Texas Taxpayers Finance Formula One Auto Races as Schools Dismiss Teachers
By Darrell Preston and Aaron Kuriloff - May 11, 2011 11:43 AM CDT
The "Circuit of the Americas" 3.4 mile long Formula One auto racing track, now under construction in Austin, Texas, U.S., is seen in this artist's rendering. Source: Circuit of the Americas via Bloomberg
Texas, 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 races have failed to gain traction previously in the U.S. Since the 1970s, the series has been hosted by Long Beach, California, as well as Las Vegas, 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 track, backers aim to attract automakers such as Fiat SpA (F)’s Ferrari Group, Renault SA (RNO) and Daimler AG (DAI)’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 from Montreal 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 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 and hockey’s Dallas Stars who runs the sports and media program at the University of Texas 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 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., 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. in Robbinsville, New Jersey. 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, 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 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 and South America, 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. 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 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)’s horse track in Louisville, Kentucky, which hosts the Kentucky Derby, 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@bloomberg.net; Aaron Kuriloff in New York at akuriloff@bloomberg.net.
