Public Finance of Arenas: Ask Economists, Get Answers - OU Econ Club Event

 
The University of Economics hosted an economists panel on the public finance of sports arenas.  The panelists shared the conclusion from data-driven research:  publicly financed sports arenas have not been shown to be economic drivers.   Rather, arenas tend to move where consumers spend money in a local economy. 

Here's a link to the youtube video of the forum. OU Econ - The Public Finance of Sports Arenas - YouTube

Norman Oversight Committee rejects Arena TIF Project Plan

The University North Park TIF #2 oversight committee met on June 18, 2024. Six members were present representing a quorum.  The committee discussed the proposed Rock Creek Entertainment District Tax Increment Finance Plan which would create two new TIF districts to pay for the costs of an arena + parking structure + district infrastructure. 

The project costs are estimated to be $230 million with up to an additional $370 million in financing costs.

The TIF structure is unusual for two reasons. First, the Texas developer, Rainer, LLC would take out a loan and the City would commit to paying off the principal plus interest costs. Second, 100% of the sales and advalorem taxes collected in the increment district would be used to pay off the debt. TIF usually split revenue growth in an increment district so that taxing jurisdictions share in the growth for the entire life of the project.  

Here is a summary of some of the key points: 

1. The committee approved the PUD and rezoning that went through the planning commission last week. The general sense was that this was an issue for the planning commission and that the Tax Increment Finance plan was what the TIF committee should focus on.

2. The committee rejected approving the Rock Creek Entertainment TIF project plan by a vote of 3 no to 2 yeahs with one abstention by the soon-to-be-new CFO of Norman Schools. Notably, the NPS Superintendent votes yes to the exact same plan at the statutory review committee last month. The superintendent had commented that his vote did not represent the opinion of the school board which had not discussed the matter yet. The school board did discuss the plan at their June meeting and expressed concerns about the impact on the school budget. The four members who were present 3. City council approved putting the arena TIF project plan to a public vote last week. The ballot language has been submitted to the county election board for an August 27th vote. There have been no lawsuits challenging that action to dates according to city attorney Walker. 4. Committee members asked for analysis of how including the lots south of Rock Creek by the Young Family Athletic Center and the industrial lots at the far north of the district would impact the project financing. These are not related to the arena or new housing development. Such estimates have not been done. City Finance Director Anthony Francisco estimated that 5 lots of fast food might generate about $250,000 in general fund sales tax revenues. There are approximately 12 lots in the south area. 5. Committee members pointed out how cannibalization is not just moving businesses but also moving where people shop and spend their entertainment dollars. This sort of shifting means less tax revenues would accrue to city, county and schools from outside the TIF leaving less money for public services - police, fire, public works, etc. 6. TIF consultant pointed out that if all the possible yet to be developed sites are not included, the project won't make. Committee member pointed out that the committee is supposed to look beyond whether the financing works but also at how the city as a whole is impacted. You can find the agenda packet here Development Oversight Committee for TIF District No. 2 Meeting-AMENDED | City of Norman Oklahoma Meetings (municodemeetings.com)

Something WILL Definitely Happen in Arena TIF District Without an Arena!

TIF is not that complicated. You divert tax revenue growth from a given area for project costs.  

The CRUCIAL question is not the situation today (are tax $s being generated now) but whether the area would growth without the TIF (fancy word is the "but for" condition). 

Can anyone with any sense make a credible argument that the increment area won't grow at all for the next 25 years? Absolutely NOT!

Even the Hunden Partners report assumes that growth WILL happen in the TIF district without a new arena. 

Sooner Investments makes a clear case that this area is prime real estate. University Town CenterNorman, OK - Sooner Investment

 "UNIVERSITY TOWN CENTER is Oklahoma’s premier destinations for shopping, dining, entertainment, and lodging! Located off Interstate 35 in the vibrant University North Park district, University Town Center is a power center, developed around Legacy Park and the Legacy Park Trail. At the center of the development is the Legacy Park lake, which boasts impressive water features and fountains, as well as an amphitheater that hosts a concert series and and many other events. Legacy Park Trail will take pedestrians from the hotel district to Legacy Park, through the shopping center, and out of the development, through the city to Historic Downtown Norman and the University of Oklahoma." 

To the extent that the district will grow without a $600 Million arena spending plan, then taking 100% of tax revenue growth from the district WILL hurt city, county and school budgets. They will get less tax revenue growth during the period it takes to pay off the project debt (up to 25 years).

Don't be fooled by the attempts to avoid the real issue - it isn't what is there now, it is a matter of what will likely happen without a new arena. 

Housing, is half of the proposed development area - this can and will happen in Norman without a new arena. The Arena TIF will influence where that housing will happen and where related tax revenues will go (to City and schools or to pay off Rainer LLC's construction loan).

New Bars and restaurants (which make an arena an entertainment "district") don't put more money in people's pockets but will spread out where those entertainment dollars are spent.  If entertainment budgets are spent in the Arena TIF district INSTEAD of other areas of Norman, then city and school budgets are harmed. We call this displacement effects.

The Local Development Act even excludes the use of TIF from areas which would have had developed anyway (without the project). 

Note the TIF increment diversion area INCLUDES all yet to be developed land - even lots that will surely attract private capital in the very near future.  

How would UNP Arena impact Norman Public Schools? Background, Questions (and answers)

 

What is Tax Increment Financing?

It is a way to finance debt for a capital project. It allows tax revenues collected in a designated area (increment district) to be spent on TIF project costs instead of going to original taxing jurisdictions. Incremental taxes are the growth in taxes generated in the increment district above the baseline which is typically frozen at the pre-TIF level. The TIF agreement establishes the % of the incremental taxes diverted to TIF projects.

Legal Authorization of TIF Districts in Oklahoma

• Authorized by Article X, Section 6C of Oklahoma Constitution
• Established pursuant to Local Development Act, Title 62, Oklahoma Statutes, Section 850 et seq.

Length of Increment collection period and TIF project

• TIF plans set the length as the minimum of the time needed to pay for project costs or a set number of years (25 years is maximum allowed)
• 25 years is common, but not universal maximum length of increment collection period
• Enid (#7) – 10 years, Sapulpa (#4) – 15 years; El Reno (#4) – 20 years.

Life of TIF (vs. Increment diversion)

• A TIF is closed out when all funds are spent OR the termination date is reached (25 years is max by law).
• The UNP TIF #2 increment diversion ended in 2019 but the TIF district will end in 2030 or when the remaining funds are spent.

The UNP Arena Project Plan proposes two new tax increment finance schemes which have the same increment district from which 100% of sales taxes (TIF #4) and ad valorem taxes (TIF #5) are grabbed

The sales tax diversion (TIF #4) would start sooner to reflect the retail that is ready to be built south of Rock Creek across from the Young Family Athletic Center. This area is site ready for new construction.

1.      Why is the land south of Rock Creek, adjacent to the Young Family Athletic Center, in the district from which tax revenues will be used to pay for arena project costs?  How does re-TIFing this property impact NPS budget?  Isn’t the goal of a TIF to give up funds for a while to get more later? Won’t this plan grab some of the payoff from TIF #2 for up to another 25 years?

Answer: This land is probably the most valuable undeveloped real estate in Norman. It will develop without being in a new TIF district. The project needs quick revenues to start paying off the debt. The Rainer Associates LLC is taking on debt before revenues flow in.

IMPACT on NPS: Giving this up will hurt NPS budget – it is revenue growth that would otherwise go to the school budget (sinking, general and building funds) without the TIF. 

 

2.   Isn’t 25 years a long time to lock in on a TIF?  The last school bond was historically large ($ 350 million) and long (10 years vs. 5 years for previous bonds). Are shorter TIF allowed? Would shorter TIF plans make school budgeting easier?

Answer:  25 years is the maximum allowed.  Developers like the longer period to keep a project live and allows flexibility for renegotiating and maximizing opportunity to spend all the designated funds. 

Examples of shorter TIF projects in Oklahoma include Enid (#7) – 10 years, Sapulpa (#4) – 15 years, El Reno (#4) – 20 years

Impact on NPS: The longer the duration of the TIF increment diversion the more NPS budget years which are negatively impacted.

3.    Why is a 100% diversion acceptable for the district? Are there other 100% TIF ad valorem projects, or is this rare?

The original UNP TIF split the growth in ad valorem tax revenues in the increment district evenly.  The proposed UNP arena TIF contemplates a 100% (TIF) and 0% (School) split.

a. What are the advantages of the 50-50% split vs. 100% split?

Answer: the 50% split to the school district is not treated as local revenue that is deducted from state aid revenues (not a chargeable).  Accounting for the equalization in the state aid formula, the school district gets more state aid revenues from 50% of ad valorem revenues collected in the TIF than it would from 100% of the same amount of revenues without the TIF.    

 b. Does TIF reduce school funding in Oklahoma?

Answer: YES, It diverts local school funding to non-school purposes. 

3.  By how much will non-Sinking Fund Revenues be harmed?

a. How much of each extra dollar of ad valorem taxes does the school district keep accounting for the deduction of local revenue in the school aid formula, as well as the building fund?

Answer:  It is NOT a $1 for $1 deduction because the building fund is not a chargeable item.  Of the 45 mills (.045) school tax, the district keeps about 6.5 mills (.0065) after accounting for the chargeables.  (Steve Ellis has painstakingly estimated this. You could ask for the CFO’s numbers on this.)

b.    The Project plan (page 14) claims that the state aid formula will offset 79% of new non-sinking fund revenues, so the district gets to keep 81% of net new non-sinking fund revenues. Is this correct? Where does this number come from?

c. What would be the hit from the non-sinking funds for the estimated $3.25 billion worth of property whose taxes are completely diverted to the TIF?  Does $21 million sound about right?

Answer: The diversion from non-sinking funds is just over $21 million. The school district gets to keep about 6.5 mills from the 45 mill school levy.  Thus, .0065 x $3,250,000,000 = $21,125,000  

 4.      How long will it take for the school district to make-up the forgone non-sinking fund revenues to make the NPS budget whole?

The City’s Project plan estimates a “net increase in non-sinking fund revenue to the school district of approximately $1,680,000 annually.” (page 9).  No estimates of the yearly impacts are given for the years when non-sinking fund ad valorem taxes are diverted to the UNP TIF fund.

a.      What is the annual hit on the school non-sinking funds revenues during the diversion period?

Answer:  $21 million spread over say 20 years is a little over $1 million per year ($1,056,250). Is this in the ballpark? (NPS has not responded to this inquiry.)

b.      How many years after the project costs are paid off will it take to make up those foregone revenues?

 Answer: Back of the envelop estimation suggests it would take a little over a dozen years after the increment diversion ends to make up for lost revenues. ($21.125 million foregone divided by $1.68 million per year after diversion ends = 12.57 years.)

c.      How will the annual school budget be impacted if there is $1 million hit annually during the period that the TIF project is being paid off?

Answer: It isn’t clear how NPS would address the revenue hit. How many teachers is this?  How many buses? 

5.      Sinking funds are used to pay off bond debt and judgements.  How does diverting 100% of sinking funds impact the school district budget?

a.      What happens if the sinking fund revenues don’t grow as fast as expected due to the concentration of new growth in Norman happening in the new TIF district (1,000 new housing units, new bars and restaurants, etc.)?

Answer: the county assessor will adjust the school sinking fund millage rate to cover the sinking fund obligations. This will impact TIF and NON-TIF ad valorem tax rates. (I suppose the assessor could also increase property values instead of the millage rate – either way this could lead to a tax increase for non-TIF property owners).

b.      What has happened to the NPS sinking fund millage rate since the last bond election?  NPS promised taxpayers it would not increase when asking for 2023 bond approval.

Answer: It has increased slightly since last year.  CFO should have numbers on this.

6.      The schools that include the UNP TIF area are at capacity already. How much does a new elementary school cost to build, including land costs? What about extra transportation to serve a new school?

Answer – Elementary school costs would depend on size of the building. The cost would be put in a bond package in the future.  Will voters support a bond for a new school in the UNP when the ad valorem taxes paid by property owners in the UNP TIF would go to the arena project and not to paying off the bond to build a new school there?  That might ruffle voter feathers.

7.      OU Foundation CEO (Guy Patton) provided a letter of intent (not an actual contract) to offer UNP land to NPS with an option to purchase (not free).  

a.  How will this impact NPS’s ability to pay for a future school? 

Answer – The letter possible sites offered in the letter of intent are not suitable for a school. They are bordered by a car dealership to the west and an industrial activity (Southwest Wire) to the north. 

 b. What is this land worth?

Answer: The price quoted was $8 per gross square foot with a detention pond thrown in at a nominal cost.  If the non-detention pond area is approximately 5.5 acres, bringing the purchase price to about $1.9 million. A detention pond is not buildable, it is a liability.  It is unclear if this is a good price given its location and the surrounding land uses.  

 

Norman Arena TIF Will Harm School and City Budgets

Many promoters of the University North Park Arena TIF project have tried to argue that there is no harm to the schools because the TIF district is not generating tax revenue today.  This, of course, misses the crucial question: would that area generate tax revenue without the TIF?

In the case of the proposed new Arena TIF Increment district is shared by TIF #4 (sales tax) and TIF #5 (property tax). The increment district is the area where taxes collected are used to pay for project costs. 

There is no credible reason that spending up to $600 million for an arena project is necessary for growth to happen in the TIF district.   

Is it realistic to think that nothing at all would happen in the University North Park area over the next 20 or 25 years without an arena?  This claim is ridiculous. 

The Young Family Athletic Center is already drawing tournaments and a lot of activity.  Nearby restaurants have noted the uptick in business. The properties surrounding the YFAC are site ready and already for sale. These sites are probably the most valuable land in Norman today. 

The figure below shows the YFAC and the current year's property taxes for the Surf Bar - just across the road from the YFAC. The School taxes for the current year are a little under $11,000. 

The lots with yellow X's are included in the tax increment district - from which tax revenue growth would be used to pay for the arena TIF costs.  If we multiply the property taxes paid by the Surf Bar by  10 or 11 for 20 to 25 years, we are talking real money that the school district won't get (even accounting for school air formula).

In addition, the sales taxes from these properties would not go the city general fund (3%) but instead be used for TIF project costs.  

These properties south of Rock Creek were in the original University North Park TIF district (TIF #2). The increment from TIF #2 was ended by a restated and amended project plan.  The logic behind TIF is that taxing jurisdictions give up revenues for a period of time and then get higher tax revenues after the costs are paid for. 

By putting this land from the original TIF #2 into the new TIF district, the City and Norman Schools are going to miss out on revenue growth that was tied to TIF #2.  The original TIF was a 60-40% split in advalorem tax revenues between the TIF project and the original taxing jurisdictions The proposed new TIF would be a 100% apportionment to the TIF. It is worse for the original taxing jurisdictions than the original one.

The bottom line is that the proposed UNP Arena TIF plan WILL take revenue growth from the City of Norman and Norman schools because there WOULD absolutely be some development in the area even if an arena is not built.

Council votes to put Arena TIF project to Public Vote

 

This video summarizes some key moments at the meeting.

1. Mayor Heikkila made unprecedented changes in the public comment process. He limited comments to 2 minutes instead of 3 and limited the total time on an item to 30 minutes.  Many who signed up to speak in advance were not given the opportunity to do so. 

2. Developers and applicants get as long as they like and multiple opportunities to address city council. There is a systematic imbalance in the process. 

3. Of the 14 speakers who got a chance to speak on the Arena TIF item, and 2 were against taking the plan to a public vote (Chamber of Commerce President Scott Martin made some claims about jobs. CM Elect Dixon made a claim that people voted for the TIF when they elected him and Matt Peacock. 

Council voted to put the TIF project plan to a public vote in August. There was some discussion about whether that vote would be binding since the Local Development Act does not require a vote as part of the process. 

Can you imagine a mayor or council person voting the opposite of a public vote on an item.  Geez. 

Norman city council changes on July 2. It is unclear of the new council will wait for the public vote or push through a vote on the TIF.  

THINGS THAT DIDN'T MAKE THE EVENING NEWS! Norman OK City Council TIF Meeting 6-11-24 (youtube.com)

TIF is NOT Free money, UNP Arena won't pay for itself!

 

Tax Increment Finance is a popular tool used to pay for public (and private) assets.  Oklahoma City has had over a dozen TIF projects. Yet OKC did not use TIF to build a new NBA arena.  They asked taxpayers to approve a 1% designated sales tax. 

Norman has had 3 TIF projects so far,

TIF #1 was a small TIF for campus corner infrastructure upgrades.

TIF #2 - the infamous University North Park project which yielded a power retail strip anchored by Target but no promised "lifestyle Center".TIF #2 split the growth in tax revenues in the increment  district - 60% of sales taxes and 50% of the property taxes were diverted to TIF projects. 

TIF #3 diverts 90% of property taxes collected in the increment area for upgrades need to replace old infrastructure in central Norman.

The proposed new TIFs are unusual. They would collect tax revenues from the same increment district. TIF #4 would divert sales taxes and TIF #5 would divert property taxes collected in the TIF area.  Both would divert 100% of the taxes collected in the increment district in contrast to most TIF projects which split the revenue growth. The contractual taxpayer obligation would be to spend up to $600,000,000 (that's 600 million) or however much is collected for 25 years.  

The project costs include $230,000,000 for an arena, parking structure and district infrastructure.  The financing costs bring up the price tag to $540,000,000 to $600,000,000. 

Arena facilities, themselves are boondoggles - they don't generate enough revenues to pay for construction and finance costs over a 25 year lifespan.