Dec. 18 (Bloomberg) -- With its 92-year-old football stadium starting to crumble, the University of Washington began contemplating a renovation half a dozen years ago. One financing idea -- getting $150 million from Seattle-area taxpayers -- ran afoul of state Representative Ross Hunter. The state was reducing college funding, and tuition was surging.
“We were cutting billions of dollars out of our budget, and we are going to build a stadium. Really?” says Hunter, 51, a Democrat from Medina who is chairman of the House Ways and Means Committee. “I was OK with saying ‘No.’”
That didn’t prevent taxpayers in Seattle and the rest of the U.S. from subsidizing the $250 million project anyway. Tax breaks on municipal bonds issued for the stadium, donations for construction and increased contributions tied to ticket purchases will cost the U.S. Treasury $154 million over 30 years, based on data compiled by Bloomberg. Without the exemptions, Athletic Director Scott Woodward says, he couldn’t have financed the overhaul.
As the school’s football team prepares for a bowl game Dec. 22 in Las Vegas, the field at Husky Stadium is dotted with earth movers and dump trucks. The construction shows how even some of the most soundly run college football programs benefit from indirect tax subsidies totaling hundreds of millions of dollars. In addition to the deductions that helped fund this project, sports departments are exempt from taxes on ticket, television and other income generated by their stadiums.
The system of taxpayer subsidies is contributing to a financial arms race among the 120 schools in the top division of football, the most lucrative college sport. Within that group, the median athletic budget is $38 million, according to an October report by the National Collegiate Athletic Association. The richest programs generate revenue of almost four times as much, approaching $150 million. Only 23 programs turned a profit in fiscal 2011, according to the NCAA.
Tax preferences reduce the cost of athletic programs, allowing schools to build bigger facilities and pay coaches more. Breaks targeted at fans reduce the cost of tickets, allowing schools to raise prices. Dennis Coates, an economist at the University of Maryland Baltimore County, said college sports may not be the best use of tax exemptions.
“If we are going to allow charitable donations, we should think about what the ultimate purpose of those donations happens to be,” Coates said in an interview. “When one thinks of charity, they don’t think of charity flowing to the head football coach of a big state university.”
Coates also questioned muni financing for stadiums. “Using the borrowing power of the state and tax-exempt interest to build stadiums for sporting events isn’t the real purpose of the university, either,” he said.
Maximizing revenue by creating premium seating -- such as Husky Stadium’s new luxury suites -- is part of the funding strategy. The University of Washington project is just one of dozens of stadium or arena overhauls in the past decade.
The University of California, Berkeley, unveiled a $321 million renovation to its football stadium in August that upgraded seating and concession stands, widened concourses and brought the structure into compliance with seismic standards. The University of Alabama in Tuscaloosa spent $65 million adding 9,000 seats and 36 sky boxes to Bryant Denny Stadium in 2010. And for $226 million, the University of Michigan in 2010 added 82 suites, 3,000 club seats, a new press box and other amenities.
As Congress contemplates a revision of the tax code next year to close the federal budget deficit, some of the decades-old exemptions that benefit college sports may face elimination, according to U.S. Representative Dave Reichert, a Washington Republican on the Ways and Means Committee. Deductions for donations to education cost the Treasury $5.7 billion this year, according to Congress’s Joint Committee on Taxation. There isn’t an estimate for lost revenue from sports-related exemptions.
“Everything has to be on the table,” Reichert said in an interview. “We feel like the momentum is there” to overhaul the tax system, he said. “Stadiums are paid for a certain way today. But there could be a better way to pay for them.”
The University of Washington has been playing football in horseshoe-shaped Husky Stadium since 1920. The vista from the 72,500-seat venue, the largest in the Pacific Northwest, includes Lake Washington, Mount Rainier and downtown Seattle. On football Saturdays, some fans arrive by boat and anchor nearby. A wave to the dock summons a ride ashore with the school rowing team, winner of four of the past six men’s national championships.
By most measures, the 42,500-student university runs a model sports program. The athletic department’s $70.2 million budget supports 10 men’s and 11 women’s teams. The school doesn’t require student athletic fees.
UW athletes tied with those of the University of Utah for the third-highest graduation rate in the Pacific 12 Conference over the past four years with 81 percent, behind No. 1 Stanford University and the University of California, Los Angeles. The school finished in the top 25 of the Learfield Sports Director’s Cup -- an award that measures the success of the entire program -- in four of the past five years.
This year’s football team won 7 games and lost 5, and it will play in its third straight postseason game when it faces Boise State University in the MAACO Bowl. All of the school’s other fall semester teams qualified for the NCAA postseason.
Around six years ago, however, it became clear that the sports program’s biggest income source would have to be updated. The oldest football stadium in the Pac-12 needed renovations to withstand earthquakes, comply with the Americans With Disabilities Act and replace crumbling sidewalks and railings. The university also wanted to add revenue-generating premium seats and electronic displays, and update the structure’s technological infrastructure.
The price tag was going to be $450 million. The university proposed covering $150 million of that by extending county taxes on food and beverages, rental cars and lodgings, which had been used to finance stadiums for the National Football League’s Seahawks and Major League Baseball’s Mariners.
Representative Hunter, a former Microsoft Corp. manager whose district doesn’t include the stadium, and other lawmakers turned thumbs down. The legislature would have had to assent, and it never came to a vote. Starting in fiscal 2008, the state’s revenue fell 5.6 percent over the ensuing five years, according to the Washington State Budget & Policy Center in Seattle.
Over that period, state funding for the University of Washington declined 50 percent, while tuition and mandatory fees for resident undergraduates jumped 66 percent to $10,574, according to the school.
All of that left Woodward, the athletic director, to rehabilitate the stadium without funds from the county, the state or the university. Now 49, Woodward set out to cut the costs. He got permission to bypass the university’s usual committee-laden approval process and obtained proposals directly from developers for preset prices, rather than through architects and builders separately, says Chip Lydum, the associate athletic director for operations and capital projects.
Developers are more efficient in negotiating with builders -- getting them to work for less in return for getting hired on other projects -- and substituting less expensive materials that still meet building codes. That, plus recession-borne lower borrowing costs, reduced the price.
For $250 million, the school is adding 30 luxury suites, 65 patio suites, 2,500 club seats and an 88,000-square-foot football operations department. It is lowering the field by four feet (more than a meter) and rebuilding the lower bowl and south-side upper deck. There will also be a 200-car parking garage that wasn’t originally planned.
The financing includes $50 million in private donations. While that means the money isn’t coming directly from taxpayers or students, it does reduce revenue to the U.S. Treasury. Contributions for university facilities are usually 100 percent deductible. Assuming that donors were in the 35 percent tax bracket -- for those with taxable earnings of more than $388,350 a year -- the cost to the Treasury may total as much as $17.5 million.
Woodward borrowed the remaining $200 million by selling municipal bonds. Investors in muni bonds don’t have to pay U.S. income taxes on interest. Their tax break will reduce federal revenue by $1.3 million this year, or $28.5 million when all the bonds mature in 2043, based on data compiled by Bloomberg and reflecting yields as of Nov. 30. The state of Washington also is forgoing taxes on residents with interest income from at least some of the bonds.
“I’m not smart enough to tell you I know all the answers to tax reform,” Woodward says. “What I do know is that our donors are generous in this current tax structure, and we’re the only country that has this tremendous philanthropic giving. Are the breaks still needed by college athletics? I think so.”
The renovated stadium will create additional tax breaks for Washington football fans when it reopens Aug. 31. That is because the school requires some of those who buy season tickets to make donations to the athletic department in addition to the face value of the seats. Under U.S. tax law, fans can deduct 80 percent of these contributions from their taxes.
The Huskies estimate that the new suites and premium seating will raise $16 million a year in donations. Assuming a 28 percent tax rate -- the third-highest, for married couples reporting taxable income between $142,700 and $217,449 -- that would cost the Treasury as much as $3.6 million a year initially, increasing over time as contribution minimums rise.
“That deal may not be good federal tax policy, but it’s the best available and most responsible deal for the university and its stakeholders,” said Justin Marlowe, a professor of public finance at the University of Washington’s Evans School of Public Affairs, in an interview.
Additionally, the athletic department projects that other stadium-related revenue -- such as ticket sales, naming rights and concessions -- will increase by $17 million, or 57 percent, to $47.5 million annually, according to Assistant Athletic Director Carter Henderson. That will more than cover payments on the stadium debt of $15.9 million, the school says.
One group that isn’t benefiting from Woodward’s stadium project is students. After the renovation, their section will move to the end zone from the lower level between the 30-yard lines. Student tickets used to go for $120 a season. Now Woodward will sell those seats to the public for as much as $1,249 a season, including the mandatory donation, according to the university.
The students didn’t have a vote on the move and didn’t like the idea of a 10-fold price increase, says Evan Smith, 21, the president of the student government organization. The senior from Gig Harbor, Washington, who is studying economics and government, said students felt like poor neighbors.
“It was dropped on us in the final stages of approving the renovation,” Smith says. “The sentiment was, ‘Wait, the football team is our team, it’s our college, they play for us.’ When they are running onto the field, they are looking at the student section, and we are cheering them on.”
The students did get the athletic department to lower their season ticket price to $99 for the end-zone seats.
“In the end, they took the approach that: ‘We look at all of our customers the same. We can charge more for these seats and you can’t afford it, so we will charge those who can,’” Smith says. “It was kind of tough hearing that.”
Economists and politicians debate the benefits of taxpayer subsidies for stadiums, professional or college. Job creation and business development promised by proponents usually fall short of estimates, said Marlowe, the UW public finance professor. The projects often move money that would have been spent at one venue to another, without adding significant new economic activity, he said. At the same time, tax breaks for the wealthy often encourage investment, allowing benefits to filter down and create value for all, he said.
“The Huskies are heroes to the community,” Marlowe says. “Is that enough of a benefit? Is the tax break to the rich enough to underwrite the effort, through fundraising, investment and high-priced tickets, worth it to generate pride in the community? We’re living through some difficult economic times and these are the kinds of questions being asked.”
Hunter, the state lawmaker who argued against tax money for Husky Stadium, says there is something to learn from Woodward’s ability to get the project done anyway.
“This is like one of those times when you say ‘No’ to your kid, and he says, ‘Darn, I really want that,’ and so he decides to mow a bunch of lawns and babysit,” Hunter says. “In the end, they are getting a great stadium that will last for years.”
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