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Numbers Don’t Lie People Do — The Truth About Who Profits from AEG’s NFL Stadium Deal

EDITOR’S NOTE: Quentin Fleming, author, management consultant and adjunct professor of managerial decision-making and strategic planning at USC’s Marshall School of Business, has brought his expertise to provide the first independent professional analysis of the proposed MOU and supporting documents for AEG’s NFL stadium/Convention Center deal with the city. In this letter to Mayor Antonio Villaraigosa with copies to City Council members who will discuss the MOU today, Fleming raises serious questions about the economics of the proposal and whether it will generate the positive impact that is claimed by the city’s AEG-paid consultants CSL (Stadium07252011PartD.pdf) — a firm that has consistently under-estimated the public funding components of stadium deals (PublicFunding.pdf).

Dear Mr. Mayor:

As a citizen, homeowner and taxpayer of Los Angeles, I am submitting this letter with the sincere intent to help benefit the City of Los Angeles.

There is serious misinformation resulting in a critical problem surrounding the current negotiations for constructing Farmers Field in downtown Los Angeles. The misinformation is the mistaken belief among many members of the City Council and the public that building Farmers Field will produce significant economic benefits to the citizens and to City of Los Angeles finances. The resulting problem is that the City is operating under the
e
rroneous belief that it
i
s in a weak negotiating position that will produce an undesirable financial
situation.

The reality is this: building Farmers Field will generate significant profits for AEG, the City will not extract
the full and pr
oper revenues because of the mistaken belief of economic benefits that do not exist, and that the City
will leave untold millions of dollars on the table that it otherwise should have obtained.

AEG has undertaken its own studies that claim significant economic benefits will result from
buildin
g Farmers Field and there are significant errors/untruths with these assertions.
Unfortunately, the draft MOU recently
released by the City also contains errors that
over
state these same purported benefits to the City.

I will frame the following key facts by quoting the late Senator Daniel Patrick Moynihan:”Everyone is entitled to his own opinion, but not to his own facts.”

•     Fact: New stadiums do not provide a net economic benefit to
the local
economy.

·         Fact: Mega-events (e.g., Superbowl, Final Four) do notprovide appreciable economic
ben
efits to the host city and economy.

·        
Fact:
Using professional sports franchises as an economic development tool is a
failed economic policy.

I have conducted a review of scientifically valid economic research that conclusively demonstrates the above three facts. What is significant is that all the research consistently



comes to the same
conclusions despite taking differing approaches to analyze the subject
. A brief list of research is presented as Appendix A, and information about the
researchers and  their institutions is presented as Appendix B. It is imperative that representatives
for the City understand and utilize this research in their negotiations with AEG.

I have spent time
studying the recently released draft MOU between the City and AEG and have identified a series of either data or methodological errors. A critical
error occurs in the Jul
y 25, 2011 memo from Messrs. Miller,
Santana and Abbassi titled “Los Ang
eles Convention Center and Event Center Memorandum of Understanding.” Page 8 of
the memo specifically states: “Table 1 shows the expected fmancing structure
for the Event Center. The estimated Internal Rate of Return (IRR) for AEG is 6.7
% …. This IRR is significantly below the traditional IRR sought by AEG or
other developers of 15-20%. This low IRR indicates that it is not possible to allocate any
additional Event Center revenue to the City
.” (Emphasis mine.) 

This conclusion is based upon
flawed methodology contained within the CSL report
. My
calculations suggest a true IRR to AEG that is significantly greater and conforming to traditional IRR sought by
developers. I will lay out my reasoning when discussing page 22 of the CSL report at the end of this
letter.

The remainder of this
letter will proceed thorough the CSL report, identified in the MOD as “Attachment D: ‘Fiscal Anal
ysis of
Proposed Downtown Stadium And Convention Center Project’.”

CSL
Report, Page 2. The report states: “Significant economic and fiscal
impacts could be generated within the City of Los Angeles … and the ongoing operations of the
stadium and new NFL team …. ” This assertion in the Executive Summary has been
clearly and consistently proven wrong by the research in Appendix A.

CSL
Report, Page 3. The report states: “New taxes paid to the City of Los
Angeles … will total more than $146 million (NPV) …. ” Again, this assertion has been
clearly and consistently proven wrong due larg
ely to what
is known as the “substitution effect” in the research in Appendix A.

CSL
Report, Page 3. The report states that costs used b
y CSL in its analysis of the stadium relies on data provided by AEG. There is no mention of independent research or analysis undertaken by CSL to validate the data provided by AEG which raises
serious methodological concerns
. It must be assumed that AEG presented
data that is most favorable to its position, calling CSL’s economic analysis into question. This
reliance upon AEG-provided data is further discussed in the Financial Analysis section
on page 20: ”Basic assumptions have been made regarding the distribution of stadium
operating revenues between the NFL team that would be the primary tenant at the facility
and AEG, which would operate the stadium. These assumptions have been determined based on discussions with AEG
.

CSL Report, Page 4. The
report states
: “The proposed operating structure
at the new 
stadium will be unique in the NFL ….
The situation at the new
stadium
will require the sharing of revenues between AEG and the team, . ” This
issue of “revenue sharing” is essentially irrelevant as AEG is a privately-held business wholly owned by Philip Anschutz, and the NFL team will be either wholly or substantially owned by
Philip A
nschutz. Revenues will be shared between
Philip Anschutz and wholly or substantially P
hilip Anschutz.

C\SL
Report, Pa
ge 5. The report states: “During the first year of
operations, the total new 
economic activity for the NFL team and new stadium could
appro
ximate $456
million on a
n annual basis, with 6,320 jobs created. Over the
initial 30
years of operations
the s
tadium should generate nearly $8.7 billion in total output, with $5.3 billion in direct new spending.” (This information is also reiterated on pages 43-44.). This conclusion is a
serious error bec
ause it gives the false illusion that the
Cit
y and economy of Los Angeles will benefit from the presence of an
NFL team. From a m
ethodological standpoint, CSL is
committing the classic error of onl
y using economic activity focused solely on
the stadium
/team. This error is amplified by “using multipliers supplied by the IMPLAN Group” (page 43). The research presented in Appendix A conclusively demonstrates that the net economic impact to Los Angeles will be negligible, largely due to the combination of what economists refer to as
the s
ubstitution effect, the crowding-out effect, and the leakage effect.

CSL
Report
, Page 12. There are a series of data errors contained in the table titled “Summary of Public-Private Contributions to NFL
Stadium Development.” I have not yet been able to corroborate the data presented for stadiums constructed since
2002, but the percentages for Public Finding are significantl
y understated for the twelve stadiums opened between 1992-2001. CSL looks strictly at the cost to construct the stadium,
ignoring the public contribution requir
ed for the
stadium to operate. The result of this irror is to significantly understate the true public funding required of NFL
stadiums, and calls into question whether CSL has similarly failed to identify the true
public funding that will be required for Farmers Fi
eld. This is
in contrast to CSL’s methodology for calculating economic benefits which projects forward for a 30
year period from Farmers Field opening. The
correct numbers
are presented in Appendix C.

CSL
Report, Pa
ge 22. The report
stat
es: The
projected IRR for the stadium operations would be approximatel
y 6.7% based on a total investment of $900 million
b
y AEG.” An examination of the data and methodology outlined in pages 19-23 enables me to arrive at an IRR of 6.71 %, consistent with CSL’s calculations. However, close examination of the data and methodology in pages 19-23 makes no mention of revenues to AEG
from th
e Farmers Field naming rights. This amount has been publicly stated by Tim Leiweke to be
in the nei
ghborhood of $700+ million.
A
ssuming an inflation/ discount
rate of 4.5
% beginning in 2012 (the likely year any formal contract
would be signed
), with 30 equal payments of $23,333,333 beginning in 2016 (the first year
of stadium operation
), there
is a Net Present Value of $333,057,613 that will be realized by AEG and that has
not 
been factored in. The result is a project that delivers a substantially
higher IRR
than the 6
.7% presented in the report.

Please accept this letter
in the spirit of a sincere desire to help the Cit
y of
Los Angeles.

Respectfully,Quentin Fleming 

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22 Responses to Numbers Don’t Lie People Do — The Truth About Who Profits from AEG’s NFL Stadium Deal

  1. David says:

    This is the kind of analysis that should be coming from the CAO of the city. Thank you Quentin Fleming!

  2. Anonymous says:

    Thank you Professor Fleming. But the Mayor & Jan Perry will say “My mind is made up; don’t confuse me with the facts”.

  3. Anonymous says:

    The Mayor and Perry may have a job to work for me, but they do tell me what to think.
    They are WRONG to believe how powerful they are.
    Give them HELL, folks, tell them to straighten
    up and fly right. So far out of line, they belong in jail.
    Bonafide citizen and taxpayer and voter

  4. Hope says:

    The Numbers do not lie. And in the sprit of helping the City of Los Angeles, is indeed the most important priority. AEG must now adjust this with the Final Draft.
    Net Present Value of $333,057,613 that will be realized by AEG and that has not been factored in. This is the kind of analysis that should be coming from the CAO of the city.

  5. Hope says:

    The Numbers do not lie. And in the sprit of helping the City of Los Angeles, is indeed the most important priority. AEG must now adjust this with the Final Draft.
    Net Present Value of $333,057,613 that will be realized by AEG and that has not been factored in. This is the kind of analysis that should be coming from the CAO of the city.

  6. Anonymous says:

    I want jobs to come to the TRADE LABOR as well as those not in the trade union. Does that happen; it does. So I’m not surprised to see many business interest in and around the stadium. GDP actually grew only .4% That’s an indication of unemployment. So as unemployment goes down, after the project is built and the sister city is on the side line that’s the healthy skeptism. Let’s hope a team will come because relocation fee for team. A team must be on boards says CLA, but City working on this further. If AEG has the money why is City Bonding? Because this is how such projects work, a city building, for 75 million dollars City get a beautiful building so why not make it green? Make it green. JAN make it green. Our building our asset. Win Win. Revenue sources that are reliable, to assure some gurantees and double check the variations, should we fall short AEG gurantees that GAP. Tax Exempt DEBT RATE. Mello Ruse, why not let them finance. Interest rate for Ruse higher. Property owners paying special tax – a loan on the property Kick em out “eviction” -Nexus on MelloRus tax. Maximizing Mello. Eric G. gives a Mayorial Speech. The bottom line is, when the Labor Teams are done building, R the terms conducive for profit; if so, lets move forward.

  7. Anonymous says:

    I want jobs to come to the TRADE LABOR as well as those not in the trade union. Does that happen; it does. So I’m not surprised to see many business interest in and around the stadium. GDP actually grew only .4% That’s an indication of unemployment. So as unemployment goes down, after the project is built and the sister city is on the side line that’s the healthy skeptism. Let’s hope a team will come because relocation fee for team. A team must be on boards says CLA, but City working on this further. If AEG has the money why is City Bonding? Because this is how such projects work, a city building, for 75 million dollars City get a beautiful building so why not make it green? Make it green. JAN make it green. Our building our asset. Win Win. Revenue sources that are reliable, to assure some gurantees and double check the variations, should we fall short AEG gurantees that GAP. Tax Exempt DEBT RATE. Mello Ruse, why not let them finance. Interest rate for Ruse higher. Property owners paying special tax – a loan on the property Kick em out “eviction” -Nexus on MelloRus tax. Maximizing Mello. Eric G. gives a Mayorial Speech. The bottom line is, when the Labor Teams are done building, R the terms conducive for profit; if so, lets move forward.

  8. Anonymous says:

    I want jobs to come to the TRADE LABOR as well as those not in the trade union. Does that happen; it does. So I’m not surprised to see many business interest in and around the stadium. GDP actually grew only .4% That’s an indication of unemployment. So as unemployment goes down, after the project is built and the sister city is on the side line that’s the healthy skeptism. Let’s hope a team will come because relocation fee for team. A team must be on boards says CLA, but City working on this further. If AEG has the money why is City Bonding? Because this is how such projects work, a city building, for 75 million dollars City get a beautiful building so why not make it green? Make it green. JAN make it green. Our building our asset. Win Win. Revenue sources that are reliable, to assure some gurantees and double check the variations, should we fall short AEG gurantees that GAP. Tax Exempt DEBT RATE. Mello Ruse, why not let them finance. Interest rate for Ruse higher. Property owners paying special tax – a loan on the property Kick em out “eviction” -Nexus on MelloRus tax. Maximizing Mello. Eric G. gives a Mayorial Speech. The bottom line is, when the Labor Teams are done building, R the terms conducive for profit; if so, lets move forward.

  9. Anonymous says:

    Home from church and the funeral for an old friend, only to find not eight messages, but two messages times 3 each plus two congratulating and agreeing with Professor Fleming, for a total of four messages. What gives?
    I like what Senator Patrick Moynihan said “Everyne is entitled to his own opinions
    but not to his own facts” 2 messages times 3 each count as two messages not six.

  10. Anonymous says:

    Ok folks its up to us to send to all the reporters we all know. Cooy and paste this story to all your email groups, post it on as many blogs as you can and get the word out. If city council refuse to do the right thing and are so corrupt they don’t care then its up to us to get the ball rolling and NOW!!!!

  11. david J barron says:

    FACT: If there was profit to be had building a new stadium, private investors would have been the fisrt in line.
    Another fact: The Energy Efficiency Standards for Residential and Nonresidential Buildings that were established in 1978 in response to a legislative mandate (Energy Code) to reduce California’s energy consumption have done so dramatically well, (thanks to our talented electrical engineers) that Califonia’s Building Efficiency Standars, along with energy efficient appliances, have saved more than $56 Billion in electricity and natural gas costs since 1978. Futher, it is estimated the standards will save an additional $23 Billion by 2013, That’s why additonal power plants weren’t neeeded to be built. So, no need to increase power rates?
    Instead, repeal the City’s business tax which is driving employers out of town. That’s one reason unemployment is so high. Install our Rate Payer Advocate who is not politically connected, fix our streets and sidewalks, abolish the mayor’s ‘gang’ program, hire 12,000 officers to suppress the gangs and graffiti. This is how you begin to create JOBS.
    I’m David Barron, a civil servant who cares

  12. Anonymous says:

    11:46 a.m., you must be new to the city, if you expect any intelligent analysis from the CAO or the CLA. They are all ciphers/political appointees whose job is to agree with the Mayor, City Council & their benefactors. In LA, it is the public that has to analyze eveything and present the facts, not that it matters. We have an extremely corrupt government, but none of the authorities like the FBI, AG or the DA who should be collaring them seem to have the guts. So join in the fun. This is the only blog in the city that allows the public to weigh in and expose the corruption, not that it matters either.

  13. Hope says:

    I think the Convention Center is the risk. The NFL I am fine with as long as it comes with a quality team. Remember season is short.
    I think AEG should pay the balance owed on the Convention Center of 2-million dollars, now rather than via taxes.

  14. Hope says:

    I think the Convention Center is the risk. The NFL I am fine with as long as it comes with a quality team. Remember season is short.
    I think AEG should pay the balance owed on the Convention Center of 2-million dollars, now rather than via taxes.

  15. Anonymous says:

    Hope, you are hopeless. Where did you come up with two million dollars owed. Not sure we are even on the same page anymore.

  16. Anonymous says:

    i have been trying to tell everyone i speak too that this stadium deal is flawed. How can our city council possibly negotiate w/ the AEG on a even scale. These people are the top talent money can buy,while our city council are career poiticians who have never ran anything…we need experts to negotiate on our behalf,not our lame city council and stupid Mayor, whos main goal is a luxury box on sunday…..

  17. Jim says:

    To David Barron,
    Regarding Power Plants, you need to speak with your State Representatives and the Governor.
    Whether your efficiency claims are true are irrelevant because you are ignoring regulatory mandates.
    In the City of Los Angeles, over 40% of the power comes from the Intermountain Power Authority, a coal-fired plant.
    Therefore Los Angeles has to replace Intermountain and other Coal Plants such as Navajo.

  18. QUESTIONS says:

    If 275 million comes from bonds, isn’t that footed by tax payers? If so, shouldn’t it be voted by tax payers?

  19. Wayne From Encino says:

    It’s too bad that the Clowncil and the Mayor can’t read and write, because that letter is damn good. It’s also too bad Carmen “Gaga” Dumbtanich abdicated his role as City Attorney and too bad Wendy Gruel is only 1 IQ point lower than Chicken-Head Hahn. AEG, meanwhile is writing all the reseach, reports, and owns all the “negotiators” for the City. Did you see that fat, useless Magic Johnson crying for football so “his grandkids” could go see a game? Did he mention how AEG provides his FORMER OWNERSHIP OF THE LAKERS THE DAMN COURT TO PLAY ON? And did he mention HE wants TO BUY INTO A FOOTBALL TEAM?
    What team does L.A. get? Name the damn team we have lined up? NONE, NADA, NOTHING! And the City Hall Gangstas are going forward with this?
    If we get a new President in 2012 (which is almost laughable to think the People have any clue) they’ll shut this whole City Government down and run L.A. WITH A FEDERAL CONSENT DEGREE AND A FEDERAL MONITOR! The U.N. should be called in TO MONITOR THE NEXT ELECTION IN L.A!
    Hats off to Kaye and the growing group of Angelinos who are seeing this crap has to go they way of the Dinosaurs.
    Time to GET RID OF ALL ABSENTEE BALLOTS! This is the first U.N. reform for L.A. that is needed, and needed now.
    313 MILLION DOLLARS OF “BONDS” FOR THIS CRAP? WTF.
    Finally, I call upon one person who does know better: COME ON BILL ROSENDAHL—SPEAK UP AND KILL THIS STADIUM DEAL! YOU KNOW WHAT A MELLO-ROOS BOND TAX IS—AND WHY AEG PUT THAT IN THERE!

  20. Anonymous says:

    Good posts. What is scary in this city is how bias, unbalanced and unethical the local media reports. They have become spin doctors for the gangster Mayor and morons on council. Not one of them is reporting these type of great reports. How the hell can the bafoons on council make a decision on this deal when it is AEG who paid paid for all the studies? I’m going to keep harping on this issue. Failure of a Mayor, corrupt council members and Controller, all received FREE tickets to AEG events. Why isn’t Wendy auditing that??? Is the media so afraid of reporting the truth and facts. I also find it hard to believe that at least 7 council members and the Mayor has received $1,000′s of dollars in campaign money and the Mayor for his projects from AEG. Reporters forgetting to add that to their stories. C’mon David Z you had such a good reputation but ruined it with this story.

  21. Anonymous says:

    Dumb ass Rosendahl is now folding just like I thought he would. How in the hell can these clowns vote for this when the city won’t see any decent rates of return”
    “”"The first public review of the stadium’s financing plan, economic consultant Bill Rhoda told the City Council that AEG will see a 6.7% rate of return from the project over 30 years. Projects of a similar size typically generate a return of 15% to 20%, he said. “You really can’t take any more revenues out of this entity because then [the deal] won’t be financeable,” he said. CLA Gerry Miller, offered a similar take, saying AEG’s return will be “less than half” the amount that such deals normally produce

  22. Pingback: The Truth About the Current Farmers Field Proposal — An Analysis by an Economic and Management Expert | Ron Kaye L.A.

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