Friday, June 19, 2009

The Arena Chronicles -- Part I -- The Present

Well, at long last my fingers have made it to the keyboard, and my take on the Blue Jackets/Arena situation is underway. While my tardiness has been due in part to work commitments, I have also spent a lot of time digging into the details and background, to the extent possible, in order to paint the most factual picture possible. Here are some of the things I have pursed in preparing for this blog series, as well as the series I am presenting at Inside Hockey:
  • Interviewed Blue Jackets Sr. VP/General Counsel Greg Kirstein
  • Spoke with Blue Jackets Public Relations VP Todd Sharrock and obtained some background information from him
  • Interviewed Franklin County Commissioner John O'Grady
  • Researched and reviewed background material on the Nationwide Arena deal and the Arena District in general
  • Researched information concerning other cities, and how arenas/stadiums have fared there.
  • Reviewed court filings and orders in the Phoenix Coyotes bankruptcy case to glean information from that situation.
  • Researched other development projects with which the County has become involved.

The major notable gap in my efforts so far is the lack of a Nationwide representative in the mix. I will continue to work on that angle, and will hopefully be able to contribute more from their perspective later.

I have split this whole topic up into three segments -- roughly devoted to The Present, The Past and The Future, in that order. Why not start with the past? To be honest, I thought it was more important to focus on the here and now first -- firmly framing what the issues are (and what they aren't), addressing some of the misperceptions that have emerged since this issue came to light, and in general moving the debate from emotion to fact. As noted in one of my previous posts, I have seen several of these scenarios play out over the years. The one common denominator among all of them is that the sooner the debate began to focus on fact, rather than conjecture or emotion, the more progress was made.

Now that the preliminaries are out of the way, let's get down to the substance, one topic at a time (sources/quotes are attributed within each topic, and I will endeavor to make it clear when my own opinion comes into play):

Prevailing Attitude

I think it is really important to understand the attitude that the Blue Jackets are bringing to the table in this entire scenario. Greg Kirstein went to great lengths to point out that "there are no bad guys" in this story. Todd Sharrock echoed those sentiments. While it is easy to immediately look for blame to assign when issues arise, you won't find that coming from the CBJ camp. Whether they are talking about Nationwide, Franklin County, Ohio State, the City of Columbus or state legislators, the CBJ are taking the high road. While cynics might argue that it is in the Blue Jackets' best interest to take that approach, that is almost always the case, yet few organizations actually do it. I am not so naive to think that public pronouncements correspond completely with private sentiment, but the CBJ deserve credit for attempting to start off with a non-confrontational atmosphere.

It's An Arena Issue --Economics Lesson

Another point Kirstein made, is that this is truly an Arena issue, not a Blue Jackets issue. A lot of internet postings and angry rumblings were referring to the "sin tax" proposal as a "Blue Jackets bailout", which is fundamentally incorrect. The Blue Jackets had their operations extensively reviewed by one of the top sports franchise operations consulting groups in the country, and undoubtedly the top group for hockey. The NHL also took a look at things. Their unanimous opinion, is that the Blue Jackets are fine, the market is good, the facility is good . . . but the lease sucks. The consultants calculated that the Jackets are upside down to the tune of about $12.1 million per year on the lease, compared with other teams in the NHL.

It all comes down to revenue that other teams enjoy, but the Blue Jackets cannot access. We will discuss all of the reasons for that in the next installment, but suffice it to say that this is one of the perils of a privately owned arena. Keep in mind that Nationwide is one of only two professional sports facilities in the country that were privately financed. The other is AT&T Park in San Francisco, home of the Giants. That is not a good comparison, however, as over half of the $260 million construction price tag was paid for by naming rights. The Giants took out loans for the balance, and, as owners of the facility, receive all of the revenue. I could not find numbers on the economic performance of AT & T Park.

The Jackets have documented losses of $80 million since 2002. A big chunk of that came during the lockout year, when the late Mr. Mac refused to implement large-scale layoffs. Former President/GM Doug MacLean has been quoted as pegging the losses for that year alone at $17 million. Kirstein could not confirm or deny that number, but it is in keeping with the attitude Mr. Mac brought to the table. If we take that number out, that leaves $63 milion in losses for the remaining 6 operating years, or $10 million per year, in round numbers. That is less than the lease revenue deficit identified by the consultants, supporting the idea that the core operations are financially sound. This is particularly impressive, given that payroll has increased from $22 million in Year 1 to $50.8 million last year, and attendance was in a decline prior to the playoff run of last season.

Although I have not spoken to a Nationwide representative, it is clear that Nationwide Arena, on a cash basis, is not making money. It is certainly holding its own in terms of attracting local events, as a review of the bookings at the Schottenstein Center and Nationwide indicates, but as one events promoter was quoted as saying "You have two "A" class facilities in a "B" class market." True enough -- Columbus is not in the same stratosphere as New York, Chicago, San Francisco, Los Angeles, etc. in attracting top shows or first run events. Obviously, this is one of the reasons that Nationwide is willing to part with the Arena to the County for a substantial discount. However, this simply reinforces the point that the real issue is the Arena, although the Blue Jackets are certainly impacted.

Look at it this way -- the Jackets could (theoretically) negotiate a deal with Nationwide to assume the revenue streams that they do not have access to right now, and be made whole in the short term. However, it would then be Nationwide looking for help from the County and others. If the essential operations of the Blue Jackets were in question, there is no way on Earth that the Jackets could transfer that monetary risk to Nationwide, or anybody else, for that matter.

It's The Arena Distric as well -- Economics Lesson II

While the whole genesis of the Arena District as we now know it will be addressed more fully in the next installment, it bears mention here. The John Glenn School of Public Affairs conducted economic impact analyses of the Blue Jackets, the Arena, and the Arena District on the local economy, underwritten by the CBJ, Nationwide and the Franklin County Convention Facilities Authority. While the details of these studies are available on the CBJ website, the essential points are that billions of dollars in new investment, jobs, sales and property values have been created since Nationwide Arena was constructed. These studies support the fact that the Arena drives the development of the District, and the Blue Jackets drive the Arena.

In my interview with him, County Commissioner John O"Grady acknowledged these essential facts, stating:"To me it's pretty simple -- they (the Blue Jackets) drive the Arena, which in turn energizes the Arena District, which permits things like devleopment of the new 500 room hotel for the Convention Center area. It's all interlocked."

As I noted above, more on this in the next installment, but keep it in mind.

This Is Not Phoenix

One of the more alarming aspects to the reactions arising from this issue is the speed with which people were willing to make analogies to the Phoenix Coyotes' situation and tehir bankruptcy. Not even close folks. First, even Jim Balsillie disregards any attempts to bring Columbus into the same discussion bag as Phoenix, stating "They're not going anywhere. The market is too good." Commissioner Gary Bettman similarly refused to take the bait during a press conference at the Stanley Cup Finals, referring to the situation as a "lease issue", and acknowledging the strength of the Columbus market.

Secondly, while nobody wants to minimize the $80 million in losses that the McConnells have faced, we aren't in the same league as Phoenix. Since becoming involved with the franchise in 2001, Jerry Moyes has poured $300 million into the club, which showed losses of over $36 million per year in 2006, 2007 and 2008. Phoenix is not a strong market, and the surrounding Westgate City development has not taken off nearly as well as the Arena District.

Finally, remember that nobody from the Blue Jackets has raised the issue of moving the franchise. All of that discussion was in response to media queries. From J.P. McConnell to Mike Priest to Greg Kirstein -- they are unanimous in noting that they have started this whole process precisely to avoid ever having to address the issue of moving. 'Nuff said on this one.

Sin Tax Mythology

Much of the visceral reaction to the disclosure of CBJ attempts to get a "sin tax" increase in Franklin County stemmed from the perception that the CBJ were seeking to "end run" the citizens and get a tax levied without a vote. While one can certainly understand some institutional reticence to the concept of a vote, in light of the results in 1997, this entire issue was overblown.

First, in my opinion, a fundamental problem with the whole issue was the timing and manner of the communciations about the Blue Jackets issues and the scattered initial response. Kirstein notes (and O'Grady confirms) that the Blue Jackets and Nationwide had been in discussions for a couple of months on the "sin tax" concept, which was modeled on the precise funding mechanism used in Cleveland for the stadiums there. Where the spin got out of control was on the "vote/no vote" issue. The state legislation being contemplated would have authorized the imposition of a tax without a vote, but did not require that imposition. The County Commissioners would have been free to submit a tax to the voters, if they chose to do so. That fact was lost in the shuffle of the initial response, as alcohol and tobacco lobbying interests caught wind of the effort and put pressure to bear at the State House. The legislators, in turn, asked for an unequivocal show of support from the County. With new taxes being as popular as the plague, particularly in this economy, such a show of support was not forthcoming, and the "sin tax" was DOA.

In the end, while the CBJ and Nationwide were diligent in dong their homework, in terms of the economic impacts and review of operations, there just was insufficient time to develop a comprehensive communication plan that would have permitted a smoother roll-out of the concept, and perhaps more favorable public response.

The County Response

Another source of irritation to the hockey faithful was the perceived tepid interest displayed by County Commissioners in the immediate aftermath of the team disclosures. Commisioners Brown and O'Grady both issued written statements in response to public inquiries that were, at best, tepid, and at worst discouraging to those hoping for some definitive show of support. In light of these responses, I submitted interview requests to all three commissioners. I received a prompt reply from Brittany Thompson, Public Affairs Officer for the comissioners, and she arranged the interview with Commissioner O'Grady.

In the course of the interview, it became apparent that Commissioner O'Grady was much more engaged in the issue, and more definitive in his approach, than his written statement would lead one to believe. After reviewing the history of the recent discussions with the Jackets and Nationwide, and noting that there was "no enthusiasm" for a "sin tax increase" to support the Arena issues, he unequivocally stated that "we will get it fixed." He noted that there were many potential approaches that could potentiallyl be involved, and that the County Adminsitrator had been directed to investigate the issue and potential resolutions.

O'Grady also advised that he had met informally with some Nationwide representatives the day prior to our interview, and had urged the Blue Jackets and Nationwide to get together first and discuss some of their options, and come back to the County with more of their ideas.

O'Grady acknowledged that the emergence of this issue was not terribly surprising to him, noting that he was familiar with the nature of the agreement and that "we were bound to end up in this spot."

I then asked O'Grady if he agreed with Kirstein's call for a "public/private" partnership to engineer a solution to the deal, and noted that the overwhelming majority of arenas have public support. I also noted the other "public/private partnerships" touted by the Commissioners, including a potential expanded equestrian facility for the Quarter Horse Congress, Huntington Park, and similar undertakings. While perhaps falling short of an enthusiastic embrace of the concept, he did note that he was in favor of "the right kind of public/private partnership". He agreed that the Blue Jackets were "too important" to lose, and expressed his desire to be part of the solution. He is convinced that a solution can be found that will not require an increase in any taxes.

So, even though details are out of reach at this point, I came away with a much more positive view of the County willingness to be a participant in a solution to the issue, and was pleased to see that initial steps had been taken to investigate those solutions.

Where We Are, And Where We Aren't

In the final analysis, here is my take on where things stand right now:

  • The McConnells are taking some serious financial hits, which need to be rectified
  • The financial shortfalls are not the result of basic operational flaws or a bad local market
  • The crux of the current situation is the Nationwide Arena lease , and the revenue streams the club cannot access.
  • The Blue Jackets and Nationwide Arena are the keys to the Arena District, which is the single biggeset economic engine in Columbus. To permit that to go away would be economic and political suicide for the parties in charge.
  • The County is interested in participating in a solution, but does not want to increase taxes
  • The Blue Jackets are not playing the "we are moving" card, and have no motivation to do so, as long as progress is being made.
  • Comparisons between this issue and the Phoenix situation are ludicrous.
  • Given the success of the Arena District, public participation is far more palatable than in 1997, when the success of such an endeaver was doubted.

I am a firm believer that progress will be made and that in the long run, this will be viewed as a minor blip in the franchise history. There is too much at stake economically to ignore the problem, and we have some big hitters paying attention to it.

Next Up: How We Got Here, or Not Liking The Bed We Made

Fire away!!!


jemhuff said...

Great write up. Looking forward to the other 2 segments. Are you getting paid for all this work? ;-)

Anonymous said...


Anonymous said...

Thanks for taking time to research the Arena problem. It may not be as dire as first speculated.

LTL said...

Great job JAL!


JAL said...

Thanks for the comments. Edition likely on Wednesday or Thursday. Waiting for one research item to come through, and want to get a follow up piece out on Phoenix, plus a piece on the draft.

Stay Tuned!!