Coyotes Ugly

Written by Editorial Staff Category: Valley News Issue: October 2012
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First and most thrilling to fans, the Coyotes fared extremely well on the ice, qualifying for the playoffs and advancing to the Western Conference finals for the first time in the franchise’s 16-year history. That was the non-ironic, momentous-momentous part of the Coyotes’ season.

In the midst of their often-spectacular play, the team accomplished something arguably more historic: They drew dead-last in NHL attendance, becoming the first team in the modern NHL era to win their division and inspire the most indifference in their fan base. That was the dubious-momentous part of the season.

Think about it: first in the standings and last in attendance. It’s counter-intuitive, un-democratic, unwholesome and more than a little sad. It violates everything we know – or think we know – about that holy pact of expectation and reward between sports team and fan: Put a better team on the ice – or field, or court – and put more fans in the seats. That simple calculus holds true almost everywhere. But certainly not in the city of Glendale over the past five years.

No wonder Glendale can’t give the team away. That’s not a flip figure of speech – it’s literally true. Since 2009, the money-hemorrhaging Coyotes have been owned by the NHL itself – a strange, semi-incestuous foster care arrangement that’s prevented the franchise from pursuing a coherent and productive marketing strategy. In its various attempts to entice a buyer – and, by extension, keep the team at Arena – Glendale has offered numerous taxpayer-funded subsidies to prospective owners. The latest proposal calls on Glendale to pay about $16 million a year to former San Jose Sharks owner Greg Jamison for “arena management” duties. Free money. Dowry payments.

phm1012ht 2 smIs this what has become of the once functional Coyotes franchise? Reduced to the role of ugly-duckling spinster daughter in a corny send-up of The Taming of the Shrew, with Glendale playing the faltering aristocratic father who’ll do anything – kind sir, this is my life savings, take it! – to extort a marriage proposal out of some fancy boy from the city?

As a whirlpool of motivations and money, it’s been a fascinating spectacle. John McCain wandered into the melee briefly. So did the Goldwater Institute and at least one Canadian billionaire. And though the Coyotes will be playing in Arizona when the NHL season begins October 11, and seem relatively assured of finding their gentleman suitor, it won’t be smooth skating for some time. If ever.

The story of the Coyotes begins with the birth of the  Winnipeg Jets in 1972. Playing in the old World Hockey Association, the Jets skipped over to the NHL when the WHA collapsed in 1979. Winnipeg was hardly a model franchise. Playing in the NHL’s smallest arena, in a marginal central Canadian market, the franchise was in dire financial trouble by 1996. Lacking any viable Canadian buyers, Jets owner Barry Shenkarow sold the team to American businessmen Steven Gluckstern and Richard Burke, who in turn struck a deal with Suns owner Jerry Colangelo to move the team to Phoenix and play in America West Arena – part of a larger migration of foundering northern franchises to subtropical American cities with little or no native hockey culture. Atlanta improbably got a team. So did Tampa Bay and Raleigh, North Carolina.

The move broke the collective heart of Manitoban hockey fans but had the blessing of NHL Commissioner Gary Bettman, says Forbes executive editor Michael Ozanian, who’s covered the NHL extensively. “[Bettman] really wanted a coast-to-coast market at the time... a full presence throughout the country to maximize a TV deal. So Phoenix was part of that vision.”

Powered by the addition of superstar center Jeremy Roenick from the Chicago Blackhawks and stellar play from power wingers Keith Tkachuk and Rick Tocchet, the Coyotes were extremely competitive upon their move to Phoenix in 1996, posting six consecutive seasons of .500 or better and making the playoffs five of those years. “White Out” fever – dating back to the team’s Winnipeg days, in which playoff crowds dressed in snowy white – became a fairly reliable Valley sports tradition.

Business-wise, the team fared less well. Attendance was stable but unspectacular during the team’s honeymoon phase in Phoenix, hindered by the fact that America West Arena was somewhat inadequate for hockey. The 200-foot regulation hockey rink barely fit in the arena, and the parameters were so unforgiving that one of the upper decks actually hung over the board and ice, obstructing game-play views for many seats and rendering them worthless. Adapted for hockey, the 18,000-seat arena accommodated just over 16,000 fans, making it the second smallest NHL venue at the time.

phm1012ht 3 smAs the team’s play went south in the mid-2000s, so did attendance – precipitously. In 2002-2003, just one year removed from their most successful season on the ice, the Coyotes finished second-to-last in attendance, outdrawing the lowly Nashville Predators by 37 fans.

Bleeding out like Tim Roth in Reservoir Dogs, owner Burke – who bought out Gluckstern in 1998 – decided he had enough, selling the team to Valley developer Steve Ellman for $87 million. Ellman in turn recruited NHL legend Wayne Gretzky as director of hockey operations and co-owner, scoring a short-lived public relations coup. According to Forbes’ Ozanian, Ellman never had an expectation of building a winning franchise, or turning a profit. The team was simply a “lynchpin for a larger real estate deal” that led to the construction of Westgate City Center and its associated, 17,000-seat entertainment venue, which was originally called Glendale Arena. (The naming rights were later sold to The arena itself was funded by Glendale via bond initiative to the tune of $220 million – evidently money well spent for a growth-minded suburban city hungry for a national profile.

“That was the whole reason the Coyotes were put there,” Ozanian says. “When Ellman and company sold the [Westgate ] project, the team would turn a profit for their investors on the sale. Then the investors got out, the real estate market tanked, and so did Westgate.”

Ellman flipped the team – along with its lease – to trucking magnate and minority partner Jerry Moyes in 2006, reportedly to settle a financial dispute over Westgate. According to a 2009 article in the Toronto Globe & Mail, the Glendale-based Moyes “was never keen to own the Coyotes” and “told Bettman and other league officials that he would stop funding the club, which was losing more than $40 million annually.”

Ultimately, the league bought out Moyes for $140 million and assumed guardianship of the club.

Three years later, the Coyotes continue to lose money at a spectacular pace. Most likely, the NHL would have moved the team by now, if not for the city of Glendale, which pays the league a $25 million-a-year subsidy to offset losses and keep the team at until a new owner steps up. Obviously, Glendale wants to keep the Coyotes at almost any cost. But why?

To feed the otherwise-dormant concrete circus animal in its backyard. According to an analysis commissioned by the city, Glendale’s debt payments on Arena will average about $12.6 million annually over the next 20 years. Add to that the perceived value of a marquee sports franchise and the dollars it brings to the struggling Westgate project, and it simply costs less to pay someone upwards of $20 million a year to buy the Coyotes than to let the team go.

Make sense? Not everyone thinks so.

Darcy Olsen is a casual hockey fan at best. Mention the term “crease violation,” and she will think of poorly-ironed slacks, not an errant attacker who wanders too close to the goal. Blue lines? Laser skin therapy will take those out.

So how is it that Olsen was named the 64th most influential person in the sport by The Hockey News on the publication’s yearly power list? The answer: by slapping down the Coyotes’ best shot yet at finding an owner. As president of the Goldwater Institute, Olsen was instrumental in scuttling a Glendale-subsidized ownership deal between the NHL and Chicago businessman Matthew Hulsizer last summer. For her efforts, Olsen won the ire of Senator John McCain, NHL President Gary Bettman and any number of Arizona hockey fans. But the big-government watchdog is unapologetic, which is why she finds herself just behind future-Hall of Fame Detroit defenseman Nicklas Lidstrom on The Hockey News list.

phm1012ht 4 sm“Our biggest concern is to make sure [Glendale] constructs a deal that holds the taxpayer harmless,” Olsen says. “It’s not a conservative thing. It’s just good government.”

A toothless think tank the Goldwater Institute is not. Five years ago, the organization launched its own litigation center – i.e. ninja-lawyer squad – to further its Libertarian policy goals. So when Olsen threatens to sue, tax-revenue-spending officials listen.

Following the NHL’s seizure of the Coyotes in 2009, several prospective ownership groups flirted with the idea of buying the money-losing team (see boxes). Glendale finally thought they had a winner in early 2011, when Chicago investment manager Hulsizer put together an investment group that agreed to meet the NHL’s estimated $170 million asking price. The deal would be contingent on a hefty taxpayer-funded subsidy package from Glendale, estimated at $197 million over five years, to help defray the money that Hulsizer would inevitably lose running the team. No less a luminary than Senator John McCain, a Coyotes fan, helped proctor the deal, figuring – as many observers did – that the Hulsizer deal was Arizona’s last, best hope of keeping the Coyotes.

Enter Olsen and ninja Goldwater attorney Carrie Ann Sitren, who concluded that the deal ran afoul of the Arizona Constitution’s “gift clause,” which makes it illegal for any public entity to “give or loan its credit... by subsidy or otherwise” to private interests. The threat of Goldwater legal action was enough to ice the deal. According to Olsen, McCain, who publicly characterized her actions as “blackmail,” called personally to rag her out over the phone: “I said to him, ‘Senator, you’ve made this great career out of fighting pork in Washington. Why don’t you use your political capital to keep the Coyotes in town? Get your friends together, form your own group?’”

Olsen smiles at the memory of the conversation. “And he said: ‘Well, that wouldn’t be profitable.’ And I said: ‘That, Senator, is the problem with making taxpayers pay for it.’”

Though she understands the “added value” rationale of keeping the Coyotes in Glendale – the idea that the team generates foot traffic for nearby businesses and sustains a fusion reaction of restaurant sales and other retail activity – it’s based on a flawed presumption, Olsen believes.

“The most comprehensive meta-analysis over the last 50 years shows that stadiums and arenas don’t have a measurable impact on businesses,” she says. “It’s called the ‘substitution effect.’ People simply do their spending inside the stadium rather than elsewhere.”

Hulsizer walked away from the deal in June of 2011. Flush with another $25 million taxpayer infusion, the Coyotes stayed.

phm1012ht 5 smDOUBLE OVERTIME
Glendale – led by outgoing City Manager Ed Beasley – learned its lesson after the Hulsizer fiasco. As ownership talks developed last spring with former San Jose Sharks owner Greg Jamison, the city commissioned Valley accounting firm Elliot D. Pollack & Co. to run the numbers on its deal with Jamison, dubbed the Arena Management Agreement. The firm’s conclusion: Glendale would actually lose less money paying Hulsizer a $16.2 million yearly contract to manage – booking concerts, managing concessions, etc. – than it would if the Coyotes simply bolted town.

“If Jamison doesn’t buy the team and the Coyotes move, then [Glendale] wouldn’t be getting rent or 15 percent of the [] naming rights,” economist Jill Welch, who compiled the report, says. “Glendale also gets a ticket surcharge from all ticket sales.”

Factoring in these revenues, the Jamison deal – which also requires the new owner to change the team’s name to the more universal-sounding “Arizona Coyotes” – would cost Glendale an average of $7.9 million annually; if Glendale bid adieu to the Coyotes and paid someone else to manage the arena, the annual loss would be $8.8 million, translating to a savings of $17.8 million over the 20-year life of the lease, according to Welch.

Anticipating objections from the Goldwater Institute, Glendale also hired an attorney to testify before a city council workshop that the deal does not constitute a subsidy, or violate the gift clause, because the financial benefits outweigh the costs to the taxpayer. Olsen says she can’t confirm the “veracity” of that claim, because Glendale’s 100-page report is sketchy about the monetary expectations that will be placed on Jamison.

Working to push through a 0.7 percentage sales-tax hike to fund the deal – and certainly leery of spooking their latest Coyotes suitor – Glendale leaders have been mum with media. Acting City Manager Horatio Skeet did not respond to multiple requests for comment, and Mayor Elaine Scruggs declined comment.

One can sympathize with their predicament. After all, Glendale isn’t the only North American city that’s crushed itself a bond-funded sports venue. Built in 1989, the Toronto SkyDome cost Canadian taxpayers roughly $590 million and was such a towering boondoggle that the city of Toronto sold it to a media company for less than a tenth of its construction cost.

phm1012ht 6 smNor are the Coyotes the only hockey team with revenue issues. As Ozanian points out, losing money is all the rage in the NHL these days. “There are only a handful of teams that make money: the [Toronto] Maple Leafs, the [Boston] Bruins, the [Philadelphia] Flyers… maybe a few others,” he says. Still, the Coyotes/Glendale/ situation is especially bleak. Last year, Forbes estimated the Coyotes’ value at $134 million – dead last among the NHL’s 30 teams. Mystifyingly, the team’s attendance figures have actually gone down as the team improved on the ice over the past three years (see graphic, page 28).

Say that Glendale does fashion an acceptable lease agreement for Jamison, and the NHL ratifies the deal: Is there any reason to believe this drama won’t be played out again in four years? Ozanian envisions one scenario. This fall, the league and the NHL Players’ Association will attempt to hash out a new Collective Bargaining Agreement – the labor treaty that sets a limit on what percentage of league revenues go to player salaries. Currently, that figure stands at 57 percent; the league would “like to get it down to around 47 percent… it’s not apples to apples with what the NBA did last season, but it’s close,” Ozanian says. The team’s payroll is currently around $44 million – already much lower than the NHL average.

Most critically, the Coyotes need to turn around home attendance and ticket sales. Other NHL teams have clawed out of the revenue doldrums, and fairly recently. When the Chicago Blackhawks were also-ran-bad in the early part of the last decade, they also routinely finished in the lower third of attendance. Last season, they led the league with 21,533 fans a game.

Glendale’s predicament is a little more complicated. According to an analysis conducted by the Arizona Republic, Glendale would still lose about $9 million annually “even if the Coyotes went to the Stanley Cup Finals for the next 20 seasons and the arena booked 30 sold-out concerts each year for the next 20 years.”

Faced with such sobering forecasts, the Goldwater Institute’s Olsen proposes another idea: Flip to the Tohono O’Odham Nation. Evidently, the cash-flush tribe has inquired about obtaining the arena and could make the $12 million mortgage payments without involving tax payers. “[Selling] the arena is a possibility they should explore,” Olsen says.

Perversely, Glendale’s arena debt could be the one thing keeping the Coyotes in Arizona. Relieved of and its hefty mortgage, Glendale would have no reason to offer sweeteners to prospective owners. The Coyotes would probably move to Quebec City. Or the Toronto suburb of Hamilton. Or Seattle. That would be unfortunate – because having an NHL team is a nice point of pride for the Valley. We’d be the largest city in the U.S. without one if the Coyotes moved.

For the time being, it looks like Glendale taxpayers will foot the bill for the privilege.

Note: As of press time, the Goldwater Institute has no legal activity pending to halt the Glendale/Jamison deal, which appeared on track to be ratified before the NHL’s 2012-2013 opening day on October 11.