Photo by rsmdc on Flickr.
DC has proposed building a new soccer stadium at Buzzard Point with help from public funds. The city already did this for Nationals Park, but did it work? We can find out by doing a cost-benefit analysis.
Building Nationals Park cost $701.3 million, according to a 2008 estimate. DC contributed $670.3 million, paying $135 million upfront and borrowing another $535 million. In addition, the city spent $82.6 million of federal money on upgrades to the Navy Yard Metro station, South Capitol Street and the Douglass Bridge. That doesn’t account for all the costs, but it’s the final dollar cost.
In this post, we’ll look at money spent on the stadium and how much the Nationals contributed. Later, we’ll look at the externalities caused by the stadium and what they mean for DC United.
What the stadium cost
In addition to the costs noted above, the District lost some existing revenue. Of the $670.3 million DC paid for the stadium, $57 million went to buying and cleaning up the land for the stadium. At that price, the land likely generated as much as $200,000-$500,000 in property taxes each year, but now it’s been moved off of the property tax roll. Several of the displaced businesses have left town, as did some of the residents there.
There were some additional one time costs that are hard to quantify. The city took the land by eminent domain, which Jim Titus noted carries a social cost. District employees spent time and resources preparing for baseball, not all of which were billed to the stadium.
There are also continuing costs from the stadium and baseball. Paying for the stadium pushed the District to its debt limit, which means the city can’t borrow money for anything else, including the new soccer stadium. That’s why the District has offered to trade the land for a soccer stadium for the city-owned Reeves Center at 14th & U streets. The games have traffic and parking impacts that would not exist otherwise, and the District often spends tens of thousands of dollars per game for security. The DC Sports and Entertainment Commission must pay $1.5 million every year to maintain and enhance the stadium, and set aside another $5 million for a Contingency Reserve Fund.
Aside for the maintenance fund, none of these other costs have been accounted for. Ignoring those, a conservative estimate is that DC paid $675 million for the stadium, $82 million for transportation upgrades to support it, and another $1.5 million a year for maintenance.
How DC pays for it
DC’s budget paid for the $135 million in upfront costs for Nationals Park, but Major League Baseball (MLB) could have paid for this. MLB bought the Expos in 2001 for $120 million and then sold them in 2006 for $450 million, turning a cool profit that would have easily covered this expense. But MLB only kicked in $20 million. The Nationals paid another $11 million.
To pay the bonds it issued to cover the $535 million stadium debt, the city created four sources of revenue: A gross receipts tax on businesses that make more than $5 million a year, a share of the utility taxes paid by every non-residential taxpayer, a 4.25% special sales tax on stadium sales, and rent paid by the Nationals.
The first two are just untargeted taxes on DC businesses, and are thus related to baseball only in that the revenue is dedicated to paying for the stadium. But the sales tax is a user tax on baseball fans and the rent is obviously a direct payment by the Nationals, so those can reasonably be counted as annual baseball contributions.
Unfortunately, when DC reports sales taxes from Nationals Park, they combine the special sales tax with the regular sales tax, which is currently 6% on the same items, and the 10% tax on concessions. Is this fair? All taxpayers pay the regular sales tax and concessions tax, which pay for things like roads, schools, and other things the DC government does. This approach to calculation suggests that baseball doesn’t contribute to schools or roads.
I’m sure every business would like to dedicate their sales tax to paying off their construction debt, but that isn’t how anyone else gets to do things. How much of the total sales tax is the special sales tax? According to Jonah
Keri in his book Baseball Between The Numbers, concession revenue is about 30% the size of ticket revenue and merchandise is about 10%. So, we could estimate the amount of the reported sales tax that is from the special baseball tax only at about 30% of the total sales tax.
In addition, much of this sales tax revenue comes from entertainment spending that would have happened without baseball. This is what economists call the substitution effect. “As sport- and stadium-related activities increase, other spending declines because people substitute spending on sports for other spending,” sports economist Brad Humphreys said. “If the stadium simply displaces dollar-for-dollar spending that would have occurred otherwise, there are no net benefits generated.”
Rent for the ballpark started at $3.5 million in 2009 and climbed to $5.5 million this year. From now on, rent goes up by a little less than 1.9% per year, which is below the 3.22% average rate of inflation over the last 100 years. That means that rent in real dollars will likely go down.
In addition, the Nationals would pay an extra $1 for every full price ticket sold after the first 2.5 million. So far, that’s never happened. Meanwhile, property taxes on a $500 million stadium, which the Nationals don’t pay, would total more than $9 million.
The total amount paid in baseball sales tax and rent for 2008-11 averaged $14.2 million, well below the $30 million a year total estimated in 2005 and the $23.5 million estimated in 2008. It would go up to $15.6 million if the Nationals were paying the full $5.5 million rent.
The debt service on Nationals Park costs the District $38 million, meaning that city taxpayers are paying between $22.4 and $23.8 million a year just on the bonds, or $30.8 million if we use only the special baseball tax. And then there’s an additional $1.5 million a year in maintenance and more still on security.
Again, the Nationals could pay this. In 2010, the team made $36.6 million dollars in operating income, which means they could pay the additional bonds and the maintenance costs and still have $11.3 million in profit. Even if we use the discounted baseball sales tax and add in security costs, the Nationals would still be able to keep whatever part of $4.3 million they don’t need for security. And of course, after 30 years, they would own the stadium outright. But that isn’t how the deal was cut.
So far, DC taxpayers have paid $140 million to build and maintain the stadium, $82.6 million for stadium-related transportation upgrades, and another $24-32 million a year to pay off the debt and maintain the stadium. In the next segment, we’ll look at the external benefits to see if DC is getting a return on such a large investment.