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
erroneous belief that it
is in a weak negotiating position that will produce an undesirable financial
The reality is this: building Farmers Field will generate significant profits for AEG, the City will not extract
the full and proper 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
building Farmers Field and there are significant errors/untruths with these assertions.
Unfortunately, the draft MOU recently
released by the City also contains errors that
overstate 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
benefits to the host city and economy.
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 July 25, 2011 memo from Messrs. Miller,
Santana and Abbassi titled “Los Angeles 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
The remainder of this
letter will proceed thorough the CSL report, identified in the MOD as “Attachment D: ‘Fiscal Analysis of
Proposed Downtown Stadium And Convention Center Project’.”
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.
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 largely to what
is known as the “substitution effect” in the research in Appendix A.
Report, Page 3. The report states that costs used by 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 Anschutz. Revenues will be shared between
Philip Anschutz and wholly or substantially Philip Anschutz.
Report, Page 5. The report states: “During the first year of
operations, the total new economic activity for the NFL team and new stadium could
million on an annual basis, with 6,320 jobs created. Over the
initial 30 years of operations
the stadium 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 because it gives the false illusion that the
City and economy of Los Angeles will benefit from the presence of an
NFL team. From a methodological standpoint, CSL is
committing the classic error of only 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 substitution effect, the crowding-out effect, and the leakage effect.
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 significantly understated for the twelve stadiums opened between 1992-2001. CSL looks strictly at the cost to construct the stadium,
ignoring the public contribution required 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 Field. 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.
Report, Page 22. The report
projected IRR for the stadium operations would be approximately 6.7% based on a total investment of $900 million
by 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 the Farmers Field naming rights. This amount has been publicly stated by Tim Leiweke to be
in the neighborhood of $700+ million.
Assuming 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 City of