$720 million stadium will open with big operating deficit

Cleaning crews are wiping construction dust from the 63,000 seats in Lucas Oil Stadium, prepping for the public’s first peek at the $720 million venue Aug. 16.

But the hard work is only beginning for the city’s Capital Improvement Board, the entity charged with operating the stadium.

The fumbling point: CIB is anticipating a $20 million operating deficit for Lucas Oil Stadium in 2009. Anticipated expenses are $27.7 million–far outstripping the $7.7 million CIB expects to collect from its share of revenue from stadium events.

CIB will have to spend down reserves to cover the difference for 2009. The financial picture for future years is unclear, though officials expect to garner more event revenue once the Indiana Convention Center expansion opens in 2010.

"We’re comfortable that the budget we have will support the initiatives planned in 2009," said Ann Lathrop, CIB treasurer and a partner in the Indianapolis office of Illinois-based Crowe Chizek and Co. LLC. "Forecasting beyond that is on our plate coming up."

The deficit is emerging as the biggest financial challenge stemming from construction of the cavernous, retractable-roof stadium. So far, payments the state is required to make on bonds issued to finance the project appear manageable–thanks to higher-than-expected revenue from a host of new taxes.

CIB also manages and operates the convention center, Conseco Fieldhouse, Victory Field and several other properties. It has an operating budget this year of $74 million, and through the years has amassed tens of millions of dollars in reserves.

But CIB plans to draw down about $25 million from those reserves to shore up its 2008 operating budget. And after drawing down more than $20 million next year, the surplus could shrink to as low as $5.6 million.

Attracting events

City officials believe the key to narrowing the shortfall will be to lure a wealth of events to Lucas Oil Stadium, from concerts and trade shows to corporate stockholder meetings.

Attracting events beyond Indianapolis Colts games to the stadium is crucial because the team gets all revenue derived from its games. CIB and the Colts each get about half of revenue from other events.

But many of those opportunities may not materialize until the $275 million expansion of the convention center opens in two years. The expanded center will be connected to the stadium via an enclosed walkway.

"We’re expecting fairly significant increases in revenues," said CIB President Bob Grand. But in the interim, the board’s bracing for tight budgets and potential cuts to shore them up.

"We’ll have to be very fiscally responsible in the next three years," Grand said.

He said CIB has dropped a couple of charitable golf outings and also has flatlined a total of $1.4 million in grants to the Arts Council of Indianapolis, the Indiana Black Expo and the Indiana Sports Corp. in its 2009 budget. He said those could be cut if needed.

"If those activities are driving revenues … then I’m going to support them," Grand said. "If not … they’ll probably be reviewed and cut."

But spending reductions of that magnitude would be a drop in the budget. Lucas Oil’s $27.7 million in estimated operating costs represent nearly 36 percent of CIB’s operating expenses.

CIB didn’t face the same challenges at the RCA Dome, in part because it controlled more of the revenue. Barney Levengood, executive director of CIB, told IBJ that he did not have revenue and expenses for the RCA Dome, saying his office does not break out the information that way.

CIB may be able to find some relief to financial pressures by using revenue generated by other venues it oversees, said Rob Hunden, a consultant who formerly worked for the Indianapolis Bond Bank.

"They have a lot of ways to move things around," said Hunden, president of Chicago-based Hunden Strategic Partners.

A critic of publicly funded stadium deals said stadium backers rarely explain the true expected operating costs when they’re trying to win support for a project.

As a result, when stadiums open, cities often have to struggle to keep up.

"It isn’t unusual to have much greater operating expenses," said Rick Eckstein, a professor of sociology at Villanova University in Pennsylvania.

But Grand said he doesn’t foresee operating costs being a problem once the new stadium and expanded convention center are humming with bookings.

For 2008, the board has an overall budget of $108 million, with $34 million earmarked for debt payments on construction of Conseco Fieldhouse, the RCA Dome and an earlier convention center expansion.

About $60 million of the board’s revenue comes from taxes, including portions of local hotel, car rental, cigarette, and food and beverage taxes.

Grand said he didn’t think the board would need to tap taxpayers for any additional money to cover operating expenses "at this point," adding that CIB traditionally has operated "pretty efficiently."

Making bond payments

CIB isn’t on the hook for the largest expense–the bonds issued to pay for construction.

Under a deal brokered with Gov. Mitch Daniels in 2005, that responsibility fell to the state. The Indiana Finance Authority is handling the bond issues, and the newly created Indiana Stadium and Convention Building Authority is overseeing construction. The state also took responsibility for making the $40 million payment the Colts received for terminating their RCA Dome lease.

The final tab for the project is expected to be $720 million–that’s $5 million more than the initial $625 million budget and its $90 million contingency fund.

Now, the authority is preparing to start construction on the $275 million convention center expansion with nothing left in the contingency fund.

But that doesn’t faze David R. Frick, chairman of the authority. He said he wasn’t surprised that the stadium, with its fast-track construction schedule and complicated design, used the entire contingency fund.

"The convention center costs will be much more predictable," Frick said, adding that the authority won’t exceed the budget.

To cover stadium construction, the Indiana Finance Authority sold $666 million in bonds, and it soon will sell bonds to cover the convention center project. Bonds will be repaid from a bevy of new taxes, including increases to the Marion County hotel, car rental and admission taxes, and a regional tax on food and beverage sales.

"After both the stadium and the convention center projects come online, the rates will be locked in at a low, average rate of 4.3 percent for the life of the bonds," said Jennifer Alvey, public finance director at the Indiana Finance Authority.

Annual payments on the bonds are projected to start in 2010 at $22 million and climb steadily to more than $100 million per year by 2039, the year they should be paid off.

The state projects debt payments will total slightly more than $2 billion while revenue is expected to come in at nearly $2.2 billion. But if revenue comes in faster than needed, the state is legally required to use the extra money to pay off debt early.