A Bloop Single on Ballpark Analysis

Friday, Aug. 18, 2006 | Last monday’s front page story in The San Diego Union-Tribune “Ballpark Built Despite City’s Fiscal Ills” has some good information in it concerning the city’s intentional deception employed to issue the bonds. But the article fails to delve into how crooked this deal was, who profited from it, and just how badly the taxpayers were beaned. As is often the case, what is important in such a story is what is not reported.

Deep within the story we find mentioned in passing that “San Diego paid, for the time, an unusually high 7.66 percent interest rate for its private bond deal with Merrill Lynch because of the lawsuits and controversy that had dogged ballpark construction.”

This is not only incorrect, but cries out for further investigation:

• Were the bonds risky for investors? No! These bonds were AAA insured bonds – the highest possible rating for a bond. Note the graphic on page A6 in the article, describing the $6.2 million premium paid to AMBAC to provide such insurance. If, perchance, the city somehow was not held responsible for paying the bonds with interest (an event that has almost never happened with such municipal bonds), AMBAC would have to pay. The city’s whining about the lawsuits and controversy was a smokescreen.
• So why, oh why, were these federal and state tax-free bonds priced at 7.66 percent (roughly equivalent to a taxable bond paying over 13 percent)? Who made that decision? Almost surely it was made by lead underwriter Merrill Lynch in a no-bid process.
• Who purchased the bonds? Here it gets even more interesting. These super-safe bonds offered a spectacular investment return for this low interest period, so demand should have been huge.

But to sell the bonds publicly would have required the disclosure of financial information the city politicians and bureaucrats didn’t want to release. According to a Wall Street Journal article “Beleaguered San Diego Overpays on Merrill Bonds” (Monday, October 10, 2005), Merrill Lynch bought the entire bond package, presumably for its own account. Remember, these are the same guys who surely first told the city that they needed to pay 7.66 percent to issue triple-A insured bonds! Such a private sale to an underwriter apparently avoids any public financial disclosure.

Anyone who thinks that the city politicians were just A. Ignorant or B. Incompetent is misguided.

Our city politicians and top bureaucrats intentionally cost San Diego taxpayers millions every year by issuing these windfall profit bonds.

The U-T article goes on to say that “After paying $39 million to issue the bonds, the city netted $130 million.” And that’s all the story says about this absolutely outrageous underwriting cost. Consider – the city is paying 7.66 percent on $169 million dollars of bonds, while it netted only $130 million to put into the ballpark. Stated differently, the city is paying 9.96 percent tax free for the NET proceeds. At that time, there were credit cards charging less interest than that!

The above-mentioned Wall Street Journal article reported that:

“The terms upset even some ballpark supporters.

‘It’s ridiculous that we had to pay nearly 8 percent for those bonds,’ says Peter Q. Davis, a former banker, who was chairman of the city redevelopment agency at the time of the deal. Mr. Davis says that he unsuccessfully urged top city officials to contact possible buyers other than Merrill. ‘A sole bid is just ridiculous,’ he adds. Mr. Davis notes that the payment of bond principal and interest was guaranteed by an insurance policy, which he says justified a lower interest rate.”

Peter Q, like most of us, did not realize at the time that a con job was in process.

There’s much more to the Petco story that has seldom received notoriety. For instance, the Padres “lease” the ballpark. People think that means they pay for the ballpark. Well, the city pays about $20 million a year, while the Padres pay a paltry half million annually. Period!

Part of that payment by the city consists of $3.5 million towards the operating costs for Petco (apparently including the night lights for the games). The Padres pay nothing. To add insult to injury, the city’s $3.5 million payment rises with the cost of living, but the dinky Padre “lease” payment does not.

And the scandal surrounding the huge land condemnation and giveaway to Moores remains largely untouched by most of the media.

In baseball, stealing is an old and honored tradition – but only along the base paths. Here we find the Padres and the city leadership stealing big-time from city taxpayers, and for that kind of theft, the prosecuting umps should assign prison sentences.

Richard Rider is a Libertarian who runs the group San Diego Tax Fighters. He can be reached at rrider@san.rr.com.