How Unlucky Can We Get In Public Profitsharing Deals
Written by Michael Lewis on January 5, 2012
By Michael Lewis
The zero-profit-sharing sham at AmericanAirlines Arena verifies that taxpayers lose when governments hand powerful interests sweetheart deals.
Despite Miami-Dade County sending the arena $6.4 million a year, profit-sharing with the Miami Heat subsidiary that runs it has never kicked in as the deal enters its unlucky 13th year.
We’re so unlucky, in fact, that the public last year came within just a few hundred thousand dollars of getting its first dime from an arena whose construction we still fund.
The abysmal deal was cut in back rooms days before a 1996 election. Mayor Alex Penelas, who had backed a referendum to prevent waterfront land use for such a project and opposed arena funding, came out of secret meetings and switched sides. He fronted the deal with the Heat and, as we now know, was either vastly outsmarted or bought into a bad deal for private reasons.
In the deal, net must top $14 million before the county starts to collect 40% of profit from its own arena on land it bought from the City of Miami for $37 million to give the Heat a waterfront home, though the enclosed arena turns its back on the water.
Last year profit hit $13.22 million, tantalizingly near payout.
Not that anyone looks closely. Former county finance director Carter Hammer once told us the Heat didn’t bother to project arena revenues for the county, and the county certainly didn’t bother looking for the figures.
Although the county claims to be trying to save every dollar, no one seems to care. When we asked current Mayor Carlos Gimenez about the arena split shortly after he took office, he said he did care but cited more pressing worries.
Okay, but with tens of thousands of employees, doesn’t the county have anyone to probe how the nation’s seventh most visited entertainment venue moves money among entities run by Heat billionaire owner Micky Arison?
We’d like reassurance that someone looks out for the public.
Not that it’s easy. Business is far more adept at moving assets than government is at following the money.
The result is that government seldom gets paid in such contracts.
Bear this deal in mind at the soon-to-open Marlins stadium. It too is county owned but team controlled. As at AmericanAirlines Arena, the team also runs the site via a subsidiary that can shift funds among multiple entities.
Unlike the Heat deal, however, the Marlins needn’t even pretend the public is due ballgame profits. It’s only in some non-baseball uses that the county is to share receipts, though the Marlins get to decide when they keep everything and when the public might share if money remains.
But we were assured by George Burgess, the former county manager who engineered the giveaway Marlins deal before he had to resign, that the public is protected.
Chicago-based consultant International Facilities Group, which also worked with the county on the Heat arena, reviewed and approved the Marlins stadium budget, Mr. Burgess noted in the Marlins deal, so "it’s outside validated."
Based on the track record, that’s not reassuring.
Determining government revenues by the profits of only one entity among several operated jointly is a pitfall not confined to sports.
Proposed casino resorts would elevate potential profit-sharing payouts and offer far more incentive to casino operators to shift funds.
Under bills in the legislature, each massive resort would require at least $2 billion investment, with hotels, meeting centers, restaurants and other enterprises the bulk of the deal.
The state would become a de facto partner, sharing operating net from the casino profits alone that could hit billions annually. That share is proposed at 10%, possibly rising or falling if legislation changes.
But the higher the tax, the more incentive to shift costs from other business lines to the casino itself. That way, casino profits — and taxes — would fall and the operator’s true take would rise.
The Genting Group, which plans its Resorts World Miami to displace the Miami Herald and the Omni Center, explains that it mixes many profit centers on the casino floor, not just gambling but also dining, bars and services. Allocating costs among them could be even trickier.
Casinos, after all, are unusual: meals, drinks and even hotel rooms are offered below cost to lure gamblers. Subtracting those costs from casino profits for taxation offers wide room for hanky-panky.
If government doesn’t bother to examine a basketball arena’s projections and future fund flow, imaging dealing with gambling operators trying to cut taxes. They will deduct the costs of every other operation from gambling receipts for tax purposes.
If we’re unlucky with basketball, think how unlucky we can be with gambling professionals in control.