Dec. 18 (Bloomberg) -- When voters approved a sales-tax increase to pay $540 million toward stadiums for Cincinnati’s professional baseball and football teams almost two decades ago, city leaders promised lower property levies and a business district along the Ohio River.
The tax relief hasn’t materialized as pledged, said Todd Portune, a commissioner in Cincinnati’s Hamilton County. Instead, the county government is grappling with annual stadium expenses totaling at least $43 million this year, including debt service, county documents show. Residents have seen a public hospital sold, mass-transit investments postponed and little private development near the stadiums that didn’t involve additional public subsidies, Portune said.
“It’s an albatross that hangs around our necks,” said Portune, who has dealt with the cost for almost 13 years in office. “Every year it forces us to either come up with more revenue or take away from spending for other things the county needs.”
Cincinnati is one of dozens of cities and states where officials’ promises tied to sports venues were undone by unexpected finance costs, insufficient tax revenue or surging expenses, causing leaders to raise taxes or redirect money.
From hockey and spring-training facilities in Glendale, Arizona, to the National Football League stadium in Indianapolis, the costs of hosting professional sports aggravated the collapse of revenue during the past two recessions and burdened cities and states. Minnesota officials this year had to find revenue for a $975 million domed stadium under construction for the NFL’s Vikings after an initial tax source fell short.
Taxpayers nationwide spent about $10 billion more than planned building the 121 major-league stadiums in use through the 2010 season, according to data from Judith Grant Long, a Harvard University professor of urban planning. Counting the cost of land, infrastructure and lost property taxes adds about $89 million to the average $170 million of subsidies for each venue, the data show.
Unexpected costs are a risk for communities building stadiums. Paying for renovations to the Mercedes-Benz Superdome in New Orleans after Hurricane Katrina led the Louisiana Stadium & Exposition District, which operates the building, to borrow $361 million this year, about a third of which went to pay Bank of America Corp. to end an interest-rate hedge. The expenses, borne by the state, have amounted to more than triple the agency’s $44 million share of the renovation.
Officials in Indianapolis raised hotel, restaurant and rental-car taxes on top of other revenue sources to pay for the $720 million Lucas Oil Stadium for the NFL’s Colts. Five months after the stadium opened in 2008, the board that manages it began predicting a deficit of $25 million, growing to $45 million the next year.
The deal with the Colts was fair and “brings extreme value to the city,” Ann Lathrop, president of the Capital Improvement Board, said in an e-mail. “The board took extraordinary cost control measures, worked with the State Finance Authority to creatively manage the cash funding requirements for bond insurance, borrowed money from the state for the swap termination payment, and leveraged new revenue sources to bring the board back to solvency within 24 months.”
Eric Eagan, a spokesman for the Superdome, declined to comment.
Glendale, a city of 232,000 people northwest of Phoenix, is spending at least $655 million to reinvent itself as the area’s sports and entertainment hub. It built a $180 million arena for the National Hockey League’s Phoenix Coyotes and $200 million spring training ballpark for Major League Baseball’s Los Angeles Dodgers and Chicago White Sox.
The cost of the hockey arena has risen as the city has incurred $275 million of management fees since a previous owner of the Coyotes sought bankruptcy protection and Glendale faced losing the team. The training facility has failed to generate expected development, though officials still want to draw businesses, said Jennifer Stein, a city spokeswoman.
The venue has brought some ventures, including a Jimmy Buffett’s Margaritaville, a sporting-goods store and outlets, Stein said. Losing the team would have cost the city revenue, she said.
In Cincinnati, Bengals owner Mike Brown took control of the team in 1991, after the death of his father, Paul Brown, a Hall of Fame founder and coach of the Cleveland Browns, who in 1967 headed an ownership group that acquired an expansion franchise in the American Football League. The Reds are owned by Robert Castellini, who led a group that bought a team after the 2005 season that was then valued at $270 million. The team is now worth $680 million, according to a data compiled by Bloomberg.
In the 1990s, each team began pushing for public funding to replace Riverfront Stadium, which opened in 1970 and was shared by both organizations. In March 1996, Hamilton County voters approved a half-percentage point increase in their sales-tax rate to fund the football and baseball venues as part of an effort to revive the area along the Ohio River.
Paul Brown Stadium opened for the Bengals in 2000 and Great American Ball Park opened for the Reds in 2003. The stadiums are about a half-mile apart.
Castellini declined to comment, according to a Reds spokesman, Rob Butcher. Mike Brown declined to comment through Jack Brennan, a Bengals spokesman.
Roxanne Qualls, mayor at the time of the stadium plan, said investment in the arenas helped keep the teams in the city, where they serve as marketing assets and cultural amenities, while sparking development.
“We were able to use that investment to facilitate development around the riverfront,” she said. “It’s been worth it.”
According to a 1996 report by the Center for Economic Education at the University of Cincinnati, the stadiums were projected to generate $296 million a year in new spending. And along with money to pay for the stadium debt, the higher sales taxes would provide money for a property-tax cut. A group of stadium supporters called Citizens for a Major League Future also promised the projects would generate more than 18,000 jobs and provide money for schools, according to a campaign flier.
Backers say the stadiums anchor construction in the area between them known as The Banks, a $2.5 billion development. Though growth has occurred more slowly than expected, it has revived the riverfront with restaurants, bars and residential space, supporters said.
“The city has both teams and has redeveloped its riverfront into a vibrant neighborhood,” said W. Stuart Dornette, a partner at law firm Taft Stettinius & Hollister LLP, who represents the Bengals. “None of that would have been possible without the sales tax to pay for the stadiums.”
The project along the riverbanks also includes the National Underground Railroad Freedom Center, said Dan Lincoln, chief executive officer of the Cincinnati USA Convention & Visitors Bureau.
“The stadiums are leverage to create the kind of city you want to be,” he said.
None of the investment in the area would have been possible without subsidies from the county, some of which were paid from sales taxes passed to fund the stadiums, said Dusty Rhodes, county auditor. The Underground Railroad museum “impeded development” by using space that could have gone toward privately financed construction, Rhodes said.
“They said this would jump-start private development, but I don’t see any private development,” said Rhodes.
The county borrowed $623 million beginning in 1998 with municipal bonds, some of which was refinanced in 2006 and 2011.
Hamilton County sales-tax bonds sold to refund stadium debt in 2011 and maturing in December 2027 traded at a yield of about 3.84 percent this week, the lowest since 2012, data compiled by Bloomberg show. Investors demanded about 1.3 percentage points of extra yield to own the securities, down from about 2.1 percentage points in August.
The debt is rated A2 by Moody’s Investors Service, the sixth-highest level.
Last year, Moody’s assigned a negative outlook to the county’s general obligations, citing “the lack of a long-term strategic plan for the growing obligations of the stadium” sales-tax fund. Such a move signals a possible rating cut, which could raise the county’s borrowing cost.
Public costs for Cincinnati stadiums now exceed $1 billion in 2010 dollars, according to Long, the Harvard professor, who tabulated expenses for stadiums for a book titled “Public Private Partnerships for Major League Sports Facilities.”
The NFL stadium proved particularly costly, according to Long. Paul Brown Stadium was the second-most expensive public deal of any U.S. stadium, according to her data, with the public paying $706 million, including land, infrastructure, maintenance and tax breaks. It trails only Indianapolis’s Lucas Oil Stadium. Taxpayers also spent about $489 million on the Reds’ Great American Ball Park, according to Long’s data.
The price rose for the Hamilton County stadiums as the U.S. economy endured two recessions starting in 2001. Meanwhile, the local population and tax base shrank. The population fell to 802,374 in 2010 from 845,303 in 2000, according to a financial statement.
Sales-tax collections for the stadiums were expected to grow by 3 percent a year, but instead rose an average of 1.4 percent from 1999 to 2008, county documents show. Slow collections of other revenue led the county to cut 1,700 jobs, diminish promised property-tax reductions and delay payments for schools, Portune said.
The county will spend more than $50 million on stadium debt service and other costs in 2014, according to financial documents. To cover the cost, the county reduced a planned tax rebate, according to budget documents.
The county has raised property taxes, refinanced debt and sold off a hospital to close the gap, said Portune. Voters, dissatisfied with the stadium investment, twice rejected proposed new taxes to build a jail, Portune said.
New gambling tax revenue is going to the stadiums, which means the county can’t use that money for other initiatives, such as a regional rail system, said Portune. The gambling proceeds would be adequate to pay debt service on the first leg of a new system, he said.
Besides the recession reducing projected revenue, the county’s challenges result from construction-cost overruns, other uses of the funds and the effect of Internet sales on tax revenue, Hamilton County Administrator Christian Sigman said in an e-mailed statement. The 1,700 job cuts had nothing to do with the stadiums, he said.
The county has kept its pledge to rebate property taxes every year except 2011, 2013 and 2014, said Sigman, returning more than 95 percent of the rebates promised.
“I am confident we will continue to meet our obligations to bondholders, sports teams and other funding partners,” Sigman said.
Minnesota fans didn’t have to wait for a new Vikings stadium to be built to find out they would need additional revenue. In March 2012, the NFL team and public officials agreed to build a $975 million stadium, with taxpayers contributing about $498 million.
That plan fell apart before a planned bond sale, scheduled for early next year. The amount of gambling revenue to be collected to pay the public’s cost this year was cut to $1 million from $16 million, according to Minnesota Management & Budget, a state agency. Before groundbreaking this month, lawmakers realized the original funding source wouldn’t generate enough revenue. This year they added a one-time contribution from a tobacco tax increase to build a reserve fund and closed a tax loophole.
The stadium is expected to generate development in downtown Minneapolis and provide a venue for national events such as the Super Bowl, said Michele Kelm-Helgen, chair of the Minnesota Sports Facilities Authority, which is overseeing the project at the site of the existing Metrodome.
A developer has announced plans to build two office buildings, investing $400 million in a project expected to bring 5,000 jobs, Kelm-Helgen said.
“The Metrodome has been surrounded by a sea of parking lots,” she said. “We’re seeing this incredible interest in all of this vacant land around the arena site.”
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