[PAA-Discuss] Texas Funds Formula One, May Fire Teachers

Wed May 11 17:52:36 EDT 2011

TEXAS FUNDS FORMULA ONE, MAY FIRE TEACHERS

 By Darrell Preston and
Aaron Kuriloff - May 11, 2011

http://www.bloomberg.com/news/2011-05-11/texas-taxpayers-finance-formula-one-auto-races-as-schools-dismiss-teachers.html

Texas [1], which may balance its budget by firing thousands of
teachers, plans to commit $25 million in state funds to Formula One auto
racing each year for a decade. 

Four years after motorsports' most
popular series left the U.S., Texas investors including Clear Channel
Communications Inc. co-founder B.J. "Red" McCombs are building a
3.4-mile (5.5-kilometer) track to bring the event to Austin. Comptroller
Susan Combs has agreed to pay $25 million for races through 2022, a
subsidy questioned by critics and lawmakers as the state cuts costs to
close an estimated $15 billion two-year deficit. 

"I don't understand
why 25 people in Austin could not put up $1 million each if they thought
this was a good opportunity instead of the state making a $25 million
commitment," said Senator Dan Patrick, a Houston Republican. "The
developers should find the money through private sources." 

As many as
100,000 teachers in Texas may be fired because of spending cuts to cope
with the state's budget crisis, according to Moak Casey & Associates, an
Austin-based education consultant. For $25 million a year, the state
could pay more than 500 teachers an average salary of $48,000. 

"I have
to wonder why the state of Texas is all over funding for this racetrack
and not the school-funding crisis," said Ewa Siwak, 44, who teaches
German in the Austin Independent School District and whose job at Bowie
High School is being cut. "Tax dollars for education should be a higher
priority." 

NO TRACTION

Formula One [2] races have failed to gain
traction previously in the U.S. Since the 1970s, the series has been
hosted by Long Beach [3], California [4], as well as Las Vegas [5],
Detroit, Dallas, Phoenix and, most recently, Indianapolis. The races
there ended in 2007 on declining attendance. 

With 20 million Texans
within 250 miles of Austin and a growing Formula One fan base in Mexico,
the city's annual race will be successful, Steve Sexton, president of
track developer Circuit of the Americas LLC, said in a telephone
interview. 

By building the Circuit of the Americas [6] track, backers
aim to attract automakers such as Fiat SpA (F) [7]'s Ferrari Group,
Renault SA (RNO) [8] and Daimler AG (DAI) [9]'s Mercedes that compete in
Catalonia, Shanghai and Istanbul. Racing-team owners include U.K.
billionaire Richard Branson and Indian liquor magnate Vijay Mallya.
Races [10] from Montreal [11] to Sao Paulo draw thousands of fans,
including those paying $1,200 apiece for a seat in Monaco's grandstands.

Each race in Austin is projected to generate enough tax revenue [12]
to recoup the $25 million from a state Event Trust Fund pool, according
to Allen Spelce, a spokesman for Combs, a Republican. He said the plan
calls for putting the $25 million into a revolving account for paying
annual event-related costs. 

$250 MILLION SUBSIDY

If the financing
works as projected, the decision will use $250 million in state tax
revenue for the races over 10 years. 

"With places struggling, spending
that much money on an essentially one-off event is tough to do," said
Michael Cramer, a former president of baseball's Texas Rangers [13] and
hockey's Dallas [14] Stars who runs the sports and media program at the
University of Texas [15] at Austin. "It's a very high cost of entry."

Texas, like other states cutting budgets for schools, nursing homes
and basic services, uses economic-development spending to bring in jobs
and seed growth. That often involves giving up tax revenue generated by
a project to pay part of the cost. New Jersey is providing $200 million
of tax-increment financing to help develop the American Dream in the
Meadowlands, which will be the biggest mall in the U.S. when it opens.

"I'm not sure of the wisdom of using tax dollars to fund a racetrack,"
said Siwak, the Austin teacher. "They're giving so much tax dollars away
I don't think they could make it up with the racetrack." 

ECONOMIC
OUTLOOK

Combs's office estimates a Formula One race in Austin next year
will spur $300 million of spending, Spelce said in an e- mailed
statement. Construction of the $242 million track, which has begun, is
projected to add 1,300 temporary jobs and pump $400 million into the
economy. The venue will seat 120,000 fans. 

The state isn't investing
in the track development, Spelce said in the e-mail. He said the
Legislature authorized the use of the money from the Major Events Trust
Fund [16] in 2009. 

"The funding generated by the activity offsets the
state's investment," Spelce said. "It is important that the state
continue to generate new economic activity to ensure that Texas
continues to grow." 

Formula One racing attracts the wealthy who
sponsor teams and draws fans from around the world, said Zak Brown,
chief executive officer of Just Marketing Inc. [17], an agency based in
Zionsville, Indiana. JMI, as it's known, focuses on motorsports. 

SPORT
FOR WEALTHY

"It's a lifestyle of the rich and famous," Brown said in a
telephone interview. "The whole industry has a lot of wealth around it,
a lot of politics." 

The cost of holding races has made it too
expensive for sponsors without a public subsidy, said Mark Cipolloni,
president of AutoRacing1 Inc. [18] in Robbinsville, New Jersey [19]. The
company runs a website that covers motorsports. 

"It isn't
cost-effective for an independent race," Cipolloni said. "Most races in
major cities wouldn't be held without public support." 

The state's $25
million is being paid to London-based Formula One Management Ltd. to
hold the race in Austin, Sexton said. Formula One, owned by London-based
CVC Capital Partners Ltd., a private-equity firm, is run by Bernie
Ecclestone [20], the chief executive officer of the series. 

"It's
going to Mr. Ecclestone and Formula One to get them to bring the event
here," Sexton said. 

OUTSIDE INTENDED USE

Paying such a fee goes
beyond the intended use of the state fund, which was set up to support
bringing annual events to Texas by rebating increased taxes they
generate to cover costs including security and traffic control, said
Richard Viktorin, an accountant with Audits in the Public Interest. The
Austin- based group opposes government support for the races. 

In the
past, the event fund has been used to subsidize professional football's
Super Bowl [21] championship game, college basketball's Final Four
tournament and business meetings such as a Chick-fil-A Inc. convention.

"It's off-balance-sheet financing for a rich man's sport," Viktorin
said. Combs is "supposed to be a fiscal officer for the state. She's not
controlling that fund." 

Formula One participants and sponsors have
wanted to return to the U.S. since 2007, when the last race was run in
Indianapolis, Ecclestone said in a telephone interview. Indianapolis
began hosting the event in 2000. Interest waned after defective tires
led most entrants to withdraw in 2005. 

U.S. Venue 

"No one wanted to
hold it," Ecclestone said, until the Austin promoters stepped in.
"Carmakers and team sponsors are also keen to have a race in the U.S. to
help leverage their backing of teams." 

Formula One's popularity has
declined in the U.S., partly because there haven't been any races in the
country in recent years and partly from a lack of successful American
drivers since Eddie Cheever and Mario Andretti, JMI's Brown said.

"It's moved around," said Brown, who praised the Austin track's
design. "There was a 10-year period where there was no Grand Prix," or
Formula One race, in the U.S, he said. 

The Austin event is expected to
benefit from its proximity to Mexico [22] and South America [23], where
the series has grown in popularity, said Ecclestone. Austin's city
government also may invest $4 million a year in tax revenue to
facilitate the event, the Austin-American Statesman reported [24]. The
city hasn't been asked to provide any incentives, said Matt Curtis, a
spokesman for Mayor Lee Leffingwell. 

TOURISM 'BOOSTER'

"It's going to
be a major booster in our convention and tourism industry," Curtis said.
The "return is very significant." 

Formula One races won't be the
track's only use. Developers have booked international championship
motorcycle [25] races, called MotoGP, starting in 2013, Sexton said. He
said they're also trying to bring in concerts, conferences and other
events. 

Austin and the state are unlikely to recover their investment
directly, Cipolloni said. However, the race will expose the city to a
wide audience of tourists and executives that could help recruit
companies and create jobs, he said. 

"They won't collect tax money
equal to the $25 million" from the state, Cipolloni said. "It's just a
way to get exposure for the city." 

Sexton, a former president of
Churchill Downs Inc. (CHDN) [26]'s horse track in Louisville, Kentucky,
which hosts the Kentucky Derby [27], agreed that events at the Austin
circuit will do more than just generate new tax revenue. 

"It will
bring in an affluent audience that has never been to the city," Sexton
said. "It should have a substantial economic impact." 

To contact the
reporters on this story: Darrell Preston in Dallas at
dpreston at bloomberg.net [28]; Aaron Kuriloff in New York [29] at
akuriloff at bloomberg.net [30]. 

To contact the editor responsible for
this story: Mark Tannenbaum at mtannen at bloomberg.net [31] 

Links:
------
[1] http://topics.bloomberg.com/texas/
[2]
http://usgptexas.com/index.php/history/
[3]
http://topics.bloomberg.com/long-beach/
[4]
http://topics.bloomberg.com/california/
[5]
http://topics.bloomberg.com/las-vegas/
[6]
http://www.circuitoftheamericas.com/
[7]
http://www.bloomberg.com/apps/quote?ticker=F:IM
[8]
http://www.bloomberg.com/apps/quote?ticker=RNO:FP
[9]
http://www.bloomberg.com/apps/quote?ticker=DAI:GR
[10]
http://www.formula1.com/
[11] http://topics.bloomberg.com/montreal/
[12]
http://topics.bloomberg.com/tax-revenue/
[13]
http://topics.bloomberg.com/texas-rangers/
[14]
http://topics.bloomberg.com/dallas/
[15]
http://topics.bloomberg.com/university-of-texas/
[16]
http://www.texasahead.org/tax_programs/event_fund/spetf.html
[17]
http://justmarketing.com/index.cfm
[18] http://www.autoracing1.com/
[19]
http://topics.bloomberg.com/new-jersey/
[20]
http://topics.bloomberg.com/bernie-ecclestone/
[21]
http://topics.bloomberg.com/super-bowl/
[22]
http://topics.bloomberg.com/mexico/
[23]
http://topics.bloomberg.com/south-america/
[24]
http://www.statesman.com/blogs/content/shared-gen/blogs/austin/racing/entries/2010/12/02/austins_4_million_f1_incentive.html
[25]
http://www.circuitoftheamericas.com/
[26]
http://www.bloomberg.com/apps/quote?ticker=CHDN:US
[27]
http://topics.bloomberg.com/kentucky-derby/
[28]
mailto:dpreston at bloomberg.net
[29]
http://topics.bloomberg.com/new-york/
[30]
mailto:akuriloff at bloomberg.net
[31] mailto:mtannen at bloomberg.net
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