City Betting on Red Sox Boon Sees Stadium Plan Stall on Lockdown

(Bloomberg) -- The ambitious downtown project promises to herald Worcester, Massachusetts’s transformation from a once-dilapidated mill town and give it a piece of the Boston Red Sox, the beloved baseball team from 50 miles away.

There’s set to be a 10,000-seat stadium for the team’s Triple-A minor league affiliate, two hotels, more than three hundred apartments, and space for offices, restaurants and shops. The money it’s forecast to generate, as well as lease payments from the team, would be plentiful enough to repay more than $100 million bonds the city agreed to back to finance it.

But less than two years after the city gave it the go ahead and began issuing debt, the project has been upended by the pandemic that has pushed the economy into the steepest slowdown in decades and cast uncertainty about the future of everything from office work to spectator sports. While construction on the stadium is continuing after a month-long pause, the company developing the surrounding area has put work on hold for at least a year, delaying the tax-collection bonanza the city is counting on to repay its bonds.

“We aren’t immune from the reality -- from changes in travel and tourism,” said Worcester City Manager Ed Augustus. “That everything can move forward without having an impact on the timing is unrealistic.”

Even as the nation starts reopening, the surge in unemployment and business closures are triggering an abrupt reversal-of-fortune for America’s local governments, which have seen massive chunks of tax revenue disappear in only a matter of weeks. That’s leaving vast budget deficits, triggering spending cuts and threatening economic development projects like real estate developments, stadiums and museums that are routinely financed in the $3.9 trillion municipal-bond market.

While such debt is frequently backed by revenue like ticket sales or fees, shifting the risk to investors, Worcester issued general-obligation bonds, which are backed by whatever money the city brings in.

Providing such guarantees backfired on some cities during the last economic downturn. Harrisburg, Pennsylvania, was driven into insolvency after it stood behind an ill-fated trash incinerator project. Moberly, Missouri, was stung by its decision to back bonds issued for a company that was building an artificial sweetener factory. A small Michigan city, Allen Park, worsened its financial strains when it issued debt for a movie studio.

Augustus said he’s confident that won’t be his city’s fate. He said development around the ballpark will eventually be completed as planned, noting that the city has some “breathing room” with its bonds. The first principal payments on those it has issued so far don’t start until 2023, according to data compiled by Bloomberg.

Even if it stalls for longer than expected, he said the city could refinance the debt to push out the payments further.

Denis Dowdle, the president of Madison Properties, the developer of the area around the stadium, said he’s just as committed to the project as he was before the pandemic.

“Our bet even before the team came along was that Worcester would not be a bad place to invest in long term and we’re still committed to that,” Dowdle said in an interview. He said the pre-development plans of the office space and apartment buildings are continuing on schedule, through there aren’t any tenants yet signed on.

“Every business in the country and in Worcester is affected by what is going on,” Dowdle said. “People are struggling for next month’s and next quarter’s payroll. The notion for new office space isn’t front of mind for many people.”

Once a center of New England’s machinery and manufacturing industries, Worcester is the second-largest city in Massachusetts, with about 185,000 residents. In contrast to many Northeast cities and towns, Worcester has a growing tax-base and economy, anchored by several colleges, universities and hospitals. It has the fourth-highest credit rating from both S&P Global Ratings and Moody’s Investors Service, a sign of its ability to weather the slump.

Yet the economics surrounding the public financing of sports stadiums are difficult even when the economy is on firm footing, said Michael Leeds, an economist at Temple University who studies the public financing of stadiums.

“Even in the best of times, this is a dubious undertaking,” he said. “Now it’s gone from bad to worse.”

Several major and minor league stadiums have left cities saddled with costs they were unprepared to bear.

After Bridgeview, Illinois, sold bonds to finance a stadium for the Chicago Fire, a Major League Soccer team, the suburb saw its credit rating cut to junk because of the debt. In Chester, Pennsylvania, the revenue promised by surrounding development never materialized.

Andrew Zimbalist, an economist at Smith College whom the city hired to construct a revenue model for the project, said what separates Worcester’s investment from failed stadium deals is the development surrounding the stadium.

“People in Worcester love the Red Sox. If you can make this be a neutral bet economically, the cultural and social impacts of having this team would make it worth it,” he said. “You don’t put money into Central Park to hit oil in the middle.”

Augustus, the city manager, said the goal is to transform the area into a destination for people from surrounding Massachusetts communities.

“We spent a lot of time really trying to not just build the ballpark,” Augustus said, adding it is seen as “a tourist destination for folks in the area.”

“When they are looking to do something on a summer night, they will want to come to Worcester to enjoy the ballpark, whether it be a concert or ball game and all of the restaurants and other amenities we have here,” he said.

But if the development doesn’t produce the tax revenue Worcester expects, the city will still be on the hook for the debt, said Victor Matheson, an economist at the College of the Holy Cross in Worcester.

“Those debt holders are first in line to get money from the city, before police officers, before teachers, before firefighters,” Matheson said. “If you don’t have enough money to pay you start laying off. Or you raise taxes in general for everyone because you accumulated debt we can’t pay for.”

Augustus said he doesn’t expect that to happen. The city finished fiscal year 2019 with an operating surplus and has taken a “conservative and flexible” approach to this coming year’s proposed $721 million budget in order to contend with the pandemic, according to city documents.

“The city’s overall finances are fairly strong, we are not looking at deficit spending or dipping into reserves even in a tough fiscal year coming up,” said Augustus, whose city has froze hiring and sought ways to cut spending to cope with the slowdown. “You can’t predict the future but we have options as a city. There are circumstances beyond our control.”

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