There is a lot of excitement about the proposed new arena and entertainment north of the University North Park (UNP) shopping district. Much of the promotion, however, is more hype than substance, including labelling those in opposition as “naysayers.” As an economist who specializes in local economic development and tax policy, I can point to the economics reasons to reject this proposal.
To begin, we need to ask the right question. The question is not CAN we use public funds to promote an arena-anchored entertainment district in the UNP area, but rather is there a compelling reason to do so? Common sense economics, which is backed by peer-reviewed empirical analysis, provides ample justification why spending $200 million in public funds to build an arena is a poor investment for the community.
The net impact of relocating OU basketball and gymnastics competitions from Lloyd Noble to roughly 6 miles away from OU campus is likely to be small. OU athletics would serve as the anchor tenants for the new arena. These sports competitions are already occurring in Norman. These competitions would not be new activity, but simply shift where competition-related spending would take place.
The hype about the SEC changing everything is at odds with the proposed size of the new arena. A capacity of 8,000 is slightly more than OU men’s basketball home game average attendance last year, which was about 7,270. The plan is for an arena that has 3,000 less capacity than Lloyd Noble and would just cover average attendance. This leaves little room to accommodate a larger draw of visitors.
The UNP arena plan provides further evidence that joining the SEC is not expected to increase OU men’s basketball attendance.
The proposed new arena would be the smallest one in the SEC. Auburn currently has the smallest SEC arena with a little over 9,000 seats. By OU’s own projections, men’s basketball crowds are not anticipated to increase by much.
How does a new arena translate into a larger tax base if larger crowds are not anticipated?
Perhaps the logic is that upscale seating will enhance the experience and induce fans to spend more in Norman. Likely fans WILL spend more for the experience inside the arena with upscale box seating and club facilities. It is unlikely that increasing the cost of attendance will lead to more spending outside the arena on taxable activities.
The most likely impact of relocating OU basketball and gymnastics competitions is a shifting of where fans eat and drink on event days. The gains in the new arena and surrounding businesses will be offset by losses in core Norman. Only net new activity pays off in terms of the city’s tax base.
The city of Lincoln Nebraska paid to build a new off campus arena with an adjacent entertainment district. Lincoln, wisely, paid for their new arena by adding a new arena occupancy tax on hotel, car rentals, and restaurants and bars. By tracking the arena tax revenues before and after the opening of the new arena, we can evaluate if there was a noticeable bump in tax revenue trends. The tax collection data shows that revenues stayed on their pre-arena growth paths with no apparent arena bump. Why would we expect sales tax spending to turn out differently in Norman?
There is little reason to think that relocating the arena will significantly impact sales tax revenues which raises serious concerns about using tax increment financing to pay for the arena. TIF are designed to create a designated revenue source to pay for project costs, including borrowing and interest.
The TIF fund collects growth in taxes over a baseline (pre project) level. If arena-related tax generation shifts to a TIF district, then tax revenues will be siphoned from the city’s general fund. The more a TIF cannibalizes activity and growth from the non-TIF areas, the more the City budget is shortchanged.
Norman has already experienced the budget harm of TIF in relation to the UNP shopping development. An empty field along the fast growing interstate did not need a public subsidy to create a retail shopping strip anchored by Target. At the time of creation, economic development consultants noted that the UNP area would develop without TIF given its prime location.
The UNP TIF has been successful in drawing customers and retail businesses from other areas of Norman. If we look at the sales taxes collected in the UNP TIF versus the rest of the city, we see robust TIF growth but corresponded flat growth in the rest of Norman. Overall, Norman’s sales tax revenues do not show a TIF bump. The UNP TIF tax diversion grew to over 10% of the city’s general fund, which in part motivated the call for ending the diversion of sales taxes to the UNP TIF fund. The diversions to the TIF has impacted the city’s ability to spend on needed water, sewer, and transportation infrastructure. TIF money is not free.
Another concern with the proposed plan is that the $800,000 million dollars in promised private investment is not guaranteed and the city has a poor record of enforcing claw backs. Recall that the UNP TIF plan promised a lifestyle center with high-end stores such as Niemen Marcus. To date, not a single INCH of the lifestyle center has been built and the developers (OU Foundation) never had to pay the $8 million penalty for failing to deliver the private investment for a lifestyle center.
Public-private partnerships all too often leave the public assuming the risk and holding the bag when promised private investment falls short. The very same players are again asking Norman taxpayers to front the cost of a UNP development project based on unrealistic promises of tax base growth and speculative housing, apartments and offices that may never get built.
The focus needs to be on the proposed arena, this is a big ticket facility that the city is being asked to build, own, and operate. If we focus just on the return on investment to taxpayers of a university-sport anchored arena, the prognosis is poor.
If, however, this is a quality of life amenity, then TIF financing is not appropriate. TIF schemes deprive the public of voting on projects funded with tax revenues. A more prudent and democratic option, would be to allow voters to decide on a special purpose tax to fund the project, such as the OKC MAPS and Norman Forward programs.
If we are willing to spend $200 million of taxpayer funds, what is the best opportunity to enhance Norman? The choice is not a new arena or nothing.
