One of the biggest questions about the Chargers stadium/convention center initiative is how it can be financed without harming the City economically. A study commissioned and paid for by the City of San Diego attempts to tackle that issue and, like most other parts of this situation, there is not a clear answer.
The 21-page study, obtained by NBC 7 SportsWrap, was conducted by Public Resources Advisory Group (PRAG), a company that does quantitative modeling and analytics. PRAG based its research on the wording of the Chargers initiative, historical looks at interest rates and tourism growth trends, and a sample cash flow analysis from Goldman Sachs.
The PRAG report ran through multiple scenarios attempting to see where the City would be at risk if the Chargers initiative is approved by voters in November. It was looking to see how the initiative handles Overall Coverage.
Overall Coverage is the ability of the initiative’s annual revenues to pay the annual principal and interest requirements, fund in full the annual cost of maintaining and improving the convention center/stadium, and contribute to the City’s general fund, according to the report.
The three main factors it considered were project cost, interest rates for the bonds, and future Transient Occupancy Tax (TOT) growth.
Let’s begin with the assumption that the project cost will stay at $1.8 billion and the Chargers/NFL will provide $650 million, leaving $1.15 billion for the proposed Transient Occupancy Tax (TOT) to cover.
The analyses from Goldman Sachs call for a 4.25 percent interest rate, which is historically the average rate on public debts. The PRAG report ran numbers based on a 5.0 percent interest rate, which is more in line with the average over the last 10 years. Interest rates on public debt are historically around 4.25 percent and hotel taxes have increased at a historical average of around 4.6 percent.
The PRAG report looked at different potential TOT growth rates and came up with the following scenarios:
- For a five percent interest rate and two percent long‐term TOT revenue growth, Project Cost must be less than the current estimate, or revenues would need to increase 6.5 percent in year one at the current Project Cost estimate.
- For a five percent interest rate and three percent long‐term TOT revenue growth, the Project Cost could be increased by 10 percent or revenues could decline 10.5 percent in year one at the current Project Cost estimate.
- For a five percent interest rate and four percent long‐term TOT revenue growth, Project Cost could be increased by 30 percent, or revenues could decline 22.4 percent in year one at the current Project Cost estimate.
In the City of San Diego’s Five Year Financial Outlook for 2016-2020, the city itself makes a conservative assumption (basically a worst-case) that the TOT revenues will grow by 4.5 percent in 2017, four percent in 2018, four percent in 2019 and 3.5 percent in 2020.
With those numbers, according to the report, even if the project cost surpassed $2.0 billion due to unrealistic land acquisition costs or environmental mitigation, there would be enough money generated from the TOT increase to be fully covered.
However, there are multiple scenarios in the PRAG report that suggest the project could have financial issues. The report says there is significant uncertainty as it relates to all three of the main variables. It is difficult to predict how interest rates and TOT growth will look over the next 30 years, the life of the bonds.
The final cost of the project is a large concern, according to PRAG, which says in the report: “We believe it is critical for the City to have much greater confidence in the estimated Project Cost.”
Another factor is taxes. If any unforeseen part of the project financing was required to be taxed it could add significantly to the cost. In the end, the PRAG report offered the following analysis:
“At this time we believe that it is not possible for the City to know if the projected revenue stream would be sufficient to meet Overall Coverage. Our sensitivity analysis found many scenarios where there would be insufficient funds to meet all requirements.”
One of those scenarios is movements in the final project cost. If the Chargers are able to keep it at $1.8 billion, and the interest rates and TOT growth stay with their historical trends, then according to the City of San Diego’s commissioned research the Chargers initiative would be able to fund itself.
However, as of now, we don’t know if that $1.8 billion is going to be the final number. There are still multiple outstanding issues and concerns, not the least of which are parking and traffic flow, and the Chargers have not offered solutions for that could dramatically drive up the price.
Until many of those questions are answered, we will not know for sure if the TOT increase proposed by the Chargers initiative will be sufficient to cover the cost of the construction, and that is something voters absolutely need to know before heading to the polls in November.