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Why the future of Austin’s F1 race is in doubt

Economic development officials in Gov. Greg Abbott’s office are dramatically cutting the state’s annual contribution to Austin’s Formula One race, a move race and track officials said imperils the event’s future.

Officials with the governor’s office and Circuit of the Americas confirmed that the state’s payment to support the 2015 race would drop by more than 20 percent from previous years. The state had contributed about $25 million in 2012, 2013 and 2014; this year the amount will be closer to $19.5 million.

Bernie Ecclestone, the sport’s chief executive, told the American-Statesman the reduction could mean cancellation of the Austin race. “If it’s changed, it’s going to be difficult to continue the race in Austin,” he said, speaking from Brazil, the location of this weekend’s F1 race.

During the four decades he has controlled the international auto race series, Ecclestone has earned a reputation for hard-ball tactics, including threatening to pull races to gain negotiating leverage for his company. But Circuit of the Americas Chairman Bobby Epstein confirmed the change places the future of the Austin race in serious jeopardy.

Although a few million dollars seems a tiny sliver of a sport contested by teams that spend hundreds of millions of dollars to compete, and that is viewed by an estimated half-billion people worldwide, little of that money makes its way to local race promoters, where profit margins are thin and typically depend on government support.

“To use a technical term,” Epstein said, “I think we’re screwed.”

The dispute raises the specter of a heavyweight legal battle, pitting the race’s wealthy local promoters against the state over whether Texas officials are reneging on their apparent commitment in 2011 to support the Austin race with a quarter-billion dollar subsidy over a decade. Then-Comptroller Susan Combs and Gov. Rick Perry referenced the figures in letters to Ecclestone.

“An entire facility was constructed based on that deal,” said Dave Shaw, spokesman for Circuit of the Americas, the private company controlled by Epstein and auto magnate Red McCombs that owns and operates the racetrack southeast of Austin’s airport. “If the calculation is changed now, that’s effectively changed the terms of the deal.”

The state’s payment is based on how much economic activity the race generates for Texas. The program had been administered by Combs’ office. Circuit of the Americas pays the money directly to Ecclestone’s company as a sanctioning fee for permission to hold the race. Management of the trust fund was transferred to Abbott’s office in September.

Although attendance for Austin’s Formula One race has dropped since its inception in 2012, a spokesman for the governor’s office said that wasn’t the main reason for the $5.5 million decrease this year. Rather, he said, the office decided to use different formulas than the comptroller’s office used to calculate the race’s economic impact.

Epstein said that amounted to “a breach of trust. The state clearly made promises. I think we made a deal, and we lived up to our end of the deal.”

He added: “It’s like you go to a restaurant and order a dinner, and then after you’ve eaten the meal they change the price.”

Nixing the Austin race would be catastrophic to Circuit of the Americas. Although the $300 million facility also hosts other races, such as MotoGP, and includes the Austin360 Amphitheater music venue, the operation revolves around the track built specifically to host F1 races.

In recent weeks the event already has felt severe financial strains. Epstein has described the waterlogged Oct. 25 race weekend as “financially devastating.” Early reviews of last weekend’s inaugural F1 race in Mexico City, meanwhile, viewed by some as direct competition to the Austin event, have been glowing.

10-year commitment?

The dispute over the state’s financial contribution to Formula One also promises to reopen a debate over whether early supporters of bringing the race to Texas, mostly notably Combs and Perry, overstepped their authority by appearing to guarantee the decade-long subsidy.

The state money is funneled to Formula One through an economic development program called the Major Events Trust Fund. It arranges to pay organizers of large, mostly sporting, events — the Super Bowl and NCAA tournament basketball games, for example — a portion of sales, hotel, car rental and alcohol tax revenue generated by out-of-state spectators.

Most of the events are one-off games, and local promoters use the promise of the money to persuade organizers to bring their business to Texas instead of another location. Afterward, they apply for expense reimbursement through the trust fund.

Formula One, by comparison, had what seemed to be a deal with the state of Texas to receive the money year after year. Combs, a strong believer in economic incentives as well as a race fan, assured Ecclestone in letters that Texas was committed to paying a quarter-billion dollars through the trust fund program — at least $25 million a year over 10 years — to host the U.S. Grand Prix. Perry also signaled his support for the project early on.

Critics said Texas taxpayers shouldn’t subsidize a multibillion-dollar European sporting enterprise. A lawsuit later claimed the race didn’t meet the trust fund’s qualifying terms, although it was subsequently dropped.

‘It hit us cold’

The state’s payments to Formula One and other Major Events Trust Fund events also have come under fire from the state auditor. In a September report, Auditor John Keel questioned the methods economic development officials had used to calculate events’ economic impact. The report concluded Texas could be overpaying event organizers, including for Formula One, by as much as 20 percent.

To receive payment from the state through the trust fund, organizers must demonstrate that the economic activity generated by their event is worth at least that much in additional state tax collections — money that, were it not for the event, Texas wouldn’t see.

Such projections are controversial among economists. Critics note the estimates typically are generated by those who have the most to gain from them — a point Keel acknowledged in his report: “Those organizations have an interest in maximizing the amount of funding approved for disbursement.”

In the case of Formula One, several weeks before last month’s race, organizers submitted an economic projection demonstrating that the extra tax revenue Texas collects from out-of-state race fans will come to at least $25 million. The calculation is based on the anticipated number of visitors, and the estimated amount each will spend on lodging, transportation, alcohol and souvenirs while in Austin.

Officials in the governor’s office and Epstein said that Circuit of the Americas’ projections for the estimated economic gain to the state from the 2015 race was approximately the same as they had been in year’s past — about $25 million. But the governor’s office informed race organizers several weeks before the Austin race that, according to its new formulas for measuring economic impact, the state would only reimburse $19.5 million.

“It hit us cold,” Epstein said. “No one could foresee this coming.”

He added that, with tickets already sold and racing teams soon arriving, it was too late to cancel the 2015 race. “But the big question now,” he said, “is, ‘Is the race coming back?’”

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