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State wanted to cut F1 payments even more, records show

Formula One officials said that by contributing $5.4 million less to the 2015 race than the state had in previous years, Texas Gov. Greg Abbott was imperiling the future of the Austin event. But the cuts first proposed by the governor’s office were even steeper, documents obtained by the American-Statesman under open-records laws show.

According to a Sept. 30 letter to Circuit of the Americas from Bryan Daniel, executive director of Abbott’s Office of Economic Development & Tourism, the agency proposed contributing only $15.6 million in state support of the race — a 37 percent decrease from the $25 million the race had been receiving through the Major Events Trust Fund when it was administered by the comptroller’s office under Susan Combs.

The program, which moved to Abbott’s office in September, offers government support to large events based on what their presence contributes to the regional economy. With the Oct. 25 race weekend less than a month off, local Formula One race officials pushed back, correspondence shows. On Oct. 16, the governor’s economists agreed to raise the subsidy, though only to $19.6 million.

Local F1 promoters said the difference was financially devastating nonetheless. “To use a technical term, I think we’re screwed,” Bobby Epstein, Circuit of the Americas’ chairman, told the American-Statesman on Tuesday.

Because Texas officials — most notably Combs and former Gov. Rick Perry — appeared to have promised a $25 million annual contribution as early as 2010, decreasing the state support now represented “a breach of trust,” Epstein added.

The disagreement over whether Texas broke a promise to support the race will play out over the coming months. In the meantime, an expert in the economic impact of large sporting events said the newer calculations being used by government analysts may be closer to the truth.

“They’re going in the right direction,” said Craig Depken II, an economics professor at the University of North Carolina at Charlotte.

His research has concluded estimates of the economic benefits of large sporting events to the local economy — including some in Texas specifically — are almost always too rosy.

Depken said the idea behind Texas’ major events fund is sound. The program rewards events such as the Super Bowl, NCAA playoff games and F1 by returning to them certain tax collections that Texas wouldn’t receive were it not for the event being held here. The taxes include sales, hotel, car rental and alcohol. Only spending by out-of-state visitors counts.

The tricky part, Depken said, is accurately calculating that number. “There are a thousand loopholes in how to measure this,” he said.

A month or so before their event, organizers submit an estimate of how much money they think it will increase the state’s tax revenue. The government’s economic development team then reviews that and either signs off on the projections, or adjusts them.

Circuit of the Americas’ math showed that tax revenues flowing from the Oct. 25 race would be worth an extra $25 million to the state — approximately the same figure used for the 2012, 2013 and 2014 races. In all three of those cases, the comptroller’s office more or less agreed, and race organizers collected the reimbursement, which goes to pay Formula One for the privilege of Austin hosting the race.

But just before the 2015 race, State Auditor John Keel issued a report suggesting that the math used by Circuit of the Americas (and other event organizers) and the comptroller’s office was unreliable. Among other concerns, he questioned how many times they should count the value of a dollar spent.

Depken said that is where economists often depart ways over such projections. Everyone agrees that when a tourist spends a dollar on, say, a beer, it contributes a dollar to the economy — known as a “direct” impact. The question is how much value the dollar adds after that.

Applicants to the Texas trust fund program typically have added in the same dollar’s “indirect” impact — the money the tavern spends to buy more beer to meet the increased demand of F1 tourists, for example. Then, beyond that, they add in an additional “induced” impact — money the bartender spends with his extra tips, say.

In his audit, Keel raised questions about how to account for such “multiplier” effects. A spokesman for the governor’s office confirmed a big reason for the lower number it reached for the Circuit of the Americas reimbursement was that it had adjusted its measurement of these.

The significance of the smaller state contribution remains unclear. F1 boss Bernie Ecclestone told the American-Statesman that it could force him to cancel the race.

Yet one F1 financial expert said that could end up being a blessing in disguise for Austin’s local promoters. Christian Sylt, the author of “Formula Money” and a British financial journalist who covers F1, said that’s because while the sanctioning fee for the Texas race started at $25 million, Ecclestone typically raises it every year.

So even if the state’s contribution remained at $25 million, Circuit of the Americas would be operating at an increasing deficit in the future. By forcing the issue now with its lower contribution, “all the state has done is precipitate the inevitable,” he said. “It’s almost like it’s doing them a favor.”

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