Loans Arena renovation is $88 million.

That comes from a portion of the city's eight percent admissions tax on ticketed events (for venues that hold more than 750 people) and represents, as council president Kevin Kelley has rightly noted, an extension of an existing arrangement.

Currently, the city of Cleveland receives, in its general fund, 3/8 of that tax revenue for Cavs games and 6/8 of the revenue for other events. The balance — 5/8 for Cavs games, 2/8 for everything else — goes to pay down debt on Gateway bonds. The payments are marked "Gateway Arena Project Funding" in documents provided by Cuyahoga County to dogged 84-year-old Cleveland reporter Roldo Bartimole. (The 2016 values are reprinted below with his permission.)

The Q deal, we're told, was hashed out over two-plus years of negotiations. But Mayor Frank Jackson, per his chief of staff Ken Silliman, began participating only in November, 2016, one month before the glitzy announcement of the completed deal, a "creative" "exciting" "collaborative" package that elected leaders were pleased to say created no new taxes.

As far as the city is concerned, the deal proposes an extension of the current admissions tax structure. Beginning in 2023, when the Gateway bonds are (hopefully) paid off, and until 2034, the portion that now goes to Gateway debt service will then be applied to the arena renovation debt service. That's interest on the $140 million in bonds that the county voted to greenlight last week.

"We're going to make this town great again," trumpeted County Council President Dan Brady at the time, in remarks that sure didn't scan as ironic.

There are two immediate problems with (or at least criticisms of) the arrangement, and both serve as answers to City Council President Kevin Kelley's fundamental question about the deal: "How would the city of Cleveland be better off by doing nothing?"

The first, as noted bluntly by councilman and mayoral candidate Jeff Johnson, is the following: "That's our money." The roughly $5.5 million in Q tax revenue that went toward debt service in 2016 would, in the absence of debt, be applied to the city's general fund. That money could help prop up any number of ailing city departments: Parks & Recreation, Health, Safety, etc. It'd be a vital source of income from an arena on which its tenants pay no taxes.

This dynamic has been noted repeatedly by councilman Mike Polensek. It has also been noted by residents. Two councilpeople have told Scene that their constituents are angered that the Q deal was never mentioned in conversations about Issue 32, the citywide income tax increase that narrowly passed in 2016.

The annual revenue generated by the admissions tax is of course nowhere near the revenue generated by the income tax increase, but it's a mark of local leadership's lack of transparency and disrespect for voters, in the view of many, that the dire proclamations about imperiled city services and guaranteed layoffs failed to include disclaimers about the millions soon to be signed away to the Q. (Greater Cleveland Congregations has also noted this discrepancy). Beginning in 2023, if the deal were to be voted down, that tax revenue would flow directly to the city's coffers. The city would be "better off," then, in very basic financial terms.

The other criticism, as we noted Wednesday, is that the Cavs' projections related to the admissions tax seem way too high. Cavs' president Len Komoroski has said that with the upgrade, the arena can expect 200 events per year. Without the upgrade, Komoroski estimated, the number would fall to 160.

Scene counted the events from 2016. Not including the RNC, we reported that the total number was 157. One reader noted that this total was deceiving because of events, like Disney on Ice, that perform multiple times on a single day. Though we intentionally didn't count, e.g., individual games at the MAC Tournament as discrete events, we now regret that decision and agree that our total number was deceiving.

The modified number, accounting for the multiple performances on single days, is 177. That's a dramatic increase, and much closer to the Cavs' projections. We certainly should have accounted for that in our initial reporting — we admit we were perhaps too hastily combing through the events calendar during hours we have no reservations characterizing as wee. This revised number now also appears in the original piece.

An additional note, though, if we're gong to get technical: Seven out of that 177 total belong to the Ringling Bros. circus, which has been discontinued.

At any rate, the 200-per-year projection still seems high. Even though there were no "events" in July because of the RNC, twenty-sixteen included championship runs by both the Cavaliers and the Monsters. It was a banner year for the Q.

The revenue that went toward debt service in 2016, (the same portion that, beginning in 2023 will go toward arena debt service) is as follows, from the county, via Roldo:

Jan 29, 2016—$357,861.24 2/8 of admission tax for “events” for Dec. 2015
Jan 29, 2016—$298,096.26 5/8 of Games admission tax for Dec. 2015

Feb 26, 2016—$132,752.02 2/8 of admission tax for “events” for Jan. 2016
Feb 26, 2016—$426,444.47 5/8 of Games admission tax for Jan. 2016

Mar 29, 2016—$178,678.31 2/8 of admission tax for “events” for Feb. 2016
Mar 29, 2016—$248,147.82 5/8 of Games admission tax for Feb. 2016

Apr 28, 2015—$39,335.51 2/8 of admission tax for “events” for Mar. 2016
Apr 28, 2015—$184,883.19 5/8 of Games admission tax for Mar. 2016

May 26, 2016—$274,279.89 2/8 of admission tax for “events” for Apr. 2016
May 26, 2016—$162,161.37 5/8 of Games admission tax for Apr. 2016

Jul 01, 2016—$77,044.07 2/8 of admission tax for “events” for May 2016
Jul 01, 2016—$452,532.51 5/8 of Games admission tax for May 2016

Jul 28, 2016—$233,437.72 2/8 of admission tax for “events” for Jun. 2016
Jul 28, 2016—$591,596.39 5/8 of Games admission tax for Jun. 2016

Aug 26, 2016—$47,832.00 2/8 of admission tax for “events” for Jul. 2016

Sep 28, 2016—$69,896.03 2/8 of admission tax for “events” for Aug. 2016

Oct 28, 2016—$183,927.52 2/8 of admission tax for “events” for Sep. 2016

Nov 29, 2016—$251,832.73 2/8 of admission tax for “events” for Oct. 2016
Nov 29, 2016—$478,607.49 5/8 of Games admission tax for Oct. 2016

Dec 29, 2016—$303,271.66 2/8 of admission tax for “events” for Nov. 2016
Dec 29, 2016—$481,311.81 5/8 of Games admission tax for Nov. 2016

2016 Revenue (for Gateway Debt Service):
Admissions (Games/Events) Tax $5,473,930.01 (Total for 2016)

Again, that's $5.5 million. Yet, from 2023-2034, the Cavs are projecting $8 million a year. (Eleven years at $8 million per year is how we get to $88 million). And once again, if there are shortfalls in those projections, the county will pay the difference from one of two dedicated reserves, the other of which will be saved for facility upgrades at Progressive Field (noted by none other than Brent Larkin yesterday.) If the reserve is exhausted, the Cavs will front the difference in the form of "contingent rent," which is an advance, and will be reimbursed back to the Cavs when the reserve is replenished.

In this respect, the city of Cleveland would be better off not by doing nothing, exactly, but by using city finance personnel to produce their own projections. (The Cavs, of course, are known to prefer and to promote exaggerated figures.) But by doing nothing — that is, by not rubber-stamping the current deal — the city avoids a situation where projections may be significantly overestimated. This protects the county from further public spending. (Though now that county council has okayed the sale of the bonds, it's honestly unclear to me what would happen if City Council halted the deal.)

City councilmembers, quite rightly, are foremost concerned with the financial encumbrances of the city, but they would do well to remember that their constituents are residents of both Cleveland and Cuyahoga County. As such, in the event of lost or lessened services due to impacts on the general funds of both, city residents pay twice as much, even though they are the least likely to attend events at the Q.

This is why the issue of the massively subsidized upgrade is so toxic in so many of the city's wards. It's also why city council challengers, in a pivotal election year, are licking their chops in the wings. They can't wait for incumbents to support the deal because that support instantly becomes a lynch pin, if not the lynch pin, of campaigns against them.

Contact Senior Writer Sam Allard:  sallard at clevescene dot com / @SceneSallard / (216) 802-7282.

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