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Ralston Arena: Town's hope for windfall was based on wildly faulty numbers, analysis shows

Ralston Arena: Town's hope for windfall was based on wildly faulty numbers, analysis shows

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Looking back, it seems on its face to have been an audacious vision: that Ralston, a working-class suburb of just 7,000 folks, could build a $32 million, 3,500-seat sports arena.

But town officials in 2011 offered figures that showed the math worked. As city leaders sold the proposition, residents were shown projections during town hall meetings that the arena would generate enough profit to pay off the construction bonds each year and still leave a tidy profit — $600,000 in the first year. That, they were told, was enough to reduce the property tax levy by 18 cents — a 33 percent tax cut.

Everyone now knows Ralston faces a far different reality, the Ralston Arena having become a tax-dollar sinkhole.

What happened?

A World-Herald financial analysis shows that Ralston’s 2011 projections were wildly optimistic about the arena’s financial performance. The city grossly underestimated the yearly cost of operating the arena — by almost $2 million, nearly double the projection — and was also long on annual revenues, by about $1 million more.

To top it off, unanticipated costs and added parking raised the final price tag to more than $41 million, boosting the annual bond payments by almost $1 million a year.

Even with substantial state tax subsidies, which are now coming in nearly $1.5 million a year above initial estimates, the arena still has fallen far short of breaking even.

To keep from defaulting on the arena bonds, city officials over the past three years have without fanfare raided about $4 million from other city funds and gone outside to borrow another $1.2 million. Now it’s likely that Ralston taxpayers who were sold on an arena that might cut their taxes will soon start paying higher property taxes and a new restaurant tax.

“That’s a huge misfire,” Ken Kriz, a Wichita State University public finance professor who formerly worked at the University of Nebraska at Omaha, said of the original projections. “I still do revenue forecasting for the City of Omaha. If I’m off by 10 percent, I want to go jump off the Bob Kerrey Bridge.”

Ralston officials now acknowledge their projections were indeed far off the mark. But they insist they were diligent in creating and vetting the numbers, working with consultants familiar with the operations of like-size arenas.

“It wasn’t (just) me sitting down at a table putting numbers together,” said Don Groesser, Ralston’s embattled mayor.

Groesser said city officials are working hard to improve operations and bring more business to the arena. However, even with those efforts and with the proposed tax increases, the city’s financial future remains uncertain. Some experts say bankruptcy, while not on the horizon, is not out of the question.

[See also: How the Ralston Arena became a financial 'train wreck,' and dragged the city with it]

But The World-Herald analysis suggests that Ralston’s salvation might lie not so much in attracting more events and fans to the arena as in people buying more hammers, garden supplies and lumber at the Menards building supply store next door to the arena.

It all relates to the generous way state lawmakers crafted the “turnback tax” that has been helping to subsidize the Ralston Arena.

Turnback financing allows a portion of the state sales taxes generated in and around an arena to help pay the project’s debt. The general theory is the arena and its taxpayer-owners should share the benefits of the new economic activity — tax dollars that would not have been generated without the project.

Turnback dollars for the Omaha and Lincoln arenas are limited to sales at the arenas and at nearby hotels — those within 200 yards of the Omaha arena and 450 yards of the Lincoln arena.

But when crafting the turnback for Ralston, Nebraska lawmakers didn’t limit the outside sales to hotels, literally throwing in the kitchen sink.

Ralston collects turnback revenue on sales of any retailers within 600 yards of the arena, as long as they opened during a window of two years before and two years after the arena commenced operations. Those provisions allow Ralston to collect turnback taxes on sales at the Menards, which opened about the same time as the arena and which generates tens of millions in annual sales.

As a result, the turnback funds Ralston receives already exceed Lincoln’s and approach those of Omaha. Ralston collected $2 million last year and projects to receive $2.4 million next year — enough to cover almost three-quarters of the city’s annual $3.3 million bond payment.

Ralston officials are now asking state officials to make the turnback provisions even more liberal. Groesser unabashedly thinks the turnback should be expanded enough to cover the city’s entire annual debt payments, which are due for the next 18 years.

Gov. Pete Ricketts has been open to the idea but noncommittal. The local lawmaker pushing the proposal for Ralston has said it will be a tough sell in the Legislature.

Given the current rate of growth in Ralston’s turnback funding, though, it’s conceivable that even without state action, the incentive dollars could at some point cover the entire annual debt payments. Then Ralston taxpayers’ exposure would largely be limited to the arena’s operating losses, currently running at about $400,000 annually.

Also cushioning against bankruptcy is the fact Ralston still has many other options to balance its budget.

For example, Ralston’s sales tax is 1.5 cents, a half cent below that of La Vista and a handful of other Nebraska cities. A voter-approved half-cent boost would bring in nearly $400,000 a year. Ralston also has additional ability to raise property taxes.

John Bartle, dean of UNO’s public affairs college and an expert on government finance, said the broad structure of Ralston’s turnback subsidies along with the local taxing options make bankruptcy seem unlikely, at least as things now stand.

[See also: Timeline of the Ralston Arena, from 2010 to 2015]

Bartle said he’s not sure the Menards store meets the “but-for’’ test often applied to tax subsidies — that the economic activity wouldn’t have happened without the subsidized entity.

“I don’t see where buying a garden hose has anything to do with the activity of an arena,” Bartle said.

But it’s certainly helpful to Ralston taxpayers that the city is getting those substantial, growing dollars, Bartle said.

Kriz agreed bankruptcy isn’t likely right now but said it can’t be taken off the table completely. What would happen if a competitor bought out Menards and closed the store?

And regardless, he said, it’s likely Ralston taxpayers will be forced to subsidize the arena for years to come.

“It’s a giant cash hole right now,” he said.

A bankruptcy is what started it all.

The old Lakeview Golf Course, a fixture in Ralston near 72nd and Q Streets, failed and then closed in 2007. With the land’s frontage on 72nd Street, Groesser and other Ralston officials saw an opportunity to grow their landlocked town.

A working group sought to attract retail business to the space, to take advantage of the city’s recently enacted sales tax, but didn’t have much luck. Then, in 2009, the group became involved in talks with the Omaha Lancers junior hockey team, which was actively shopping for a new arena.

That led Ralston officials to the Legislature in 2010, seeking turnback funds to help pay for an arena. The city hired former Omaha city official Walt Peffer as a lobbyist and consultant.

[See also: Firm got paid $364,000 since 2010 to consult on Ralston Arena project]

The Ralston turnback bill ultimately passed without a negative vote. Peffer defends the bill’s broad tax scope, saying it’s needed for small towns to generate enough money for such projects.

City officials hired a Virginia-based company with expertise in ice arena construction and management to perform a feasibility study.

The report by Rink Management Services contains much demographic data and figures on how much people in Omaha like ice sports, but it offered little in the way of detailed financial projections on how a 3,500-seat arena would perform. A narrative on the feasibility of the arena covers a scant two pages in the 86-page report.

Rink Management concluded that the arena would be successful when figuring in the turnback taxes. Its final recommendation, though, was only that the city continue its arena consideration and planning.

Ralston officials began working with an architectural firm, which in turn connected Ralston officials with Lance Johnson, an arena consultant who formerly ran the Scheels Arena in Fargo, North Dakota.

Peffer said Johnson and another arena consultant assisted the city in putting together financial projections for the arena. Johnson could not be reached for comment for this article.

Peffer said the consultants did not prepare a formal report. But he said they did work with Ralston officials to estimate the arena’s performance, based on actual figures from like-size arenas. Those numbers were combined with Ralston officials’ estimates for increased local tax collections to derive the final projections.

The projections became part of Ralston’s efforts to sell the arena to residents, featured in town hall meetings hosted by city officials in spring 2011.

The projections indicated the arena and its adjoining practice ice sheet would generate just over $3 million in excess of costs each year — more than $2 million from arena operations and another $1 million from the turnback tax and other city tax growth.

That would be enough to cover the annual bond payment and leave a surplus of some $600,000. The presentation noted that surplus “equals a possible 18-cent reduction in property tax.”

The profit figure was projected to grow to nearly $1 million within four years.

The final slide in the presentation offered Ralston residents two possible futures for their community.

One showed what could happen without the arena: The city’s property tax rate would rise because of climbing costs and stagnant growth. The alternative future, with the arena, showed the property tax rate steadily falling.

“It’s still a big project in our little city, but we can do it,” Groesser said then. “It’s so important for our city.”

In the end, 80 percent of Ralston voters backed the proposal.

A state committee that included Gov. Dave Heineman then supported turnback incentives for the project. Before doing so, Heineman got Groesser on the record saying he would not be back seeking more funds if the project did not work as planned.

Heineman also got Groesser’s assurance that Ralston residents understood that their property taxes could rise if finances fell short.

It can be debated now whether Ralston officials should have known that the projections were overly rosy. Around that time there were numerous cases of smaller-size arenas around the country that were struggling financially, including the arena right across the river in Council Bluffs. It’s possible that vetting the figures more widely also could have raised red flags.

Stan Benis, the former CenturyLink Center manager hired by Ralston last year to attempt to turn around the arena, chuckled at one point last week when looking at the original projections.

Benis said the anticipated advertising “was probably an aggressive number,” as were the projections for attendance.

Groesser said he thought Ralston was diligent in putting together its numbers.

“We certainly used accountants and research people who had run an arena before,” he said. “We had to depend on the experts we brought to the table.”

Groesser and Peffer said they didn’t believe that Ralston’s arena could be compared to the Mid-America Center in the Bluffs. Ralston’s was smaller, had an additional ice rink and more anchor tenants, they said.

The Ralston Arena opened in October 2012 to much fanfare, with one Ralston resident calling it a dream come true.

But dream soon turned to nightmare, with the financial problems beginning to arise before the arena even opened.

Ralston officials took out additional bonds to complete the arena’s furnishings and took out still more to expand parking. That bonding increased the annual debt payment from $2.5 million to $3.3 million. Already, the projected profit margin was gone. And things only got worse during the first year of operations.

Comparing city budget figures to the projections, arena revenues fell $1 million short of expectations. But where the projections really missed the mark was on the cost to manage and operate the facility. The city had projected $2.3 million. Instead, costs reached $4.2 million.

Even after adding in turnback subsidies and growth in other city taxes, the operation was almost $400,000 in the hole.

Groesser at the time soft-pedaled the loss, noting there was a lag in the city receiving all its turnback funds the first year. The city received only $239,000.

But Groesser didn’t mention that the losses left Ralston without a single generated dollar to make its first bond payments: $1.7 million for that year.

City officials paid the debt by taking almost $1 million out of city reserves and using $768,000 of Ralston’s annual keno proceeds — dollars that are allocated for community betterment.

The arena quickly went through two managers. In-arena financial performance was largely unchanged during year two in 2014.

But turnback funds began flowing full throttle that year, hitting $2 million. While Ralston officials used a lower projection of $700,000 in turnback revenue in selling the arena to voters because Menards had not yet committed to building a store, city officials always knew the project had the potential to reach that figure.

Even with that big new infusion of dollars, Ralston still fell more than $600,000 short of what it needed to make its $2.3 million bond payment in 2014. City officials again tapped other city funds and keno dollars, to the tune of $1 million, and borrowed $1.2 million on the private market to improve cash flow.

The challenges grew even more this current year, with the annual bond payments ramping up by $1 million to the full $3.3 million.

World-Herald figures suggest the arena operations and turnback taxes will fall more than $1 million short of making the payment. Ralston officials confirmed that, recently allocating $1.2 million in keno dollars to make the payment due later this month. That’s roughly equal to the total amount Ralston’s keno operations generate in a year.

Groesser said Ralston is not broke, projecting to finish the fiscal year at the end of this month with about $2.5 million in city accounts. But it appears Ralston’s ability to borrow and tap other funds might be reaching its limit, as Groesser and city officials two weeks ago initiated efforts to increase taxes.

At this point, Groesser plans to push for a restaurant tax that would raise $350,000, a 2.5-cent property tax that would raise nearly $100,000, and more than $300,000 in budget cuts — roughly 3 percent of the city operating budget.

Groesser said he’s bothered and distressed by all the speculation about bankruptcy — he said he has recently lost 4 pounds — but said Ralston is managing its arena problems.

He said he’s still not sure why the original arena projections were so far off. Not only did he think they were realistic at the time, he continues to believe that with additional turnback taxes, and improved operations under Benis’ leadership, the arena will yet become a financial winner for Ralston.

“I’m not going to look back,” he said last week. “I’m going to look forward and make this thing work.”

Contact the writer: 402-444-1130, henry.cordes@owh.com

***********

Original projections for the Ralston Arena were off by more than $1 million on revenues and about $2 million on costs. Despite state subsidies that now exceed projections, the city still needs to tap other city funds to make its bond payments. Beginning this year, annual bond payments increase by $1 million, forcing Ralston city officials to move to raise taxes. Numbers below are for 2014, the latest available. 

 ProjectionActual
Arena revenues$4,471,219$3,328,145
Arena expenses$2,318,342$3,922,852
Net of arena operations$2,152,877-$594,707
   
State turnback taxes$711,019$2,004,972
Local tax growth$366,731$194,456
Total taxes$1,077,750$2,199,428
   
Net of operations, taxes$3,230,627$1,604,721
Payment due on bonds$2,527,678$2,233,345
Bottom line$702,949-$628,624

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