Saturday, December 18, 2004

Pay now, pay more later

I'm going to get into another rant, shortly. Let's try to stick with news for a moment, first. The Post points out that the team could easily spend next year playing in the major league stadiums of other clubs. They propose the best thing to do would be use Camden Yards as a home field, since there are already few conflicting games. Angelos might actually go for that if they compensate him for the fans showing up.

It looks like the mayor's overall plan is to try to convince Cropp that there are enough possibilities for "private financing" that she should kick out her amendment. I get the feeling that Cropp wants a plan certified by the CFO, first, but I would have to believe that's not likely to happen by the end of the year. Cropp will probably drag this out until the very last day by getting rid of the council's recess, and scheduling another session on the 30th or so. I still don't know what's going to happen, but I don't expect MLB to cede to Cropp's demands. Though it seems unlikely, I am hoping that Cropp is just going to say, "we've gotten several viable plans that I believe will be certified, so we'll lift the amendment, even though none has been certified yet", making her look like she's done something good for the city, when the opposite is probably true. Uh-oh, here comes the rant.

"Private financing" is something of a joke, because D.C. will end up paying the money out of its own coffers no matter what. It amounts to the district collecting money from industry now for something it could have gotten more money for later, because the investor ends up taking more risk if he spends the money now, and will therefore need a bigger return, which will come from money that could have been in the D.C. coffers.

It should be obvious that no private investor is going to cover part of stadium and construction for no gain. Whether it be a huge cut of parking revenues, land rights surrounding the stadium or rights to build tall buildings, "private financing" basically means that D.C. is going to sell something to a private investor in order to collect the 1/2 the stadium construction price. But if you look at all of the proposals, you will see that the District is selling assets it could have sold anyway. What it is looking to do is transfer short-term risk to an investor, but by doing so, the district comes out with less money in the long term.

For example, consider a parking deal. Let's say the district sells rights to some percent of parking revenue to a private investor in exchange for a big cash payment and a guarantee of covering all cost overruns up to some amount, which would be the ideal case for the district. When doing the math, the investor is going to assume he has to pony up all the money for the overruns, and still wants to make a profit on top of that. The end result is that the district will end up giving up far more of the parking revenue than they otherwise would have needed to give up.

The same thing can be said of any plan I've seen proposed. The district will be selling something that it could have sold anyway, in all circumstances. Unless they're selling something they wouldn't have otherwise sold (particularly, part of the ballpark itself), "private financing" is a misleading term.

By asking for up-front cash, they're introducing big risks to investors, so they're going to end up getting worse deals than they could have gotten, meaning less cash to the District from the park in the long run. The only risk they take off themselves is the amount of short-term cash they have to pony up. Since they'll end up paying the total cost whatever it ends up being, they'd be better off taking out loans to fund any overruns than going the route Linda Cropp wants to go down, where investors will effectively end up charging the District far, far more for the cash.

This should be obvious to many of the people involved. I think even Cropp understands it, she's just trying to put something together that she can "sell" to her constituency that will make her look good. Someone should be "selling" that she is going to cost the city more money in the long run.

Overall, I'm really disappointed in the Mayor's ability to sell to the people. It's clear to anyone who looks closely at the deal that the average resident of D.C. isn't really being asked to pay anything out of pocket... it's all coming from the pockets of business (including the team, who makes lease payments). The Post has said it, but it hasn't been well communicated to the people.

It's also clear that the District can make a good bit of money as a result from the people in the suburbs. Hasn't the District been looking to tax commuters for years, but been stymied by the federal government? Why can't they sell this as something that will keep D.C. entertainment dollars in D.C., but effectively extract more money from people who live in the suburbs that they couldn't otherwise extract?


At 2:02 PM, Blogger DM said...

Spot on explanation of "private" financing, John. Just another reason this whole thing really is a fiasco.


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