The Mysterious Cost of a New Wizards and Capitals Arena for Virginians

When the Virginia state legislature opens its new session later today, one of the biggest questions facing lawmakers will be whether to dump a huge pile of taxpayers’ money into a new sports arena.

The proposed new home for the National Basketball Association’s (NBA) Washington Wizards and the National Hockey League’s (NHL) Washington Capitals would be the centerpiece of a $2 billion redevelopment in Alexandria, Virginia. Republican Gov. Glenn Youngkin announced the project in December, but the state legislature’s approval is necessary to create the quasi-public stadium authority which will issue bonds to pay for the project and own the land upon which the stadium would sit, according to the Associated Press.

How much public money will be used to fund the project remains somewhat uncertain—and will depend on whatever changes the state legislature might demand. The consensus answer, however, seems to be “a lot.”

Citing a leaked JP Morgan study of the subsidy deal, The Washington Post reported last month that “the net cost to taxpayers would ultimately reach an estimated $1.35 billion.” More recently, the Alexandria Economic Development Partnership, the entity that would own and operate the arena, published documents showing that taxpayers would put up about $560 million.

Notably, that total does not include several other costs that will be covered by the public, like the expected expansion of a nearby public transit station that comes with an estimated price tag of at least $150 million and about $380 million in property tax breaks. However you slice it, it looks like taxpayers will be on the hook for around $1 billion, writes Field of Schemes blogger and stadium subsidy critic Neil deMause.

Perhaps understandably due to the enormous numbers floating around, public officials have been eager to downplay or explain away how much it will cost. Youngkin’s spokesperson told the AP this week that the bonds for the new arena will be “prudently structured and conservatively sized.”

“Officials have not, however, publicly released the outside analysis that arrived at that conclusion,” the AP noted skeptically. Apparently, this is a deal so good that it has to be kept secret!

Meanwhile, Alexandria Mayor Justin Wilson, a Democrat, tried to reassure city residents last week that at least they won’t be left holding most of the bag. In a community newsletter, Wilson wrote that just 5 percent of the project’s funding was due to come from Alexandria, and argued that the bonds used for the project would be repaid by tax revenue generated from economic activity at the site. As a result, Wilson argues, “there is no City or Commonwealth tax dollars being invested in the arena.”

That’s a stretch, says Kennesaw State economist J.C. Bradbury, who has written extensively about stadium subsidy deals. “To suggest that state and local governments are going to devote $1 billion of public money to construct stadium development at no cost to taxpayers is preposterous,” Bradbury told Reason. “These funds can’t just be plucked out of thin air, they obviously come from taxpayers whose tax collections at the development will now be devoted to subsidizing the private business operations of billionaire [Wizards and Capitals owner] Ted Leonsis rather than providing other government services.”

Indeed, if the development was going to generate enough revenue to support itself, why would the government have to be involved at all? There are plenty of private sector financial institutions that would be happy to lend money to a development project that’s supposedly going to generate billions in revenue over the long term, as studies cited by stadium proponents claim.

In reality, stadium financing deals almost never live up to their backers’ promises. Bradbury’s research shows that stadiums do not drive economic development but merely shift where those dollars are spent.

The specific funding mechanism being used in this case should also draw scrutiny from state lawmakers. The so-called “tax incremental financing” (TIF) arrangement—in which future tax revenue is used to cover the up-front public cost of the project—is an increasingly popular way for cities and states to pay for stadium projects. The setup is supposed to protect taxpayers from footing the bill directly, but if tax revenue is insufficient to cover the debt service payments on the bonds, cities usually end up having to pay the cost out of their general fund budgets.

“The funding mechanism creates the fiscal illusion that the project is costless to taxpayers,” says Bradbury. “It’s not. Never forget the old economists’ adage regarding opportunity cost: there is no such thing as a free lunch.”

City officials seem determined to test that theory. While local residents are organizing grassroots efforts to stop the project, Alexandria has reportedly hired lobbyists to help convince state lawmakers to vote for the subsidy deal. That’s probably not a great sign for anyone who hopes the various governments involved here will take a serious, skeptical look at the project.