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Bonds could boost stadium cost, taxes

COMPLETE COVERAGE: View all related stories and images on the Fredericksburg baseball proposal

Here is a rendering of the proposed Fredericksburg stadium’s site plan. Click for a larger view.

The city of Fredericksburg would probably have to issue at least $33 million worth of bonds to build a proposed multi-purpose stadium, a tally higher than what has been previously reported.

That higher cost is due to the need to issue another $2.5 million to $4 million worth of bonds to cover debt service while the stadium is under construction and before any revenue or anticipated economic benefit is generated, according to an analysis prepared by the city’s financial advisor, Public Financial Management Inc. The city would also pay additional costs to issue the bonds.

The Hagerstown Suns, a Class A affiliate of the Washington Nationals, have proposed to lease a publicly financed stadium at Celebrate Virginia South for 30 years if the city builds it at a construction cost of $29.5 million.

The Suns, under the current proposal, would contribute $3 million up front for the city to acquire the land and then pay $105,000 in annual rent plus half the naming rights revenue and 15 percent of net profits on top of $700,000.

The PFM report, issued to the city June 27 and released to the public Wednesday, also shows that the annual debt service would probably be significantly higher than the previous $1.84 million estimate if Fredericksburg goes with a revenue bond.

That likely means that the city, if it is going to proceed with the proposal, would need to issue general obligation bonds to fund the stadium. Those bonds, which would pledge the city’s full faith and credit, would count against the city’s debt limit.

Click here to read a copy of the proposed lease, the PFM analysis and more. Click here for an archive of stories on the baseball question.

Revenue bonds not a viable option?

In a revenue bond issuance, only the money from the stadium project would be pledged to repaying the bondholders. As a result, the interest rate would be significantly higher to reflect the additional risk.

Revenue bonds also require more evaluation and documentation, according to PFM, which could delay the timeline. The Suns want to start playing in the new stadium in 2015 and say work would need to start by Dec. 1 to do so.

According to the PFM analysis, the interest rate on a 30-year revenue bond would be 5.75 percent if its interest is tax-exempt to investors, and 7.5 percent if the interest is taxable. Interest would be lower on a 20-year bond, but the debt service would be higher.

On a general obligation bond issuance, according to PFM, the interest rate on a 30-year bond would be either 4.25 percent or 5.25 percent, depending on whether it’s determined to be tax-exempt or taxable. That tax question has not yet been answered and likely wouldn’t be until the terms of the lease were finalized.

In a revenue bond, PFM states, bondholders would require enough annual revenue coming in to cover 1.5 times the debt service in order to provide a cushion. A reserve fund equal to one year’s debt service would be necessary.

As a result, when factoring in the need for additional borrowing to cover the interest payments during the construction period, a revenue bond issuance would require as much as $5.1 million in annual project revenue.

The current model that the city has been using estimates annual debt service at $1.84 million. Much of that would come from a new tax district on the developed properties in Central Park and Celebrate Virginia that could lead to a new real estate tax in that area of as much as 32 cents per $100 of assessed value.

Though it is possible that tax revenues from the stadium could be pledged toward the debt service, they wouldn’t make a significant dent in the requirements under a revenue bond issuance as described in the PFM analysis. That would mean the tax rate in the service district could need to be significantly higher than what is currently proposed, a rate that already has been met with ample opposition.

That has led Fredericksburg City Manager Beverly Cameron to a simple conclusion, expressed via email: “A revenue bond would not be practical.”

General obligation

A general obligation bond issuance would be more in line with the numbers that have been used to estimate the need for a 32-cent tax district, according to the PFM report. But even those costs would probably be higher than currently projected when factoring in the additional money to cover debt service during the pre-opening period, according to the report written by the PFM managing director Kevin Rotty.

Factoring in those costs, annual debt service on a 30-year general obligation bond would range from $1.97 million to $2.51 million, depending on the tax status of the interest. PFM notes that the municipal bond market has seen significant swings of late, so it is difficult to determine the exact rate.

The report notes that the city has the debt capacity to issue additional general obligation bonds under its current debt guidelines, even when factoring in the capital improvement projects that are planned in the next several years.

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. The city has used up about $108 million, or 51 percent, of its debt limit. Issuing the stadium bonds could eat up about 31 percent of the remaining bonds the city could issue for capital improvement projects.

The PFM report also looks at the issue of whether the stadium debt could negatively impact the city’s strong bond rating, which each of the three major rating firms has evaluated at just a couple of steps down from the highest level. Cities with better bond ratings have lower borrowing costs.

Because the stadium would utilize a significant portion of the city’s future debt capacity, PFM notes, “The economic spin-off of the project will be important to the rating agencies view of the City’s credit.”

PFM advises that the city undertake an economic impact study to help evaluate what effect the stadium would have on businesses in the special tax district. That study would help bond investors evaluate the deal.

“Ultimately, if the project is successful and expands the City’s economic base, it will be viewed favorably by the rating agencies,” PFM notes. “However, if the increased tax levy has a substantial negative impact on the businesses in the Special Tax District, it very well could put pressure on both the City’s credit ratings and the City’s overall financial position.”

PFM continues: “The key to getting the rating agencies comfortable with the project is making a compelling business case for the deal.”

Deal could change

It’s possible that the current details of the plan could change significantly.

Suns majority owner Bruce Quinn said Monday night at a meeting with Fredericksburg City Council that he would consider adding a surcharge on each ticket sold that could go toward debt service, which could significantly reduce the required tax in the service district.

City Council members have also been discussing whether the proposed construction costs of the 5,000-seat stadium, $29.5 million, could be significantly reduced. Comparable-sized stadiums with family-friendly amenities have been built for less than that.

The Suns continue to speak with Hagerstown, Md., officials about building a new stadium there as talks play out in Fredericksburg.

A public hearing on the baseball question is scheduled for Tuesday night in City Hall. It will be the last of five public hearings, the first of which starts at 7 p.m. Anyone who wishes to speak on the topic is welcome.

After the hearing, the council could decide to refer to the Planning Commission an amendment to the city’s Comprehensive Plan and Capital Improvements Plan, and approve a memorandum of understanding between the city and the Suns.

Bill Freehling: 540/374-5405