GUEST POST: Private investment VS. Public (Andy Traub)

Last week Scheels announced they were investing $25,000,000 of their money into their Sioux Falls store at 41st Street and Western Avenue. They’re adding over 100,000 square feet of shopping and entertainment space to an already large and polished store. Scheels representatives expect to add at least 100 jobs because of the expansion that will be completed in 2014. A private company is investing $25,000,000 of their own money and they’re creating 100 jobs in the process. Is anyone else here seeing the contrast of business acumen (Scheels) and fiscal ignorance (the City of Sioux Falls)?

This post is about math, not about being a sore loser. I wanted the events center in Sioux Falls to be built. I wanted private funding involved before we asked taxpayers to support it. I wanted it downtown. I wanted it to be smaller than the 12,000 seats proposed. I wanted it to be voted on during a presidential election so we’d have a larger voter turnout. I didn’t get what I wanted but you don’t have to be a discouraged downtown supporter to see the folly of our city’s leaders in contrast to the business acumen of Scheels’ leadership.

Our city leaders, some major hospitals and other large donors sold voters on a plan to borrow $150,000,000+ to build something that’s projected to bring 185 jobs to our city. Just like Scheels some of those jobs will be minimum wage and others will be better paying. Let’s try to be fair and compare apples to apples. Scheels is spending $25,000,000 and they may borrow that money from a bank and pay interest on it. Let’s assume they pay another $5,000,000 in interest over the life of their loan so they pay $30,000,000 for 100 permanent jobs. That’s $300,000 a job.  The best plan the Mayor could put together was estimated to be $185,000,000 for 185 jobs. 60% of voters signed up to spend their hard earned dollars on jobs that cost us $1,000,000 each. Of course we get an events center too, but let’s focus on one thing. Jobs.

Jobs are an economic engine unto themselves. When jobs are created those wages filter into the community. The money gets recycled. A paycheck on Friday becomes dinner at Spezia on Saturday or a beer at a bar just a few hours later. I’m not naive enough to believe that jobs should be the ONLY deciding factor in building something or spending public money. How many jobs are created when we build a park or pave a street? Not many, if any. When we create a business, and that’s what an events center is, then we should expect it to sustain itself and make our community grow. The truly alarming part of investing in an events center with 100% taxpayer financing is that if it loses money the taxpayers have to chip in even more. That’s right friends, since the “good people of Sioux Falls” own the events center if it loses money we have to subsidize it. And what happens if it does lose money?

Nothing happens if the events center loses money, nothing good that is. No one will lose their job (right away). No one will get their money back on the bad investment (our money). No one will say they’re sorry (politicians are allergic to apologies). We can’t close the place down because we’ve got too much invested in it. It becomes a $150,000,000 clunker of a car that we have to keep putting money into for gas and parts even though we’ll never be able to sell it. One man’s political capital would become our city’s responsibility.

Back to Scheels. If Scheels is about making a profit then why are they putting $25,000,000 into one corner of our city? They’re doing it because that’s what they do. They sell stuff. They make money. If they don’t make money people lose their jobs, their customers go somewhere else and the building closes. I believe that we need government but there are some things the government has no business participating in. Most of the things they have no business participating in are related to business.

But what about all of the other business that will come from these events? The times that my family has gone to the events center we drove from our home to the event and then after the event went home. Where were we supposed to go to dinner, Burger King? Last I checked Buffalo Wild Wings doesn’t hold 1,000 people, at least not the one by the arena. My own experience is backed up by the reports we paid so much for as taxpayers. The immediate development impact to the arena area is around $7,000,000. That’s about 1/3 of the Scheels expansion. It’s far less than is being spent on a downtown hotel going up at the same time. This “economic engine” that was sold to voters is in fact a dead man walking. It’s projected to create very little new development. It’s a $150,000,000 expense that will create 185 jobs (they hope) and you’re paying for it if you’re a Sioux Falls taxpayer.

I’m not a Kermit Staggers disciple. I’d like to pay off the riverfront work we’re so close to making a jewel in our city. I’m pro events center if we could have found one in the right location, right mix of private support and right size. I’m for government supporting business but I think Kermit is going to look like the one with the business acumen after this all shakes out because of what he’s against. He’s against gambling on non-essential entertainment that by the most optimistic estimates won’t make us much money.

I think Sioux Falls voters got suckered when we voted in someone to lead the city who made their living peddling debt and raking in the interest. Now he sold our city on the same thing except this time it’s our debt and our interest. Funny thing is he still gets paid and consumers still lose. I guess old habits are hard to break. Congrats Scheels. Your prices are outrageous most of the time but I love my $85 sandals. They’re better than $85 tickets to Bieber.



24 comments ↓

#1 Lemming on 04.16.12 at 1:10 am

That was one long ass post! I started skimming when I hit the second paragraph. In the summarized version I took from this Scheels is overpriced (For sure! – damn that place is spendy-but the escalator rides rule! and our MMM shouldn’t be at the helm…which I think most folks agree with).

#2 Poly43 on 04.16.12 at 6:39 am

Got to agree with your post. But I had to shake my head at one statement.

Just like Scheels some of those jobs will be minimum wage and others will be better paying.

Just “some” of those jobs Andy? How bout nearly all. I would guess 15 of those jobs will pay more than the other 170 combined. Those 170 part time minimum wage jobs will be taken by needy people supplementing their already meager salaries. But then…this IS a RIGHT TO WORK state. A state where your right to work 70 hours a week pays the bills.

#3 MARK on 04.16.12 at 6:57 am

Is Scheels getting any economic development $ from the city/county/state?

Won’t the EC’s 185 jobs filter $ into the community? And won’t the EC create a non-government demand for more restaurants and hotels for people to go to after they fork over $85 for a Bieber concert? Undoubtedly many of those jobs will be minimum wage but some will be decent jobs. How many new jobs? Not sure. But there will be new jobs, and I’m guessing a lot. Call it the “Build It And They Will Come” principle.

I appreciate Traub’s position. My guess from afar (and without looking at any numbers or having any intimate knowledge of the local economic projections) is that there will be some years the EC will show a loss and some they’ll show a profit. And in both years sales tax revenues and the jobs in the restaurants, motels, service providers, vendors will be up.

I might be wrong, but I’m guessing in a few years, you won’t find anyone who will say they’re against the EC.

#4 Poly43 on 04.16.12 at 7:40 am

Fargo has a Division I tenant. A tenant that they desperately needed to scratch out a meager profit last year. Sioux Falls??? A maybe bieber “event” once a year? Frankly, I’d rather go to the casino in Iowa and see Gary Puckett. But then, that’s just me.

http://jenholsen.blogspot.com/2011/12/deficit-staved-off-by-football-go-team.html

This is where we’re headed with this thing folks. Just like a lot of johhny come lately McArenas.

http://www.startribune.com/local/minneapolis/131924448.html

#5 Craig on 04.16.12 at 8:25 am

I’m still wondering which direction Scheels will expand. They can’t go East because of the strip of stores already there. If they go North it will create a barrier to traffic getting in and out of the Western Mall. If they go South they will cut into the already tight parking area.

So where do they go? West? Perhaps Champps will relocate and Scheels can expand a two story structure that direction?

I’m also surprised they decided to expand the one store as opposed to building a second location out near Dawley Farm. I’m sure they did the math and I know there is efficiency in size, but I also know Dick’s Sporting Goods was eyeing Sioux Falls and if they end up out near Dawley it could be a game-changer. (And by game changer I mean Scheels might actually have to start charging reasonable prices since they will have competition in something other than golf clubs).

#6 mhs on 04.16.12 at 8:51 am

Uh, Andy, what part of Scheels depreciating their $25mm investment and not paying taxes on it did you forget? Oh, and they get to deduct the $5mm in interest payments as well. Talk about a government subsidies. If you’re going to make conparisons between public and private investments, better tell the whole story.

#7 Tom H. on 04.16.12 at 9:47 am

Craig – If you watch the announcement video, Mr. Scheel indicates that the building will expand to the south. Yes, that will take out a lot of parking, but it’s rarely utilized fully. I consider it a small victory anytime a parking lot is built upon.

As far as the post goes – Andy makes an interesting point regarding the appropriate role of city government. In my mind, the City has two fundamental roles: provide essential services (fire, police, public health, transit) and build and maintain infrastructure (streets, parks, libraries, etc.). Job creation should not come from subsidizing citizens’ entertainment options, or providing direct handouts for businesses (TIFs, anyone?).

If we provide quality services and maintain efficient infrastructure, private investment will be attracted without the need for expensive gimmicks or corporate welfare programs.

Check out this amazing post at StrongTowns about how the current, subsidy-fueled development pattern is soundly out-performed by the small-scale traditional urban form that still exists in our older neighborhoods.

#8 MARK on 04.16.12 at 10:05 am

Good point, Tom. But I think you’d agree if some private entity could see a direct value to their bottom line, they’d finance, build, and promote their events center (and probably with property tax deferrals and other sweetheart enhancements, not to mention the federal tax advantages (subsidies).

While some would agree with the proposition that local government should provide essential services (public safety, infrastructure, etc.), others, and apparently the majority in many cases, think local governments should foster and even provide quality of life items for the community (libraries, community centers, events centers.)

While some private concern didn’t see fit to build an events center, some private company will probably pay a nice fee for naming rights, which will hopefully benefit the company and taxpayer.

#9 matt70 on 04.16.12 at 11:14 am

If the Events Center was such a sure fire money maker private money and private business would have been climbing all over the city years ago to get this built. I sure hope the “debt peddler” with the “business acumen” is right about this titanic gamble.

#10 rufusx on 04.16.12 at 11:15 am

@Mark – no – events centers are NOT retail stores. The per sq. ft. profit generated by a retail store – no matter how “spaced out” is will never be able to be equalled by an event (center). Let’s say an average Scheels customer spends $200/per trip to the store. This done in a 100,000 SF plan with 1,000 customers a day. Average Mark-up on items – 40%, distributed costs on items – 30% – net on sales – 10% ($20K)- EVERY DAY – ALL DAY LONG. Annual pre-tax net – $7.3MM.

Bottom line, private investment will never be made in a large-scale events center, for profit. Never.

#11 rufusx on 04.16.12 at 11:20 am

@matt70 – no one that I have heard has EVER claimed that events centers – in and of themseves – ever make money. What they do is draw large crowds of people who spend money at OTHER locations around town – like Sheel’s. That – in turn – spurs private development – adding to the tax rolls of the city. It’s INDIRECT.

#12 Tom H. on 04.16.12 at 11:32 am

MARK – There is obviously a spectrum of what can be considered a legitimate civic amenity. Personally, I feel that libraries are easily on the “justified” end of the spectrum, with civic centers and events centers falling further (respectively) down the spectrum of “unjustified.” You have to draw the line somewhere, obviously.

I think my biggest beef with the whole EC financing situation is the lack of a regional vision. The EC will be a regional, state-wide amenity, and we never once explored a state-wide (or other regional) funding source. I know that this opens up a can of worms with regards to the whole SF-vs-rest-of-state political dynamic, but I find it absolutely ludicrous that the funding breakdown is 0% private, 0% state, 100% city borrowing.

#13 Andy Traub on 04.16.12 at 11:51 am

Great comments everyone. I appreciate the conversation here. For those who have critical comments about what I wrote…thanks for those too. I appreciate the challenge.

Regarding any questions relating to math I don’t have to break out my loan calculator to tell you that Scheels is using 100% of their money and the Mayor’s plan is to 100% of ours. As for more jobs coming from the EC…I hope you’re right but I’m still skeptical. They’re building a hotel downtown and there’s vacant land next door to the EC that no one wants to touch (as discussed in the ARgus last week). I hope I’m wrong but I don’t think I am.

Until the EC makes money it’s an expense and it’s a broken promise (because they sold it as a money maker). Keep the conversation going everyone. Thanks again for reading and to Scott for letting me post.

#14 Badbenboyenemy on 04.16.12 at 12:44 pm

A privately owned sporting goods store with high profit margins from cheap Chinese made soft goods, has a business model that competes with a pubic events center?

#15 l3wis on 04.16.12 at 2:04 pm

Before I posted this, I told Andy at my last serving job 1 out of 10 (aproximately) credit cards I ran had Scheels on them. It is a popular place, but they do overcharge for their products. I think Andy’s point is one that Kermit made during the mayoral campaign, we should have had private investment in the EC. To date we $0. Sure we will get naming rights, but how much will that be? A spit in the bucket that most likely will go to construction plan upgrades.

#16 MARK on 04.16.12 at 2:07 pm

Andy & Tom. Very legitimate points. Hopefully your concerns were part of the pre-election debate.

As to “rufus” – I certainly agree with part of your position, except when it comes to privately-owned events centers. Yes, they do exist. Admittedly, they are the exception. And some HAVE retail space within their walls, generating revenues to offset their costs. Case in point — about 300 miles north, in a town of 50,000, Grand Forks built an events center after the flood. (Talk about bad timing, selling that to the electorate.) That city-built center was extremely controversial, especially buing built in the aftermath of a devasting flood of 1997. Some quarters they report operating losses. Some quarters they report “profits.” It cost the city over $60 million. There was a cost overrun. The community loves it. Despite GF’s relatively smaller size to SF, about the same time, and adding to the local controversy, a private individual designed and built the world class Hockey Arena investing north of $100 million of his own money. Granted the Ralph is the venue for one of the best Division 1 hockey programs, but it has great eating, drinking sites, a “Fighting Sioux” Sports Store, and hosts great concerts for the community. Except for hockey, one might say the Ralph competes with the city-owned Alerus Center. Check out an event/concert/convention at either venue, and you’ll see a lot of out-of-town vehicles, including Canadians, filling the parking lots — and afterwards the restaurants in town. GF is a lot smaller than SF and you add the fact that the FargoDome is just an hour south, which also competes for exhibits and concerts.

Some people mistakenly think it’s the UND hockey arena, but it’s owned and operated by the family trust, not by the city or the university.

I know I sound like I’m carrying the water for the pro EC crowd. I have no stake in the business, (and I was one of the skeptics 15 years ago – primarily about where it was to be built) but I thought I share my two cents worth of perspective.

I’m also NOT

#17 MARK on 04.16.12 at 2:11 pm

sorry about that. pushed send to early. I was going to admit that “I’m not an expert. – Just my thoughts, for what they’re worth. (Hopefully, more than two cents.)

I would add, however, that your new A-L council member will be a great watchdog. And I wish SF the best.

#18 Pathloss on 04.16.12 at 2:14 pm

I just don’t think an events center will ever get built. Supposedly there’s bonds. We don’t know how much or the brokerage. I worry much has already come in and funds have been diverted. You voted for an events center. You didn’t cap the amount nor did you mandate funds must go to the project. Construction jobs would have been valuable. However, Huether awarded contracts before the vote or a location was decided. Contractors are from out of state. They’ll not live or pay taxes here.

#19 mhs on 04.17.12 at 12:06 am

Mark, I gotta disagree on the Ralph as an example of a “private” facility that works. All you say is true, but, asuper rich fan shelling out big bucks for facilities really only happens in big time college sports (Oregon’s Nike largesse is another case in point) and is never intended to be a money-making enterprise, rather a give back to the old alma mater. (Any rich guys who read this that want to kick in for a new Basketball arena at USD, please let me know!)

The only true large scale private events facilities in the country are almost all parts of casino complexes: Vegas, Foxwoods, etc. Ruf is right: they exist to lose money in themselves but bring in big spenders / players / losers.

#20 Poly43 on 04.17.12 at 6:45 am

Some say the Alerus in GF is profitable? No way.

http://sayanythingblog.com/entry/audits-grand-forks-alerus-center-has-lost-10507962/

The Alerus brings in out of town money? Again, I don’t think so. Here is a couple months worth of upcoming “EVENTS”.

Artwise Elementary Art Show Tue., Apr. 17
Artwise Elementary Art Show Wed., Apr. 18
Artwise Elementary Art Show Thu., Apr. 19
UND Fan Luncheon Fri., Apr. 20
Knight for a Princess Fri., Apr. 20
Knight for a Princess Sat., Apr. 21
UND Spring Football Game Sat., Apr. 21
Spring Job Fair Tue., Apr. 24
UND/MSUM 2012 Spring Symposium Thu., Apr. 26
UND/MSUM 2012 Spring Symposium Fri., Apr. 27
Grand Forks Central Prom Sat., Apr. 28
Red River Prom Sat., May. 5
The Called TO Love Tour Wed., May. 9
UND Commencement Sat., May. 12
ALC Graduation Thu., May. 17
Anything Goes: Garage Sale-Flea Market-Swap Meet!Sat., May. 19
Community High School Graduation Thu., May. 24
Red River/Central Graduation Sun., May. 27
ND Rural Health Conference Tue., May. 29
ND Rural Health Conference Wed., May. 30
ND Rural Health Conference Thu., May. 31
ND Rural Health Conference Fri., Jun. 1
Central Boiler Convention Thu., Jun. 7
Central Boiler Convention Fri., Jun. 8
State Bar Association Conference Thu., Jun. 7
State Bar Association Conference Fri., Jun. 8

Is this what we’re counting on? Anything Goes flea markets? There’s nothing we’re going to bring newer to the plate than we can already serve up at our existing arena/community center.

New dollars to the city? Sioux Falls has metro population of 250,000. I highly doubt for ANY event, not many plates in the parking lots will be from outside our metro. Me, for example. I might spend $100 to watch bieber and then see his handlers jet out of town with that money, or I might choose to spend that same $100 at Elmwood Golf Course. Most people have just so much money set aside for entertainment. Now, what’s it going to be? bieber or golf? One or the other? Not both. Just where is ALL this influx of new dollars in that scenario?

#21 The Guy from Guernsey on 04.17.12 at 8:27 am

I was stunned that an organization like Scheel’s would continue to invest this much money in bricks and mortar infrastruture at their present site along 41st St.

Why not place your bet for this sort of guest-attracting, enhanced-shopping experience business on the happening side of town – near that soon-to-be-spankin’ new SF Events Center ? Dang, HisManMikeMayor (TM), just this last week, lauded the availability of the parcel which was the site of the former Oaks Hotel !

Build Big !
Build New !
Build It Now ! … On the Happening Side of Town !

/ sarcasm /

#22 MARK on 04.17.12 at 9:49 am

mhs: that would be a neat idea! The late Ralph Engelstad went on to build two more with his own $, one of which he donated to his hometown of Thief River Falls. He made his money in the casino/convention/tourist industry. (Most in Vegas, I believe.)

Were he still alive, and if SF would put an ice rink in it, too, he just might have listened to your pitch!

Sheels has a major presence in ND, where they’re based. Appears they focus they business plan on building some stores that double as destination and attraction themselves, but they also support the events centers up here with sponsorships and on-site advertising. (Not for the flea markets, but when they have bigger events. Look at the Alerus calendar when it hosts political conventions, UND football, HS playoffs, Bette Middler, Britney Spears, etc.)

Another thing I’d suggest Rob Port to do, when looking at quarters that the Alerus wasn’t profitable, go ask the CanadInn (adjoining facility to the north) if they’re profitable. I’m sure they won’t let us look at their books, (they’re private, after all) but I suspect they’re selling a lot of rooms, serving and catering a lot meals, otherwise they’d wouldn’t be there.) And go to grandforksgov.com or stop by city hall and check the nearly 60 quarters of sales tax revenue since the Al (& its competitor, the Ralph, were built) and the preceding 15 years of sales tax receipts. During that time, GF’s population has gone up, but not by much.

Sir Elton John sang recently in GF (the Ralph) and I’m guessing he flew on to his next tour date right after his concert. With a big bag of money, too. I’m also guessing a lot of those attending from places like Bismarck, Bemidji, and Winnipeg went out to dinner and some stayed overnight and maybe shopped the next day.

Here’s another thing to consider: $ is important. I get that. Civic pride and other intangible things are, too. (Ask the Minn. legislature, as they’re wrestling with state-private issues re the Dome.)

The Ralph, the Alerus, the Betty have also served the communities for free, from hosting fundraisers, to being live-saving staging areas for flood-fighting and “sandbag central” operations. Hard to put a value on that. Not sure where Fargo would have been able to fill, store, and keep bags dry a couple of years ago when it dodged a bullet.

Poly raises some good points about the bottom line, but the bottom line to the facility is just part of the equation.

#23 PrairieLady on 04.18.12 at 5:44 pm

Well….if the EC is not profitable, can we make it into a casino?

#24 Detroit Lewis on 04.19.12 at 12:54 am

Isn’t it already? We are betting the house.