Stadium of Common Sense

by Jack Todd

Labatt Park, the new downtown stadium proposed by the Expos, can be built without government investment through 20-year bonds issued by a non-profit stadium authority and paid off entirely through taxes on player salaries, according to a detailed financial plan made available to The Gazette.

The plan, which in its method of paying off $150 million of debt matches the plan submitted to the federal and provincial governments, provides a detailed schedule for raising $150 million of the $250-million cost of building the stadium, through taxable bonds. The plan was made available to this columnist on condition that its author remain anonymous.

The balance of the $250 million would be paid off through the sale of seat licenses, under way for more than a year now, with other financial instruments to be used as a stopgap if the team's seat-license sale falls short of its $100-million target by the year 2001. The author, a financial expert who works on such plans for a financial institution, provided a detailed table showing player salaries, taxes and payments to the bond-holders. The plan appears foolproof: by the time the $150 million is paid off in the year 2018 through the players' income taxes, the government would have earned more than $85 million in income-tax surpluses alone - without investing a dime.

Expos managing partner Claude Brochu, reached at Dorval airport before he boarded a plane to attend a meeting of the baseball owners' executive council in Milwaukee, said the plan differs from the one submitted by the Expos in the manner the money would be raised - but not in the means the club would use to pay off the debt. For the first time, Brochu last night offered details of the plan the Expos did submit to the federal and provincial governments, while saying that the club is open to financing the project through a bond issue.

"Making a long-term profit (for the government) through the issue of bonds is consistent with studies we submitted to the governments," Brochu said. "The bottom line is, how they want to raise the $75 million (Quebec's share of the $150-million total) is up to them.''

"It could be done a lot of ways. What we presented to (Premier Lucien) Bouchard included taxes on players' salaries, car rentals, a cigarette tax, a lottery and a hotel tax - but it's up to them to choose how to raise the money."

Brochu has said that he maintained silence on the nature of the Expos' proposal in keeping with the Bouchard government's wishes. Obviously, with two weeks left until the Expos are due to announce a decision on whether to build the stadium or put the club up for sale, Brochu has decided that it is time to take the offensive and go public over his frustration with Bouchard. "Bouchard's decision," Brochu charged last night, "had absolutely nothing to do with a proper decision. It was based solely on politics and optics (how things appear to the public). "The proper business decision has been proved throughout North America - and that's to build a stadium." Brochu said bonds were not specifically discussed in the proposal rejected by Bouchard - but the new spring-training stadium in Jupiter, Fla., was built with a combination of tax-exempt municipal bonds and a hotel and restaurant tax. The financial professional who prepared the study of how Labatt Park could be built, however, has come up with a proposal that would be hard for the government to turn down because, among other things, the bonds would not be tax-exempt.

His proposal includes 6-per-cent interest payable on the bonds, he said, in order to leave room for the government to collect its tax. "In the U.S.," the source explained, "these things are usually done with tax-exempt bonds so they pay only 4-per-cent interest (because the bearers pay no tax on the interest)." But Canadian governments have been reluctant to allow tax-exempt bonds, hence the 6-per-cent payout.

The source, who did the study on his own and made it available on condition that neither he nor his firm be named, pointed to the $85-million profit the two levels of government would make off the players' income taxes in explaining why most stadium initiatives succeed in the U.S.: "That's why these things always get done in the end no matter how much government resistance they encounter in the beginning. They simply make too much sense for the government to refuse."

Under his proposal, neither government makes any initial investment in the stadium, which is funded instead through a combination of the seat-license sale already under way and taxable bonds from the stadium authority issued over a three-year period - $50 million in 1999, $50 million in 2000, $50 million in 2001.

And the provincial and federal governments get to keep the taxes from all the other revenue streams generated by the project, none of which is dedicated to the building of the stadium. "This analysis does not take into account," the author points out, "the revenues generated for the government by the PST and GST on the building materials for the stadium, nor does it take into account revenues from the construction workers' wages, nor does it take into account the wages of all the other Expo and Parc Labatt employees, nor the ongoing PST and GST revenues from the sale of tickets, concessions, parking, restaurants around the stadium, etc."

Under this plan, the government would have to do three things - none of which involves a vast capital expenditure such as that envisaged in some of the wilder attacks on the stadium plan:

1) The governments would stand as guarantor for repayment of the bonds.

2) The federal government would transfer title of the land to the Expos for a nominal fee.

3) Both levels of government would act as a conduit for the transfer of the taxes on player salaries to the stadium authority.

His estimate provides a detailed breakdown of the revenues collected from player taxes, the amounts necessary to pay off the bond issue and the growth of player salaries over the next 20 years. The study, the author emphasizes, bends over backward to be conservative in its projection of revenue from the tax on the players. Under his estimate, the Expos have a U.S. payroll of $18 million in 1999 and $30 million in 2000 before the payroll reaches $45 million and remains there through 2018, when the stadium would be paid off. The estimate is conservative in the extreme: the Expos estimate their payroll will be $55 million in 2001 and will climb from there. Given that they are scheduled to receive $40 million U.S. in revenue-sharing payments that year, such salary levels are not unrealistic. Given anything like the salary spiral of the past decade, the average team payroll by 2010 will be $100 million U.S. or more, with the government in line to pocket that massive annual infusion of income tax.

The author bases his projections on the players paying taxes only for the part of the year they reside in Canada - 60 per cent. "You hear various figures there, everything from 50 per cent to 75 per cent. I think I've been conservative." The combined federal and provincial taxes on the balance he has calculated at 40 per cent - again a conservative figure. "You might be able to get it lower than that if you took a lot of tax writeoffs by high-risk investments in things like flow-through shares," he said. "But with tax writeoffs, you don't just look at the writeoff, you also look at the risk. You want to get your money back."

Under this formula, the income taxes generate $15,660,000 Canadian a year beginning in 2001 and remain at that level. The governments hand over $13,435,629 a year to the stadium authority from 2001 to 2018, and pocket the difference, $2,224,371 per year. The governments also keep the tax on the interest paid on the bond issue, which peaks at $3,491,416 in 2001 and descends from there, as the debt is paid off, to $304,203 in 2018, leaving net government revenues at $85,417,834. Under the circumstances, the author echoed Brochu in saying there is no rational reason for the Bouchard rejection and no such thing as the quid-pro-quo hospitals-or-baseball scenario envisaged by the premier.

"The Expos and Labatt Park," he said, "are a net revenue item for the government, while the hospital system is a net cost. They are complementary to each other, not opposites. Besides, you're talking about completely different levels of expenditure here. The hospitals cost us $40 million a day."

Two other financial instruments, the source said, might be used to bridge any final difference between the seat-license sales and the $100 million the Expos still need to raise privately. These are flow-through shares, which pass the expense-deduction of high-risk enterprises like oil drilling directly to the investor and "accredited" shares, tax-deductible investments which would have the Expos ownership consortium dilute their equity to an extent in return for the investments.

Whether the initial cash infusion comes along the lines suggested by the Expos or whether the $150 million is raised by a bond issue, in the long run the project should be profitable for all concerned. In the end, Labatt Park is no Field of Dreams: as this proposal shows, if it's done the right way, it's a field of common sense.

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