St. Petersburg is counting on 7% growth to fund Rays project. Is that risky?

To fund its share of a new Tampa Bay Rays stadium and the proposed surrounding Historic Gas Plant District, the city of St. Petersburg is betting on growth.

More than half of the nearly $700 million in city money targeted for the $6.5 billion project is projected to come from tax increment financing, a tool designed to pay off a public project via future tax gains on higher property values.

Mayor Ken Welch’s administration believes that paying $287.5 million toward a stadium and $130 million toward infrastructure — as well as all the debt service that would come with it — will boost tax revenue in the city’s downtown core.

Specifically, the city projects this tax revenue to grow by 7% every year until 2042, putting the city on course to pay off its Gas Plant District debt by 2055.

But what if that doesn’t happen?

What if, for any number of reasons — construction delays, an economic crash, a major tropical storm — growth in booming St. Petersburg starts to flatline?

“Historically, with these type of projects that go over decades, something happens,” said Kimball Adams, who spent 35 years as Largo’s finance director and is now an accounting professor at the University of Tampa. “I guarantee you, nobody in 2019 predicted a pandemic in 2020. You can’t project worst-case scenarios, that 1-in-100-year event. Are we going to get a Cat 5 hurricane in the next 40 years? I don’t know. You can’t project that. But the further you go out, the less confidence you should have.”

After reviewing the city’s development agreement with the Rays and their partners Hines, which is set to go before the City Council on Thursday, Tom Daniels, a land use and planning professor at the University of Pennsylvania, wondered whether that 7% growth rate seemed “optimistic.”

“These things can certainly vary from year to year, depending on what interest rates are,” Daniels said. “If interest rates went up to 10%, you’re probably not going to get the increase in property tax revenue that you were hoping for.”

City finance officials and developers explained some of the math behind their projections in a meeting last fall.

Tax increment financing works like this: When new development spurs a bump in an area’s property values, pushing up property taxes, a big chunk of that new tax revenue stays in the district for local projects and improvements, rather than being spent elsewhere. If a home in the district sees its property taxes go from $1,000 to $1,200, a portion of that extra $200 would have to go back into the district.

The Gas Plant project sits within the Intown Redevelopment Area, a district that stretches east from Tropicana Field, including the waterfront roughly between the Salvador Dali Museum and the Vinoy St. Petersburg Resort. Money from increased revenue in this district already goes toward paying off bonds used to build the St. Petersburg Pier, as well as assorted park, pedestrian and landscape improvements. New revenues projected in the Gas Plant agreement between the Ray and the city would cover the principal and debt service on a series of six stadium and infrastructure bonds issued between this year and 2035.

Thanks to development throughout the area, its tax revenue has historically increased by an average of 8.25% each year, and 13% over the last 10 years, placing that 7% figure toward the lower end of projections.

Even so, that compounded growth adds up over time. This year, the city projects having $9.4 million in this district’s revenue available to pay down debt. By 2042, that number swells to $31.7 million.

“We have not worn our rosy sunglasses to make the numbers look good,” Assistant City Administrator Tom Greene told council members in October. “We have used conservative assumptions that we believe are going to provide the resources to make those payments.”

That doesn’t mean falling short is impossible. From the Intown district’s inception in 1982 through 2000 — a period that includes the construction of Tropicana Field, also paid for through bonds — the city expected property values to increase eightfold, according to a 2019 audit. But the actual increase hit only about about a third of projections, forcing the city to pull from parking revenues and reserve funds to cover its debt service.

The district again fell short of revenue projections for a few years during the Great Recession. But by this time, the overall growth and increased property values in and around downtown was entering a boom that hasn’t really stopped. And with an array of downtown residential towers set to open in the next two years — including the 23-story Nolen, 42-story Art House, and 46-story Residences at 400 Central — the district’s tax base is on track to grow regardless of what happens with the Gas Plant District.

There are valid reasons one might criticize tax increment financing as a tool of government spending, said David Merriman, a director and professor of public policy, management and analytics at the University of Illinois at Chicago. It limits how tax revenue can be spent, sometimes at the expense of projects and businesses outside the community redevelopment area. It diverts increased tax revenues from other organizations that might otherwise benefit, such as school districts.

But the notion that this type of tax structure doesn’t work isn’t one of them.

“They very rarely fail,” Merriman said. “Cities aren’t defaulting on (tax increment financing) bonds very often, which kind of makes sense — the lenders are making them have very conservative assumptions about the bonds in order to finance them.”

One 2020 study found that more than a third of stadiums and connected development projects tied to five major professional sports leagues received tax increment financing. Among them: The Detroit Red Wings’ Little Caesars Arena, Milwaukee Bucks’ Fiserv Forum and the San Francisco Giants’ Oracle Park.

The Rays aren’t the only professional sports team angling for this type of tax revenue to fund a stadium. The Chicago White Sox have indicated they might seek $900 million of this tax revenue for a stadium in the city. Lawmakers in Utah are targeting $900 million in this type of funding to pay part of a $3.5 billion redevelopment project that would include a Salt Lake City stadium for potential Major League Baseball expansion or relocation.

The Intown Redevelopment Area is a joint venture between the city and Pinellas County, and it’s slated to end in 2032. Pinellas officials could then spend their share anywhere in the county, including outside of the district. The city’s agreement with the Rays calls for it to be extended another decade, but with only the city contributing. If the city’s 7% growth rate projections are accurate, its tax revenue in 18 years would be more than triple what it is today.

In addition to tax increment financing, the city will look to pay down its bonds through revenues from selling land to Hines and the Rays, and from interest in the tax increment financing fund. After 2042, the city will have to dip into its general fund, paying more than $220 million from another source to extinguish its remaining debt.

That number could grow, though, if the city’s tax revenue doesn’t meet projections.

Greene said the city has safeguards and alternate plans in case that happens. The existing tax increment fund has more than $25 million to pull from in case of a shortfall. The city could also restructure existing utility bonds to reduce costs and add savings.

“If some of these resources don’t pan out, we’re going to have to find the resources to make the payment,” he said in October. “That’s the risk.”

But, he noted, things could go the other way. Future Gas Plant bonds could be issued in a more favorable interest rate environment, lowering the city’s debt obligations. Annual growth could surpass 7%, which would allow the city to “turn down the spigot” and put more revenues aside, or divert them to other projects.

Greene said this week that the city hadn’t studied how likely the district was to hit, surpass or fall short of 7% growth, but that its record of performance and “strong construction value being added” gave them “comfort” that it was a safe benchmark.

Considering the Gas Plant District is such an expensive and hotly debated project, Adams, Largo’s former finance director, said it would behoove the city, and stadium advocates, to be as transparent as possible with how it reached its projections.

“There can’t be a 30-year projection out there with just one number — there’s got to be a low and a high and a middle,” he said. “What’s the range? And what’s your level of confidence? If your level of confidence of 7% (growth) is 95%, that’s pretty confident. If it’s 80%, that’s not so confident.”

However the city feels about its future tax growth, Adams said, it won’t look exactly like it does in its development deal forecast with the Rays.

“You know the best-case scenario ain’t going to happen — that’s why it’s the best case,” he said. “And the worst-case scenario probably isn’t going to happen. But that’s how a projection works.”