By Marc Korman.
About seven years ago I was sitting at a College Democrats meeting listening to a speaker from the California Governor’s office. She was explaining all of the great programs the Governor was supporting on the ballot in California, including Proposition 40. Prop. 40 provided funding for local assistance grants for environmental programs and parks. It was a worthwhile proposition. But at the time, California was in the middle of a budgetary crisis (isn’t it always). I asked how the program was going to be paid for. The woman responded that we didn’t have to pay for it, because it was a bond bill. That probably sums up the current state of California pretty well. I was reminded of that discussion when I began hearing about the proposal to build a $195 million, 24,000 person soccer stadium in Prince George’s County.
At a time when government at all levels is in a fiscal crunch, our existing infrastructure is in need of massive repairs, and the state is considering cuts to education and healthcare (temporarily delayed by the stimulus), should Annapolis even be discussing a soccer stadium?
Elected officials and DC United have rushed to assure us that taxpayers will not be on the hook for the cost of the stadium. The argument is that the stadium DC United is looking to the state to fund will be paid for by a combination of rental payments by the team in future years (amounting to 25% of the total cost) and state issued bonds, which will be repaid by tax revenue generated by the stadium. Unfortunately, the plan does not take into account a few things:
The $195 million cost does not include infrastructure improvements that may be needed. Roads and transit improvements are obvious, but a new stadium may also require utilities improvements. Proponents have said infrastructure costs will not be that high due to the presence of the Metro, but of course Metro itself is in need of a funding infusion. It is also not realistic to think everyone will take the Metro, unless we eliminate parking at the stadium which I am confident DC United is not ready to do.
We cannot assume the stadium will be full, even when the flagship team is playing. I have no idea what calculations they used to figure out the $195 million cost or the idea that the bonds could be repaid by taxes associated with the stadium. I do know that DC United’s average attendance in 2008 was 19,835 people, a drop of over 1,000 from 2007. Given the economy, we can probably safely predict a further decline in the coming years. Another question that should be studied is whether DC United’s audience will follow the team to the ‘burbs, or whether attendance will plummet. Marc Fisher’s recent Washington Post column discussed these issues in greater detail.
3. Bonds are Not Free
Government bonds are issued to provide the government a lot of money up front that it can pay back a little bit at a time over a period of years. The repayment is called debt service and it is a required part of annual government budgets.
The debt-service ratio indicates how much of the total budget goes towards servicing debt. At the federal level, the ratio is 9%. In Maryland is appears to be just 2%, a healthy number and part of why the state maintains its AAA bond rating. By comparison, California is projected to have a ratio of 6%, which partially accounts for its low bond rating and budgetary problems. All of these number projections will probably rise due to increased borrowing as a result of the current economic situation.
But the point is increasing Maryland’s debt obligation through bonds can have an adverse effect on its bond rating, which can make it difficult to borrow for other obligations. Also, given the credit crunch, how well will these bonds sell? In addition, Maryland must service those bonds, it is mandatory spending. If the stadium does not live up to its promise, Maryland must still pay its bills. In fact, Fisher’s column quotes Prince George’s County Executive Jack Johnson admitting it’s not “going to create a lot of revenue.” Well without that revenue, taxpayers will be footing the bill.
There is a big difference between state and federal borrowing. At the state level, bonds are used to finance major projects that the state cannot afford to pay for all at once. In the case of a stadium, it makes a particularly attractive target for bonds because of all the reports and studies explaining the direct economic benefits of these facilities. For example, sales tax revenue from the stadium can be specifically allocated to service the debt. Contrast that with a highway, assuming it is not tolled. The economic benefits are far less direct and there is no direct revenue stream with which to service the debt. Although we use bonds for highway funding in Maryland, we cannot directly link the taxes generated by the highway to paying off the bond because they are too ill defined. On the plus side, no one should be able to deceive us into thinking a highway project pays for itself as they can with a stadium. Similarly, transit projects offer an attractive target because of rider fees. But generally speaking, transit projects do not pay for themselves directly through fares. Those projects that have been originally billed as such, for example the DC Metro, have disappointed.
At the federal level, bonds are issued to fill the annual budget deficit. In some cases, deficit spending may be for a worthwhile expense (like the New Deal), but since 2001 the federal deficits have been as a result of unnecessary tax cuts and an ill advised war in the Middle East. That is not beneficial deficit spending.
And neither is building a stadium. Even if a stadium could generate enough funds to service all of the debt it creates, which is not guaranteed, it could still adversely affect Maryland’s bond rating. If we are going to borrow more money, let’s do it for public priorities and not a soccer stadium.
Over a year ago, I wrote about the proposed Germantown Arena and the flaws in that proposal. Back in October I proposed eliminating the Maryland Stadium Authority. I stand by those posts and add this one to my opposition to arena/stadium projects in Maryland during the current budget morass.
Thursday, February 26, 2009
By Marc Korman.