No, plummeting tax revenues don’t pose a special threat to stadium projects, here’s why

Last week I wrote a brief aside about how teams and/or cities losing revenue they were counting on using to pay off stadiums and arenas isn’t especially bad — except inasmuch as losing revenue is always bad — but I’ve since gotten enough frantic emails about this Business Journals article from Thursday about how the pandemic economic crash will make it impossible for cities and states to pay off stadium and convention centers that this subject clearly requires a deeper exploration. So, let’s spend some quality time looking at how sports stadium debt works, and why so many people, even business journalists, too often misunderstand it.

Anytime anyone wants to buy anything — a house, a car, a $1.2 billion stadium just so you can have air-conditioning — there are two ways to pay for it: with cash, or by borrowing the money and paying it off later. Local governments almost always choose the latter, raising the money by selling bonds, which are essentially a way of taking out a loan from lots of individual bondholders instead of from a bank. They can then pay off the annual bond costs either by dipping into their general funds or by dedicating a certain chunk of future tax revenues to paying off the debt: rental car taxes or hotel taxes or sales taxes or whatever, something they often prefer because then they can claim this is new money that is only there because of the team, even though that’s almost never true.

The important thing to keep in mind here is the difference between funding (who’s on the hook for paying for something) and financing (how they’re paying for it). If you take out a mortgage or put an expense on your credit card because you don’t have enough cash in the bank to pay for it all at once, that’s financing — you’re still paying for it, you’re just also paying the bank and/or Visa to borrow the money from them temporarily. But financing decisions are separate from funding decisions: If you need a new refrigerator and an equally-priced new washing machine at the same time and don’t have enough cash for both, it doesn’t really matter which one you choose to put on your credit card; either way, you end up with the same debt, and the same appliances.

Also, all of these expenses are what economists call sunk costs: Once you’ve bought a refrigerator, or a sports stadium, that money is gone and nothing you do (or the economy does) will bring it back. So if you buy a snazzy new appliance and then lose your job, that sucks, and maybe is a sign you should have been saving that money for a rainy day just in case, but really the problem is that you’ve lost your job and now can’t pay off your Visa bill, not which particular item caused that Visa bill to get so high.

Now that we’ve established some ground rules, let’s take a look at some bits from that Business Journal article:

A Business Journal analysis identified dozens of examples of stadiums, convention centers, public infrastructure projects and cultural sites in store for precipitous declines in funding as the nation weathers the financial storm. For many cities and states, the loss of hotel-related taxes alone will blow million-dollar-plus holes in their budgets every week the pullback persists…

In Mecklenburg County, North Carolina, hotel-occupancy taxes accounted for about $1 million in revenue per week for a host of uses, namely financial support for the NASCAR Hall of Fame and Charlotte Convention Center, both in the city of Charlotte. Houston pays debt service on $75 million in convention center bonds with its hotel-tax revenue, which totaled about $90 million last year when room occupancy rates were around 65% citywide.
Nevada is home to perhaps the biggest challenge of all, as approximately $750 million in financing to build the future home of the National Football League’s Las Vegas Raiders is tied to local hotel-tax revenue. The public fund dedicated to the 65,000-seat stadium’s financing generated between $4 million and $5 million a month prior to the Covid-19 outbreak.

Okay, yeah, losing millions of dollars a year in tax revenue is a terrible thing for local governments — but it would be just as bad if that money were being counted on to pay for firefighters or schoolteachers or what have you. Maybe spending hundreds of millions of dollars on a shiny new stadium looks especially bad when tax revenue dries up — just like that fridge with the built-in icemaker looks like a dumb decision when you wish you still had the money in the bank to buy food to put in a fridge — but which money you’ve chosen to assign to pay off which debt is ultimately just bookkeeping. And that money would have been gone either way: It’s not like Nevada couldn’t have used more money for more schoolteachers before this current mess started.

(The confusion of funding and financing, incidentally, is the same kind of fallacy that causes too many journalists to write articles bemoaning how cities are still paying off debt on stadiums that have already been torn down. It may be especially galling to still be making credit card payments on an appliance that’s already broken down and sitting waiting for the garbage truck to haul it off, but it wouldn’t have been any better for your personal finances if you’d spent the same amount of money but paid it off faster.)

So what happens to sports venues and convention centers now, with their bond payments still due and far less money coming in? Nothing to the buildings themselves, obviously: They, and their construction bill payments, were all completed years ago. As for the local governments suddenly facing huge shortfalls in tax revenues, they have a choice: They can default on their debts, which never happens, because they’re too afraid of scragging their credit ratings; find money elsewhere, say by selling off a hospital or two; or refinance their debts, which effectively means taking out new loans (or selling new bonds) to pay off the old ones, pushing debt payments further into the future, when hopefully the economy will have recovered enough that slicing off a slab of tax revenues to pay for decades-old expenses doesn’t feel so onerous.

This is all terrible! Cities and states are going to need those revenues and public hospitals and credit ratings in the future, and we could be looking at years if not decades of bare-bones budgets to get out of this hole. But it would be the same if local governments had spent all this money on fixing potholes instead of building stadiums — except of course that they’d now have smooth roads to show for it, instead of just a different hunk of steel and concrete on the skyline in place of the old one.

And in the end, the scale of this crisis is so huge — an estimated half a trillion dollars in state budget losses this year alone, with tens of billions more for cities — that even a few billion-dollar stadium debts are really just a drop in the bucket. Even the Business Journal acknowledges this, late in the article:

“There just has got to be big federal block grants to save the states. If that doesn’t happen, you’re going to have 50 catastrophes plus the District of Columbia,” said Greg Sullivan, research director at Pioneer Institute, a Boston-based public-policy think tank.

Ah, but then aren’t you just transferring the debt problem from cities and states to the federal government? Yes, but there are reasons why the feds can take on debt in ways that cities and states can’t, and reasons why it may often make economic sense for it to do so during tough times; I’ve saddled you with enough economics for one day, but here’s a good explanation of the argument from Paul Krugman if you’re really interested. For now, just reassure yourself that local governments aren’t screwed because they have to figure out how to pay for stadiums per se; they’re screwed because a sudden economic crash has destroyed their budgets. Sports venue spending didn’t help with that, but it would have been money down a hole either way — it’s just easier to notice your dumb spending decisions when your bank account runs dry.

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