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Steven Pearlstein

Screwball Logic Muddies Baseball Arguments

By Steven Pearlstein
Tuesday, December 21, 2004; Page E01

Reasonable people can disagree about Mayor Anthony Williams's latest plan for bringing professional baseball back to Washington. Unfortunately, a lot of the discussion so far has been based on misleading vocabulary and faulty assumptions. As the D.C. Council considers further action today, here's a business columnist's guide for thinking about the issue:

Let's start with the central issues of whether the stadium should be built with "public" or "private" financing. Financing refers to the process of borrowing the money -- let's call it $500 million -- to buy the land, build the stadium and fix up the nearby public infrastructure. The city could do that, a private entity could do it, or some combination of the two.

Stadium souvenir sales would be subject to a 10 percent sales tax under the mayor's plan. (Kevin Clark -- The Washington Post)

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But the question of financing, in this context, is different from the question of who will ultimately "pay for" the stadium project by providing the funds that will be used to make annual interest and principal payments. And in arguing against the mayor's plan, Council Chairman Linda Cropp and other critics often confuse "financing" with "pay for."

Should we care who finances the stadium? Well, if our interest is in holding down the total cost of the project, it's pretty clear we should be pushing for as much public financing as possible. The reason is simple: Cities can borrow money more cheaply.

These days, the District can borrow money by issuing tax-exempt bonds that pay an interest rate of about 5.25 percent. For a private developer, on the other hand, the cost of borrowing from banks or insurance companies would almost certainly be closer to 9 percent. Furthermore, in any private financing scheme, private entities could borrow only 80 percent of the full project cost, requiring private investors to put up the other 20 percent. This down payment of risk capital, or "equity," usually demands after-tax returns of 15 percent. That would bring the "blended" cost of capital under a private financing scheme to 10 percent or more, or roughly double the cost of "public" capital. On a $500 million project, that works out to a $20-million-a-year difference in carrying costs between public and private financing.

Now consider the second and more crucial question: Who will "pay for" the interest and principal cost once the stadium is financed? And here, too, the terms "public" and "private" turn out to be less useful than you might assume.

Under Mayor Williams's plan, for example, the city would impose a 10 percent sales tax on tickets, food, souvenirs and parking at the stadium. That would generate $5 for the city on a $50 ticket, or 50 cents on a $5 hot dog. And because it is a tax, stadium critics consider that part of the "public financing."

But imagine, instead, that the city decided to impose no sales tax at the stadium. We've already established that consumers are willing to shell out $55, including tax, for a ticket and $5.50 for a hot dog. So any economic textbook will tell you that, in a world with no sales tax, the team would step in and capture the full amount of what fans are willing to pay, raising base prices by 10 percent. That would generate an extra $15 million in annual team revenue, which the city could recapture by forcing Major League Baseball to pay $20 million rather than $5 million in annual stadium rent. And -- voila -- suddenly Cropp could claim her hard bargaining generated an extra $15 million in "private" financing.

In truth, of course, there would be no real difference between the "public" and "private" version of these arrangements. In both cases, the money would be paid by the people who attend the games, park their cars and eat hot dogs, two-thirds of whom would be non-District residents. Finance experts would consider both a version of a "user fee," long considered the most appropriate way to pay for something like a baseball stadium.

More problematic are the new stadium taxes the mayor proposes to impose on District businesses -- a gross receipts tax on big businesses and a 1 percent surtax on business utility bills. Critics argue that if it's a good idea to use such taxes to pay for a baseball stadium, it would be even a better idea to use the revenue to pay for schools, libraries and public health.

I doubt there are many people, including Mayor Williams, who would argue with that hierarchy of priorities. Unfortunately, the rest of the critique rests on three assumptions that are highly suspect.

The first is that spending more money would actually improve the quality of city services. This might be the case for libraries, where more money would buy longer hours and more books and computers. But the case is much harder for education, where empirical evidence suggests a disconnect in the District between the amount of money spent and the results achieved.

The second fallacy is that new business taxes could be enacted to support increased spending on these services. How do I know this is a fallacy? Because if city officials really had the political will to do it, they surely would have done it already. The fact that they haven't suggests strongly that District politicians know that the business community would strongly oppose tax increases for those purposes, and the business community would probably prevail.

For some strange reason, however, a majority of the rich, white males who "run" the business community are nuts enough about baseball that they are willing to swallow a modest increase in business taxes to get it. We might choose to question their values, their judgment or their priorities. But as long as they are willing to do it, why should the rest of us stand in their way? Moreover, it is a fair question to ask whether these quasi-voluntary payments should be thought of as "public" or "private."

The third assumption made by stadium critics is that Mayor Williams and his team have ignored the prospect of raising extra money from the private sector by auctioning off development rights around the stadium or the right to collect $20 from cars that park at city meters near the stadium during the games. (No, Kornheiser, the meters will take credit cards, not quarters.) In fact, the reason we are even talking about these possibilities now is that city officials have explored them. And they concluded that the best way to maximize such revenue isn't to auction off or "monetize" these rights now, but to wait until the project is further along. It should be pointed out, also, that with the stadium paid for through other sources, this extra money could be used to pay for other needed city services.

Look, don't get me wrong: I'm mighty uncomfortable with the fact that Washington and other cities have to further enrich millionaire team owners and players to attract and retain a baseball franchise. But until Congress repeals baseball's antitrust exemption, or until all major cities are willing to sign a pact that none of them will buy into baseball's Ponzi scheme, our choices are either to play by the rules laid down by Major League Baseball or not play at all. Another round of "tough negotiating" won't change that basic reality.

Or, as Don Rumsfeld might put it, you go into negotiations with the Major League you have, not the one you wish you had.

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