New NHL arenas in Calgary and Ottawa better not cross-check taxpayers

New NHL arenas in Calgary and Ottawa better not cross-check taxpayers

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If public funds are needed, they should only be made available if the risks and benefits are shared

Calgary Flames players celebrate a goal in Seattle in January. Photo by Steph Chambers/Getty Images Content of the article

By Glen Hodgson

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Interest is rising again in Calgary and Ottawa for new NHL arenas for each city’s downtown, after earlier projects failed to launch. Modern downtown arenas would have obvious appeals to owners and fans in both cities. If the projects go ahead, however, it’s a lock that taxpayers will be asked to provide financial support. Should they? And if they do, under what conditions?

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The main purpose of any new building is to help private franchise owners make more money by selling more tickets, luxury boxes, refreshments and advertising, including naming rights. In an ideal world, the buildings would be fully privately funded and operate profitably on high demand, with frequent use for concerts and other events in addition to professional sports. NHL arenas in Montreal, Toronto and Vancouver were built largely with private financing, showing that it can be done in larger markets. The New York Islanders’ new $1 billion arena is the latest example of private funding using a business model involving up to 100 concerts and commercial events per year in addition to NHL games.

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But in small markets, both the number of days during which the building is likely to generate income and the financial capacity and risk appetite of the private sector are more limited. Municipal and provincial governments will therefore have to contend with requests from franchise owners, usually backed by fans, to provide some kind of financial support for new buildings.

New installations generally benefit the local economy. The local content of most construction projects is relatively high, often exceeding 80% of the overall project cost. Construction can boost local employment, especially if labor markets are weak, which is of course not currently the case. On the other hand, any multiplier effect will be limited by “leakage” of imports used in construction and interest charges on borrowed money. And for multiplier purposes, any build will do: there’s nothing special about arenas.

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Professional sports facilities also have some of the attributes of “public goods”, in that they benefit society as a whole, not just owners, athletes and fans. A new arena could raise a community’s profile as a location for private capital investment. It could also encourage local entrepreneurs to start new businesses or attract additional tourists – people who really wouldn’t visit without the sports franchise. (People who attend a game while visiting for other reasons don’t count: if the team didn’t exist, they would likely spend on restaurants or other local attractions.)

Each case has its own characteristics. In Calgary, an arena funding deal between the city and the Flames that collapsed last year now appears to have been resurrected. In Ottawa, the National Capital Commission recently indicated that it is again ready to make land available in LeBreton Flats, where the Canadian War Museum and a few residential towers have already been built and where a train system light rail and a public library are the latest development projects.

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If taxpayers end up supporting new arenas, they should share the benefits and not just the risks – which has been the traditional “socialism for capitalists” way of doing these things. Edmonton’s impressive new NHL arena was funded through public-private risk sharing, drawing on projected revenues from an expanded property tax base, ticket surcharges, rental fees and other revenue sources related to the arena. Public-private collaboration is also being used in Ottawa to renovate the city’s football stadium and junior hockey arena, while developing adjacent commercial and residential properties. The city borrowed the funds for construction and is being repaid from several predefined revenue sources, such as ticket fees and an expanded property tax base. The private partner delivers the construction and accumulates equity in the associated commercial and residential property.

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The Flames and the City of Calgary confirmed in October that negotiations for a new arena are resuming. A risk-sharing financial partnership that minimizes the appeal to taxpayers would be the best way forward. The current provincial government has shown interest in the project — an election is coming up — but it should do what Ed Stelmach’s government did and not provide core funding for an NHL arena in Alberta.

In Ottawa, the Senators are up for sale after owner Eugene Melnyk passed away, so the move to a new arena awaits a new group of owners. The city is expected to clarify that any new arena will be funded largely by the private sector, based on a solid business model for the facility and its surroundings.

The bottom line? If public funds are needed to get any of the projects across the target line, they should only be made available if the risks and benefits are shared between the private and public sectors and the Specific revenue sources that will repay public funds are clearly designated.

Glen Hodgson is a senior fellow at the CD Howe Institute and co-author of the 2014 book Power Play: The Business Economics of Pro Sports.

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