One bright spot for the District of Columbia this week: the city’s fiscal management of its stadium bonds has earned a ratings upgrade.
Bond rating firm Fitch has bumped up the ratings to AA-minus on $186.8 million in outstanding bonds used to build Nationals Park, the home field of the Major League Baseball franchise. The bonds previously had been rated A-plus. The new rating reflects “very high credit quality,” according to the bond agency’s scale.
The bonds are secured by ballpark fees and a gross-receipts fee levied on all businesses within the District that have revenues over $5 million, as well as utility fees for businesses. One portion of the bonds is also backed by annual rent payments from the Nationals.
“The upgrade of the ballpark fee bonds reflects improved resilience of the structure,” Fitch stated in its ratings note, issued late Friday. “Annual debt service has been declining as the District has routinely chosen to use a portion of excess pledged revenues to redeem bonds prior to maturity. The upgrade also recognizes the improved growth prospects for pledged revenues as the ballpark fee has become more established. A trend of increasing numbers of total ballpark fee payers and those in the top bracket continues, while timely payments have improved.”
The District of Columbia issued $534.8 million in bonds to construct Nationals Park after a 2004 decision by the District Council. The ballpark opened in 2008.
D.C.’s credit quality has been bolstered by increasing economic growth and a rising number of businesses subject to the bond levy. Every business with sales over $5 million pays a flat fee in a tiered system that works out to roughly as much as one-one-thousandth of a percentage point in ballpark taxes. For example, a $16 million business pays an annual $16,500 tax to support the bonds. The number of businesses that are delinquent on paying the tax has plummeted too, from 26% in 2015 to 1% last year.
The ratings upgrade comes as the city projects that the pandemic will affect income, but that is counterbalanced in Fitch’s eyes by the multiple levels of taxes backing the bonds and the tendency of the local government to reduce bond debt when it has the option, rather than increase it. While the District and its budget are ultimately controlled by the Federal government, municipal government generally manages fiscal activities such as bond and budget decisions.
Not included in the Fitch math: actual stadium sales tax revenue. The pandemic-reduced baseball season and the lack of a postseason presence in 2020 (after the Nationals won the World Series in 2019) slashed ballpark tax revenues by 25% last year and probably will lop another 18% off in the upcoming season before rebounding, according to Fitch. Given the uncertainty around vaccines and the upcoming MLB season, ballpark sales tax estimates are too volatile to rely on today, it added.
Bond ratings are significant, because higher quality bond issuers generally have to pay less in interest out to investors to sell their debt. A 2017 study found that every notch of ratings downgrade cost issuers an average of six basis points (100 basis points equals one percentage point). Similarly, an upgrade like D.C.’s could cut its borrowing costs in the future.