Monday, July 25, 2011

Why the Arena Deal Is Like Your Fixed Rate Mortgage (And Why This Matters)

It’s getting difficult to keep up with the blizzard of data being generated in connection with the proposed arena plan. By my count, there are a total seven reports on the arena plan and I am sure more will surface in the final week before the vote. I want to discuss one very significant point recently made by Camoin Associates that must be kept in mind when considering the long term financial impact of the arena deal. This point has been ignored by all of the media reporting I have seen on the arena plan.

Millions of Americans have fixed rate mortgages. While the advantages of a fixed rate mortgage are obvious, there is one feature that may escape notice, and that is the inflation effect. Because your monthly payment on a fixed rate mortgage doesn’t change, the real cost of the of your payment goes down over time. This is because the purchasing power of a dollar steadily declines due to inflation. So while our salaries (we hope) go up and the prices of goods go up, our monthly mortgage stays the same.

The arena deal will benefit from the same effect. The debt service on the bond will be similar to a fixed rate mortgage. The county will be responsible for approximately $26 million each year for 30 years. However, the revenue stream will increase each year due to inflation. The price of the things that constitute the revenues subject to sharing under the lease -- tickets, concessions, parking -- are all subject to the trend of price inflation that effects the entire economy. So whether you adopt Camoin’s more optimistic revenue estimate of approximately $28.2 million in year 1 (yielding a $2.2 million profit for the county) or the OLBR’s estimate of $18.9 million in year 1 ($6.7 million cost for the county), the revenue stream will increase each year:

Thus, the OLBR’s conclusion that the plan will have a minimum impact of $6.7 million per year to the County, or $13.80 cost per year for the average homeowner, is only true for the arena’s first year of operation. The tax impact declines each year has revenues increase. At a certain point, even under the OLBR’s “worst case” scenario, arena revenues will exceed the debt service.

Note that for this same reason, the Nassau County Democratic Chairman Jay Jacobs recent insistence that the arena deal will "leave taxpayers on the hook for $12 million to cover the rest of the debt service — every year for the next 30 years” not only ignores their own projections, but violates this basic law of economics as well.

3 comments:

  1. Patrick aka sign guyJuly 25, 2011 at 11:03 PM

    Super interview on Fios 1 Long Island with Charles Wang. Twenty minutes of great insight on the new Arena plan and why it means so much to Charles and why he has made such a commitment to keep the Islanders on Long Island. A must see !!

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  2. Agreed, Patrick....will link to it in next post.

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  3. I'd appreciate it if someone "called out" the democrats on the projections...Theyre all hypocrits...

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