For fans of public financing, the proposed stadium deal might seem a little ironic. The whole discussion about financing is also amusing to me — and maybe others — because the proposed financing is a value-capture scheme, the same thing as Tax Increment Financing or TIF.
Right now, to do TIF the way it’s done in other parts of the country, Washington would have to amend its Constitution so local governments could issue bonds, then pay them back from increases in property values created by public improvements. That’s a perfectly reasonable way of operating, one I’ve advocated that we adopt here generally, with an eye toward out much more important projects than constructing sports palaces.
It all sounds so complicated, doesn’t it? Sometimes the best explanations of complicated schemes — even a good one like TIF — come from parody. Here’s a posting from The Seattle Times comment section on a recent story about the deal:
Hey, everybody I have invented a machine that spits out gold coins but I need some cash to get the diluthium crystals to run it. The Crystals cost $45,000 and I'm going to put MY OWN $25,000 into the deal. All that I need is the remaining $20,000. It may sound like a lot of money but you can borrow it at these incredibly low interest rates. Send me the money and every month I will send you the gold coins that my box spits out. I don't know exactly how many gold coins it will produce but it will be at least enough to pay for the loan -- so it really isn't costing you anything.
To prove that I am serious, I will put the first three years of your interest payments at whatever rate the bank loans you money into this account. Also, if the dilithum crystals cost more than $45,000 don't worry — I'll pay for the difference. All I need is your $20,000. It is all here in the contract that I will show you after you send me the check.
Now I’ve been trying to understand and explain value capture and Tax Increment Financing for a decade, and I have rarely seen such a perfect explanation. I’d like to contact the author to thank him or her but the only contact in the post was an e-mail: whatafool@whatwasithinking.com.
The reason why the deal and all value-capture efforts are easy to make fun of is that they seem too good to be true. I need money for a project, you borrow the money at a low interest rate, I pay you back from the money I make from the project. What’s the catch?
Well, as in a Tax Increment Financing deal, the idea behind the stadium deal is that tax revenue generated from sales in the venue will create enough money to pay back the loans the local government takes for the construction. But the deal has to make money; the box has to spit gold coins.
But that isn’t different from many other loans. Have you borrowed money to fix your roof? Buy a house? Start a new business in your garage? All of these loans are made with an interest charge that is based on the likelihood that you’ll pay it back. In the case of a mortgage the loan is big, the interest rate small, and the credit of the borrower has to be (or should be) solid. In the case of consumer debt, the amounts are small and the interest rate is high, mostly because buying a pair of shoes, for example, doesn't generate any revenue or value
Without debt, however, we can’t grow our economy or our own dreams — and sometimes our fantasies. If all we had was cash to work with, we couldn’t do the things as a community or as individuals to create value to make ourselves more sustainable.
Unfortunately it takes the star power of millionaires and professional sports teams to motivate local officials to do what they should be doing on a regular basis to support transit-oriented development in our region. Why not do this same kind of wheeling and dealing around light rail, where debt could be issued for infrastructure then paid back by private developers and property owners with the incremental increase in their property values created by the improvements?
The good news is that if Mayor Mike McGinn can pull this deal off, maybe he can make the argument that we should use the same concept for other things that are more sustainable than the sometimes fickle fancies of local sports fans. This deal also looks like it’s going to have the involvement of budget guru Dwight Dively, something that should inspire confidence in the stadium deal if it comes together. But it would all be simpler, without the necessity for a part of the plan that lets the city wind up the owner/operator of what will be a 30-year-old arena, if the constitution were aligned with those in other states, more open to the risk that comes with innovation.
However, I’m a lot more confident that building compact communities around transit will deliver the gold coins to pay us back than the unlikely scenario, which seems to drive some of the fervor for the arena deal, of a Seattle team winning a championship of any kind. Does anyone want to bet?
