Saturday, June 28, 2014

Cost-Benefit Study Request by City Council Would Have Undervalued DC United Stadium Benefits

Phil Mendelson at DC City Council Hearing
(Photo: Doug Barnes from City Coucil Website, 2019)
by David Rusk
July 2014

The DC Council has issued a Request for Proposals (RFP) for a consultant to do an independent analysis of the complex transactions involved in the DC government's providing (and owning perpetually) the site for DC United's new soccer stadium at Buzzard Point.

At Thursday's hearing Ward 4 Councilmember and Democratic mayoral candidate Muriel Bowser stated that she had proposed such an RFP to Chairman Phil Mendelson. It is clear that the consultant's independent analysis (due September 12th) will play a major role in the Council's decision regarding the new stadium. It is critical that the consultant's "independent analysis" be conducted in accordance with ground rules that produce a level playing field. In my reading of the RFP, that appears to not be the case on at least one critical point. As witness #65 here is my testimony to the Council (only Chairman Mendelson was present at the time).

Testimony to Chairman Mendelson

Mr. Chairman: My name is David Rusk. My wife and I reside at 4100 Cathedral Avenue, NW. We have been residents of the District of Columbia for 31 years.

I am a soccer fan and ardent DC United supporter. I am also a local taxpayer and former elected public official myself. (I served in the New Mexico legislature and was mayor of Albuquerque). I welcome the Council’s action in issuing a request for proposals for an independent consultant to evaluate the complex transaction proposed with the consultant’s final report to be submitted by September 12 of this year.

I would like to focus on one provision of the Request for Proposals.

In Section C.2.2 (Cost-Benefit Analysis) the RFP states that "[T]he costs and benefits will be measured over a 10-year horizon … [emphasis added]." Directing that a 10-year horizon be used rather than a 30-year horizon – which is the life of the agreement – is likely to produce a negative cost-benefit analysis. Why? A. Within the context of the 30-year agreement, the tax abatement provided to DC United is concentrated in the first 10 years.

  • The full DC sales tax is abated for the first 5 years; in years 6 through 10 the sales tax will be 50%; and 100% of the full sales tax is paid for years 11 through 30 – that is, after the 10-year horizon.
  • DC property taxes would be abated fully for the first five years and then scaled upward in five year increments to 25%, 50%, 75% until the full 100% property tax rate would be paid in years 21 through 30 – that is, after the 10-year horizon. 
  • DC United would pay an additional rent of a flat $2 for each ticket sold in years eleven through twenty and an inflation-adjusted $2 for each ticket sold in years 21 through the end of the ground lease – worth about $1 million a year but all after the 10-year horizon. 
  • Finally, DC government may issue bonds to cover some or all capital improvement costs for the stadium site. Issued for a typical 15-, 25-, or 30-year period, such bonds heavily front load interest payments rather than reduce the principal in the early years, inflating the apparent cost of financing judged within a 10-year horizon.
Thus, with significant costs (tax abatements) heavily concentrated in the first ten years while significant added benefits (the surcharge per ticket plus full taxes paid in the later years) are ignored within the 10-year horizon, this part of the cost-benefit analysis would likely be negative, providing a seemingly "objective" economic rationale for rejecting the proposal. I urge that the Council’s independent consultant should be directed to use a 30-year horizon for the cost-benefit analysis.

Thank you, Mr. Chairman

Conclusion

Though Councilmembers had heard many witnesses without asking any follow-up questions, Chairman Mendelson addressed himself explicitly to my testimony. He spoke for close to two minutes regarding why a 10-year time horizon had been specified within the RFP. Unfortunately, as I told the Chairman, my cochlear implant picked up only snatches of his comments as broadcast by the sound system within the acoustics of the Council chamber so I could not respond properly to his comments. However, he invited me to review the hearing as broadcast on the Council's website and respond. I pledged to the Chairman that I would do so.

Chairman Mendelson's spirited and lengthy defense demonstrates that this provision of the RFP wasn't just the casual creation of some junior Council staffer but a deliberate decision by Council leadership. We must take it seriously.

No comments:

Post a Comment