Sports

DC Plans To Give A Private Business Over $100 Million To Build A Stadium

CREDIT: AP

Last week, the city council for the nation’s capital gave final approval to a financing plan for the city’s Major League Soccer franchise, D.C. United, to build a new stadium.

Under terms of the deal, the city will borrow $106 million and re-purpose $32 million of existing budget funds to acquire land for the stadium, while D.C. United will pay for the actual construction. It’s not the worst deal in the world (that’s a high bar in the stadium finance world, so it isn’t exactly a point in D.C.’s favor), but even though completion of the stadium deal was greeted with a sigh of relief from council members, the outgoing and incoming mayors, and fans of the team, there are still major questions — and potential problems — about the deal that went unanswered before approval is granted.

The most fundamental question, one that went unasked throughout the process, is why D.C. taxpayers were footing the bill at all. United is owned by a wealthy Indonesian media magnate who recently spent more than $400 million to buy a controlling stake in Italian soccer giant Inter Milan. And while United is not a profitable enterprise per se — it loses money on an annual operating basis — its value as an asset has steadily risen, thanks to MLS’s growing popularity and a new league-wide TV deal. Now, with the new stadium, profitability isn’t out of the question, and the value of the club is expected to rise exponentially, as the Washington Post noted in its write-up of the council vote:

D.C. United has been sold twice since the team began trying to build its own venue, something most MLS clubs have. The team says it lost more than $5 million this season even though it made the playoffs, but a newly completed stadium is likely to dramatically increase the franchise’s value and could provide United a path to profitability.

To put a number on it, United’s value is expected to grow from $80 million now to an estimated $200 million once the stadium is built, according to a previous Post report. D.C., in effect, is subsidizing a “path to profitability” and a massive growth in value for a private business that could make that sort of investment itself.

“If these are such good deals (for cities) why aren’t we doing this all the time for all businesses?” said sports economist Victor Matheson, who has studied the economic impact of publicly financed stadiums. “What is it about sports? Basically, we’re paying for half the factory.”

The answer to why D.C. United isn’t paying for this is quite simple: it doesn’t have to. Consciously or otherwise, we’ve set up a system in this country where cities have no leverage, because even if it makes total sense to ask a private business (in these cases, sports franchises) to make investments that will be good for their bottom lines and overall values, the result is that the team will leave for another city willing to subsidize that “path to profitability.” In effect, it is a self-perpetuating problem in which every publicly-financed stadium becomes a justification for the next one.

As a result, we get processes like the one that just played out in D.C., where keeping the team and beating arbitrary deadlines (D.C. had to finish this by the end of the year, to hear proponents tell it) means rushing a deal through — in D.C.’s case, right after an election and without much public input — and not properly assessing the short- and long-term damage the projects may cause. Anyone who has followed stadium sagas might be familiar with those problems in other cities, and in D.C., there are potential issues on the horizon thanks to the way this deal was done, according to Wes Rivers, a policy analyst at the D.C. Fiscal Policy Institute, which has scrutinized this plan from the beginning.

D.C.’s costs are supposed to remain below the theoretical $150 million cap imposed by the deal, but they could rise above it — to as much as $230 million — thanks to the city’s use of eminent domain to secure land and a tax break the city’s chief financial officer said was unnecessary. And rising costs, along with D.C.’s choice to use its limited borrowing authority and re-purposed budget funds to finance the stadium, could have budgetary implications for the city. While D.C. is in solid financial shape now, Rivers said, it could be facing a shortfall in 2016, and using existing budget funds and adding millions of dollars in annual debt servicing costs could exacerbate that. There are also questions, Rivers said, about how borrowing to finance the stadium will affect other District spending plans, from new school construction to affordable housing development to the replacement of the city’s largest homeless shelter, all of which have been long-term priorities.

Council members have repeatedly stressed that those projects won’t be affected, but Rivers worried that speeding up the process of approving stadium financing could jeopardize those projects.

“We tried to get it done so quickly, and we’re not thinking about, one, the true fiscal benefits to the city, and then what it’s going to mean to our capital budget,” Rivers said. “I think we tread on dangerous ground by not thoroughly analyzing the risks to our fiscal health and to what our priorities as a city are going forward.”

D.C. will also likely never realize the economic benefits supporters of a new stadium (and even the New York Times) say it will bring. There exists a near-consensus among economists, and in academic research, that stadiums have little-to-no positive effect on metro area economies, not generally and especially, Matheson said, when they simply replace a facility in another part of the city. The economic impact figures are almost always vastly overstated, and even the council-commissioned report into the United stadium found that the positive fiscal impact of the new stadium would be negligible to the city’s budget (as for the idea that it will develop the neighborhood in a substantive way: the city’s seven-year-old baseball stadium sits less than a mile away, providing perfect evidence that these stadiums don’t exactly have huge development effects).

Again, none of this is uniquely a D.C. problem, because the District’s stadium saga looks almost exactly like many others before it. As ESPN’s Mina Kimes noted in October, cities have handed over more than $8 billion to these types of projects since 2005 without holding public votes. And as we and others have chronicled, those projects often lead to major problems down the road. That fundamental question about why taxpayers are footing the bill instead of the owners who will benefit is almost never asked by the people holding the purse strings; the potential problems that follow are almost never seriously contemplated, much less figured out, in advance.

And as long as there is no real expectation that teams should make these investments themselves, the problems will persist. Cities will fork over hundreds of millions of dollars to keep their teams, subsidizing already-wealthy owners’ pursuits of profitability while risking other long-term priorities. Perhaps United’s deal won’t turn out poorly. But when the process is this typical, the result tends to be too.