Citizens beware!

The arena proposal, to be released only a few business days before the Sacramento City Council’s one and only scheduled meeting to hear comment on it, relies on the privatization of public domain to help finance construction of the arena at an initial estimated cost of $387 million dollars. Although Mayor Kevin Johnson and Think Big have been happy to talk about the supposed benefits of an arena, there has been little public mention of the risks to city taxpayers and long-term costs—both direct and indirect—of the public-financing features of the plan being developed.

This plan would lease a large number of taxpayer-owned downtown street and garage-parking areas to private companies in return for a windfall of upfront cash to help pay for a new arena, mainly for the benefit of the millionaire Maloofs’ basketball team. The annual revenue from the parking, once estimated at $10 million, would be lost to the city for the duration of the lease which could be anywhere from 30 to 70 years. This long-term revenue loss would have to be replaced by tapping other city resources at a time when budgets for essential public services—like police, firefighters, health clinics, libraries, parks and schools—are being slashed, due to the city’s deficit problem.

The financing plan may also put city taxpayers on the hook as guarantors. Despite my many written public-record request inquiries to the mayor and his chief of staff, I have been unable to verify whether or not a public-loan guarantee is in the proposed financing package.

The city’s residents should be sufficiently informed of the broad outlines of the public-financing features under consideration in time to give input to their representatives well before the council holds its only scheduled arena hearing on December 13. This is especially urgent because the city council will vote yea or nay on the arena proposal sometime in January after the council’s two-week holiday recess. The public cannot weigh in on what it does not know. My impression is that the general public has no idea that the arena proposal calls for a public-financing component. Nine out of 10 of the many otherwise knowledgeable people to whom I have mentioned this were astonished to hear that a plan to privatize public parking was in the works.

At a minimum, the city should have made public preliminary information regarding the term of the contemplated lease, the relative contribution of public and private resources for construction of the arena, and the potential liability of city taxpayers under any loan guarantee under consideration. Specifically, to what extent would city taxpayers be liable should the Kings leave Sacramento after the arena is built? What happens if hoped-for arena profits do not materialize and/or if the NBA cancels games in future seasons? Think Big’s Nexus report does not address these specific issues and concerns.

The Think Big presentation I attended was upbeat but equally unenlightening. If the arena is the surefire investment that the group claims, why aren’t the Maloofs, private businesses and private lenders lining up to finance it privately instead of coming hat in hand to the city for a public-financing contribution?

Perhaps most troubling is the adverse impact a concession agreement negotiated after plan approval would have on the city’s ability to govern solely in the public interest within the sphere of the privatized-parking operations. (The city council’s reluctant approval and transfer of a garbage-collection deal partly due to fears of a breach of contract lawsuit provides a recent cautionary example.)

According to Ellen Dannin in a 2011 article for the Northwestern Journal of Law and Social Policy, typical privatization contracts contain “terms that make government parties [to these contracts] the insurer of the private contractor’s financial success.” These include clauses called: 1. compensation events, 2. noncompetition provisions, and 3. “adverse action … clauses.” Under a “compensation event” clause, were the city to hold a street fair in the privatized area, it would be required to compensate the private contractor for the resulting loss of revenue. The other two clauses achieve a similar effect. The city may negotiate these terms out of the contract, but to the extent it does, private parties will lower the upfront money and monthly rental they are willing to pay. The public loses either way.

Privatization of public domain is often akin to selling one’s seed corn for instant gratification only to discover too late that the ability to produce anything in the future has been sold off. Long-term starvation can ensue. If citizens and policy makers don’t start looking critically at the ever-increasing number of privatization proposals, there will soon be little government left that is accountable solely to its citizens. Transformed from citizens using public facilities and services to customers of private businesses, we could soon be governed piecemeal by unaccountable private corporations whose only duty is to their shareholders. There is an inherent conflict of interest between the private parties to these deals and the long-term public interest. Citizens beware!