The beginning of the end for Austin F1 race (4th Update)

UPDATE #4

If they don't first pay Bernie what they owe him from the 2015 race, stick a fork in the Austin race

The future of the struggling US Grand Prix was thrown into further doubt Wednesday when the 2016 Formula 1 calendar listed the race as “subject to agreement" with the promoter.

Officials at the Circuit of the Americas have said they are financially strapped after storms wiped out much of the 2015 race weekend and by news the Texas governor's office is cutting public funding by about 20 per cent.

The 2016 race calendar still has the race scheduled for Oct. 23 but with an asterisk. Track officials did not immediately respond to a request for comment.

The $300 million track was built to host the race, which has run in Austin since 2012. Mercedes driver Lewis Hamilton has won three times, including this year to clinch this third Formula 1 championship.

The private investors who built the track, including hedge fund manager Bobby Epstein and billionaire businessman Red McCombs, said they were promised significant help from the state to pay for the commercial rights to hold the race over a 10-year deal. Under an agreement reached with former Gov. Rick Perry and former Comptroller Susan Combs, Texas gave $25 million from the state's Major Events Trust fund in the first year.

Promoters said they were counting on that money every year. But a 2010 letter from Perry and Combs to Formula 1's commercial rights holder Bernie Ecclestone notes the state portion could be less than $25 million for the rest of the contract. The letter says that if tax revenues fall short, promoters must make up the difference.

Texas Gov. Greg Abbott's office told track officials they will get about $19.5 million from the state for the next race because the formula used to award grants were changed to make them more restrictive.

Combined with local tax revenue, race officials will still get about $23 million in public funds.

Abbott's office did not immediately respond to requests for comment on the updated race calendar. Abbott was travelling in Cuba on Wednesday, wrapping up a three-day trade mission to the island nation.

Austin Mayor Steve Adler has called the race an important event for the Texas capital. But he also has told track officials they can't look to the city for a "bailout."

Track officials have said the event has pumped 'hundreds of millions' of dollars into the Austin and Texas economies since 2012 and applied for state funding under the same formula as Super Bowls, NCAA basketball tournaments and other events. Jim Vernuto/AP/Fox Sports

11/21/15 It stands to reason that there would be a formal contract governing the $250 million deal between the state’s Major Events Reimbursement Program and the Circuit of the Americas.

After all, written contracts are the standard way of doing business between parties, be they individuals, businesses or governments. Formal contracts between the city of Austin and companies such as Apple and Samsung are used in similar deals that rely on public subsidies. The documents, which are legally enforceable in court, typically spell out the obligations of each of the parties and how negative situations will be handled if they occur.

Formal contracts likely are more important in circumstances that involve multiyear deals between the private and public sectors – such as the one in question with COTA, which stages Formula One in Austin. Such contracts serve to bind city councils, legislatures or governors to the terms set by their predecessors. Without such legal binders, there are no guarantees an elected official or a council will abide by terms set by a previous one.

So it came as a surprise when Gov. Greg Abbott’s office and Bobby Epstein, chairman of the Circuit of the Americas, in response to our question to see a written contract, told us there was no formal contract. There should be. It would have avoided the controversy and confusion playing out in this high-stakes saga between billionaires and government officials that is endangering the future of Formula One in Austin.

At a meeting Thursday with the American-Statesman’s editorial board, Epstein attributed the absence of a formal contract to an oversight due to "naivete." In hindsight, however, he conceded that it would have been better had the parties signed a written agreement codifying terms in letters dating back to 2010, in which then-Gov. Rick Perry and then-Comptroller Susan Combs appeared to promise an annual state contribution of $25 million for 10 years, with the understanding that if the event didn’t generate enough taxes, COTA would make up the difference. Without that or an amount close to that, it is doubtful Austin’s F1 race will continue beyond 2016, Epstein said.

On Friday, Epstein’s spokesperson sent an email response regarding a contract: "There could never have been a 10-year contract with (the Major Events Reimbursement Program), as the application to create the fund, which the major event functionally does, must be submitted each year."

There is little doubt that F1 has benefited the Central Texas economy – to the tune of $507 million for the 2013 F1 race, according to COTA figures. Nonetheless, it’s up to COTA and F1 officials to craft a business model that can withstand shifts in the economy, political world and their own industry. At this point, there are serious concerns about whether COTA’s business model is sustainable.

Abbott’s decision reflects that view. And since there is no contract to bind Abbott to prior terms set by others, he is well within his authority to adjust those terms in light of new information regarding the event’s economic impact on Central Texas. That is due diligence in managing public dollars. COTA should look to its private investors to make up the difference or to Bernie Ecclestone, Formula One’s chief executive.

The dispute between COTA and Abbott’s office centers on the amount of public dollars the state’s Major Events Trust Fund is obligated to contribute to the F1 event and how that amount is calculated.

The Statesman’s Eric Dexheimer reported this month that the state’s events fund contributed about $25 million in 2012, 2013 and 2014. During those years, Perry was governor and Combs oversaw the events trust fund. The pair have since left office.

Epstein initially said the state’s contribution should be $25 million for 2015 – the same as in prior years – and the amount pledged by Perry and Combs. He later clarified it might be lower than that, given the 5 percent drop in F1 attendance this year.

The attendance drop was not the primary reason Abbott’s office reduced the state’s contribution to $19.6 million. Instead, Abbott’s office used different formulas than the former comptroller’s office used to calculate the race’s economic impact. Combs’ office verified figures provided by COTA, using methods more generous than Abbott’s office, which now oversees the fund.

The purpose of the fund is to attract big events to Texas by offering government subsidies based on what their presence contributes to the regional economy. In the case of F1, the state’s payment is based on how much economic activity the race generates for Texas. Obviously, if the economic activity declines, the payments should, too.

That presents a problem for COTA, which took a financial hit when thunderstorms and other weather conditions eliminated nearly two days of the race weekend in October. Epstein said were it not for those factors and the state’s reduced contribution, COTA would have been in the black this year.

But trends, such as falling attendance, reduced state contributions and rising costs, portend future deficits for COTA. The for-profit organization built the $300 million track east of Austin Bergstrom International Airport to host F1 races, but also stages other sports events and concerts on the site.

Epstein said he can’t expect private investors to continue putting money into a venture that is losing money. Quite so. But if that deal is too risky for private investors, why would it be considered a sound investment for the public sector? Austin MyStatesman.com

11/18/15 The organizers of the U.S. Grand Prix "have not paid the hosting fee for the just-completed race," and Formula 1 CEO Bernie Ecclestone said that he is giving the Austin group more time to "cope with a decrease in state financial support," according to Christian Sylt for the AUSTIN AMERICAN-STATESMAN.

11/15/15 Circuit of The Americas chairman Bobby Epstein admits the Austin Formula 1 race's future "is not looking good" after a state funding cut of $5.5M per year for the United States Grand Prix venue.

"I'm concerned about the future," Epstein told Autosport. "We did not know they would change how they calculated the funding. We just received a letter that they were going to do that.

"To cover the loss of funding, we have to sell another 30,000 tickets. But if we could have sold another 30,000 this year we would have. We didn't stop selling. So I don't think we're going to make our way out of it by selling more tickets. It's not looking good."

Between this year's loss due to rain and a cutback in State support, the Austin race may soon be history

11/10/15 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 reports Eric Dexheimer of the American Statesman.

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 or not 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?" MyStatesman.com