Why I’m No Fan of the Stadium Financing Plan

Henry J. Aaron
Henry J. Aaron The Bruce and Virginia MacLaury Chair, Senior Fellow Emeritus - Economic Studies

November 7, 2004

Like many others, I have just recovered from sleep deprivation induced by hours of late-night, tension-provoking TV watching. No, I’m not vreferring to last Tuesday’s election returns. I mean the excitement of baseball’s two cliff-hanging league championship games and the Red-Sox-curse-ending sweep of the World Series. So you won’t be surprised that I was thrilled when Major League Baseball announced in September that it had decided to relocate the Montreal Expos to Washington.

My enthusiasm dissolved, however — replaced by concern for the District’s financial recovery — when the details of what the city had offered to lure a team became public. The proposed deal imposes huge costs on the District and gives virtually all of the financial gains to the team. The city will bear the burden for years to come, while enjoying little real financial benefit from baseball’s presence here.

Council Chairman Linda Cropp offered her own, only moderately less expensive financing proposal last Friday, but the mayor’s plan is still the one on the table. The details are complicated, but the main features of the mayor’s plan are clear. The District agrees to refurbish RFK Stadium at an estimated cost of $24 million, build a new stadium for the team to use starting in 2008 at an estimated cost of $361 million (including land and parking), and provide up to $101 million more for infrastructure improvements and contingencies. These numbers are courtesy of the District’s chief financial officer, Natwar M. Gandhi, not the D.C. Sports and Entertainment Commission, which I believe badly underestimates likely outlays.

To cover these costs, the District would sell $550 million in municipal bonds and commit to paying them off. To help the city do so, the team would pay rent starting at $3.5 million and rising annually, and the District would levy taxes on tickets, parking and concessions and impose an additional tax on D.C. businesses with gross receipts of $4 million or more.

That these estimates understated probable costs was confirmed when the council acknowledged last week that the bond issue would have to be increased to $550 million from the $500 million originally planned. The District must pay all costs for expanding roads, relocating sewers and water supply, and expanding the Navy Yard Metro station, unless the federal government agrees to share in this cost. Most importantly, the deal obliges the District to pay any cost overruns related to refurbishing RFK Stadium for temporary use, acquiring land for the new stadium, and construction costs.

Based on experience elsewhere, costs could go far higher. Expenses on new stadiums in Seattle, Phoenix and Cleveland ran $100 million, $110 million and $120 million, respectively, over initial estimates. In Milwaukee, Detroit and Arlington, Texas, overruns were $40 million or more. Moreover, the District also would pay penalties to the team if the new stadium is not ready when contractually promised, even though the team could continue to use RFK.

The bond issue would not necessarily cover these extra costs. If it didn’t, the District would be on the hook to pay them out of its operating budget, putting a direct squeeze on municipal services.

Rent from the team will provide roughly one-sixth of the total needed to pay off the bond issue. The remainder will be covered by public funds raised through a 10 percent tax on ticket sales and concessions, a 12 percent tax on stadium parking and a graduated tax on District companies whose gross receipts exceed $4 million.

What does the city get from this deal? A major league team to whose games residents of the Washington metropolitan area will be able to buy tickets. That’s about it. Under the deal inked with Major League Baseball, the District will get not one cent from advertising proceeds, local television or other media rights. Despite building and paying for most of the stadium, the District would have the right to use or rent it out just 12 days a year. The team owners, by contrast, would be able to rent it out — and keep all of the proceeds — on other non-game days. The agreement commits the team to support various community activities, but omits mention of how much money the team will be required to spend on such activities. The amended package released this week puts in provisions that would let the District tax itself to fund up to $450 million in community activities. The city always had this power. This codicil in no way increases baseball’s commitment to help the District pay for its myriad social needs.

There is one nice perk in the deal. During the regular season, the Sports and Entertainment Commission gets the use of two private suites, parking and 25 box seats, free of charge. In the post-season, the commission can have the space, but it has to pay for it, just like season-ticket holders.

The District also gets to collect the 10 percent tax on tickets and concessions, and the 12 percent tax on parking. But these taxes are too low. All of the revenue from them — and more — will be needed to pay off the stadium bonds. The District is taking on a large risk and it should participate in the gains that a well-run team will generate. Its share of the team’s revenues should go up as proceeds from tickets and parking exceed specified targets.

Advocates for the stadium deal claim that the plan is justified in part because it would create jobs and promote economic development. Numerous studies have shown that large stadiums, surrounded by parking, do little to promote economic development. You might have hoped that the failures of urban renewal would have made city planners understand that mindless constructionism does not lead to healthy urban growth. Economic development requires houses, apartments, offices, small shops, theaters and parks. A stadium attracts attendees for perhaps 350 hours a year. Money spent on tickets and in restaurants and other concessions inside the park do little or nothing to promote economic development for the remaining 8,410 hours.

Let’s be clear. The guys who negotiated this deal from baseball’s side are not spending their own money. They are spending yours and mine. Who’s getting it? Well, to start with, major league owners who collectively took over the Expos in 2002. And whoever ponies up an expected $300 million or more to buy the Expos. And Baltimore Orioles owner Peter Angelos, to whom other baseball owners will make additional side payments on the grounds that a team in Washington will somewhat diminish the value of the Baltimore franchise.

The mayor and others who negotiated this deal warn that the matter is settled and that if the City Council does not ratify it, the Expos will go elsewhere. The proper answer is that a better deal is not only possible but that negotiating one is the only fiscally responsible thing to do.

Washington is a valuable site not only for a new team but also for the other teams that will play here and share in gate receipts that are expected to vastly exceed Montreal’s. A Washington team will enhance the value of Major League Baseball’s television contract, which brings added profit to all teams.

A deal that passes part of the gains from a successful franchise to the taxpayers of the District should be possible if the District’s negotiators do not engage in preemptive surrender. If a better deal is not possible, then perhaps the Expos should go elsewhere. As valued as a major league team would be, it is not worth jeopardizing the financial health of a city that only recently was near bankruptcy.