Bucks Arena Latest: As state bonding debate begins, possible solutions begin to take shape

A deal to secure a new Milwaukee Bucks arena may not be around the corner, but the debate for funding a downtown project continues to take shape.

Wisconsin State Assembly Speaker Robin Vos revealed last Friday that the state's non-partisan Legislative Fiscal Bureau had calculated NBA-related state taxes amounted to $10.7 million in 2012, a figure that the LFB estimates could support $150 million in 20-year bonds. It's a big figure which could have a major impact on the nature of the funding debate, which we can expect to get more serious once the Bucks have completed site selection and preliminary project designs (presumably by the end of 2014). You may recall that Gov. Scott Walker first expressed interest in studying the Bucks' tax impact back in June, which triggered Vos' request that the LFB study the topic. For more background be sure to check out some good reporting on the LFB report by Dan Shafer of Milwaukee Mag, Don Walker of the Journal-Sentinel and Rich Kirchen of the Milwaukee Business Journal, while Walker also touched on it in his latest piece at the JS this week.

So what might the "jock tax" estimates mean going forward? Well, let's start by noting that tax receipts from NBA sources should increase significantly over the figure quoted by the LFB for 2012. The league's new $24 billion television contract begins in 2016, bringing in an average of $2.66 billion annually vs. the $930 million in the current deal. If you think about that on a per team basis, that's an increase of about $60 million annually for each of the league's 30 teams, which under the current collective bargaining agreement would get split about evenly between players and franchises. Hence, basic math suggests the current salary cap of $63.2 million could crack $90 million as soon as the 16/17 season, with teams pocketing the other half. Moreover, the Bucks have already seen a significant bump in franchise profitability since 2012 due to improved revenue sharing in the league's 2011 CBA, and that picture will similarly only get rosier in 2016. While Forbes estimates that the team had negative operating profits in each year between 2010 and 2013, a league memo obtained this summer suggests the Bucks were expected to rake in $14.8 million in net profit for this past season. It's a little bit apples and oranges from an accounting standpoint, but you get the drift. Teams like the Bucks have gone from struggling to break even to potential cash cows, which also explains why franchise valuations are going through the roof. Based on that, it's not unreasonable to guess that the $10.7 million figure calculated by the LFB could easily surge significantly (40%? 50%? More?) by the time construction for a proposed arena breaks ground.

The LFB memo doesn't provide much additional numerical detail, though it does outline a scenario for how NBA-related "jock taxes" could be collateralized to support new arena funding.

Under the Wisconsin Constitution, the state can only issue general obligation debt for internal improvement projects (for example, buildings, roads and other infrastructure improvements) that have a public purpose. Also, federal tax policy associated with the tax exemption on interest generally limits the exemption to bonds issued for private purposes. However, in the past, the state has issued federally tax exempt, general obligation bonds to assist local governments and nonprofit agencies with facility and infrastructure improvements, including the BMO Harris Bradley Center, which is the current home facility for the Milwaukee Bucks

Legislation authorizing the bonds to be issued for these purposes typically declares that such facilities or improvements have a public purpose. The legislation also declares that if such a facility is not used for that public purpose, the state would retain ownership in the facility equal to the state's commitment for the facility or improvement.

So if the state legislature approved, the state could presumably issue tax exempt debt to support an arena project while maintaining a pro rata share of project ownership. Some quick Excel math suggests the state used a 3.7% interest rate assumption for its bond calculations, with total payments over 20 years projecting to $150 million in principal and $64 million in interest charges for a total bill of $214 million. Just for reference, if the same amount was spread over thirty years -- a scenario not addressed by the LFB memo but possible given arena lifespans -- the annual amount required to service the debt would fall to around $8.7 million using a 4% debt figure.

Now it's tempting to look at those numbers and think "Hey, problem solved!" But ultimately this is a negotiation, which means we should expect plenty of back and forth as all the stakeholders push and pull to maximize their own interests. You can't blame public stakeholders for trying to squeeze as much as possible out of the Bucks, and likewise the Bucks have every right to make a case for public support given the kind of broader project this is shaping up to be. If you have something that people want -- and plenty of cities would like an NBA team -- you don't give it away for free, right?

How all of this plays out isn't easy to predict, but some scenarios seem more likely than others. Let's start with the Bucks, since they're the stakeholder with the most to gain and thus the clearest incentives. The tough part is ahead of course, with securing an agreement for a site the next hurdle to clear. Given the Bucks' reported preference for Journal Square and the Wisconsin Center District-controlled UWM Panther Arena and Milwaukee Theatre, that process alone could prove difficult.

But let's say that they're able to figure that out over the next two months, paving the way for a grand project proposal and the start of financing talks sometime in early 2015. Minority investor Ted Kellner spoke of the team raising upwards of $300 million in private funding back in August, so we can probably use that as the new floor for expectations of what the Bucks will bring to the table once financing-related discussions kick off. In other words, once a site is picked and an initial plan is put forward, the Bucks will need to significantly bump the initial $200 million figure we heard from Marc Lasry, Wes Edens and Herb Kohl in May. Don't underestimate the importance of managing expectations and strategically rationing good news, and so far the Bucks have done this rather well.

Once the Bucks put forth their big plan along with a bigger ante, everyone will presumably be excited about the sign of good faith and continued progress the team has made in lowering the amount of public funding need. After all, it's not every day that some New York billionaires decide to plow a quarter billion dollars into the state, but again, that doesn't mean we're there yet. Aside from trying to minimize the overall amount of public money required, the Bucks will also have to negotiate the thorny process of where it comes from. Tom Barrett and the Milwaukee County folks will say that the public piece has to be more than just a Milwaukee-funded project (ie give us the state's jock tax money...or um, multi-county sales tax money?), a demand that's not likely to diminish now that Barrett is doubling down on his proposed streetcar project. Meanwhile, bordering counties will continue to say that a new arena is a Milwaukee problem (ie take your sales tax and shove it). And Madison will have to debate whether any of the tax money the Bucks bring in can be redirected towards arena funding.

The latter is the newest question which will need to be answered, though the good news is that we at least have some data to use as a basis for debate. You can bet that the Bucks (or by proxy the MMAC) will eventually release a broader economic impact study on a new arena development, though that's somewhat secondary to understanding the actual tax dollars the Bucks are generating (which would disappear if the franchise left). That's ultimately the ace up the Bucks' sleeve; while calculating the broader economic benefits of an arena is fraught with guesswork, the direct tax impact of the Bucks staying or leaving is rather black and white. But while Walker and Vos seem open to at least discussing the possibility of using that revenue stream to seal an arena deal, we're not surprisingly seeing skepticism from other parts of the state.

Honestly that shouldn't be a surprise. If you're a random state rep from somewhere up north, you don't really have a compelling reason to give away $10.7 million already in the state budget if you think it's politically more attractive to play hardball. While those "jock taxes" aren't new taxes (an important prerequisite for many), they're unfortunately already being used for something, and as a result you'll have plenty of opponents claiming that the Bucks and their players are obligated to pay state taxes just like anyone else. I won't pretend to know how those provincial politics will play into the voting calculus in Madison, but it's obviously an issue.

So while I'd selfishly love to think that the appeal of a transformative project in Milwaukee will win over even skeptics in Madison, ultimately this is a political negotiation and, well, those aren't always easy to predict. Still, I think there's at least one form of jock tax funding that even basketball-hating skeptics might consider (begrudgingly?) palatable. For simplicity, let's call it a jock tax incremental financing (JTIF). I haven't heard this suggested anywhere yet, but the idea is pretty simple. First, set a budget baseline for the amount of tax dollars the Bucks bring in --  for example, the $10.7 million figure calculated for 2012 -- and then allow any amount above that to be funneled towards debt service for an arena project. Conceptually it's similar to the notion of a traditional tax incremental financing using a property tax baseline and paying debt off the amounts added to it, though this would obviously be coming from a completely different revenue pie.

The obvious appeal to opponents of public funding is that it doesn't blow a hole in the budget, allowing the bean counters to continue penciling in the same state tax revenue they had previously received from NBA-related taxes. But given a huge projected spike in NBA-related revenues on the horizon, that still leaves plenty of potential upside for arena proponents to leverage for an arena development over the long term. Consider that while the NBA's salary cap for the 11/12 and 12/13 seasons was south of $60 million, the cap could swell to upwards of $90 million starting in 2016. League salaries of course don't track exactly with the cap (which most teams exceed), but you get the idea. Tack on the Bucks' recent staff hiring spree and ballooning Bucks corporate profits, and there's a good chance the state's $10.7 million in NBA-related tax collections could similarly rise 50% or more by the time an arena is being constructed -- and continue to grow in excess of inflation going forward. For instance, if that excess revenue amounted to $6 million in JTIF revenues, then at 4% interest over 30 years you could hypothetically support $100 million in debt, which depending on the ultimate amount of private investment could get you most of the way towards funding a $450 to $500 million project. If you assumed a 20-year term, then the number would be around $80 million.

Even if the growth in NBA taxes is more modest, the approach would be worth very real dollars, and every little bit helps. Combine it with a plain vanilla TIF for the new development area and you'd guess a deal is doable without a sales tax, without leaving a hole in the state budget, and all while driving the public portion of the funding from tax dollars the project itself would be supporting (ie the project and NBA's incremental taxes would be paying for it). Tapping into the Wisconsin Center District tourist taxes could also be an option if the current WCD sites are rolled into an arena development, though how the WCD fits into this is an entirely separate and rather complicated discussion. And we haven't even mentioned the MMAC’s Cultural and Entertainment Capital Needs Task Force, which has focused on new taxes (primarily sin taxes, TIFs and sales taxes) in its study of funding for an arena as well as other local public assets. All of those could be options, too.

So if it seems like we're oversimplifying...well, we certainly are. None of this figures to be easy, and we can't assume that all of the stakeholders have an incentive to make a deal as quickly as possible (or at all). But like any other business, the Bucks have the right to use their leverage to push for public support, and politicians wouldn't be doing their jobs if they didn't ask why any of it is necessary. But both sides ultimately will benefit from a new arena, which is precisely why a trio of billionaires can be asking for public support in the first place. The Bucks are already major net importers of revenue and tax dollars into the state, and the new TV deal figures to dramatically increase the amount of cash flowing into the state's coffers. So while the Bucks' billionaires will be getting richer, so will the state, and as a result both sides should feel compelled to find a middle ground at some point. Clearly, the more private money that can be brought together, the better the odds of getting something done sooner rather than later, and the Bucks can't afford to wait forever. But the reality is that arenas and stadiums built outside major markets always get some sort of public funding, and not just because politicians or the public are naive.

So we can guess how this might go. The Bucks will put an ambitious plan forward with a big chunk of additional private investment around the start of 2015, political sparring and posturing will ensue, and ultimately arena proponents will pull together another chunk of private money to seal some sort of compromise. At that point the key stakeholders could feel like they forced the other side to make concessions (never underestimate the importance of optics), some opponents will still be ticked off, and everyone who likes basketball and downtown Milwaukee can breathe a huge sigh of relief. The details of who owns the arena, how much the Bucks pay in rent and who gets arena sponsorship dollars will of course also be important. But that's at least one outline of how a deal can eventually get done, even if there are plenty of ways things can go wrong -- and probably some other ways they could go right.

Easy? No.

Doable? Absolutely.