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Wednesday, May 31, 2017

The Biggest Q Deal Sweetener is Hugely Dependent on LeBron's Future

Posted By on Wed, May 31, 2017 at 1:15 PM

click to enlarge SAM ALLARD / SCENE
  • Sam Allard / Scene
Thursday, Cleveland City Council's official Twitter account, @CleCityCouncil, tweeted a story from Bloomberg BNA about the Q Deal: "Cleveland Cavaliers Stadium Deal No Slam Dunk to Protesters."

The story featured comments from Tristan Rader, of the Cuyahoga County Progressive Caucus (CCPC), representing the opposition; and from Council President Kevin Kelley, representing the pro-deal political leadership.

It served primarily as a survey of the deal for the Bloomberg BNA audience — "legal, tax and compliance professionals" — and it presented more erroneous legal justification from Kelley about the rejection of the referendum signatures last week. For example:

"While ordinances that provide for funding to enter a contract may be repealed, there is no such exit once the city has already inked a deal with a private citizen," the piece reads. "Thus, when Mayor Frank Jackson (D) signed the deal with the Cavs and Cuyahoga County, there was no going back, Kelley said."

That's simply not the case. (Who, for instance, is the private citizen in Kelley's mind? The Cavs or Cuyahoga County?) At best, Kelley's comments represent a misreading of the City Charter, which does allow that, in the case of emergency ordinances, costs already incurred on a contract may not be re-collected, even after a voter repeal. The official charter language (Chapter 9, Section 64) is as follows:
If, when submitted to a vote of the electors of the City, an emergency measure be not approved by a majority of those voting thereon, it shall be considered repealed as regards any further action thereunder; but the measure so repealed shall be deemed sufficient authority for payment in accordance with the ordinance, of any expense incurred previous to the referendum vote thereon. (Italics added.)
So if money had already been spent (or if, more accurately "costs had been incurred"), voters couldn't get that back. But nothing has been spent. No action has been taken on the Q Deal at all. The county is waiting for a resolution on the referendum issue before it sells the renovation bonds. Visible construction on the arena has not yet begun, though crews have been spotted doing (perhaps unrelated?) work on the roof. No costs that we know of — except, perhaps, those associated with architectural designs — have been incurred.

Turning now to the subject mentioned in this piece's headline:

The Bloomberg BNA story concluded with a quote from Kelley emphasizing what has been positioned as the Cavs' most generous contribution over and above the legislation itself, (which, if we're to believe the deal's proponents, is already a "forward-thinking investment in Cleveland's neighborhoods"): the guarantee that the City's general fund will never receive less than what is committed to debt service on the arena renovation bonds in a given year (from 2024-2034).

“For some cities, stadium deals can be a tough call whether the deal is a net positive investment for the city. But here I don’t have to be concerned,” Kelley told the Bloomberg reporter, on the same day he spoke with Scene about the wobbly legal defense for rejecting the referendum signatures. “I look at the hard cash that’s going into our general fund and the guarantee that we get one dollar for every dollar that goes to debt servicing.” (All italics in quoted material added by the author.)

The Bloomberg piece referenced it earlier as well:

"The funding deal also comes with commitments from the Cavs toward community betterment projects, including donations to the county’s Habitat for Humanity and renovations of basketball courts at high schools and community centers. Half of the admission tax will also go toward the city’s general fund. But demonstrators said this wasn’t sufficient and have rallied for a community betterment fund."

Here are a few other examples of how the Cavs' pledge was reported:

Cleveland.com's City Hall reporter Robert Higgs, writing about the deal-sweeteners on the evening that City Council approved the deal: "The Cavaliers pledged to match dollar for dollar the amount of money that was committed to debt service on the project from the admissions tax if that exceeds the remaining amount that goes to the city. If that happens, the Cavaliers will write the city a check for the difference."

Crain's, in its mixed editorial on the merits of the deal: "In the face of opposition that was making it hard to get a supermajority on Cleveland City Council that would fast-track the renovation project, the Cavs tossed in some deal-sweeteners. Chief among them: For every dollar of admissions taxes to arena events that goes to debt service for the bonds that pay for the expansion, the city's general fund will get an equal amount."

And here's Councilman Brian Cummins, in an April 25 blog post (published the day after the final City Council vote) explaining his last-minute change of heart on the Q Deal. Cummins' was the pivotal vote that facilitated the ordinance's passage as an emergency measure.

"The Cavaliers have guaranteed that the city’s portion of admission tax collections will be equal to the amount collected for arena debt payments. Some years the debt payments are greater than what the city received in admission taxes by as much as $1.2 million. That will no longer happen when the deal begins in 2023. This concession will amount to $4 to $10 million more in revenue to the city. This is a significant change in the initial proposal."

(More on this in a moment.)

As far as I know, Scene is the only outlet that has suggested that this might not be such a generous pledge. (Higgs at Cleveland.com, to his credit, presented the provision clearly.) This is from my dispatch scribbled in the immediate aftermath of the deal-sweetener announcement on the steps of City Hall:

"The money for the project will come from admissions tax revenue at the Q. The current structure puts 5/8 from Cavs games toward debt service on Gateway bonds and 3/8 to the city's general fund. For non-Cavs-events, the split is [2/8 to debt service and 6/8 to the general fund]. Over the past couple of years, the revenues from these portions have been roughly the same. So the Cavs' guarantee is merely to ensure that that the amounts that are already nearly the same will be precisely the same."

And here I am a week later, in a larger piece about the framing of Q Deal debate.

"From 1995-2016, 50.4 percent of the Q admissions tax revenue went to the general fund and 49.6 percent went to debt service. [The established] ratio will continue from 2023-2034, with the money that currently goes toward Gateway bonds going toward the renovation. This is also why the Cavs' lately announced commitment to provide "at least an equal amount" to the general fund that the city provides to the Q project is a truly minor one, and ought to be reported as such.... The presentation by [Frank] Jackson and by other leaders is as if this commitment is a new 'matching grant' of some kind."

The pledge is, actually, a kind of matching grant, but not in the way that has been suggested by Kelley and others. The Cavs have not pledged to pay a dollar to the general fund for every dollar they receive for the renovation. (That wouldn't make any sense, as it would effectively cancel out the city's contribution). They've only pledged to cover the difference in the event that, during a given year, the revenue tilts in their favor. Remember that the cooperative agreement is already structured so that there's an approximate 50/50 split.

My annoyance has been, and continues to be, that very few people are acquainted enough with the specifics of the deal to recognize the insignificance of the Cavs' pledge.

While the pledge is indeed a safety net, (and it's certainly better to have it than not!) the past 22 years demonstrate, I think persuasively, that it is unlikely to be worth very much. It may not result in a single extra dollar for the city at all. The Cavs' "dollar-for-dollar pledge" is rendered especially insignificant based on the career trajectory of LeBron James.

Over the past 22 years, to reiterate, 50.4 percent of the admissions tax revenue has gone toward the city's general fund and 49.6 percent has gone toward debt service on Gateway bonds. In eight of these 22 years, more money has gone toward debt. These would be years that, if the "dollar for dollar pledge" had been in effect, the Cavs would have had to fork over a check equal to the difference.

There is something easily observable about every one of those eight years — 2005, 2006, 2007, 2008, 2009, 2010, 2015, 2016: LeBron James was a member of the Cavaliers. In seven of them (all but 2005), the team advanced to the playoffs. In the year (2o16) with the highest cost differential between debt service and the general fund ($1.2 million), the Cavs won an NBA championship, and played three home NBA finals playoff games.

This is in keeping with the existing structure of the cooperative agreement. It's arranged so that more Cavs games (and those with expensive ticket prices, like games deep in the playoffs) mean more money to debt service / arena renovation. And LeBron is almost single-handedly responsible for those additional games and additional revenue. Look at what happened when LeBron went to Miami for four seasons: 
click to enlarge img_0548.jpg
And it's perfectly true, as Brian Cummins noted in his April 25 post, that had the Cavs' pledge been in effect since 2005, the city's general fund would have received annual payments eight times. The $1.2 million figure he cited from 2016, however, is unique, nearly double the amount of the second-highest year. The values from other years are as follows:

Money Cleveland would have received from Cavs if "dollar for dollar" pledge had been in effect:
2005: $154,266.00
2006: $348,984.00
2007: $454,210.00
2008: $454,850.00
2009: $474,649.00
2010:$676,394.00
2015: $643,804.00
2016: $1,212,065.00

That's not chump change. But unfortunately the pledge hasn't been in effect during this, what is beyond doubt the most successful Cavaliers era ever. The pledge isn't in effect this year either, as the Cavs return to one of the most anticipated NBA Finals of all time. It won't be in effect next year or the following year or in 2020, when the contracts of Kyrie Irving, Kevin Love, Tristan Thompson and J.R. Smith all expire. It won't go into effect until the 2023-2024 season, during which LeBron James, if he's still playing in the league (and still on the Cavs) will turn 39 years old. LeBron is a player of extraordinary physical gifts, who has never suffered a significant injury. It's not out of the question to think that he might play into his early 40s. But only 25 players in the history of the league have played until their 40th birthday. (Vince Carter, who is 40, is the only active player to have done so.)

LeBron is of course not the only determining factor in the Cavs' future success. By 2023, the team might have drafted another generational talent. A new core of dominant players might have emerged around a veteran LeBron. A dynasty, and the talent that accrues magnetically to it, might have been fully solidified. But on the other hand, LeBron may retire at 38 or even 36. LeBron may take his talents elsewhere. Only remnants (Kyrie? Tristan?) of the current team will likely be around in the mid-2020s. No one will be around in the 2030s. After LeBron, the core players may disband, seek their fortunes elsewhere. The franchise could descend into dark days with which fans are deeply familiar.

It's impossible to know what will happen. Brian Cummins' assertion that the Cavs' pledge will net the city $4-$10 million in additional revenue from 2023-2034, for example, is pure speculation. It's also possible — and perhaps likely, given what we know of LeBron's impact in the past — that the pledge could net the city a lot closer to zero.

Again, if your assumption is that the Deal is necessary, it's much better to have this dollar-for-dollar provision than not to have it. It could indeed net the city significant revenue from 2023-2034 if the Cavaliers remain a postseason threat at the tail-end of LeBron's career and after it. But it should be fully understood that the cooperative agreement on which the Q Deal is structured already generates an almost exact 50/50 split. Moreover, the sliver of funds that the Cavs have pledged to provide pale in comparison to the Q admissions tax revenue Cleveland would receive were the city not to enter into the agreement in the first place: all of it.


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