The $475-million Boondoggle | By Graeme Archibald

On Wednesday, Edmonton city councillors held a private meeting that was hastily put together. As the councillors sat in the chambers at City Hall, the media anxiously waited outside to get the scoop. All that was known at the time was that it had something to do with the proposed downtown arena, which is likely the most polarizing municipal issue since the closure of the City Centre Airport. The councillors eventually emerged, looking grim by all accounts. Even Mayor Stephen Mandel, an ardent supporter of the arena project who made it one of the centrepieces of his bold vision for Edmonton, told reporters that he was not optimistic – “frustrated might be a better word” as he put it.

This came as a surprise to many – it was thought that a deal had been reached between the City of Edmonton and the Katz Group, the company of Edmonton billionaire and Oilers’ owner Daryl Katz that wants to build the arena. A funding framework was approved by city council on October 26, 2011, which laid out a plan for the $450-millon arena. Under that agreement, the Katz Group would pay $100 million (paid for in installments of $5.67 million over 35 years) , the City would pay $125 million, $125 million from a ‘facility improvement fee’ (a ticket tax), and $100 million from other levels of government. In addition, the deal would see the city funding tens of millions of dollars worth of surrounding infrastructure improvements, such as a pedway over 104th Avenue and LRT connections, as well as a ‘marketing relationship’ under which the City would pay the Katz Group $2 million a year for 10 years. The Katz Group would handle the arena’s operating costs, while assuming all of the arena’s profits, as well as a pledge to invest $100 million in surrounding development and keep the Edmonton Oilers in the city for 35 years.

For many – myself included – that deal seemed to favour the Katz Group just a little too much, but was still fair enough for the project to proceed. Despite the missing $100 million commitment from other levels of government – as both the provincial and federal governments have refused to provide any funding – designs were drawn up and confidence in the project seemed to be fairly stable.

That was until Tuesday, when the Katz Group sent a letter to the city manager, Simon Farbrother. In it, the Katz Group outlines a number of problems that they have with the agreement as it stands. In short, the Katz Group complains that the estimated costs of the arena now exceed the original $450-million, the proposed “winter garden” development exceeds its original estimated $50-million cost as per inflation. Additionally, they argue that under the current arrangement (with the cost increases), it has “proved impossible” for the Katz Group to reach revenue streams from the arena that would “ensure the Oilers’ long-term sustainability” and provide a sufficient return for the Katz Group. They also complain that competition from Northlands’ existing Rexall Place requires “fresh consideration” be given to the management of capital and operating expenses.

Essentially, the Katz Group wants a whole new funding arrangement, with the City taking on significant new costs. Mayor Mandel revealed this morning that the new cost of the arena is about $475-million, which is not a massive increase in the grand scheme of things. However, it is the Katz Group’s apparent desire to re-evaluate the additional funding concerns that led City Council to vote against any new funding for the arena project on Wednesday. According to Councillor Don Iveson, the Katz Group wants a “substantial, new, ongoing taxpayer-derived [subsidy] for the team”. The Edmonton Journal is now reporting  that subsidy to total $6 million per year, which would erase the Katz Group $5.67 million per year/$100 million contribution to the arena. In addition, the Katz Group wants the City of Edmonton to be the anchor tenant of its proposed office tower for the entertainment district – which involves the city paying even more to the Katz Group.

It has become clear to me, and many others in the city, that the Katz Group is looking for additional corporate welfare from the city, to offset the costs they will incur from running the arena, the Oilers, and the supposed “competition” that they will face from a derelict Rexall Place. While the exact figures are not public knowledge, it appears that the Katz Group wishes to essentially erase its liability in the project through additional public money being funnelled to them from the city.

In their letter, the Katz Group states that they believe the city has additional capacity to spend more money on the arena. I am a supporter of the downtown arena project – however, it is not the place of a municipal government with limited revenue to provide exorbitant sums of taxpayer money to the private sector in order to reduce their risk in a business deal. The City has enormous commitments elsewhere – essential services, road construction, LRT expansion, etc., which limits the amount of money that can be invested into nice-to-have-but-really-not-essential capital projects like a downtown arena.

Since Council refused to provide more money to the Katz Group, there are rumours abound that Katz will move the Oilers out of Edmonton. Although some fans see this notion as a disaster of epic proportions for the city (which is ridiculous), most don’t realize how difficult that would be to accomplish. The Edmonton Oilers are amongst the most profitable teams in the National Hockey League, and moving a team requires a super-majority of supporting votes from all the other NHL owners, which is a difficult feat to accomplish – just ask Jim Balsillie.

I used to think of Daryl Katz as a good guy. He was Edmonton’s resident self-made billionaire who lived a quiet life in a river valley mansion. He was going to revitalize downtown with a shiny new arena. Now, it just seems that Katz wants the city to take on the majority of the costs while he and his company realize the profits. In comparison, Seattle just approved a new arena, to be split between the public and private sectors. Unlike Katz, the arena’s developer, Chris Hansen, offered additional private money to make the deal more palatable to the cash-strapped city government. If only Katz and the Katz Group were the same, I think we would have seen this arena breaking ground a long time ago.

After the events of this week, most arena supporters – save for diehard Oilers fans and those ‘we-need-world-class-stuff’ boosters – now find themselves questioning the intentions of the Katz Group, and whether or not the project will proceed at all. I still hope that the arena goes through, as I believe it’ll do wonders for Edmonton’s downtown, but not at the cost currently presented to the City. I commend Edmonton City Council for having some backbone and standing firm. As of now, the puck has been passed to the Katz Group, and we’ll likely soon see how they wish to proceed with negotiations.

What do you think about the arena project? Should the city re-negotiate with the Katz Group? Is the arena dead? Voice your opinions in the comments section below!

Graeme Archibald is a fourth-year Political Science Honors student who once took a class on municipal politics. You can follow him on Twitter @gajarchibald.

Related posts:

  • Great article, Graeme… Really good insight. A shame Katz Group doesn’t have a stronger sense of civic duty. Thanks!