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Pearlstein

Stadium Financing

Steven Pearlstein
Washington Post Columnist
Wednesday, March 16, 2005; 11:00 AM

Washington Post business columnist Steven Pearlstein was online to discuss his latest column, which tackles the issue of baseball stadium financing options.

A transcript follows.

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About Pearlstein

Steven Pearlstein writes about business and the economy for The Washington Post. His columns on the economy appear every Wednesday and Friday.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

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Columbia, Md.: Dear Steven,

Great read as usual. Can't you do this more than twice a week? Any way, let's forget this silly notion of evaluating the many 'financing' plans and ask the right and only question. Why is the public, thru its city, county or state asked to cut its financial throat on behalf of millionaires who are willing to cut each other's throats to plunk down hundreds of millions to land themselves a team? Why must we 'provide' a stadium and all the extra benefits that come along with a stadium deal to let a group of millionaires become team owners? Nobody provided my mother with a kitchen and choice parking when she started a small catering business. She doesn't hold the public or its representatives responsible for the failure of her business, either. Must we have different sets of rules for millionaires and regular grunts?

Steven Pearlstein: Well, you may remember that, in the end, I support this stadium and the public ownership and financing of it, as distasteful as I find it. But then let's be candid about what we are doing, and not dicker around with obfuscation or silly debates about "public" or "private" financing. After Nat Gandhi briefed the council yesterday, the councilors said, "Nat, that's all wonderful but which plan costs the city the least." And this is what I mean when I'm talking about financial illiteracy. The question actually is meaningless. Cities don't have money. They only collect money from certain parties, and use it to provide jobs and services to other parties (people and businesses). The only question here is who do you want to collect the money from. The stadium and the land cost what they cost -- it doesn't matter what financing plan. The money for it will be borrowed from someone, at some interest rate. So the question is who is going to pay it back and what do you have to give up in terms of revenue streams that could be used for other purposes and what other risks do you want to assume in the process. You can't just boil it down to a simply question of which plan costs less.

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New York: I am a graduate student at Columbia University, and we are working on a case study regarding the politics and economic impact of the stadium deal. In terms of the tax on businesses-- who are the winners and who are the losers? What kind of tax will it be?

Steven Pearlstein: Three kinds of taxes have been passed by the Council. One is a gross receipts tax on the largest businesses in the city, which is probably the most controversial. The second is a utility surtax on power used by businesses and government in the city, which it turns out would be half paid by the federal government, which is why it is so popular here. And finally there is the 10 percent tax on the sale of tickets, popcorn and parking at the stadium.

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Washington, D.C.: Would it be cheaper to issue bonds or take one of the proposals? With one of the proposals the tax may go away in a few years, with bonds would the taxes remain the same over the term of the bonds?

Steven Pearlstein: All proposals involve some degree of bonding or borrowing. IN the Deutsche Bank proposal, they borrowing may not involve publicly traded bonds -- they will place the loans with insurance companies and pension funds or hedge funds in a private placement. But they amount to the same thing in the end, plus or minus the fees and reserves required for public bonds. And depending on the uses and the revenue streams used to back the bonds, they can either be tax exempt or not. The city could also just use general obligation bonds, which the CFO is loathe to do because there is nothing he prizes more than his bond A bond rating and the more you borrow, the harder it is to maintain that.

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Eden Prairie, Minn.: How much are the new owners of the National paying for the franchise?

Shouldn't the revenues produced by the new ballpark deal justify a franchise "market value" greater than or equal to the price of the franchise plus any direct stadium contributions by the new owners?

Steven Pearlstein: You are absolutely right. The value of the franchise is determined, in part, by the rent it has to pay. Lower the rent, higher the value of the franchise, which is right now owned by the league. That is why they fought so hard for public financing (i.e. low rent). Right now we don't know the new owners, although several parties have submitted proposals. But there is still one last area to be worked out -- the split of TV revenues with the Baltimore Orioles. And until it is clear how much TV revenue the new Nationals owners are going to get, they can't really finalize their bids.

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Washington, D.C.: So what criteria were used in certifying the two proposals and eliminating the others?

washingtonpost.com: 2 Financing Deals Cleared for Stadium

Steven Pearlstein: There were three criteria, as I recall. One was whether the proposal lowers the total amount of bonding required. Another was whether the proposals reduces the gross receipts tax that the city would have to collect from businesses. And the thirds was whether the proposal would provided added economic spinoffs with minimal additional risk. Only two passed muster by those criteria.

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Washington, D.C.: So, the city owns the stadium... it will borrow the money to buy the land and build the stadium, and it will float bonds that will be paid back by the taxpayer to pay for this asset, which the city will then own. Millionaires who own the team will reap the benefits thereof. Have I got that right?

What is wrong with this picture?

Steven Pearlstein: Well, you need to be careful in the use of taxpayer. In this case, the taxpayers are particular subset of taxpayers: people who go to the game and large businesses in Washington, which through their associations essentially signed up to be taxed, albeit under duress. The general taxpayer is sacrificing only in this sense: that if the city was willing to raise those taxes from businesses, the revenue would have been used to improve services or decrease the general taxes on property and income that most residents pay. But really, in the way most people mean the term, the taxpayers weren't on the hook here as long as there weren't big construction overruns and the team attracted the number of fans necessary to generate the sales tax revenue that had been anticipated.

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Washington, D.C.: What's wrong with just using RFK? Why do we need a new stadium at all?

washingtonpost.com: Special Report: Washington Nationals

Steven Pearlstein: Well, that's what I said originally, and I still don't have a satisfactory answer. I can't believe a fully rebuilt and modernized RFK could be done for $250 million and satisfy everyone for the next 15 years. After that we can talk. What persuaded me to support the thing int he end, however, was where they were putting it and its economic development potential.

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Eden Prairie, Minn.: Has a site been selected for the new Nationals ballpark?

Is the site big enough to generate parking revenues and ancillary development that can be used for stadium funding?

Are the proposals under consideration ballpark proposals or local economic development proposals?

I believe the site is key to generating private stadium investment opportunities and revenue streams. Shouldn't the goal be to minimize public funding and maximize private funding?

Steven Pearlstein: Well, I'm with you except when you get into the distinction between public and private financing. Not sure there is a big distinction between the two, after you set aside the question of the rent to be paid by the team. The developers proposed to borrow/put up money to help pay for stadium construction and land acquisition, but only if they were granted development rights and rights to the stream of sales tax revenue that businesses in the neighborhood would generate. That might appear to be "private" financing. But you have to look at these things in terms of opportunity costs as well as direct costs. My reading is that they were asking the city to give up too much in terms of these future revenue streams to justify getting the up-front construction money.

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San Jose, Calif.: What happens if there are cost overruns in the ballpark construction phase? Are there agreements (guarantees) in place that would shelter the DC taxpayer?

Steven Pearlstein: No, that is one of the big risks that council members were hoping to mitigate. Some of the developer proposals would have done that, but, as I say, at too high a cost. Remember,the question isn't whether you want to minimize risk, but what people will charge you for the privilege. There is no free lunch.

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Washington, D.C.: This is in regard to your use of the term "general taxpayer".

It would seem that any time the general funds of the city revenue base are being used to pay off an obligation, that the notion of a "particular subset of taxpayer" becomes irrelevant. We're all going to be paying for the acquisition of the asset, i.e., the stadium, whether or not we actually attend games.

The team owners are being given a place to "conduct business" at the taxpayer's expense...ALL taxpayers. No matter which way you spin it, every time I buy a stick of gum in a CVS some of the sales tax, plus some of my D.C. Income Tax, is going to pay for that stadium.

Has it been demonstrated that the city will actually get any positive monetary result from this, even in the long run? Or will we all end up financing something at a net deficit to the city, which is going to simply provide a bunch of fat-cats with billions in short-term profits?

Steven Pearlstein: I am not sure I agree with you on the point of who is "paying" for the stadium. I like my analysis better: the users of the ballpark (fans and team) and businesses paying the ballpark and utility taxes. The reason I say that is because these taxes were able to be passed because of the support of the business community. So the revenue from these taxes would NOT have been available to reduce other taxes, say, without the ballpark, because as a matter of political reality, they would not have been able to gain approval of mayor and council. I know that is a political judgment, not an economic one. But so be it.

As for the long term financial benefit to the city, I think the case could be made that, at this site, it will be enough of a development catalyst that it can be justified. But, again, there are no guarantees on that. That is a subjective analysis.

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Washington, D.C.: It's my belief that the stadium deal is overly generous to MLB due mainly to the leverage that baseball has through its anti-trust exemption. Do you have any feel whether there is any sentiment on Capitol Hill to review baseball's rather unique anti-trust status?

Steven Pearlstein: You got that right. But be careful about concluding from that that the world would be better if the exemption were lifted. What the league would probably do is simply turn itself into a single company with each owner having a share of the stock (the National Hockey League is now considering just such as LBO). And in that case, there would be no antitrust problem, although it might invite another league from starting up.

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New York: If Williams is struggling with black and latino constituencies-- what is really in it for him? Is he winning votes by bringing the Nats to DC?

Steven Pearlstein: Not sure he is winning many votes with it, although as a general matter, the better people feel about their city and its prospects, the more likely they are to return an incumbent to office.

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Arlington, Va.: Isn't it also relevant that the tax upon fans will expand the city's tax base, by reaching a group of (Va. and Md.) taxpayers that would otherwise be outside DC's jurisdiction? Isn't this an unmitigated positive factor, from the city's point of view?

Steven Pearlstein: Yes it is an unmitigated factor. But if you look at two-thirds of the flow of sales tax revenue from the non-residents, and consider that maybe half of that would have been spent on entertainment in the district anyway, it is not a huge number.

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Steven Pearlstein: Thanks, folks. See you next week.

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