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November 18, 2004

The National Debt

Shuffling Deck Chairs in D.C.'s Titanic Stadium Deal

by Neil deMause

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The planned transmogrification of the Montreal Expos into the Washington Nationals was going so well. That is, of course, assuming that your idea of "so well" is ramming a stadium bill through the D.C. city council after only a single marathon public hearing, one attended by hundreds of mostly angry constituents--one local whipped out a checkbook and demanded, "How much money does it take to buy back this city council?"--but not by either the mayor nor several councilmembers expected to cast key votes on the deal.

Knowing what we know about Bud Selig, it's pretty safe to assume that this was, indeed, his idea of going well.

That changed a week ago Friday, when with just four days to go before what looked to be certain approval of Mayor Anthony Williams' $440 million (or so; more on that later) stadium bill, council chair Linda Cropp threw an enormous wrench into the works. Up until then a backer of Williams' plan, Cropp abruptly declared that she would be introducing her own bill to build the Expos' new home north of the present RFK Stadium site. Because this was land already under D.C.'s control, Cropp argued, the city could save $83 million earmarked for buying and clearing the private parcels needed for Williams' preferred site near the Navy Yard in Southeast D.C.

Four days later, Cropp revised her proposal, saying she'd support the original Southeast site...but only if the bill were changed to include the possibility of a privately financed stadium plan that, she said, she'd learned about just the previous day from an interested developer. It was Tuesday morning by this point, with just hours to go before the stadium vote, and no one on the council was eager to vote for some screwy plan that, rumor had it, involved some sort of obscure tax shelter. So Cropp simply canceled the vote, using her prerogative as council chair to take her ball and go home.

Whether you're a vestigial Montreal fan (hi, Jonah!) or just a critic of ballpark blackmail, it's tempting to be cheered by this sudden outbreak of stadium glasnost, especially the broaching of the heretofore unspeakable term "private financing." But don't be fooled by the rhetoric: The closer one looks at Cropp's counterproposals, the more apparent it is that these latest developments are more shell game than sea change.

Let's take Cropp's short-lived RFK deal for starters. While sold as a money-saver, it wouldn't have been much of a deal for the D.C. government: The city would have saved $83 million in land costs, sure, but it also would have meant using an existing parcel of city land that otherwise could have been used for something else. It's the ever-popular economic concept of "opportunity cost" again: Just as spending existing tax money on a stadium means it can't be spent elsewhere, existing city land is an asset with a value of its own; maybe not $83 million, but a significant chunk thereof.

As for Cropp's latest "private financing" deal, the accounting is even more convoluted. As Cropp explains it, it all began when she was approached by a private development consortium at the beginning of last week. Their spokesman--a lawyer whose previous claim to fame was suing the city over a previous public-private partnership--said that his group would happily build a $350 million stadium themselves, so long as the city would put up the cash for land and infrastructure costs.

With the projected cost of Williams' plan seemingly rising by millions of dollars every day--independent estimates now have the final price tag at anywhere from $540 million to $614 million--anything that got the public tab trending in the opposite direction sounded great. It also raised a question, though: If the stadium was such a bad deal for D.C., why on earth would private investors want to buy into it?

The answer stems from a discrepancy in the federal tax code: governments don't pay taxes, and private companies do. As a result, any asset owned by a public entity is a depreciation waiting to happen, if only you could find a way to get it into the hands of someone who can use the deduction.

Here's how it works. Say you're a local government with an aging asset--a water system, a sewage treatment plant, an enormous Roman god, whatever. You sell it to a private company for a nominal price, and that company promptly leases it back to you for an equally small sum. While the physical property never actually changes hands, the depreciation rights do, from the public agency (which can't use them) to the private partners (which very much can). The private group saves big-time on its taxes, the city government is cut in for a share of the boodle, and everybody wins. Everybody, that is, except for federal taxpayers, who get shafted as a result of what's little more than a bunch of paper shuffling.

In the last year or so, Congress has made several attempts to crack down on these sorts of deals, known as LILOs (lease-in, lease-out) or SILOs (sale-in, lease-out), after a rash of such notorious cases as First Union Bank saving tens of millions on its taxes by "buying" a bunch of streetcars from the city of Dortmund, Germany. This being Congress, though, several loopholes remain, and the proposed stadium deal looks like it would sail through one of them: The private developers would build the stadium, but the city would pay much of it off with ticket and concessions taxes; meanwhile, the stadium owners would pay a phantom "rent" on the land that would never actually be collected, existing only as an expense on their ledgers and their tax forms. (Technically, it would be "deferred" for 25 years, at which point the company would turn over the money-losing stadium to the city in lieu of the accrued rent.)

After all the beans are counted, it's estimated that this would generate $10 million a year in tax savings for the private developers, with almost no money out of pocket. D.C., while still on the hook for $150 million in land and infrastructure, plus another $150 million or so in stadium-related taxes, would get to shave a few million dollars a year off its new business tax, placating the local business leaders who have been growing increasingly cranky about paying the mayor's tab. (Williams tacked on last-minute amendments to his bill upping the business tax, in part to quell concerns over cost overruns, in part to create a nebulous "community benefit fund" to deflect charges that the stadium was taking cash out of the mouths of city schoolkids.)

The important thing to note is that none of this is remotely "private" financing. As tax expert Bob McIntyre of Citizens for Tax Justice summed up the deal: "Instead of sending a bill to D.C. taxpayers, they'd be sending a bill to federal taxpayers."

The problem with all of these deals stems from the "baseball agreement" signed in secret by Mayor Williams and MLB representatives back in September. Though this agreement has no force of law--only a council vote can do that--everyone involved has been careful to call it a "contract," treating it as the sacred cow in the room during any subsequent stadium talks. For example, when Cropp first staged her mutiny, Williams wailed publicly that "this is a horrible message we are sending to the business community and our citizens that if I make a commitment that as soon as things get rough, we're not going to do it."

The trouble is, since Williams' single-handed "commitment" guaranteed that the team would get to keep all baseball revenues, and pay nothing towards the stadium except a relatively low annual rent, if you're not going to break it, you might as well just give up and start writing checks made out to "Lords of Baseball." It's like trying to feed a dozen people from a plate full of nothing: You're not going to get anywhere by arguing about how to cut it into more equitable slices.

In any event, these latest maneuvers may end up doing little beyond selling some papers in D.C. That's because on the day that Cropp was getting an earful from her private investors, Mayor Williams was engaged in a far more traditional pastime: vote-buying. In exchange for signing on to Williams' bill, the mayor handed out everything from $45 million in new library funds to $2 million in new laptops for various members' districts. (We know this because, in what's either a refreshing display of candor or an astonishing bit of chutzpah, the council made out a written list of its quid pro quos.) The one genuine concession that would have saved public money--a cap on near-certain cost overruns, which independent estimates have now pegged at anywhere from $90 million to $174 million--ended up on the cutting-room floor, since that would have required breaking the all-holy "contract".

When Bud Selig agreed to declare D.C. the winner of the Expos extortion-go-round without getting a stadium deal up front, he was taking a calculated risk, one it now looks like will pay off. All that's left to determine is the losers: The people of Montreal, certainly, and D.C. residents who'll be paying for this deal for the next 30 years (in baseball terms, that's seven and a half Cristian Guzmans), and possibly every taxpayer in America, a buck at a time. More worrisome, it promises to accomplish Selig's main goal in this whole mess: To raise the bar on stadium subsidies that had begun to be lowered in recent years, as teams like the Boston Red Sox and St. Louis Cardinals--hey, recognize those names from something?--backed off of exorbitant stadium subsidy demands in favor of renovation on the one hand, and a largely privately funded project on the other.

When legislators in Minnesota or Oakland or Miami go to the negotiating table in coming months and years, they're sure to hear that D.C. is the new "industry standard," where the city handles all the costs, and the team reaps all the benefits. With that kind of payoff at stake, you'd think Bud could have at least paid for the laptops.

Neil deMause is an author of Baseball Prospectus. 
Click here to see Neil's other articles. You can contact Neil by clicking here

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