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Measure C Likely to Spare City Budget but Guarantee Rests on Chargers’ Promises

To understand whether the city’s general fund could be at risk if Measure C passes and a convadium is pursued, you have to figure out several things, including how much the project will cost and whether interest rates or other factors could increase the bill. Then you have to know how much money a hotel-tax hike meant to cover the city’s share of the project will bring in.

Then you have to determine whether the city’s general fund could end up serving as a backstop for bond payments.

Finally, you have to decide whether to trust Chargers Chairman Dean Spanos. Here, we break down all those points.

It has become a major point of contention between supporters and opponents of Measure C and the convadium it envisions: whether the city’s operating budget – the money that funds city services, parks and public safety – could be tapped to support the facility and football team.

Chargers officials say Measure C, which would raise hotel taxes to pay for the city’s share of project, includes no such burdens, and publicly pledge they’ll take every step to avoid putting the city’s operating fund at risk.

“The initiative imposes no obligation on the general fund to pay a cent,” the team said in a written statement. “The new (hotel) tax is the only funding mechanism.”

But City Council members and advocates leading the campaign against the measure don’t believe the Chargers’ promises, and they’ve seized on reports they say fuel questions about what might happen if the team’s projections don’t become reality.

To understand whether the city’s general fund could be at risk, you have to figure out several things.

The first is how much the convadium project will cost and whether interest rates or other factors could further increase the bill. Then you have to know how much money a hotel-tax hike meant to cover the city’s share of the project will bring in.

Then you have to determine whether the city’s general fund could end up serving as a backstop for bond payments or if a joint-powers authority and an arbitration process the Chargers have advocated will protect that fund from being tapped.

Finally, you have to decide whether to trust Chargers Chairman Dean Spanos, who said his measure was crafted precisely to safeguard the city’s general fund and who made a series of pledges to Mayor Kevin Faulconer.

The team, though, isn’t offering many specifics about Spanos’ promises.

There’s lots of dispute and little certainty on all of these variables. Start with the total cost of the project.

The Project Tab

Neither the mayor nor the Chargers have solidified their convadium design or plans. Earlier this year, the team estimated it would cost $1.8 billion.

That includes the convention center, the joint-use portion of the convention center-stadium and the cost of acquiring the properties to do it (some of which the city may have to seize).

The Chargers have committed $350 million plus another $300 million from the NFL. The rest is up to the city. The Chargers say the city’s roughly 60 percent share of the project will be entirely covered by the hotel tax hike.

The total cost of the project, then, will be very important.

The city’s independent budget analyst and a Los Angeles-based consultant have separately noted the team’s early $1.8 billion project cost estimate needs refining.

Exactly how much the Chargers will contribute to the project will be determined long after it’s approved.

Measure C requires the city and the Chargers to call in cost-estimating experts after the Chargers solidify their convadium plans. A city entity tasked with overseeing stadium financing must sit down with the Chargers to hash out whether the team should invest more in the stadium and the joint-use portion of the convadium.

The initiative dictates that each side would retain an engineer and cost-estimating firm and that if their conclusions differ by more than 5 percent, an independent review panel appointed by the mayor, City Council and Chargers would vote on what the team should contribute.

This process would only cover stadium and joint-use facility costs, not the convention center or land acquisition costs the city’s pledged.

Environmental fixes, the relocation of an MTS bus yard at the center of the project site and untold other issues could also increase the convadium bill for the city.

There could also be other needs that come up outside the project itself, such as road upgrades around the convadium, that fall entirely to the city.

Chargers officials told Voice of San Diego the city could issue additional hotel-tax bonds to support infrastructure upgrades, if needed.

Then there are the interest rates.

Public Resources Advisory Group, the consultant hired by the city to analyze Measure C, predicted the facility may cost $2.3 billion once interest is included, even absent direct project cost spikes.

The consultant said seeking such a large hotel-tax-backed bond could drive up costs and draw negative media attention, which could further drive up costs.

“We note that to the best of our knowledge there have not been any billion-dollar TOT-backed revenue bond transactions, and a transaction of this size may well carry a size penalty,” the consultant wrote.

The consultant recommended the city use higher interest rate estimates to predict actual costs than the ones the Chargers initially penciled in given all those elements.

The measure says the team will cover any cost overruns for the stadium but that it won’t be legally on the hook for any increased convention center construction or land acquisition costs. Spanos did not promise the mayor that the Chargers would cover cost overruns on the whole project. He promised the mayor that the team wouldn’t go forward with the project if it turned out to be that much more expensive than planned.

If it goes forward, though, the city will be relying on hotel-tax revenue to cover its costs.

That means we have to understand how much money the hotel room tax increase will bring the city.

The Hotel-Tax Haul

The city’s contribution to the project is supposed to come from a hotel-room tax hike. Measure C would increase the hotel tax in the city from 10.5 percent to 16.5 percent.

Measure C would have the city borrow money and pay it back with this hotel-tax money every year as it comes in. It is supposed to have more than enough to do this, thus the remainder would flow to tourism marketing and operations and maintenance for the stadium and the convention center. If any cash is left over after all of this, it would go to city.

Chargers officials told us they’re assuming the hotel-tax increase will pull in about $1.15 billion, the amount the team estimated as the city’s share of the convadium project. They’re confident about that conclusion because hotel-tax revenues have increased an average of 3.9 percent since 2000 even despite financial crises.

The city’s independent budget analyst reviewed city hotel-tax projections and estimated the hotel-tax increase could bring in $1.3 billion to $1.6 billion for the project.

San Diego County Taxpayers Association CEO Haney Hong, whose organization opposes the measure, said those revenue assumptions could be true and still not be enough to cover project debts and costs.

“The truth of the matter is that no one can say with certainty whether the TOT increment can cover things because we just don’t know what the cost will be,” Hong said.

The independent budget analyst, the outside consultant and tourism leaders have also cautioned that increasing the city’s hotel tax could have a negative impact on hotel business.

Chargers representatives have said those concerns are unwarranted.

Who’s on the Hook?

The Chargers’ owner may not be worried about those assumptions. But let’s say there’s a major recession or something else happens to crater hotel-tax collections.

Who would pay back the people who bought these bonds? Could city taxpayers and City Hall’s general operating budget be on the hook?

The measure directs the city to issue bonds for the project but the Chargers says Measure C gives the city the ability to shield the general fund.

The team wants the city to create a joint-powers authority so it wouldn’t directly pay debt service or other bills.

They included this language in their ballot measure to try to accomplish that:

JointPowers

But notice that language only says the entity seeking bonds may be a joint-powers authority or a city-created corporation that safeguards the city’s general fund from bondholders, not that the city must create a joint-powers authority.

It also says that the general fund shouldn’t be obligated to pay bond debt but doesn’t bar that outright.

The Chargers say the initiative’s worded this way because the city would need to create the governing structure and the Chargers and their initiative can’t dictate that structure.

Some opponents have doubled down on concerns about this following an agreement with Faulconer.

Here’s what Spanos pledged to Faulconer in a Sept. 29 letter:

KFagreement

City Councilman Chris Cate, one of Measure C’s most prominent opponents, sees the agreement as a confirmation that the city’s general fund could be on the hook.

“The Chargers have now essentially admitted that their measure is flawed,” Cate said. “By agreeing to what the mayor had asked, it goes against what they’ve been saying the entire campaign that, ‘No, the general fund’s not at risk.’”

Cate and others fear that the city’s general fund will ultimately be on the line – no matter what that agreement with the mayor dictates.

The Chargers dispute this characterization.

“The language in the initiative is very clear on this point regardless of who is the actual issuer [of the bond debt],” the Chargers wrote in a statement. “And we have unequivocally said that we will not go forward if any reasonable scenario suggests the city may have some exposure.”

Keeping Up the Convadium

OK, so say that the hotel-room tax generates enough money to pay for the bond and the city’s operating budget is protected from any major risks.

Keeping up a facility like this is very expensive. Could the city’s operating budget be called on to keep the lights on?

The Chargers have said a major goal of their initiative was to keep the city’s general fund from paying for operations and maintenance for the convadium, costs it’s now saddled with at Qualcomm Stadium.

Chargers representatives gave us a scenario. They used the city’s projection that it would collect $127 million from the hotel-room tax hike in 2022 after sending some of it to tourism marketing. In that case, $50 million would go to pay off the loans to build the facility, and another $24 million would go to tourism marketing.

That would leave $15 million to go to the stadium operations and maintenance fund and $10 million for the attached convention center. Any remainder would flow to the city’s general fund.

The team says experts they hired at Goldman Sachs tried to structure Measure C to ensure that the city had more cushion than it needed to cover bond debts with these hotel taxes. Then they ran many stress scenarios to test it.

Those scenarios included a 6 percent bond interest rate – higher than the rate now expected on the market – and another Great Recession immediately before or after the convadium opened.

“While there are no guarantees, even under our most-stressed scenario, the debt service is paid, the Tourism Marketing District is paid and monies are available to pay operations and maintenance,” the team said in a statement.

The consultant for the city was less convinced.

“At this time, we believe that it is not possible for the city to know if the projected revenue stream will be sufficient to meet overall coverage,” the consultant wrote.

In his pledge to Faulconer, Spanos acknowledged the measure does not prohibit the use of the city’s general fund to pay some of these costs.

Thus, he made an additional promise to the mayor he wouldn’t let it happen.

Pitching Promises

Spanos made a list of promises. The agreement promises the city’s general fund won’t subsidize the convadium project or its operations and that the project won’t move forward if hotel-tax revenues don’t flow as the Chargers expect.

That deal’s not binding, and there are many details left to be sorted out.

For example, the Chargers agreed to include the pricey replacement of Tailgate Park parking in the budget for the project but didn’t specify whether the team would be picking up the bill.

When I asked whether the Chargers had committed to cover this cost, the team simply said replacing the parking spaces at Tailgate Park was a cost that had been included in the project budget without going into more depth on what would happen if it didn’t fit or whether it would cut into the chance the city has of getting money for tourism marketing and the general fund.

Chargers officials have repeatedly said taxpayers shouldn’t worry. They pledge the hotel-tax increase will provide more than enough revenue to cover debt service, tourism marketing and operations and maintenance – and that there are checks in place to ensure the general fund isn’t at risk, including the deal with Faulconer.

Indeed, the team says, bond buyers won’t purchase bonds if they don’t think hotel taxes alone will cover the convadium debt.

And Spanos has also promised Faulconer that the Chargers will not move forward with the project if costs exceed the hotel-tax proceeds the team’s projected with the tax hike or if the mayor takes issue with any aspect of the project.

“As the initiative contemplates, and as we agreed with the mayor, all authority rests with (Faulconer),” the Chargers said in a statement. “If he is not satisfied with all these assurances, we won’t proceed.”

They may not. But the hotel-room tax hike would still happen. The moment the deal fell apart, the tax hike would go down from a 5 percentage point increase to just 3 percentage points — two would fund tourism marketing and one to the city’s general fund.

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