A Monumental Giveaway | Citizens Against Government Waste

A Monumental Giveaway

The WasteWatcher

The Commonwealth of Virginia is the latest jurisdiction to fall victim to the taxpayer subsidized stadium fad.  Virginia’s Major Economic Investment (MEI) Project Approval Commission voted to approve a tentative deal on December 11, 2023 for Monumental Sports & Entertainment, the parent company of the Washington Wizards and the Washington Capitals, to vacate the District of Columbia’s (D.C.) Capital One Arena and set up shop in a new $2 billion facility in the Potomac Yards neighborhood of Alexandria, Virginia. 

Regardless of whether they enjoy basketball or hockey, or even live in the northern Virginia suburbs, all Virginians now face a monumental choice.  They could support the state government’s efforts to divert taxpayer resources from other public priorities to subsidize a major league sports venue, or push for the team’s owner, billionaire Ted Leonsis, to finance his own arena with private investment like other owners have done to avoid sticking taxpayers with the bill. 

The full details of the proposed deal have yet to be released due to the elongated approval process that must work its way through the Virginia legislature.  According to NBC News4 in D.C., “If the commission approves the plan, a formal bill would be drafted and introduced to the full General Assembly this coming session.   If approved, Youngkin would then need to sign it, and the proposal would be presented to Monumental, which then would consider Virginia’s offer or seek a better deal from the District.”  Fortune reported that, “Subject to legislative approval and sign-off from the Alexandria City Council, it would break ground in 2025 and open in late 2028.”

A stadium location at Potomac Yards was not part of the original proposed “North Potomac Yard, Phase 1 Development plan,” released on September 22, 2020.  They included an academic building, and several mixed-use, office, and residential buildings.  The proponents of the new sports and entertainment center have shared a rough sketch of the project’s proposed cost breakdown.  Monumental will pay $403 million of the development’s $2 billion projected cost, with the remainder coming from investors who purchase municipal bonds issued by a new state sports and entertainment authority that will be created for this purpose. 

The Commonwealth will spend $200 million to double the capacity of the brand new Potomac Yard Metro station, which opened on May 19, 2023, to facilitate increased access to the planned Monumental Sports & Entertainment complex, which will include a 2,000-3,000-seat music venue/convention center, a new hotel, and the new corporate headquarters for Monumental Sports.  According to Virginia State Delegate and MEI Commissioner George Barker, “… the project wouldn’t cost Virginia taxpayers anything because it would not come from an existing pool of money.  The commonwealth would own any arena and lease it to Monumental for 40 years, and the company's lease would pay off the project over that time …”

However, creating a new state entity to issue municipal bonds on Monumental’s behalf will provide the indirect subsidy of making returns from the investment exempt from state and federal income taxes because municipal bonds enjoy tax-exempt status.  Without this taxpayer subsidy, Monumental would have to issue corporate bonds or otherwise acquire private loans to finance its own arena, the interest from which would be counted as taxable income for the bondholders’ federal income taxes.  The cost of debt financing will decline if interest rates fall this year, as many expect. 

The state and federal subsidy boils down to the difference between the higher interest rates Monumental would have to pay for private debt and the subsidized rates they will get to pay to holders of the municipal bonds issued to finance their project.  Also, unlike the NBA or NHL themselves, Monumental - a privately held company - could seek equity financing as an alternative to debt.    

Thus, the commission’s proposal avoids directly subsidizing the arena out of the Commonwealth’s coffers by masking the indirect subsidy coming from state and federal taxpayers through the arena’s tax exemption.  But Alexandria announced plans to contribute an additional $106 million in taxpayer funds to develop some of the ancillary properties in the 70-acre development area surrounding the new arena, including a performing arts center, auditorium, a hotel, and a 2,500-space parking garage.  

While the state and federal subsidies come largely in the form of foregone income tax revenue, the deal will also require Alexandria to forego property tax revenue.  Giving the new state sports and entertainment authority to own the land and lease it to Monumental and the other commercial and retail tenants exempts the 70-acre urban lot from all state and local property tax liability.  If the sports authority collects less rental income than the city would collect in property taxes from the site, that difference amounts to a taxpayer subsidy.  Property tax revenues would fund Alexandria City Public Schools, but the land’s lease revenue will be collected by the new state sports authority, not by the city, and used to finance the arena’s billion-dollar construction bond.  Rather than funding Alexandria’s kids, every penny will go to bondholders who pay no income taxes on their returns.

As costly as Virginia’s subsidizing Monumental’s move to Alexandria will prove, an even greater expense would befall D.C. residents if Leonsis decided not to relocate, as Mayor Muriel Bowser (D) and the D.C. Council have also offered Monumental their own generous giveaway to stay put.  Capital One Arena has been the current home of the Wizards and Capitals since it first opened in downtown Washington, D.C. in 1997 when D.C. taxpayers contributed $79 million to acquire the land and expand its nearby Metro station.  Ted Leonsis took control of the arena when he purchased the Capitals in 1999 and his company, the Monumental Sports Network, has since leased the arena’s tax-exempt land from the District at a below-market rate.  In 2023, he demanded $600 million from the District to finance renovations and the D.C. Council and Mayor Muriel Bowser agreed to provide $500 million.  Monumental cannot exit its lease with the District until 2027, and may only do so by paying off a $36 million bond. 

In his bid to win over Virginians, Gov. Glenn Youngkin (R), who was named as Citizens Against Government Waste’s January 2024 Porker of the Month for his support of the plan,  touted it as a jobs program, claiming it will bring 30,000 new jobs to his state.  Unfortunately for the governor, history shows public stadium subsidies have tended not to increase overall employment in the medium-to-long run.   In The Economics of Sports (Routledge, 2002), Dr. Michael Leeds explained how, “economists have consistently found little or no evidence that facilities and teams affect the level of employment, tax receipts, incomes, or wages in a city.”  Having spent a career in private capital markets, Gov. Youngkin ought to be able to tell the kind of investments that pay off from those that will that merely draw resources away from productive enterprises. 

“There’s a long history of politicians and companies exaggerating the benefits of economic development deals and minimizing or downplaying the costs,” said Greg LeRoy, author of The Great American Jobs Scam, “and that’s absolutely true in the stadium space, we see it over and over again.”  LeRoy argues that voters should take the governor’s 30,000 jobs estimate with a grain of salt.  Many would be temporary construction jobs which are “obviously not the permanent jobs that could be counted on to sustain the regional economy.  And then you also have to account for the jobs that are lost in Washington, D.C. … The question is … might we create better jobs, or jobs that are not just being moved from Washington? … What else might we put in place of the arena footprint that would be higher value-added, that would make more sense from a daily commuting point of view, from a permanent job creation point of view”?

Since entering office at the beginning of 2022, Gov. Youngkin has led the charge to tear down the regulatory barriers to job growth and economic activity in Virginia, signing numerous bills and executive orders cutting taxes and removing barriers of occupational licensing and other job-killing regulations, beginning with Executive Directive Number One on his first day in office.  The governor ought to double down on that success rather than supporting a massive taxpayer giveaway. 

For example, Gov. Youngkin could signal his support for Senate Bills 168 and 212, or House Bill 590, which would each reduce job-killing small business regulations imposed on restaurants and gaming establishments by the Virginia Alcoholic Beverage Control Authority.  H.B. 368 and S.B. 233 would reduce regulations limiting the construction of new housing, and a series of bills including H.B. 1067, 983, and 1269, along with S.B. 626 would streamline the state licensing process for certain medical professionals and expand competition among healthcare providers.  The Commonwealth’s economy can organically create thousands of new jobs if the government gets out of the way.  Gov. Youngkin should prioritize shepherding these pro-growth reform bills, and others, through the General Assembly rather than handing out public resources to a business that can easily afford to build its own facilities.

Lawmakers on the MEI Commission unveiled this proposal just months after concluding a strained budget battle that reminded voters that the Commonwealth’s coffers can only be stretched so far.  Stewarding public dollars not only serves the taxpayers, but also helps those who would benefit from public spending that can no longer take place. 

There are many Virginia basketball and hockey fans who have hoped to see a professional arena come to the Commonwealth.  There is nothing wrong with building a new arena if the franchise owner pays for it by soliciting private capital like any other major commercial enterprise, instead of taking taxpayer resources that could have gone to support vital public services and help struggling Virginians.

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