Tuesday, May 12, 2009 | A new audit paints a grim portrait of the city’s management and revenue practices for Qualcomm Stadium, whose operations the San Diego Auditor’s Office found to be “not self-sustaining” and largely dependent on money from city subsidies.
The audit raised serious concerns about the stadium’s administrative policies, its revenue-generating inefficiencies, and its capacity for long-term solvency, especially in light of looming uncertainty over just how much longer the Chargers plan on calling the stadium home.
One of its most prominent findings concerned the stadium’s growing reliance on public funds to cover its operating costs. Drops in revenue from stadium operations have forced the city to divert money from other parts of its budget to cover the deficit. Another finding warns that San Diego, because of stipulations in the city’s current agreement with the Chargers, will be on the hook for a $21.4 million bond debt obligation should the team choose to vacate the stadium after 2010.
Overall the audit depicts a facility facing increasing costs and dwindling revenue as city and stadium officials have struggled to lease out the venue, failed to develop a comprehensive business strategy and properly maintain billing records, and been constrained in their revenue-earning potential by stipulations and legal settlements that have granted the Chargers substantial monetary concessions.
The audit also proposed several recommendations for mitigating the drain on city coffers posed, now and in the future, by short-sighted management of the facility. It highlights the claims by some team and city officials that the city could be better off financially if the Chargers got the new stadium they’ve been seeking since 2002.
“One of our primary arguments on the need for a new stadium has been that taxpayers have a very bad deal on Qualcomm Stadium right now. They have an aging facility that they’re required to support, it generates generally no money for taxpayers,” said Mark Fabiani, the team’s special counsel. “I think the audit proves that.”
In a review of the stadium’s finances since the 2006 fiscal year, the Auditor’s Office found that the stadium has been operating at a considerable deficit, relying on more than $16 million in city subsidies over the last three years to close the funding gap resulting from insufficient revenue generated by stadium operations.
Along with rent and concessions revenue from Chargers events, the stadium’s revenue streams include money from parking, event producers who lease out the stadium, and shorter-term contracts with the Holiday Bowl and Poinsettia Bowl football games.
The stadium’s projected budget for fiscal year 2009 calls for an additional $4.4 million in subsidies, to be drawn from the city’s hotel room tax, for a total of almost $10.9 million. That’s a 68 percent hotel-tax funding increase over fiscal year 2008.
“Without this subsidy the Stadium Fund would become insolvent and other financial sources of the City would have to be tapped in order to sustain Stadium operations,” the audit reads.
The audit dishes out plenty of blame for the funding shortfalls, not the least of which it casts on current operating agreements with the Chargers that make the city responsible for overhead services like utilities, security, and maintenance for Chargers home games.
According to the audit, the city incurs costs of more than $2.8 million each year to host Chargers games. Offsets from rent paid for use of the stadium, which the current agreement caps at $2.5 million per year, do not cover all of the city’s Chargers-related expenses, which are further augmented by several monetary claims that the Chargers hold against the city.
Between the 2005 and 2007 football seasons, the city actually paid the Chargers organization a net total of $492,000 to host Chargers games.
That’s because the stadium is also required to compensate the Chargers for lost ticket sales resulting from seating modifications the city made in order to bring the facility up to Americans with Disabilities Act compliance.
The payments, tied to seat sales within individual sections, are triggered each time more than 90 percent of the seats in any section are sold. The payments are based on the estimated lost ticket and concession revenue that the Chargers would have earned had seats not been removed for ADA compliance.
The Chargers also claim rent credits against the city for half of the property taxes the team pays on stadium skyboxes.
These stipulations, combined with the rent caps, and operating and maintenance costs covered entirely by the city, have driven the stadium’s Chargers-related ledger into the red.
But it gets worse for the city. Since 1997, the city has had to make annual payments of more than $5 million to satisfy its debt obligations on the $68 million in revenue bonds issued to fund the stadium makeover that convinced the Chargers not to abandon the venue at that time. Those bonds were issued on the assumption that payments on them would be drawn from operating revenue.
In addition to the net losses associated with the Chargers operation, stadium personnel have struggled to book leased events such as concerts, further cutting revenue and forcing the city to instead make payments on the bonds from the general fund, which pays for services like parks, libraries, and public safety, according to the audit.
A further stipulation of the contract with the Chargers holds the team fully responsible for the balance of the bond if it leaves the stadium, but only until 2010. After then, the team can leave by paying a fee that covers only a portion of the remaining bond balance. As of 2010, the remaining principal balance on the bonds is estimated to be $54.7 million, but after 2010, the termination fee is lowered from the full amount to $25.8 million.
Each year beyond 2010, as the city’s payments on the bond lower the principal balance, the Chargers termination fee will decrease by an equal amount. The city will be responsible for the difference between the principal balance and the sliding-scale termination fee, regardless of whether or not the Chargers remain at Qualcomm. That difference is $21.4 million.
The audit recommends that the city administration create a financing plan to pay off the stadium renovation bonds irrespective of the city’s agreement with the Chargers, and that stadium managers formulate a long-term strategy for offsetting costs and maintaining the stadium’s solvency, including more aggressively pursuing lease agreements with other event producers.
The audit also took the stadium’s management staff to task for its lack of a formal business plan and its mishandling of billing documents and event files, some of which were incomplete and made it difficult to determine the exact revenue the stadium earned from certain events. Other files indicated that in some instances, discounted rates were granted to event producers such as MTV because the network was producing Chargers-related content.
“Regardless of the revenue amounts collected from these events, without properly executed user agreements the Stadium does not have adequate legal assurance to guarantee revenue to cover operational costs and maintenance, or to protect itself against potential liabilities related to these events,” the audit reads.
Other findings from the audit:
- As of 2009, there is no formal reporting process by which the stadium management communicates with the city’s Real Estate Assets Department director. “Without a comprehensive reporting mechanism between Stadium and Read Director, the performance and status of key issues facing the Stadium may not be transparent.”
- The city’s ongoing negotiations since the expiration of San Diego State University’s previous contract have not adequately included the input of the Stadium Advisory Board, whose members are appointed by the mayor and confirmed by the City Council. Although the nine-member body holds monthly meetings to discuss stadium issues and has the deepest understanding of the stadium’s needs, it does not have any financial or budgetary authority.
In a memo, James Barwick, city director of real estate assets agreed with most of the findings of the audits, and acknowledged that in light of the stadium’s unsustainable operating procedures, the city must develop longer term strategies for keeping the stadium viable, improving management, and paying off the renovation bonds.
“The City acknowledges its responsibility to ensure that the Stadium Renovation Bond obligations are met, irrespective of the status of the Chargers, and will evaluate both a long-term and short-term financing plan,” Barwick wrote.
But Barwick went on to say that the city would not accelerate its payments on the bonds if it meant the Chargers’ share of the obligation before 2010 would be reduced.
Requests for comment from the Mayor’s Office have not been returned.