Greg LeRoy: The Cost of the Proposed Arena Deal
Michael is joined by Greg LeRoy, author of The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation to break down the proposal to build a $2 billion sports arena in Alexandria. The proposal claims 30,000 jobs will be created in return for Virginia taxpayers footing the initial cost--but LeRoy says "economic development" projects don't create lasting jobs and tend to shuffle around existing money. They break down the mechanics of the deal, the costs and benefits, and how state subsidies for the arena might not be worth it after all.
Episode Transcript
Michael Pope
I'm Michael Pope. This is Pod Virginia, a podcast that is starting off the new year with a discussion of that proposed Arena in Alexandria. How much money will taxpayers fork over for this thing? We've got a really great guest here today to talk about this. He's the author of an excellent book, The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation. Greg LeRoy, thanks for joining us.
Greg Leroy
Great to be with you, Michael.
Michael Pope
Let's talk jobs. In your book, you write that economic development is often not much more than extortion and bribery. And that all these promises of jobs, jobs, jobs are often brought to us by rented consultants, proffering rosy projections about job creation. In this Alexandria example, the estimate is 30,000 jobs. Do you think that's accurate? And what kind of jobs are we talking about here?
Greg Leroy
Well, I'm suspicious of that number for a number of reasons. Obviously, some of the jobs that will get created at first are construction jobs, and that will be a lot of jobs for a while during the time it gets built. But then those are obviously not permanent jobs that would be counted on to sustain the regional economy. And you also have to count the jobs that are then lost in Washington, DC, because the games won't be held anymore in downtown Washington.
Michael Pope
What has been the history of these kinds of promises? You said that you were suspicious? I'm just wondering, what is that suspicion rooted in?
Greg Leroy
Sure, so there's a long history of politicians and companies exaggerating the benefits of economic development deals and minimizing or downplaying the costs. And that's absolutely true in the stadium space; we see it over and over again.
Michael Pope
In terms of money that taxpayers would be on the hook for, there are a couple of different buckets; let's start with transportation. I think this is what people are talking about the most. The dollar amounts that people are talking about are basically $200 million, which Alexandria and the state of Virginia would hand over for transportation improvements: connections with a local dash bus, a new bus rapid transit stop, street improvements, and possibly even connections to Amtrak and Virginia railway. I think a lot of our listeners would say, well, transportation improvements, that sounds really good. What's wrong with that?
Greg Leroy
There's nothing wrong with that. Obviously, it's a prime real estate space with the arrival of the Amazon campus and the arrival of the new Virginia Tech campus nearby. It's an area that's primed to take off because of pre-existing commitments that have been made both by the state and by Amazon. The question is, what else might better be done with that place where the stadium is going to capitalize on those huge transportation investments? Might we create better jobs? Or jobs that are not just being moved from Washington, etc?
Michael Pope
Well, that's the job part of it. What but what about the transportation improvements? I think a lot of people would like to see investment in transportation improvements, even if the arena wasn't there. So the fact that there's potentially a $200 million taxpayer-funded investment and transportation I think a lot of people would say, well, that's really good. You could even do that without an arena, right?
Greg Leroy
Yes, you absolutely could do that without an arena. And you might actually ask yourself, what else could we put in place of the arena footprint? That would be a higher value-added? That wouldn't make more sense from a daily commuting point of view from a permanent job creation point of view if you're going to spend that much on transportation.
Michael Pope
Let's talk about the estimates; 30,000 jobs is the estimate. You said that you're skeptical of that number. Another estimate here is the investment in the community. In other words, the economic development was supposedly created by this thing. The estimate is $12 billion in economic activity as a result of this arena. What's your reaction to that number?
Greg Leroy
Here, we get into the cost-benefit apples and watermelons problem with economic development discussions. So, the phrase economic activity is not the same as costs or benefits. Suppose you're looking at this from a taxpayer point of view, to look at it strictly from a fiscal taxpayer point of view. In that case, you'd have to say what the public monies are in and what the public monies are out. And that's the real brass-tacks discussion about whether taxpayers break even or get any kind of return on this investment. But when you say economic activity, that means everything, including payroll, which could be the players' salaries and could have ripple effects on neighboring property values. That could be any number of things that don't go to the public treasury that don't offset the taxpayer costs but are claimed as benefits of the project. And again, it's not like those are bad things to happen. But you could also have the same kinds of benefits or, quote, economic activity if you did something else with the same property.
Michael Pope
Let's talk about this new authority that needs to be created in order to borrow money to finance this thing and pay it back. So, the new authority would get money from the rent payments. So I guess the authority would own the property and then rent it to Monumental, so they would get rent payments from the private company; plus, there are parking fees that they would get as income, and the authority would get this income. Naming rights: eventually, somebody's going to name this thing. And that's going to be a major corporation. And there's lots of money involved in incoming money there. Plus, tax increment financing, which I understand from reading your book, is not always as transparent as it might be. Explain how tax increment financing is often a raw deal for taxpayers.
Greg Leroy
Let's back up and work on all the layers of the onion in just a second. First of all, the fact that the stadium will not be privately owned but will instead be owned by a public authority means that it will be off the property tax rolls; they will not pay property taxes. And that's a very big subsidy because the biggest tax that the average company in America pays today is the property tax. And that property tax loss to Alexandria means they won't get property taxes for its schools, police, fire, or other public services. And property taxes are normally the biggest source of revenue to support those kinds of local public services. The second issue is that the rent being paid will be artificially low because the stadium can borrow money tax-free. After all, it's a public authority. So the interest paid on the bonds will be at least free of state income taxes when wealthy individuals buy the bonds, and probably also federally tax-free; we have to learn to look at that, which means that the interest rate for the borrowing is low, and therefore the rent is artificially low. Again, tax is subsidized by the tax-free status of the authority. And then tax increment financing. So, to the extent that the property values in the area go up as a result of all this new investment, which is a good thing, and theoretically then could generate a lot of new revenue for the city to help absorb all the costs of all this activity. All the increase, the so-called tax increment, will not go to public services for, I think it's 25 years in Virginia but will instead be diverted away from public services to help pay down the debt as well. So, the city won't be capturing the incremental increase in the value of the properties in the redevelopment area for a very, very long time.
Michael Pope
Actually, you went through a number of things just there that I want to make sure that I fully grasp, and one of them is about public ownership. So, the authority would own it. Is that always the case? So, there is a chapter in your book that's about this topic. I love the title, italizzzz loot, loot loot for the home team. Are these things always owned by the public? This is the part that I'm having a hard time understanding. If this were a theater that we were talking about or some kind of venue for entertainment. You would have a private company building it and financing it. Why do we need the city in the state to finance this thing and own it?
Greg Leroy
Because of the tax-free interest savings in the property tax abatement that it effectively gets because it's off the property tax rolls. It's extremely tax-advantaged.
Michael Pope
Explain how this has worked in other areas that you have taken a look at.
Greg Leroy
So it's not typical for a private factory, for example. You wouldn't have a steel mini mill owned by a state authority, for example, or an auto-plant or a warehouse. There are some places, due to constitutional oddities in certain states, where technically, legally, the property is owned by a local development authority, and that's the way they get them off of property taxes. But those deals don't last forever because the ownership change is not permanent; it's typically 10 years. So this is a structure that's increasingly common with stadiums, unfortunately, because it's so lucrative. I guess I should also point out that's the other long-term consensus point about stadiums from an economic point of view. And that is, the only thing we can say for sure they do is enrich the owners of the franchises; whether other things work out or not, whether taxpayers ever break even is highly debatable and very uneven.
Michael Pope
Let's make sure that we circle back to that point: Do stadiums and arenas actually produce the economic development that everyone says they do or promised that they would in the future?
Greg Leroy
That's usually not the case; again, because of this reason that I'm talking about, you're moving leisure time, dollars, and time around within a regional economy. You're creating something else for people to do with their time and money. But then they're not doing that other thing they could have done. Instead, you and I don't have a fatter paycheck and more time to recreate just because we have a new stadium to go to, or a new ice rink, or whatever. That's the problem.
Michael Pope
So let's talk about the hits to the local city. So, the city of Alexandria would be on the hook for paying $56 million for the facility that would be publicly owned. So they would make that investment and then own it, plus $50 million to build an underground parking garage. What's your perspective on what the city would get out of making that $100 million investment?
Greg Leroy
Well, that's the question, and I guess we're also talking about a concert venue. Is that right? As well as the stadium?
Michael Pope
Oh, yeah, I have no doubt that this would be a venue. If you think about the Capital One in Washington, DC, I mean, I saw shows there. So I'm positive this venue would also be for Taylor Swift and that sort of thing.
Greg Leroy
And I read that there might even be a second entertainment venue. In any case, parking fees will help pay for that. So it's not like unless the whole deal fails. Nobody comes to see concerts or sports events; the money will be generated to cover the construction costs, and the city won't be out of the upfront cost of the construction and, hopefully, the maintenance of the facility. There are two other issues. One is what else might the location have done to generate a different kind of economic activity that would be more durable and not displacing the existing activities now happening in DC? And the other issue is, if the thing were not off the tax rolls, that we're generating actual new property tax revenue, in addition to permanent jobs, what might that better do for the revenue streams of the city of Alexandria? How much better could it handle it? I think another issue, frankly, is traffic here. That is, even though the site will be well served by Metro and bus rapid transit hubs that are getting augmented there. There are a lot of people who are going to drive right. And the question is, who handles all the extra traffic and congestion? Do you have to have more public safety and traffic management on those nights? And what does that do to the quality of life in the neighborhood that you've got bursts of congestion at game time? Those questions have to be weighed as well.
Michael Pope
Actually, you just raised an issue that I'd like to circle back around to, which is, what if this thing is a failure? What's the worst-case scenario here?
Greg Leroy
Well, the worst-case scenario is that 10 years from now, people will be less interested in NBA and NHL games, and they're all going to eSports games. So they're all staying home and playing games virtually. And there isn't the draw to generate the revenue to pay off the debt service that's been taken on for the construction activity, and so on. We at Good Jobs First are skeptical of another form of spending for retail. We've been very critical, for example, for incentives given to Walmart for more than 20 years and very critical for 15 years now of incentives given to Amazon. For the same reason, things are changing so much in retail space. We thought it was wrong to subsidize an aggressive company monopolizing retail like Walmart when it was going on its big growth spurt. We also criticized those getting into malls and Cabela's and outdoor sporting goods companies like Bass Pro and Target because you don't know what's going to happen in retail. And then, sure enough, here comes Amazon disrupting with e-commerce, other e-commerce companies as well disrupting the bricks and mortar retail space. And now we've got all these abandoned malls and abandoned retail storefronts and teetering retail development projects, many of which got subsidies in the day. So we think capitalism morphs, things change, and we don't know what the entertainment world is going to look like 10 or 20 years from now. But making this very long-term bet on a couple of sports and an entertainment venue is inherently risky.
Michael Pope
In your book, you write that elected officials who support economic development projects are often thumbing their nose at Common Sense social science and good government. Do you think that's what's going on here with this? I mean, like, we're about to enter this period with members of the General Assembly who are about to start debating this later this month. And then eventually, members of the Alexandria City Council will have to vote on this. What would you say to those elected officials who are considering what they want to do about this?
Greg Leroy
I would say look at the history and the work of the economists who have been writing about this issue for decades. Look at books like Field of Schemes by Neil DeMoss. Talk to economists like Victor Matheson and JC Bradbury and others who have been publishing and writing on this for a very long period of time; they'll convince you, if you pay attention to them, that you don't need to subsidize these projects because they're going to happen. After all, the DC market is robust and attractive. Investors are going to make a great dollar by being in a big, fat, lucrative market like DC. And second, that you shouldn't be taking the risks. The trouble with politicians, obviously, is that they have short-term goals because they want to get reelected; who doesn't want to be at the groundbreaking for this project and doesn't want to rub shoulders and get their name in the paper as one of the people that brought the project, a shiny new venue to Alexandria, that's gold for somebody trying to get reelected. Let's be honest; that's the political calculus. But as long-term shepherds and stewards of the public good, they should also be thinking about the risks and the costs and whether they're overspending to get something that's not that great a benefit?
Michael Pope
We haven't seen all the elected officials jump on board quite yet. In fact, the chairwoman of the Senate Finance Committee, Louise Lucas, who actually represents the Hampton Roads area, a totally different part of the state, posted on social media. This is the quote, anyone who thinks I'm going to approve an arena in Northern Virginia using state tax dollars before we deliver on toll relief for public schools in Hampton Roads must think I have dumbass written on my forehead. So I mean, another part of this is that it's not just people in Northern Virginia that will decide the fate of this. It's people all over Virginia, including people who listen to this podcast, who are all over Virginia and Richmond. And so, what should people outside of Northern Virginia think about this project?
Greg Leroy
I'm really glad to hear that. And I think that she's exactly right because the costs will be distributed to everybody in the state because of the loss of state income tax revenue on the bond issuances and the costs of running the state's authority sponsoring this. There are competing issues, right? Northern Virginia is already the most prosperous and rapidly growing metro area within the Commonwealth. So why shouldn't they be looking at it from the point of view of other needs that need to be met in the state? She's exactly right. She's right for that reason. She's also right, for this is a job piracy story. This is a venue that already exists in the District. It's called the Capital One arena. It's been there for a long time, it's been successful, and it's already well served by public transportation. The owner is already wealthy, and the teams are popular; why spend so much money to move an existing venue and jobs a very short distance. And the reason is because of our federal constitutional structure by moving across the state line, Monumental can get treated as, quote, new job creators, unquote, I'm putting air quotes around that because it's new to Virginia, but it's not new to the metro area.
Michael Pope
I think a lot of our listeners would be here in this conversation and saying, Greg Leroy, you're just painting a very bleak negative picture here. This thing is going to be really successful, and a rising tide lifts all boats, and these loans are going to be paid back. What's the problem here?
Greg Leroy
Well, the problem is, it's not necessary to do this. If Monumental wants to spend their money and their investor's money, getting a deal like this, you know, let them do that. If voters get to decide on stadium deals as they have in a few places, they usually vote them down. And I think that says a lot.
Michael Pope
Let me ask you about that. Have we seen examples where wealthy people like this millionaire, who's at the head of this project, actually pay for it with their own money? I mean, like, Are there examples of that happening?
Greg Leroy
We have to remember Marshall Purnell, who built the stadium in DC originally. It happened at a time when the District wasn't especially flush. He was moving the basketball team from Baltimore, and he got a very modest bit of help, I think, with some of the transportation infrastructure. But it wasn't at all a gold-plated deal. And he was a very civic-minded guy. And he did a lot of other good things with his wealth. So there's even local history and that front. And there certainly had been other cases of taxpayer revolts against deals. For example, taxpayers in Seattle long ago voted that if anybody lent money to a sports franchise, the bonds had to get a market rate of return, which is to say, no tax advantage. And that effectively blocked subsidies to the Paul Allen-owned sports franchises there for many years. And in Seattle. The same thing happened in Minneapolis with the Minnesota Twins, which I think is why they ended up in a suburb person named Neil deMause, who I mentioned before; you should really have him on to do a second podcast on this. So he wrote a book called Field of Schemes, and he blogs at fieldofschemes.com. He's all over these deals, including the one with the race going on now in Tampa Bay as well.
Michael Pope
In your book, you write that this economic development system is often rigged, and it shifts the tax burden away from big companies and puts it instead on working families. Do you think that that is what we are going to see here with this monumental arena?
Greg Leroy
I do think this is a regressive tax event; there's no doubt about it. Because you're taking the authority of the state and granting massive tax advantages in terms of no property taxes, tax-advantaged financing costs, and giving them to Monumental and their investors. And you're saying we're now going to induce growth, and we're going to have more activity in this area. But even the incremental property taxes generated by that activity aren't going to go to public services; they're going to go to help pay the debt service. So, guess who pays for everything else that goes up in terms of public costs associated with this event? It's everybody else who pays taxes, including Alexandria and the state of Virginia. You can't get blood from a rock; it's got to happen that way.
Michael Pope
One theme that you keep coming back around to in your book is there's no accountability. So there are all these promises of job creation. And then, when they're not met, there's no accountability. And all these promises of economic activity will be created as a result of borrowing all this money and forking over all these tax dollars. But then, if that doesn't happen, there's no accountability. Cant, you build into the process. What if 30,000 jobs aren't created? Is there some sort of accountability? Can't you build that into a deal in advance?
Greg Leroy
In the structure of this deal, it would be very difficult to penalize Monumental if the deals fell short. And here's why. It's because it involves debt. When you sell bonds, you have to satisfy the bond buyers, that is, the wealthy people lending you the money by buying the bonds, that the revenue stream will be there to pay them back. And if you were to say, Well, we think the money will be there. But if they don't create as many jobs as we want them to, then we're going to cut back on the money available to pay the bonds. You couldn't sell the bonds. That's the problem. That's the problem with TIF districts; that's the problem with so-called private activity and bonds tied to economic development. If the deal were structured differently, if we were saying we're gonna give monumental income tax credits, that is, discounts on its state corporate income tax bill, and we're going to tie the value of those credits and the number of jobs created each year, we could build accountability, because we could then say, if you said, 30,000, and you created 20,000, we're gonna give you a 1/3 haircut because you fell 1/3 short on the job creation, that would be entirely feasible and doable, and it wouldn't impede the deal.
Michael Pope
Are there examples of that kind of thing happening?
Greg Leroy
Yes. So, for example, in many manufacturing deals, that's absolute. One way it's done. The term of art in the professional is called performance-based. And it means that the incentives are backloaded and tied to the company doing its part of the deal first. It's job creation, capital investment, worker training, whatever it's obligated to do. Then, each year, it proves that it held up its end of the deal and collects its credit for that year.
Michael Pope
Well, this has really been a fascinating discussion. I appreciate you joining our podcast. One last question, which is kind of open-ended. But members of the General Assembly are about to start debating this. Members of the Alexandria City Council are about to start debating it; what do they need to keep in mind? Some of them might have an incentive to want to stand on a stage with people and be part of the ribbon cutting and the ground laying and all that sort of stuff. What is what counterbalance should they be keeping in their minds?
Greg Leroy
I think a couple of things we've heard on one is they should be absolutely adamant that a full cost accounting is made. That is, it's not just asking for the face value of the loans. It's also the foregone state income tax revenue on the sales of the bonds.
Michael Pope
By the way, do we know what that number is?
Greg Leroy
We don't, but it certainly could be estimated because you can guess the rough income tax bracket of the typical wealthy Virginian who would buy those bonds and how much revenue they would not then pay in foregone state income taxes. After all, they are getting the tax-free interest. Yes, it can be estimated, and then also a full-throated analysis of the foregone property tax revenues affecting Alexandria because of the public ownership structure of the facility. That's a really crucial element. Then, the foregone revenue from the TIF district was added as well.
Michael Pope
Playing devil's advocate here, what if all of those things were added up on a spreadsheet? And you're looking at them? And you would say, well, yeah, this deal is really good because all these marks have been met.
Greg Leroy
Even then, I would say it doesn't need to happen. And that's the other problem with accountability here. Nobody in the public sector has the right to climb inside Ted Leonsis's black box of decision-making about what causes him to make this decision versus another decision. We know he wants to stay in the DC area because he's got the franchise here. It's lucrative. It's got lots of wealthy fans and lots of big advertising dollars. Does he really need the public assistance to make this deal happen? And that's the test that everybody needs to ask themselves first, because unless you can positively, absolutely say he wouldn't do it. But for that subsidy, every dollar spent without that test is potentially wasted. And frankly, because the team already exists there and again, because you're pirating jobs and economic activity away from the District. You also have to calculate the harm done to the District to the benefit of Alexandria.
Michael Pope
All right, we have been joined by the founder and executive director of Good Jobs First; he is the author of The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation. Greg Leroy, thanks for joining us.
Greg Leroy
Great to be with you, Michael. Thanks a lot.
