Friday, April 16, 2010

CIB and Ballard Administration Appears Ready to Cave Into Pacers' Threat, May Offer Simons Sweetheart Deal on Conseco Fieldhouse

Apparently the Capital Improvement Board is considering a Lucas Oil Stadium style sweetheart deal to bail the Pacers out. The Star reports in part:
Paul Okeson, former chief of staff for Mayor Greg Ballard, said the city is "seriously
thinking about" taking over the operation from the Indiana Pacers. Okeson is handling the city's negotiations as a member of the Capital Improvement Board, which oversees the city's sports venues.

It's not entirely clear how the CIB, which has faced its own financial struggles and is funded primarily by tax dollars, would pay for it.

Negotiations between Indianapolis and the team have been ongoing for months. Although city leaers have said they want to keep the Pacers in town, they have been quiet about their specific intentions.

Some criticized the potential deal as a taxpayer bailout for Herb Simon, the team's billionaire owner. Simon cited the Pacers' $200 million in losses when he first asked the city for help paying for Conseco's operations last spring.

City officials emphasize they would not be writing the Pacers a check.

"If they leave, it's going to cost us roughly $15 million to run this place, and that doesn't include the losses that come along with them going," Okeson said. "In no way is it giving money to the team."

The Pacers' current 20-year contract provides a clause that allows the team to negotiate the lease's terms after 10 years but includes a termination fee -- estimated in the tens of millions -- if the team were to be sold and move.

Under the contract, the Pacers pay for the operating costs of Conseco, while the CIB is responsible for larger capital improvement projects. The team, in turn, keeps revenue from basketball games and other events at Conseco.

It's possible, Okeson said, that even if the city assumed the operating costs at Conseco, the Pacers still might receive revenue from concerts and other events there.

Also unclear is whether the Pacers would agree to such an arrangement. Greg Schenkel, a spokesman for the team, declined to comment Thursday.

"We're not in a position to discuss the situation any further at this time," he said.

On Tuesday, Pacers Sports & Entertainment President Jim Morris said that if a deal couldn't be reached by June 30 to remove the $15.4 million burden from the Pacers, the team would consider all options, including leaving town.

Okeson said the CIB will remain open to other options while the board figures out ways it could pay the extra operating cost with its funds, which come from taxes on things such as hotels, food and beverages, cigarettes and auto rentals.
I have spent hours studying the Pacers Conseco contract. The termination provision is one single-spaced paragraph that stretches over three pages and is extraordinarily difficult to follow. (It's been suggested that this may have been written so lay people can't interpret it. That's worked as virtually no one in the media even attempts to challenge the claim that the provision lets the Pacers walk away from Conseco after 10 years while paying little if no penalty.)

The Pacers do have a right to terminate the contract after 10 years. But that right is only triggered if: 1) the team losing money; 2) the team being sold; AND 3) the team is being relocated out of Indianapolis.

The Star reporter Francesca Jarosz said the penalties are estimated in the "tens of milions." No, the penalty would be much higher than that. The contract has two penalty formulas, and you take the lowest one that applies. The first formula is based on how much the team sells for. The second one is a structured liquidated damages provision. Both penalty provisions decline as the Pacers get more deeply into the second ten years of the contract.

Assuming the team sold for $300 million, the penalty provision would be about $165 million by my calculations. The other penalty provision renders a penalty of $234 million. According to the contract you take the lowest penalty, so it would be $165 million; the penalty would be lower if the team sells for less than $300 million which is what Forbes had previously estimated the franchise to be worth. (Under the first formula you multiply the sales price by 50% and add in an amount the Pacers still owe from Market Square arena).

For a more lengthy interpretation of the contract, see a post I wrote last August:
Friday, August 21, 2009: Dispensing With the Lies Told About the Simons' Right to Terminate the CIB-Pacers Conseco Fieldhouse Contract
I'd be the first to admit that I could be wrong about the interpretation of the contract. Even though I spent a couple hours mapping out the termination provision and how the penalty provisions work, it's an extraordinarily convoluted and poorly written clause in the contract. I could have missed something. But no one from the city or from the CIB has ever challenged my legal interpretation. They are content just repeating the spin that the Pacers under the contract have a right to pick up and move the team to another city. They know that reporters aren't going to dig into that three page, mind-numbering paragraph to challenge the false assumption that the City and the CIB claims requires them to negotiate with the Pacers.

Regardless, almost certainly the Pacers do not have a right to terminate the contract and move the team out of the city. The termination provision only is triggered if the team is sold and being relocated out of the city. And the penalties the Simons would have to pay would be enormous.

Frankly, I don't think the City/CIB cares about what they contract says. They are bound and determined to give away more taxpayer money to the Simons. The fact that Okeson actually suggested that the CIB might take over the operations of the building, while still giving the Pacers revenue from the building, shows how completely incompetent the locals are when it comes to negotiations and how to operate the CIB in a business-like fashion. Haven't we learned anything from the Lucas Oil Stadium sweetheart deal that nearly bankrupted the CIB?

It's time the Indiana General Assembly dissolved the CIB and took the management of sports facilities away from the irresponsible and incompetent political leaders who continue to want to give away taxpayer money with misguided deals. If not, the General Assembly can expect that the CIB will be back in a year or two asking for another bailout for another misguided deal.


Marycatherine Barton said...

Thanks for your request to the General Assembly, here stated, Paul. I so very much agree with it, and so hope we get this cherished wish.

Paul K. Ogden said...

Thanks MCB. Yes the General Assembly needs to do something. It is apparent that there have been ZERO improvements at the CIB and with Okeson, there's been a definite backwards step.

By the way, I apologize to everyone for my botched headline. Obviously I meant "Simons" not "Irsay."

Steve said...

Good article! Is it possible to get a list of CIB members with contact/email information?