Report

Rising Baseball Stadium Costs Create Problems for the District

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Last year, the District’s Chief Financial Officer determined that the cost of building a baseball stadium would be $535 million.  On Monday, December 12, the CFO released an updated estimate which found that stadium development costs are now $667 million.  This means the stadium is now $132 million, or 25 percent, over the cost estimate of just a year ago.  Major League Baseball recently offered to contribute $20 million toward stadium costs, which covers about one-sixth of the recent cost overruns and just three percent of total stadium costs.

Mayor Williams and stadium officials have claimed that the increase in stadium costs is not problematic because the city has identified other revenues to cover the expenses above $535 million and those revenues are not part of the general fund.  A review of the new stadium budget reveals, however, that rising stadium costs have created fiscal challenges for the District.

  • The revenue sources established to pay for the stadium are not sufficient to cover necessary infrastructure improvements.  It is not clear how they will be funded.  Moreover, the District plans to make an unusual use of its general fund rainy day reserve to cover some of the cost overruns.
  • While additional revenues have been identified to cover some cost overruns, those funds could be used to pay off stadium bonds faster if they did not have to be used for the overruns.
  • Finally, the new stadium budget has a $43 million contingency.  The District does not have the ability to pay for stadium costs if they rise even more than that, even though the city would be fully liable for those costs under the proposed lease.

 

Insufficient Revenues to Cover Stadium Costs

Stadium legislation adopted last year and modified this fall limited the amount of bonds that could be issued to $535 million.  The legislation allowed the District to use other revenues in the Ballpark Revenue Fund for stadium costs if not needed for bond repayments.  A review of the current stadium budget reveals that the District does not have sufficient capacity from the capped bond amount and other revenues to pay for stadium costs ‘ and that the District is taking unusual steps to address the higher costs.

  • Total stadium costs are $667 million, but revenues available during the construction period total $631 million ‘ $535 million in bonds and $96 million in other revenues, including the MLB contribution.  The lower figure excludes $36 million in infrastructure costs ‘ such as Metro station upgrades ‘ that the CFO indicated a year ago should be included in official stadium cost estimates.  No funding source has been identified to cover these infrastructure costs.
  • Roughly $10 million of the $96 million in non-bond revenues will come from an unusual use of the District’s rainy day fund (known as the “contingency reserve”).  The District will use $125 million from the rainy day fund ‘ which is part of the city’s general fund ‘ for RFK stadium renovation and stadium land acquisition costs.  But instead of replenishing those funds quickly when stadium bonds are issued, the District will hold the rainy day funds in the Ballpark Revenue Fund for two years in order to earn interest.  Without that interest, which will total about $10 million, the District would not have enough funds during the construction phase to build the stadium.  The rainy day funds would be replenished with ballpark funds after two years, with interest.

The rainy day fund was established to cover general fund revenue shortfalls or expenses associated with natural disasters, unexpected public health or safety requirements, or unexpected obligations created by federal law.  The District’s rainy day funds, which include the contingency reserve and an “emergency reserve,” total $254 million.  The $125 million devoted to the stadium would tie up nearly half of the rainy day fund.

 

Rising Stadium Costs Will Adversely Affect DC’s General Fund

As noted, the CFO has identified $96 million in revenues that can be used to cover the difference between the $535 million bond proceeds and the $631 million new cost estimate (excluding infrastructure).  The revenue sources include a “premium” the District will receive when it issues bonds, interest on bond proceeds and rainy day funds, and stadium taxes collected this year.  (The latter are available because the city has not issued bonds and thus has no debt payment obligations.)

Mayor Williams and stadium officials claim that the availability of these additional revenues allows the District to cover cost overruns without affecting the rest of the District’s budget.  Yet if there were no cost overruns, most of these additional revenues would be available and could be used to reduce the amount of bonds issued below $535 million or to pay off the $535 million bonds more quickly.  This is significant because as soon as stadium bonds are repaid, stadium-related revenues ‘ such as $24 million in sales taxes on tickets, parking, and concessions ‘ can be placed in the general fund and used to support basic services.  The cost overruns limit the District’s ability to pay off bonds early and thus ultimately reduce revenues that will flow into the general fund.

 

Unlike Most Cities, the District Has No Protection against Further Stadium Cost Overruns

The new stadium budget of $631 million includes $43 million in contingency funds.  If further cost overruns are greater than $43 million, however, current stadium resources would not be sufficient.  Yet under the terms of the Baseball Stadium Agreement signed in 2004, the District is responsible for all cost overruns.

This financial risk and exposure to the District is relatively unique.  According to Rick Eckstein, a sociology professor at Villanova University who has studied baseball stadium deals throughout the nation, it is rare for cities to accept the entire risk for cost overruns.  Dr. Eckstein testified before the DC Council that the norm is for the municipality to pay some fixed amount with the team paying the balance.[1]


End Notes:

[1] Testimony of Dr. Rick Eckstein before the DC Council Committee on Economic Development, December 13, 2005.