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Bill Freehling is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Bill Freehling.
Stadium could take up chunk of Fredericksburg’s bonding power
COMPLETE COVERAGE: View all related stories and images on the Fredericksburg baseball proposal
Fredericksburg has enough debt capacity to build a $30 million multi-purpose stadium in Celebrate Virginia South, but doing so could eat up close to 30 percent of the remaining bonds the city could issue for capital improvement projects.
Fredericksburg’s debt limit is equal to 4.8 percent of the assessed value of all real estate in the city, which creates a roughly $213 million limit. Not all of the city’s debt counts toward the limit; for example, revenue bonds issued to pay for projects that generate enough money to cover the debt service don’t count.
The city has used up about $108 million, or 51 percent, of its debt limit. About $80 million of that went to the courthouse project that is currently under way, and the construction several years ago of the new James Monroe High and Lafayette Upper Elementary schools. Both of those projects were financed with 30-year general obligation bonds.
That leaves Fredericksburg able to issue another roughly $105 million of general obligation bonds. The proposed 5,000-seat stadium, which could be home to the Hagerstown Suns minor league baseball team if City Council approves the deal now being discussed, could use up about 28.6 percent of the city’s remaining bonding power.
If $30 million in general obligation bonds are issued for the stadium, the city’s debt would be at about 64.4 percent of its limit. That would put the city at its highest debt load as a percentage of the total limit in at least a decade, according to last year’s Comprehensive Annual Financial Report. The highest previous total was 61.1 percent in 2006.
City Manager Bev Cameron said the city doesn’t have any projects on the immediate horizon that are as costly as the schools and courthouse were. But there are many projects listed in the city’s most recent Capital Improvements Plan, including the Dixon Park Community Center, a second downtown parking garage, the Old Walker Grant School renovation, the rehabilitation of the Renwick court building and the development of the Riverfront Park. Those five projects will cost about $40 million combined, according to the CIP.
A municipality’s debt level is among the factors that firms such as Standard & Poor’s and Moody’s look at when coming up with a bond rating. Municipalities with lower bond ratings have to pay more in interest costs. Fitch Ratings recently gave the city a AA+ rating, one step from its highest mark.
It’s still not entirely clear whether the debt issued to build a stadium would be in the form of general obligation bonds that would count toward the debt limit or revenue bonds that wouldn’t. That is among the matters that the city’s bond counsel, Kutak Rock, is now evaluating as the city assesses whether to proceed with the proposed deal to bring the Washington Nationals’ Class A affiliate to town in 2015.
Though pledging the city’s full faith and credit through a general obligation bond issuance would count toward the debt limit, it would also likely carry a significantly lower interest rate. Preliminary estimates indicate that the city could get a 3.75 percent interest rate on a tax-exempt, 30-year general obligation bond, and a 4.5 percent rate if bondholders would have to pay tax on the interest generated, Cameron said.
A recent study by Washington-based Brailsford & Dunlavey commissioned to help the city evaluate the baseball proposal used a 4.5 percent interest rate to estimate the annual debt service on $30 million at $1.84 million.
Those rates are historically low due in large part to the Federal Reserve’s efforts to stimulate the economy, though they could tick up if the Fed starts tightening its monetary policy as the economy strengthens.
If the city went with a revenue bond, the $30 million might not be applicable to the debt limit, but it would likely carry an interest rate of 6.5 percent or 7 percent, Cameron said. That would significantly increase the annual cost of servicing the debt. Kutak Rock is evaluating how marketable those bonds would be.
If a revenue bond were used, the city could pledge money generated from the lease with the Suns, profit sharing, tax revenues from the stadium and naming rights money toward the debt service. A large part of the debt service in that scenario would be covered by a proposed new tax on the developed commercial properties in Central Park and Celebrate Virginia South.
Cameron said those details and many more are all being evaluated. The City Council will hold a public hearing on the stadium issue July 9, but that’s expected to be more of a general conversation about whether the idea should advance to later stages.
Proponents of the deal have said a multi-purpose stadium could hold year-round events that would provide new entertainment options and bring the community together. They have also noted that, unlike many of the projects that Fredericksburg has gone into debt to finance, the stadium would have economic-development potential that could help jump-start the struggling Celebrate Virginia project, which is seen as key to the city’s economic growth and could eventually boost the debt limit due to a higher overall assessed real estate value.
They have said the stadium would also boost businesses in Central Park, which they believe would offset the increased real estate taxes there.
Others have argued for more private investment, saying the city shouldn’t use public resources to primarily benefit the Suns and potentially compete with the businesses that are subsidizing the operation through the new tax district. Concerns have also been raised about the potential for noise and traffic.
Ultimately, Cameron said, it will be up to City Council to decide whether the project should proceed. He has not yet issued a public recommendation.
The council will hold a closed-to-the-public work session Wednesday “to consult with the City Attorney regarding the legal aspects of the proposed baseball stadium process and the status of negotiations with the team,” according to a public notice.
Under the proposal currently being discussed, the Suns would lease the stadium from the city for 30 years and put up $3 million for the land to be acquired.
Two sites at Celebrate Virginia South have been identified as likely locations for the stadium: the 38 acres where the National Slavery Museum was once proposed and a 22-acre site off Gordon W. Shelton Boulevard where the road currently dead-ends. Both sites are visible from Interstate 95, which could help land a lucrative naming-rights deal.
The Suns continue to talk with Hagerstown, Md., officials about a new stadium deal there as Fredericksburg evaluates the local proposal.