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The death of redevelopment threw a wrench into a Petco Park deal that taxpayers were assured would pay for itself. The situation presents a cautionary tale for officials and taxpayers considering a new Chargers stadium.
When voters OK’d the construction of Petco Park in 1998, boosters of the project promised that new condos, hotels and shops nearby would drum up enough new cash to cover the cost of the ballpark.
But a decade after the Padres’ first game there, the city’s spending millions to pay off the stadium.
About $14 million – roughly 8 percent of city tourism taxes – is now being funneled toward Petco Park operations and related bond payments. That’s after the city collects rent and other revenues from the Padres. Last year’s $14.5 million is double the amount of taxes generated last year by the hotel rooms around the stadium. The city is forced to close the gap, siphoning money that could otherwise be doled out to city visitor facilities and programs, including maintenance and capital needs at Balboa Park.
Former city manager Jack McGrory, who helped push for a downtown ballpark in the mid-’90s and later led the Padres’ efforts to usher in downtown commercial development, said the current arrangement isn’t what the Padres envisioned. The deal was supposed to pay for itself.
The situation presents a cautionary tale for officials and taxpayers considering a new Chargers stadium. In any proposal for a new facility, city leaders are likely to make similar claims about the project financing itself through new cash flows. But the city or county will ultimately be on the hook if those projections don’t pan out.
What changed for Petco’s promises was simple: redevelopment. The state’s 2011 decision to kill the urban renewal investment program has left the city of San Diego with the bill to pay off the ballpark.
If the city’s redevelopment agency had issued some of the bonds to finance the stadium at the outset of the deal – as opposed to agreeing to cover ballpark debts years later – the state likely would have picked up the tab after it decided to kill off redevelopment statewide. Instead, the city is on the hook for the redevelopment agency’s share – millions more than it bargained for.
It’s certainly possible to believe that the Petco Park deal was still worth what the city is now paying. It has, as advertised, transformed the dilapidated East Village into a place where thousands work, live, eat and catch games. It’s hard to put a dollar value on that. But the other pitch for Petco Park, beyond revitalizing East Village, was that the developments around the ballpark would cover the city’s costs. And it’s not clear that’s actually happening.
“The whole agreement has been turned upside down and it’s unfortunate because the taxpayers were well-served by the original Petco Park deal,” McGrory said. “Now taxpayers are subsidizing Petco Park, which was never the intent.”
To build Petco Park, the city had to borrow money, so it went to the bond market in 2002. That’s now an annual payment of at least $11.3 million.
The pitch of the successful 1998 Proposition C campaign was that this yearly bill wouldn’t hit the city budget.
Voters were assured new hotel and sales taxes, plus new property taxes captured by the city’s redevelopment agency, would cover the payment.
The redevelopment agency, which could collect 100 percent of property taxes in areas it deemed blighted and in need of a makeover, could use that and other cash to cover at least $50 million. Taxes associated with new hotels and retailers, which tend to lag behind new developments, would help the city cover its $225 million debt.
Supporters’ 1998 ballot argument emphasized private investment in East Village would turn the area into a “tax gain” for the entire city with “no new or increased taxes, no impact on existing city services or facilities.” They described their vision of a tree-lined avenue, housing and office space in an area then considered a wasteland of warehouses and abandoned lots.
They said the Padres would bear more risk to achieve that vision than the city.
Much of the development they described came. East Village has been transformed by at least $1.8 billion in private and public investment.
And it spun off more taxes.
A 2010 analysis estimated the city’s redevelopment agency, collected about $17 million in additional annual property taxes associated with East Village developments.
The same report concluded the project generated $2.1 million in new annual sales taxes at the time. And this past year, the city collected about $6.7 million in hotel taxes associated with rooms the Padres were required to bring to East Village. In the period since the ballpark opened in 2004, downtown redevelopment efforts have continued and the city hotel tax revenues have increased by more than 50 percent, though it’s not clear that could be directly attributed to any one driver, including the Padres.
But the largest new stream of cash came via property taxes and the redevelopment agency, which was taking them in, didn’t go to the bond market. The city took the debt payment – and that would later turn out to be a problem.
At least one longtime redevelopment official suggested the city shift that burden early on.
Former redevelopment agency chair Peter Q. Davis recalls advocating that former Mayor Jerry Sanders seek more money from the agency to support Petco debts a couple years after the ballpark opened.
Property tax revenue was starting to roll in to the redevelopment agency before the hotel and sales tax money the city was counting on, Davis told officials.
Sanders wasn’t interested.
In 2007, Sanders told Voice of San Diego he didn’t want to hamper the redevelopment agency’s ability to invest in other revitalization projects.
“I’m unwilling to take money out of a long-term investment,” Sanders said at the time. “As far as I’m concerned, that’s like taking money out of your IRA.”
He later relented. In 2009, the City Council voted to have the redevelopment agency help cover the city’s annual ballpark debt. Two years later, at the height of the city’s budget crisis, the City Council voted to have the agency cover the entire $11.3 million annual ballpark debt payment through 2032, when the bonds would be paid off.
It was an immediate relief for the city budget.
Then came the curveball. The state killed redevelopment in 2012. State Department of Finance officials vetted redevelopment obligations as they wound down the program, letting some stand. The state ruled San Diego’s redevelopment program couldn’t pay the city’s Petco Park debts.
The city argued the Department of Finance misinterpreted dissolution laws and acted “in a manner that protects the self-interest of the state’s treasury to the grave detriment of the state’s cities and counties.”
Suddenly, the city was stuck with the annual $11.3 million debt payment. The city also has to come up with another net $2.4 million to $3.4 million a year to pay for the ballpark – that’s the difference between what the city collects in rent and what it has to pay for police services and daily operations.
The death of redevelopment also meant less property tax proceeds associated with all the new development can directly support city bills. While the redevelopment agency collected all new tax revenue, the city only gets a 17.5 percent cut of property taxes in the area –that’s after other obligations of the city’s former redevelopment agency are covered.
The city’s not currently tracking how much cash from new hotels and businesses is contributing to its bottom line. The county auditor’s office also couldn’t immediately say how much property tax money the city’s collecting in East Village.
All that’s certain is that the city’s now sinking tens of millions of dollars into paying off ballpark debt and bankrolling operations.
The city sued over the Department of Finance decision in 2013, but a Sacramento judge sided with the state. The city is now appealing the ruling and the judge’s order that it pay back an $11.3 million payment made by CCDC as redevelopment was winding down.
The city’s now looking to refinance its bonds in hopes of reducing its annual debt bill by about $1.4 million.
The city will owe $168 million in bond payments over the next 17 years if the ruling is upheld and the city successfully refinances its debt.
It could’ve avoided this predicament.
Part of Sacramento Superior Court Judge Shelleyanne W.L. Chang’s rationale for her ruling against the city was that the redevelopment agency didn’t issue the bonds or cover related costs from the start of the arrangement. If it had done either, the Petco Park bonds likely would’ve been grandfathered in to the state’s bill for winding down redevelopment.
That means that even though the redevelopment agency was pulling in the most new revenue associated with the development around the ballpark – it wasn’t initially on the hook for the biggest piece of the stadium bill.
“They were the ones who were getting the (most) revenue from the ballpark development,” said McGrory, referring to the redevelopment agency. “Why wouldn’t they be the ones getting the bonds?”