New Stadiums Strike Out for Investors and Taxpayers

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Alex Rodriguez of the Yankees hits two runs against the Angels in the Yankees home opener in April 2010.On the field, the New York Yankees committed 61 errors this year. But one of the team's biggest errors was made, not by the players, but by the planners for the new stadium that the defending World Series champs call home. According to critics, the developers overestimated the parking revenue that it would generate.

For one thing, a neighboring mall offers cheaper parking and -- after a newly built Yankees Stadium train station opened in May -- many fans travel to the stadium via public transportation. As the New York Daily News recently reported, that's left the garages only 60% full, a shocking statistic considering that the Yankees are serious contenders in the American League pennant race.

Now, Bronx Parking Development, the developer of the stadium's parking lots, is in danger of defaulting on $237 million in bonds that were used to finance the construction, according to media reports.

Many Stadiums in Trouble

The Yankees are hardly alone. Across the country, sports teams of all levels are struggling to attract cash-strapped fans in the worst economic decline since the Great Depression.

Last week, the New York Giants reportedly failed to sell out the luxury suites of the newly opened Meadowlands Stadium. Moody's Investors Service also downgraded the underlying ratings for the $600 million in bonds used to fund the construction of the Citi Field, the new home of the New York Mets, to junk status in February.

And because these facilities are usually built with tax money, taxpayers have a vested interest in how well they perform.

In the case of New York, the baseball stadiums are owned by the New York City Industrial Development Authority, which leases them out the Yankees and Mets teams, which in turn make payments (called payments in lieu of taxes, or pilot payments) to pay back the bonds and cover maintenance costs. Luckily for New York taxpayers, the Yankee parking lots were sold to a single investor, so taxpayers are off the hook.

Should Taxpayers Fund Stadiums?

Still, the parking problems highlight the risks of financing stadiums. Economists have argued for years that taxpayers should not be in the business of backing sports -- particularly wealthy teams owned by billionaire owners -- because their economic risks are many and their benefits are few.

They can be a drain on municipal finances even after they're gone. For example, New Jersey taxpayers are still paying off some $110 million in debt for the old Meadowlands Stadium, which was demolished to make way for the new Giants facility, according to The New York Times. Seattle, Indianapolis and Philadelphia residents also are still paying for already razed stadiums, while residents of Houston, Kansas City, Mo., Memphis and Pittsburgh, are footing the bill for stadiums and arenas that were abandoned by the teams they were built for, the article notes.

Controversy continues to rage around the planned KFC Yum! Center in Louisville, where lagging sales-tax revenue prompted S&P to threaten a downgrade to junk status. In April, Fitch Ratings warned of a possible default on the bonds used to finance the Orlando Magic's yet-to-be opened new arena the The Amway Center. And Harris County Sports Authority, which sold bonds at three Texas stadiums, earlier this month saw S&P slash its rating for $475 million in debt. In Tennessee, a minor league baseball stadium deal is nearing default; in New Hampshire, revenue bonds for a minor league hockey team arena went into technical default in July; and in Illinois, a small $21 million deal for two hockey rinks also defaulted, according to SmartMoney.

A Silver Lining

Generally speaking, stadium bonds are considered riskier than other types of municipal bonds because they depend on a team's revenue, which can fluctuate depending on their performance and the state of the economy. And higher risk leads to higher borrowing costs.

Mike McDermott, an analyst with Fitch, says these problems with stadium bonds are isolated and some -- those with more dependable revenue streams -- are less risky than others. Meanwhile, some municipal bond investors such as LJPR, which manages about $350 million, say they prefer bonds with more predictable sources of revenue than ticket sales, which are based on consumers' discretionary income. " You pretty much gotta pay your water bill,' says Brad Reynolds, chief investment officer for Troy, Mich.-based LJPR.

In any case, the cloud of financial difficulties for these stadiums might come with a silver lining for sports fans. The difficulties could mean that lower ticket prices are coming, says Neil DeMause, author of "Field of Schemes," a book that's critical of taxpayer-funded sports stadiums.

"I don't think what you're seeing here is so much a death knell for the sports industry as a sign that the sports ticket bubble that grew over the last 20 years has finally popped," DeMause says. "So teams will still be able to sell tickets, just not quite for as exorbitant rates as they'd hoped."
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