LA.’s Arena Seriously Debated: Wachs vs. Semcken

The new deal that the Arena Company has proposed to the City would commit them to covering 100% of the City's $6.8 million annual bond obligations if the proposed ticket surcharge is struck down. With that new agreement, how good a deal is the City getting?

Semcken: That $6.8 million is the estimated cost, but our commitment is to provide a deficit guarantee to cover the City's obligations (lost interest in reserve accounts and annual debt service on new bonds) in the event there is a revenue shortfall in City revenues attributable to the arena. These obligations are supposed to be paid for by new parking revenue from the Convention facility, parking truces from the Arena, property truces, business license taxes, sales taxes from the Arena, and a ticket surcharge. If for any reason the ticket surcharge is disallowed or the revenues generated prove insufficient, we'll make up the deficit out of a deficit guarantee from a nationally ranked financial institution. The Bank of America has offered to talk about using their irrevocable letter of credit as the guarantee.

This is the best deal done in any major metropolitan area in the country for a new sports facility. I don't want to put words in Joel Wachs' mouth, but he tends to deceive the public about other deals around the country—he makes them look like they were all privately financed, or like they had better guarantees. But none of these deals have done what we have done. Ours is truly the best deal for the taxpayers. 

We were so confident in this that we sent the deal to Dean Rosentraub, a major critic of these deals, for his review. He wrote the book Major League Losers about how sports facilities are taking advantage of cities all over the country. And he cited our deal with the City of Los Angeles as a model that all municipalities should follow—that was even before we agreed to guarantee the City's obligations! 

Wachs also tends to mix comments about baseball and football stadiums into the discussion. The public gets confused because stadiums and arenas are very different things. He compares publicly financed projects to ours, which is over 80% privately financed—including the City's $70.5 million land contribution. In addition, we've agreed to pay back the public portion out of revenues from the facility, guaranteed!

Wachs: That remains to be seen—no one has seen what the guarantee really is.

That said, I've been calling for a guarantee from the beginning. The developers had refused for more than a year, but after I announced an initiative, all of a sudden they said they would provide one. 

I'm glad at the direction they're taking, but, again, one has to see it to know how good a guarantee it really is. Who is making the guarantee? Based on what assets? I'm hopeful that we can get the kind of guarantee we’ve been calling for, but the devil is in the details. 

It's hard to comment beyond this, but it's important to note that inevitably in every city where these sorts of arrangements with developers have had to face the prospect of going to referendum, the voters have driven much better deals for the city than City Hall would have.

What do you see as the potential rewards for the City and its citizens if your Arena plans are successful, and what are the risks if the Arena fails? What's really at stake for the City?

Wachs: The biggest issue is whether we're going to run this City like a business. 

Are we going to cave in to anyone who comes to the City with lobbyists and threatens to go someplace else if they don't get what they want? I have been trying all along to get this City to run itself like a business—to protect the taxpayers' money in the same way the developers protect their money. 

I've insisted—but the City has refused—to hire professional negotiators that have had experience dealing with professional sports franchises. Nobody in the City, as good as they are, has had one day of experience in this area. I guarantee that the other side has the best financial advisors, the best lawyers and the best political consultants in the world—the best that money can buy. 

Still, the City must drive a tough bargain. It has to show that it will be tough and defend the taxpayers’ money as if it were its own, not behave as though it's spending someone else's money. But that's not just for professional sports facilities—that's for everything. That simply has not happened in this case, though, and shows some of the weaknesses in the way government is run. 

I would love to see the Arena here. Although I don't believe for a moment that it will provide the kind of benefits the developers claim. I would even like to have it Downtown, though a lot of people would like to have it someplace else. I just want the developers to pay for it on their own. Public money should not be used to subsidize professional sports teams. The benefits that they claim—jobs, economic stimulus, helping the Convention Center—simply don't bear up under the scrutiny of most of the professional economists in this country who have studied the issue of the impact of professional sports facilities on surrounding communities.

Just look at the two arenas we already have: one at the Coliseum and one in Inglewood. Neither has done anything for the surrounding areas. The one that is proposed for Downtown—as much as I would like to have it—supposes people will show up an hour before an event, have dinner inside, and go home afterward. It will not bring the kind of ancillary benefits the developers claim it will.

Semcken: The risks to the citizens are zero because we're guaranteeing any deficit in the City's obligations. Zero risk to the taxpayer is more than they have received from any other public project. 

And the benefits are significant. A Price Waterhouse study forecast $186 million in annual incremental spending in the City above and beyond what was there before. It also projected $111 million in incremental spending in the County beyond what the Forum produces today. Two-thousand six hundred new jobs will be created as a result of the new arena. An additional $2.3 millions of tax revenues will be generated every year. There will be $162 million in annual incremental spending directly related to the Lakers and Kings. This is all based on the conservative assumptions that we forced Price Waterhouse to use. This was a very strong negotiating point that the City of Los Angeles held us to—they wanted to make sure all of the benefits we're citing specifically came from the Arena. 

The City is contributing $70.5 million of land. We're putting up a $300 million building, moving in the $225 million Laker organization and the $115 million Kings organization. So we're going to put over half a billion dollars on the corner of 11th and Figueroa. 

Again, the benefit projections look at only those benefits directly resulting from the Arena. But we can look all over the country to see what ancillary benefits sports facilities can bring: The resurgence of Downtown San Jose and Downtown Phoenix since they built their arenas; the spillover success from Coors Field in Denver (they experienced an 86% increase in sales tax revenues after Coors Field opened) and Camden Yards in Baltimore. The latter two are baseball stadiums with less than half the number of events that we're going to have in our Arena. In Cleveland, the new baseball stadium and new arena brought about a total revitalization of their riverfront, and people are moving back to Downtown Cleveland. 

We're making sure that we're not just designing the facility for sports, but for entertainment, as well, making sure we'll have excellent acoustics for concerts. We've already talked to the Grammys about making the Arena their permanent home. 

And we picked the Convention Center location because the City asked us to. Our Convention Center loses $38 million a year. In all fairness, it's not supposed to make money—it's supposed to generate conventions that make money for the rest of the City. But that isn't happening. The area around it is very uncomfortable, especially after dark. But on day one, we will clear all of that out, and it will become a very clean and attractive place to be.

There will be other tremendous benefits to the Convention Center. The National Education Association has already indicated they are looking at L.A. for their 41,000-room night convention because of the arena. That's real dollars to the City. You can have an assembly during the day and convert it for basketball or hockey in the evening in a matter of hours. This was also not included in the assumptions of this deal.

Would the City have gotten a better deal if it had been subject to referendum from the beginning?

Semcken: No! And, frankly, I don't know what I would have done if my boss had the lack of confidence in me that Councilman Wachs has demonstrated in the City negotiating team. He calls them "amateurs" and says they're unable to negotiate with the high-priced lobbyists and attorneys of the Arena Company. Professional negotiators would have told the City long ago you’ve got a great deal, sign it up. Maybe because the City’s negotiators are “amateurs," they got the best deal ever done. In no other recent arena deal anywhere in the county has a developer guaranteed the City's investment and paid for the building 100%. 

With regard to initiatives, there's a different issue at play. Because of the sheer timing and the way the deal works, it would kill the Arena. We couldn't vote on an initiative until next June. And this, by the way, would be a special election—which Councilman Wachs isn't telling everybody—and would cost the City hundreds of thousands, if not over a million to put on—more than they will ever spend on the Arena. We wouldn't be able to assemble the land we need because the Redevelopment Agency's right of condemnation expires the following December. If the initiative passed, we would need another vote in November, the month before condemnation expires. We're confident we would win at the ballot box because there is no risk to the City, but the bill would kill us. Regardless, it would cause a delay of over a year at a cost to us of up to $50 million. Sometimes the public must depend on their elected officials to represent them. 

The City Council, led by John Ferraro and Mark Ridley­Thomas—has pushed us to provide the guarantees. And they are vehemently opposed to this initiative for several reasons. What would happen if every time they made a decision to use public funds it had to go to a vote? What would have happened to all of the support the City has given to the L.A. Theater Center on Spring Street and other arts organizations—support I frankly agree with—if it had been subject to initiatives? What about Dream Works, the Alameda Corridor, low-income housing projects, 1% for ART? Where would it end?

It's not easy to get people to approve those things. If Councilman Wachs is going to set an example with the Arena, it opens up the box for challenges to all revitalization projects.

Wachs: There is no question. Every city that has put its arena or stadium deal before the voters has inevitably seen developers sweeten the pot to win voter approval. If this had gone onto the ballot at the beginning, we wouldn't have been fighting for a year for the things the developers have finally conceded, kicking and screaming. 

The developers had adamantly refused any concessions until they were forced to give in. There is absolutely no question that they are petrified of the prospect of having to go to the public. They know the public will drive a tough bargain. The public does not buy their claims of how good the Arena is for the City. The public thinks it's basically wrong to give large sums of tax money to billionaire sports owners, therefore the developers have to provide an arrangement the public can accept.

The L.A. Arena Company now sees the threat of the initiative as real, rather than an idle threat, and it is forcing them to give us things they had steadfastly refused to for a year.

What would be the impact on the City's future ability to negotiate other large scale public-private deals, including one, perhaps, for the Coliseum if your push to have all such deals subject to voter approval is approved on an upcoming ballot?

Wachs: I want every single professional sports franchise that comes in here—whether it's football, baseball, basketball or hockey—to know that the City of Los Angeles is not going to subsidize them. They have to pay for themselves. This is big business with billionaire owners and mega-millionaire players. 

I have nothing against them. I go to the games, I actually spend money on these kinds of things. But we should send a message to each team coming to this City that Los Angeles is not going to allow them to blackmail us with threats to leave, as they've done in other cities. 

Los Angeles is probably the most lucrative sports market probably in the US, perhaps the world. There are good economic reasons for teams to locate here—a tremendous media market, and so on. There is so much that makes L.A. important to sports teams that public money really doesn't have to enter into the equation.

I want others to know that they can't come to the City and say if you don’t give me what I want, I'm going someplace else.I want the people who want a football team here—whether at the Coliseum or anyplace else—to know that they'll have to pay for their own. 

I'd like Los Angeles to set a precedent and make that the standard for any professional sports team that wants to locate here. Tax money should go to the kids in the playgrounds, the libraries and the police officers. It's wrong to ask the average taxpayer to pay money to construct luxury boxes that they'll never be able to set foot into. If the owners want it, great—let them have it, but let them pay for their own. We need to let all teams know that they should not look to public subsidies here.

Semcken: All sports could leave Los Angeles. Renovation of the Coliseum and Dodger Stadium will be very difficult to get approved if those deals have to go to a vote of the people. You can win public support fairly readily for an arena because an arena has 225 event nights a year that generate significant revenue. Football (with about 30-40 events, if you 're lucky) and baseball (with 81 events) are harder to sell. 

Every major project would be delayed at best, and never go forward at worst. It's very stand these sorts of complicated deals. That's why you have elected officials who have time to review the projects.

It would be a bad signal for Los Angeles from a business standpoint and from a public policy standpoint if this initiative went through. It would only serve to circumvent the power that we've tried to give our public officials.

Why should the public care about the outcome of this contest?

Semcken: It's the public's money. They should pay attention to what the politicians are doing, and let them know what their concerns are so when they act on their constituents’ behalf, there are no questions.

Wachs: It's their money and they' re concerned about the way the City does business. The public has been equally concerned about the secrecy and back-room dealings that have marked this deal from the beginning. 

This is the public's business and the documents should all be laid out there for us. It shouldn't take Bill Boyarsky six articles in the L.A. Times to force it out. The public should have a right to say what kind of deal it likes and what it doesn't like. 

Now, if the developers don't want any money from the City and want to do it on their own, fine—they don't have to go through the same process. But if they want the City to give them its money, they can't just ram it through City Hall with high paid lobbyists.

They have greatly misjudged the public's feelings on this. The public's concern is how the public's business is done—whether it's open and out in the public, and whether they have a voice in saying how their money is spent. I don't understand why that's controversial at all.

How much of the dispute that we've witnessed has to do with the Arena deal in particular, and how much of that has to do with the way negotiations happen in this City and in this State?

Wachs: It's both. There is an underlying public resentment of the direction professional sports has taken in this country. Most people remember professional sports when it was for the masses, it represented the people. It was about sports, not money, like it is now.

The public has a hard time with the idea of ball players' not being happy with their million dollar contracts. Striking millionaires, gazillionaire team owners that buy and sell franchises, make huge profits and then go to the next place where they can make more—that is the setting that fosters this kind of resentment. People say, we have very few precious tax dollars—we don't have books in schools, we don't have libraries, we don’t have police officers. Why should we give our money for this? Developers and team owners come back and say, you should do it because you'll get all these benefits. But they don't guarantee most of those benefits. It's boosterism. And most economists say many of these purported benefits aren't going to be realized. 

The public has a right to judge the quality of a deal if they're going to be asked to spend their money on it. The fact is, professional sports is now driven almost exclusively by economics. Because the developers knew that the public feels this way, they thought the best way to get their deal through was to ram it through City Hall quietly and secretly. They really misjudged the situation and the public is angry. They are as concerned about the secrecy as they are about the money. 

Even Bill Boyarksy, who believes public money should be used for professional sports, still was forced to write six articles to expose the secrecy and the back-room dealings.

Semcken: This question touches on California's initiative system—a very difficult issue. From a business perspective, it's fairly straightforward. If you have enough money, you can get an initiative on a ballot pretty readily—it only takes 60,000 signatures. 

But its political impact is a whole other issue. The initiative system was not set up so that a vocal minority could kill a project with tremendous public benefit or to give political visibility. Councilman Wachs has deceived the public, the Council and us. He lied. In November he said he wanted a guarantee in his Council motion. Now he's got it and he persists. He enjoys having his name on the front page.

From the very beginning he has exaggerated the cost of this deal to the City and, now the guarantee. He does not want to make a deal. He wants people to recognize his name the next time he runs for office. The public needs to distinguish what's being done simply for political recognition, and what ends up being detrimental to the interests of the City. 

I don't know what Councilman Wachs' position will be on the Arena now that there is no risk to the taxpayers. If I were him, I would declare victory and tell the people, I'm the reason they had to do this (even though it wouldn't be true but that hasn't stopped him so far). If he does this, then he's truly acting in the interests of the public. If he continues to push, he's acting only in the interest of Joel Wachs.

In today's L.A. Times, Bill Boyarsky closes his column with the following statement: "The Arena would be good for LA. Combined with the Walt Disney Concert Hall, the new cathedral, the Music Center and the Museum of Contemporary Art, it will help make downtown the vibrant place it should be. But it won't be done in political back rooms. Anschutz and company must sell the project to the public as well as the politicians." Your comments?

Semcken: Bill Boyarsky is patting himself on the back and saying, I told you so. If you had released the documents when I said, it never would have come to this. He is completely correct. 

We made a mistake not to release the leases. But the public needs to understand several things. We signed a confidentiality agreement with the Lakers and honored that agreement. We now owe them a debt of gratitude for finally letting us release the information. Unfortunately, we delayed until we got beat up in the press for six weeks. 

The leases by themselves don't protect the City 100%. But the development agreement, the disposition and development agreement and our new revenue guarantee taken as a whole, provide a very complete security package for the City of Los Angeles. 

On Boyarsky's third point about public opinion, my entire staff and I have worked tirelessly at getting public opinion behind us. He's correct that we never went to meet with the Sherman Oaks Homeowners Association, but I don't ever recall being invited. We did, however, have the support of VICA, the African American Chamber of Commerce, all the labor unions, the Latin Business Association, the Asian Business Association, the Central city Association, and the Los Angeles Area Chamber of Commerce.

We've been in Pico Union every three weeks talking to the people who will be most directly impacted. I've met with probably a hundred different community service organizations. We have met with every single constituency that has asked us to. And we've been on public affairs radio and television programs. 

I couldn't, however, debate Boyarsky on an obviously sensitive issue. Frankly, he was correct. And we released those documents last week. 

Unfortunately, we did bring a lot of this on ourselves. But to say that we have not been active with the public is totally inaccurate.

Wachs: That's absolutely right. One huge distinction between the Arena and the other projects he mentioned—all of which I think are great—is that they're not owned by billionaire private interests. The Museum of Contemporary Art and Disney Hall are nonprofit, and, by and large, charitable. That's very different from the economics surrounding professional sports. 

The battle so far has shown that the public wants its say. We want the initiative because it will give people a right to have a say on this or any future deal that involves public money. If a developer wants to put up all the money on his or her own, the popular vole can be avoided. But if they want public assistance, they better get public approval. And they make better deals if they have to sell them to the public.

I want L.A. to set this standard. Other cities will surely follow our lead. It's an important issue all across the country

To what extent is this a done deal?

Wachs: If we haven't seen any specifics from the developers, how do we know what's true and what's not? That's what makes this whole thing so ludicrous. No one in this town would invest his or her money without seeing all the relevant documents and really understanding the terms of the deal. It's offensive to ask public officials to take people on blind faith and trust. That's not the way you would run a business. And it's not the way the City should run the taxpayers' business. 

By the way, I don't blame these guys. They're business people, pure and simple. Their goal is to make as much money as they can, and that is very natural and understandable. But they can only get what we're willing to give them. I blame City Hall for not driving as tough a bargain with the City's money. I'm blaming the system that has not shown an ability or willingness to drive as tough a bargain on the public's behalf as the developers are driving on their own behalf. That's the system I'm trying to change.

Semcken: It's not. The City Council still needs to vote on several aspects. Right now, a vote is scheduled for the end of September. And, as I said earlier, if it goes to an initiative, it cannot be a done deal. Again, we can’t get financing if there is a cloud on the public participation. We would have to wait until we have won approval in a popular vote. We're confident we would win because there is no longer any risk for the public. But even then, we wouldn't be able to assemble the land.

You always hear about sports teams holding cities hostage. We're the ones being held hostage.

Any closing comments?

Semcken: We have designed an Arena that will be an entertainment facility unmatched anywhere in the world—five story atrium entrances covered with interactive and virtual reality entertainment. It's designed for various family entertainment formats—concerts, family shows, etc. It will also be adaptable to the Convention Center's needs. It will truly be a great boon for the City, revitalizing an area that needs it. 

Even more importantly, it will be a facility that is good for all of Los Angeles, not just Downtown. Building the Arena Downtown means it's closer to the Valley and it's closer to the northern and eastern parts of the City. People will have better access to it because all roads lead to Downtown—the subway, the Blue Line, the surface streets, the bus system, the freeway. Everything gets you to Downtown more easily than anywhere else in the County. 

The Arena will generate substantial revenues to the City and it will generate incredible interest. This is a building that only gets built once in a lifetime. And it will be more dramatic, more extensive and more entertaining than any other Arena ever built.

Wachs: Developers of sports facilities always talk about benefits to the community. But what they say never ends up being true. The developers say the Arena is going to provide jobs—at best it provides some temporary construction jobs and some very low paid jobs which, by and large, already exist at the Forum. They say the Arena is going to provide all kinds of revenue, but the City is not getting to share in any of the profits—they keep 100% of the naming rights and 100% of the advertising rights.

They say it will help the Convention Center, but they're going to tear down the North Hall, the most successful part of the operation. Also, the Convention Center is going to be forced to give up all of its much-needed underground parking spaces to people in the Arena's luxury boxes. Convention Center visitors are going to have to walk. 

The Arena developers also say they're going to provide hotel rooms, but they won't guarantee anything. Their own memos indicate that if they decide to do a hotel, they're going to come back to the City for another $100 million subsidy. 

Most of the professional studies that have been done in this area (by economists from Caltech, Stanford, Berkeley and the University of Chicago) indicate that despite the claims of the politicians, civic boosters and developers, the touted economic benefits generally do not occur. I have no reason to believe that L.A. is going to be any different. 

I can't spend the public's money on idle promises that have nothing to back them up. I have to drive a tougher bargain. Professional sports is at a place now where teams and developers shouldn't come hat-in-hand begging cities for money. They should be saying, We're a business. This is a lucrative market. Facilitate us, but we'll pay our own way. That's the standard I want to set for all professional sports teams.