By Anthony Schoettle, The IBJ
aschoettle@ibj.com
Swamped by financial losses that go back to the time Herb and Mel Simon bought the Indiana Pacers in 1983, team officials are now looking for a new game plan-one that may involve financial assistance from taxpayers and visitors.
Apparently, not even housing the team in the much-ballyhooed Conseco Fieldhouse or a trip to the National Basketball Association finals could stop the Pacers' bleeding.
On Jan. 27, the Capital Improvement Board, the city body that owns and oversees the Indiana Convention Center, Lucas Oil Stadium and Victory Field in addition to Conseco Fieldhouse, unveiled a slew of budgetary concerns, including a projected $15 million it will need to cover Fieldhouse operating expenses in 2010.
The Indiana Pacers have lost money in 25 of the last 27 years, including nine of the last 10 seasons in Conseco Fieldhouse, said Pacers Sports & Entertainment President Jim Morris. The losses, he added, are much higher than recently published estimates of more than $6 million annually.
While Pacers officials have not officially asked to renegotiate the franchise's Fieldhouse lease, they began providing city officials with team financial information before the 2007-2008 season as a precursor to potential renegotiations.
A clause in the Pacers' Fieldhouse lease states that, if the team is experiencing financial losses after its eighth season in the building, the franchise can ask to renegotiate the 20-year lease after 10 years.
Pacers officials declined to comment on what could happen after 2010, but CIB member Pat Early conceded the 2010 payment could be just the beginning.
"It could be ongoing if we don't come up with some kind of solution," said Early, a longtime CIB member who helped craft the Fieldhouse lease.
The Pacers aren't alone. Ten of 30 NBA teams experienced financial losses last season, according to Forbes magazine. But few have registered losses as consistently as Pacers brass claims they have.
"The smaller markets face the greatest challenges," said Mark Rosentraub, a former IUPUI dean who now heads the Cleveland State University urban affairs department.
The NBA has tried to make life a little easier for small-market teams. In April 2008, after a coalition of small-market team owners that included Herb Simon petitioned the league for more revenue sharing, the league's board of governors approved a 63-percent increase in the amount of revenue shared among teams. The Pacers could get about $19 million over the next three years through the new deal. Still, less than 30 percent of NBA teams' revenue comes from shared revenue, compared with about 70 percent for National Football League franchises.
The economy is socking traditionally profitable sports operations far beyond the NBA, Rosentraub said. Ohio State University's athletic department, for instance, is set to lose money this school year for the first time in several decades.
"A lot of that has to do with their inability to bring in non-basketball events to their arena," Rosentraub said.
But Morris said the problem with the Pacers outdates the latest economic swoon and even the 2004 brawl in Detroit and other more recent player indiscretions, which led to precipitous attendance declines.
CIB President Bob Grand said at this point nothing is off the table, including increasing a variety of taxes and user fees to cover the Fieldhouse operations and other CIB shortfalls.
While Pacers officials wouldn't be specific about the extent of the organization's financial losses, Morris said not even city officials charged with overseeing the Fieldhouse know how much the Simons have lost.
"The Forbes numbers are substantially low, and the losses are higher than the Capital Improvement Board is talking about," Morris said. "Even during the year [1999-2000] we went to the NBA finals, the Simons lost money. A lot of money."
Forbes magazine estimated the Pacers lost $6.5 million last year, $1 million in 2007, and $12 million in 2006. The only year in the last decade the Pacers made money, Morris said, was 2001-2002, the third season in the Fieldhouse.
"Until I started getting into this information in the last year, I wasn't aware of the magnitude of the problem," Early admitted.
CIB members said the Pacers have revealed parts of the franchise's financial picture. They'll expect full disclosure before any money is committed. Morris said the team has been sensitive about releasing financial data because the operation is a private enterprise, but emphasized that team officials would do what it takes to work with CIB to solve the problem.
No threats made
While playing in and managing Market Square Arena, the Pacers paid the city $150,000 annually. If the team made money, the city got a 50-percent cut of the profit, which happened only one time under Simon ownership. But if the team lost money, the city paid for MSA's operating expenses. Now, the Pacers pay $1 annually to play in and operate Conseco Fieldhouse. The idea was that Fieldhouse amenities such as suites, club seats, additional eateries and entertaining areas would allow the franchise to generate more cash at more events than at MSA.
The Simons, who made their millions in the shopping mall business, are working cooperatively with local government officials to resolve this issue, Morris said. CIB members said they feel if the Fieldhouse issue isn't resolved, the city could lose the NBA franchise, and its WNBA counterpart, the Indiana Fever.
"No one," said Morris, shifting forward in his chair and raising his voice for emphasis, "has ever suggested that we would move the Pacers out of Indianapolis. The Simons have not asked the city for anything. The question is, how do we keep this franchise here for this community for the next 50 years?"
The financial problem, Morris said, stems from several factors, including increasing player salaries; lagging ticket revenue, which this year is more than $400,000 per game below the $900,000 league average; and the team's annual television revenue.
The Pacers' local TV revenue is about $5 million below the league average, Morris said. On top of that, the Pacers must pay the former owners of the defunct ABA team in St. Louis part of their TV revenue.
That deal was brokered as a condition of four ABA teams-including the Pacers-merging into the NBA in 1976. The NBA didn't want St. Louis, so the four merging ABA teams agreed to pay the St. Louis team owners one-seventh of their annual TV revenue, in exchange for the owners' folding their team. That deal costs the Pacers $4 million to $5 million annually, suggesting the team pulls in $28 million to $35 million a year from television. The arrangement has no expiration, although the Pacers and NBA have tried to negotiate a settlement.
"Basketball expenses have risen faster than inflation and faster than our basketball revenues," Morris said.
Player salaries represent one of the biggest increases, with the Pacers' player payroll increasing from $57 million in 1999 to between $70 million and $79 million annually during the last three seasons.
While Morris said the suites and club seats help the Pacers field a competitive team, non-basketball revenue hasn't been enough to cover the expenses of the 49 employees who run the facility, plus routine maintenance and capital expenditures on top of escalating basketball-related expenses.
"We do not have the capacity to run the building," Morris said.
Mystifying financials
In the last year, the Fieldhouse has hosted 200 publicly ticketed events, including Pacers and Indiana Fever games, 21 concerts and myriad other events.
The Pacers' partnership with Los Angeles-based AEG Facilities-which began in 2007-has helped bring in headliners such as Celine Dion, Neil Diamond, Elton John, the Eagles and the Trans-Siberian Orchestra. The facility is also a critical component in drawing a number of conventions to town, including FFA, Morris said.
"There's no building that brings more people downtown than Conseco Fieldhouse," Morris said. "This isn't about making money for anyone. The Simons have never taken a penny out of this franchise. This is about solving a problem."
Something about the numbers don't add up, said Randy Schwoerer, former owner of an Indianapolis-based sports and entertainment consultancy who now manages the Stefanie H. Weill Center for the Performing Arts in Sheboygan, Wis.
"Running a facility of that magnitude is a challenge, no doubt," Schwoerer said. "But I have a hard time understanding losing money to that level in a town with the sports support and entertainment appreciation that Indianapolis has. If you're losing money to that level, it's poor management and poor leadership, not solely the building."
Schwoerer said an extensive audit of the venue's activities, personnel, expenses and revenue needs to be done before any money is doled out by government municipalities.
"They can't just throw money at this," he said. "That's a government solution. They have to look at the revenue coming in and work backward."
Schwoerer knows where he'd look to make cuts.
"Maybe it's time for a payroll cut," he said. "That's my response to mounting losses in nine of the last 10 years."
Rosentraub, who will publish his second book on professional sports operation later this year, said CIB, City-County councilors and the mayor must closely scrutinize the Pacers' financials before any tax money or users' fees are put toward Fieldhouse operations. While Rosentraub thinks PS&E could have lost $20 million to $30 million over the last three seasons, he's mystified by the team's other claims.
"I would be hard-pressed to accept that, in the robust economic years, Pacers Sports & Entertainment lost money," said Rosentraub, who is a commissioner of the Gateway Economic Redevelopment Corp., which oversees operations for Cleveland's NBA and Major League Baseball venues. "I don't buy it. There are a lot of ways to categorize financial losses and gains. I certainly wouldn't accept the argument that the arena is an albatross to operate.
"As part of their fiduciary responsibility, the city council and mayor at a minimum have to see those numbers. And I mean everything. The Pacers have to state their case."
Rosentraub added that if using tax dollars is deemed the answer to this shortfall, taxpayers also have a right to see the Pacers' financials, as they did when the city subsidized operations at MSA.
While Indianapolis Convention & Visitors Association officials said the Fieldhouse and PS&E are essential to attracting various events and maintaining a vibrant downtown, some within the convention and tourism industry strongly oppose certain tax hikes.
"We don't support an increase in any hotel or restaurant tax," said John Livengood, president of the Restaurant & Hospitality Association of Indiana. "Indianapolis already has one of the highest hotel taxes at 16 percent and increasing the restaurant tax beyond its current 9 percent could also have a serious negative impact."
Livengood said better marketing could help the Fieldhouse flourish.
"It's a valuable piece of infrastructure for downtown, but I just don't know how much more expense we can bear," Livengood said. "This is a complex problem. And it will require a creative solution."