Issue Summary (Updated January 2011)

Pittsburgh Penguins Arena

The Issue: 

In early March 2007, the Pittsburgh Penguins hockey club came to an agreement with state and local officials over the funding of a new arena.  The arena was heavily financed with money from the state's gaming fund, with a sizeable portion coming from Pittsburgh's casino, while the team put up a small contribution. 

What We Know:

The new arena, named the Consol Energy Center, debuted in August 2010.  While local officials noted that no direct city or county tax money was pledged in the deal, there are some concerns for taxpayers.  The first concern is that the Sports and Exhibition Authority (SEA) paid the team $8.5 million for the former St. Francis Hospital site. The team bought the site in anticipation of a new arena and it was to count as their up-front contribution to the project. As noted in a press release from Governor's Rendell at the time, "the source of the $8.5M will be from bond proceeds over and above the $290M..."  Since the SEA is a joint city-county authority, who will be responsible for the repayment of this bond? Unfortunately, because the agreement also stipulates that "the Penguins...shall retain all revenues generated from all events at the new arena", it is clear that the SEA will not be able to use arena generated revenues to retire this debt.

Where will the SEA get the money?  RAD dollars seem to be the likely source. If so, the pledge of no local tax dollars is out the window. Alternatively, the Commonwealth will just divert more gaming taxes.  Either way, taxpayers will be on the hook.  

Another area of concern was the agreement calling for the state and the team to split any project costs above $290 million up to $310 million, the final price tag came in at $321 million-$31 million above the original projection.  The state covered $10 million at the expense of state taxpayers. The SEA is on the hook for another $5.5 million. The team is responsible for the remaining $15.5 million. 

Furthermore, the state had agreed to "fund marketing expenses incurred by the Penguins in promoting the Team..."  This marketing expense is in the form of a $2 million lump sum payment. Where this additional $2 million will come from is also a mystery.  And this does seem to be a very curious and overly generous contribution in light of the fact that the Penguins are selling out games and have the best advertising a franchise can get, namely, an exciting, winning team.  How much marketing of a new arena or the team can possibly be needed in a town that by all accounts is one of the best hockey supporting towns in the country? Simply put it is not the taxpayers' responsibility to pay for marketing.  The $2 million grant amounts to nothing more than a gift.  

And finally, the development rights arrangement between the SEA and the team is beyond the pale.  According to the agreement term sheet, "the Penguins shall have development rights to the entire Mellon Arena site..."  Not only do they have these rights, but the SEA will compensate them with $15 million in what is called a redevelopment credit.  It appears the team will be able to buy parcels of land at an appraised value using this $15 million.  In essence, the team will get the first $15 million worth of prime Pittsburgh real estate for free.  But, if they do not use all of the credits within ten years, the team will receive the remaining balance in cash, courtesy of the SEA.

Instead, the old arena property and development rights to it should have been auctioned to the highest bidder. The proceeds could have been used to lower taxes or set aside in a reserve fund to help the City and County with debt retirement.

The demolition of the old arena has been put on hold while the historic review commission looks at the possibility of granting it historic status. 

While no local tax funds were used in constructing the arena deal-the state's share is based on a tax on gaming revenues-it could have been done with private and arena generated funds.  In fact, that is how the Penguins were able to add another $400,000 per year for capital reserves.  They will put a surcharge on parking and use it to cover the fund-it will not come directly from their pockets.  And since they control all revenues the new facility generates, they will have no difficulty in meeting their $4.1 million annual rental payment. 

Recommendations:

This demonstrates how the arena funding should have been structured in the first place-private investment and arena revenue bonds.  The $7.5 million annual payment from the Pittsburgh's casino The Rivers is a first step in securing private money.  Naming rights, valued at $104 million over 21 years, would have added another $5 million.  More money could have been found through a share of non-hockey event profits. The rest of the money needed could have easily been generated through bonds backed by arena revenues. The SEA could have pledged revenue streams from concession sales, in-house advertising, pouring rights, seat licenses, and even a ticket surcharge.  These could have provided enough financing, roughly $8 million annually, to cover the necessary bond issues.  A guiding principle should be that if a multi-purpose arena can not generate enough money to pay for itself, then it should not be built in the first place.

Unfortunately, the inferior deal is done because of the unwillingness of officials to look for more private sector involvement in order to eliminate the need for any tax dollars in its construction. After all, because the $321 million arena will be owned by an authority, it will not pay city, school, and county property taxes of more than $9.4 million per year.