Tuesday, July 8, 2014

DC Council's Initial Instructions for Stadium Cost-Benefit Study Would Have Ignored 79% of Future Financial Benefits

DC United Stadium Southwest View Old Rendering, 2014
(Photo: DC United)
by David Rusk and Doug Barnes
July 2014

Ten days ago on June 26, 2014, David Rusk asked the question "Does the DC Council's RFP for outside analysis stack the deck against the proposed DC United stadium deal?"

The answer: Yes ... and how!

Over the 30-year life of the stadium agreement, DC government is projected to receive a Net Present Value of $197 million in taxes and ticket sales-boosted rent. But within only the initial 10 years that the Council RFP instructs the consultant to use, DC would receive only $41 million.

That's ignoring $156 million in revenues --- 79% of the total.

David Rusk and Doug Barnes prepared a report and have sent it to the DC Council. We are hopeful that the Council will correct its instructions to the consultant. Otherwise, the result is like instructing the referee to issue three red cards to DC United early in a MLS Cup final. The report is detailed in the following section.

Council’s Guidelines Would Unfairly Reduce Future Revenues from Proposed DC United Stadium

The Council’s instructions to a consultant to evaluate the District’s investing $119.5 million in land acquisition and public infrastructure for a new 20,000-seat, $150 million stadium to be built with private funds by DC United will ignore 79% of the future, post-construction fiscal revenue benefits flowing to DC government.

The Council’s Request for Proposals (RFP) instructs the consultant that "[T]he costs and benefits will be measured over a 10-year horizon" even though fiscal benefit analysis of infrastructure projects always utilizes the life of the project – in this case, a 30-year horizon.

According to B&D,[2] over its 30-year life, the post-construction operation of the soccer stadium is projected to yield total revenues to District government of $416,275,000. However, because a dollar thirty years from now is worth far less than a dollar today, using the B&D report’s 4% discount rate, the Net Present Value (NPV) of that $416,275,000 is $197,188,000.

By contrast, the Net Present Value of DC revenues from the first 10 years of stadium operation (as directed by the Council’s RFP) would be only $41,274,000.

That is only 21% of the total revenues to DC government over the 30-year life of the stadium project. In summary, 79% of the revenue stream is ignored.

We cannot believe that such drastic shortchanging of the fiscal impact of the stadium project was the Council’s deliberate intent in requiring a 10-year time frame for the benefit-cost analysis. Rather, we think that it reflects confusion over the difference between a fiscal benefits analysis and an economic development analysis. This confusion is evident in Chairman Phil Mendelson’s comments at the June 26th public hearing on the stadium project (after a briefing that morning by Council staff).

The reason why the Council’s RFP is based on a 10-year horizon is because, and this was just explained to me this morning, is because the thinking is that when you use a 30-year horizon, you get beyond the realm of what is most likely to be the impact, the economic development impact of this project. There is some point at which Buzzard’s Point will probably see development and so if you compare what is there today with what will be there 30 years from now under this proposal, how do you know that there won’t be something else 30 years from now? Whereas it’s less likely that there will be some development, alternative development there, in the next 10 years. That’s why the 10-year horizon was chosen.

On the one hand, a fiscal benefits analysis measures projected revenues to be received by the local government from the specific project. It might be thought of as the public sector equivalent to the Return On Investment (ROI) projected for a private investment. Many of the projected revenues have a high degree of reliability, such as future property taxes, future sales taxes from ticket sales, etc. Other projected revenues (e.g. taxes received from visiting teams’ hotel, food, local transportation bills, etc.) are somewhat less reliable.

However, the key point is that a fiscal benefit analysis of major infrastructure investments always utilizes the projected life of the infrastructure – in the stadium’s case, thirty years. According to B&D, as stated above, the NPV of revenues flowing from the stadium’s operation and closely related activities would be $197,188,000. To the revenues generated by the stadium’s operation can be added $7,267,600 in revenues generated by the stadium’s construction. Total NPV of revenues to DC government: over $204 million.

This compares favorably to the District’s cost of $119.5 million – $84.9 million for site acquisition costs (which the District will continue to own) and $34.6 million for "horizontal development costs" (e.g. streets, street lighting, sidewalks, water and sewer connections, etc.). That $119.5 million (capped at $150 million to cover contingencies) is the cost of the investment to DC government regardless of how it is financed.

On the other hand, economic development analysis projects what total economic activity (especially off-site) might be spurred by a specific infrastructure investment. Such projections are far more speculative. The City Administrator’s report estimates that over $2.3 billion in new economic activity will be generated by the stadium, ancillary development and the associated building of a new Reeves Center in Ward 8; the report estimates that 2,471 new jobs with a payroll of $725 million will be created "focused on District residents and businesses."

According to B&D, off-site economic activity generated is estimated to add NPV of another $181 million to DC’s future revenues. That brings the total NPV of revenues directly or indirectly attributed to the stadium project to $385 million.

The District government has responsibilities to the total DC community that go far beyond the responsibilities of a private sector investor. It is important for the District government to investigate and weigh the projected economic development impact of any infrastructure project as well as assess the fiscal benefits that flow directly from the infrastructure project itself.

But the two should not be confused. If the Council believes that the economic development impact of the stadium project itself will be exhausted after the initial 10 years and that economic development thereafter would occur without the stadium project (as Chairman Mendelson’s explanation suggests), then the proper way to deal with this is to enter zero economic development benefits for the stadium project for years 11-30 rather than assuming a 10-year time horizon for the fiscal benefits analysis as well as for the economic development analysis.

We do not agree with this assumption, but one can surely debate what might be the economic development impact of a specific public investment and over what period of time. Would all new development centered on 14th and U Streets, NW have occurred anyway if the Reeves Center had not been built in 1986? Would all of the new sports and entertainment activity around downtown 7th Street NW have come into being today without the Verizon Center’s having been built in 1997?

The point is that debate about the speculative, near-the-project economic development impact of the new DC United Stadium on the Buzzard Point area should not be linked to – much less distort – the fiscal benefits analysis of the stadium itself and its operation.
The DC Council should correct the confusion in the RFP and rather than re-advertising the RFP (since the change would have no impact on pricing a proposal), upon selecting its consultant, instruct the consultant to use the life of the stadium project – thirty years – as the proper time horizon for measuring the fiscal benefits impact.

Conclusion

The calculations are based on the Buzzard's Point Stadium Market, Economic and Fiscal Analysis presented by Brailsford & Dunlavey Practice Group (B&D). We realize the Council may not agree with all the calculations in this report, but B&D certainly is correct to calculate the fiscal revenues from the 30-year lifespan of the project.

Development takes time. It seems unlikely for this particular location that an alternative development scenario under the "without stadium project" case could catch up with the "with stadium project" case. The stadium site, after all, has an electric transformer switching station and a salvage yard on it. Furthermore, near-the-project economic development will lead to fiscal benefits for the District in the form of increased sales and income taxes (documented by B&D) and elevated real estate taxes (not documented by B&D). The question is, how much will it be?

Reference

Brailsford & Dunlavey Practice Group (B&D). 2015. Buzzard Point Stadium Market, Economic and Fiscal Analysis, Washington, DC. Report Prepared for Department of General Services, Govermentment of the District Columbia, Washngton DC.


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