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City Hall Hustle: Race to the Finish Line

F1 strangers bearing gifts offer council a 'risk-free' deal

By Wells Dunbar, Fri., June 10, 2011

Formula One is one high-stakes, fast-paced, expensive endeavor. And that's just for City Council.

That was the takeaway from council's careening conversation over F1's arrival in Austin, and more specifically, the terms under which the city would trigger the state's Major Events Trust Fund into luring the international racing event.

The discussion, held at council's Tuesday work session, presages a similar vetting of the subject at council's full meeting today (Thursday, June 9). With the Circuit of the Americas racetrack under construction and the British Formula One Management having selected Austin to start racing in June 2012, it might look like everything's in place. But to sanction the event, F1 boss Bernie Ecclestone demands some $25 million in annual franchise fees. Those funds would be paid from the state's Major Events Trust Fund, but with a proportional match of local tax dollars, presumably captured from the additional tax dollars generated by F1's (and its spectators') arrival in Austin.

Leaving alone the broader questions – like whether it's appropriate to publicly fund an overseas sporting monopolist when the state is slashing basic services at home – council's questions focused on ways to hold the city harmless should those additional, F1-generated tax dollars not rain down like Pennzoil from heaven.

Fittingly, the twisting, turning discussion began with a note from Assistant City Manager Sue Edwards, who oversees the Economic Growth and Redevelopment Services Office, that, in fact, the prescribed order of the Major Events Trust Fund-tapping discussions had been upended. Normally, the sponsoring city is the one to apply to the state for assistance; in this "somewhat backwards" case, said Edwards, the city was approached by the state and race organizers in hopes they'd agree to serve as the sponsoring municipality.

Regardless of the promises state Comptroller Susan Combs or Gov. Rick Perry may or may not have made to Eccle­stone, local F1 team Full Throttle Productions, represented by über-attorney Richard Suttle, endeavored to depict the agreement as risk-free to the city. The state pays in cash to the events fund but requires a $1-to-$6.25 local match, ostensibly generated by F1-initiated taxes and fees the city wouldn't otherwise realize. In this case, that comes to a $25 million/$4 million split, with Full Throttle (as "local organizing committee") offering to kick in the first, prerace $4 million. (According to Edwards, the city would be reimbursed for other expenses after the first race, when the fund has been replenished; it should supposedly continue that way for the 10 years of a post-first-year agreement. However, it's worth noting that any disbursement to the city is dependent on Combs' estimate – a topic we'll get to shortly.)

Suttle, there on behalf of the local team, repeatedly reminded council the city had to contribute nothing to the fund up front. But asked by Mayor Lee Leffingwell, "Is there ever any risk that the city would have to spend any extra money more than it is reimbursed on this event?" – presumably if the tax revenues aren't in line with projections – Suttle conceded "that answer is still open. Our goal is to get it to where it's revenue neutral," adding, "the city spends lots of money to hold other events that are near and dear to our heart, South by Southwest included." (Decidedly not in the realm of a $4 million sales tax capture, but I'll let him take that up with my boss.) Perhaps reconsidering his initial response, Suttle later qualified it, predicting F1 would be "at worst case revenue neutral ... best case, revenue positive multiple times over."

But what if the money's there – but it's more the city's than F1's? That question hovered over the meeting's testiest exchange, beginning with Leffingwell emphatically insisting: "The city will never put any money into this project. The money that comes out in subsequent years comes from the inflow from the previous event. But the city doesn't supplement that. If it doesn't come up to be enough, then it's not going to meet performance standards and most likely the state's not going to participate."

"Mayor, you have a higher belief in the value of economic studies than I do," countered Bill Spelman.

"If the economic studies are bad, and it doesn't happen, then the race doesn't happen," said Leffingwell.

To which Spelman replied, "There still is an article of faith here – that the economic study fairly represents how much money is coming into to the city's coffers that otherwise would not be there."

Lots of questions to answer – and not much time. Council action on approving yet-to-be-drafted agreements with both the state and Full Throttle is tentatively scheduled for a June 23 hearing. A preliminary economic analysis – performed not by the city but by Full Throttle's contractor – hasn't landed at City Hall yet. (Sheryl Cole called on the city to scrub the analysis, noting, "It's one thing to get a report; it's another thing to get a report from the people that are seeking your participation.")

The tight timeline, undrafted agreements, and unorthodox initiation of the process all raise eyebrows. (Suttle admitted, "My clients are betting on the fact that you're going to feel that this is such a good deal for the community" – otherwise, they wouldn't have started building the track already.) None of that means F1 shouldn't come here. But as Cole said in her closing remarks: "We've never done a deal this big. So we've got to nail it."

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