By Robert Sroka (University of Michigan)
Cities getting fleeced by professional sports teams on stadium and arena deals is nothing new. Nor is the underperformance of infrastructure megaprojects, which frequently go over budget, take longer than expected, or fail to meet revenue targets. Despite sports facilities representing some of the most financially significant and visible megaprojects that many cities will contemplate, there is often a disconnect between discussions of sports venues and the larger suite of infrastructure megaprojects.
Sometimes a sports facility deal with outcomes so dreadful arises as an opportunity to connect these silos. One such deal is the KFC Yum! Center in Louisville, Kentucky. Here the arena has seen two of three debt repayment sources (lease revenues and tax increment financing) completely fail to meet projections, initial adjustments prove wholly inadequate, and the project requires a major state bailout to avoid bond default. These failings have highlighted a few key lessons for future stadia and megaprojects alike. First, local growth coalitions can strategically misrepresent risks and succumb to over optimistic projections, making projects vulnerable to failure from the outset. In order to craft politically saleable projects and bring on necessary partners, rent-seeking behavior can create governance structures unable to survive foreseen and unforeseen turbulence. Second, Louisville’s use of sales-tax increment financing (STIF), the rarer variant of TIF, is a stark reminder of why sales tax increments are less commonly used. The project demonstrates how STIF is highly volatile and vulnerable to business movement and recession in ways that more common property-based TIF is not. This volatility means that major reliance on STIF in a project finance plan should be taken as a big red flag.
Interestingly, while most incidences of underperforming stadium and arena projects are accompanied by professional sports teams threatening relocation to extract public subsidies, there is no major league team directly involved in Louisville. Instead, the University of Louisville basketball program has played the role of the rent-seeking club, leveraging the big-city aspirations of a local growth coalition into an arena at a more expensive site, while maneuvering to keep the NBA out. These tactics paid off handsomely for the University, launching the Cardinals into a position as the highest revenue college basketball team in the country following their move to the Yum! Center. Much of this gain can be attributed to a lease that saw the University retain 90% of gross revenues and 88% of premium seating revenues, while the Louisville Arena Authority – a purpose-built to fail and relatively powerless melding of state and local interests – was left to cover the entirety of event expenses. The deal was made worse through granting exclusivity to other less attended Cardinals teams for half the calendar year, blocking potential revenues from major concert tours.
Meanwhile, the path to sales tax increment disaster was cast through setting the baseline year as 1990 in order for projections based on annual average revenue growth to capture a 27% percent gain in sales tax revenues between 1990 and 1991. However, as noted by a damning state audit in 2017, the source of this average warping year was a 1% sales tax rate increase. By comparison, property tax increment projections were based upon 10 years of data instead of 16. But with property taxes only assumed to represent 8.2% of total TIF revenues, the unskewed portion of projections could hardly make up what became gaping revenue holes.
How gaping were these holes? Between 2010 and 2016, TIF revenues ranged from 14% to 66% of projections, with an average of 46% of revenue projections met. Combined with a lease that saw one of two revenue categories only meet an average of 41% of projections through five years of operations, and Louisville was left with an arena debt service plan springing more than leaks. Attempts to tinker with TIF geography and changing arena managers were unsuccessful in disengaging the project from its iceberg.
Beyond merely documenting disaster, the larger question arises of what explains how such a flawed deal arose in the first place? A journey through the vibrant literature on megaproject underperformance is illuminative. Theories promoting the joint and deadly presence of optimism bias and strategic misrepresentation are particularly convincing. Here decision-makers succumb to the planning fallacy and are led astray by agents with divergent incentive structures intentionally minimizing risks and inflating upsides. Certainly in Louisville, an elite coalition was able to prevail over both reason and dissent, aligning a series of mutually beneficial self-interests to get the arena built, and insulate the key parties from its failure through the Louisville Arena Authority’s responsibility for revenue shortfalls. While the eventual buck stopped with the state economic development authority’s credit rating, the desperate Governor at the time, reeling from a hiring scandal in a tough election campaign, was happy to move forward with a shiny new election promise largely reliant on a revenue source (TIF) he controlled without further legislative approval necessary.
However, there is more than deception and delusion at play. Other works on governance failure account for how a dominant culture – the rent-seeking local growth coalition – was able to prime key actors for bad decisions. Likewise, literature centering on project culture adds color to why over-optimism could take root as well as why sufficient corrections were unsuccessful.
Indeed, the presence of many explanations of project failure illustrates how the Yum! Center stands out in a class (sports stadia) notorious for white elephants. For megaprojects more generally, the Louisville experience highlights what can go wrong even in a project delivered on-time and on-budget. For governments contemplating similar facilities premised on similar revenue structures, the Yum! Center should serve as a lesson in how to avoid getting stiffed.
Photo of the Louisville Yum! Center from Wikimedia Commons.
Robert Sroka is a PhD Candidate in Sport Management at the University of Michigan, and LLM Candidate at the University of Michigan Law School. His research focuses on the law and policy of sport facility finance and ancillary real estate development. Robert holds a JD from the University of British Columbia and practices local government law in Canada, with a focus on land use and risk management issues.