Del Mar's Preston Vorlicek Sez: Fairgrounds purchase a 'Game Changer' for Del Mar
The purchase of the Fairgrounds will be a true “game changer” for the City of Del Mar. The City would take responsibility for the operation of a $60,000,000 gambling and entertainment business. To put things in perspective, this is more than six times the current general fund revenues (revenues used to provide for the general operation of the City).
While many people have been talking about the possible benefits of such a purchase (local/regional control), few people have been talking about the financial details and implications of such a purchase. Fortunately, the 22nd District Agricultural Association (DAA) has provided us the latest audited financial statements for the years of 2007, 2008 and 2009. Management discussion and extensive financial details are provided in the statements. I have offered to send the actual report to anyone who is interested (email me at preston.vorlicek@gmail.com).
Below is a table summarizing the profit and loss from the 22nd DAA from 2007 through 2009. This table is directly from the audited financial statements.
Two things jump out from the above table: (1) revenues are flat, and (2) the 22nd DAA has been losing money for the past three years.
The flat revenues are, according to the management discussion, due to a general decline across the country in gambling revenues from horseracing. Indeed, horseracing tracks have been closing around the country due to a falloff in revenues.
The losses become even more concerning if you consider the fact that the City of Del Mar will be borrowing almost $80,000,000 to finance the purchase of the Fairgrounds. Yes, the City plans to establish a separate enterprise fund that will do the actual borrowing, but this borrowing will still put a significant financial burden on the 22nd DAA going forward. The Table below shows what the profit and loss statement would have looked like over the past three years with borrowing $80,000,000 (at 4 percent interest only loan) included: kind of a “what if” analysis.
You can see that the losses balloon to a collective $12,800,000 over the three-year period! Who will pay for these losses? How will they be paid for? Will the City of Del Mar guarantee loans to finance these losses? Does the City have a plan for improving the profitability of the 22nd DAA? If so, please share it.
I invite and welcome anyone (especially from the Del Mar City Council) to comment on or correct my analysis and answer these questions publicly. The only information that I have is publicly available information. If there is some “hidden information,” please share it with me.
And I STRONGLY encourage the City Council to share with the citizens of Del Mar the City Council’s financial forecasts for the Fairgrounds operations over the next few years. If there are no forecasts, I would tell the City Council to do the forecasts NOW (and share them with the citizens of Del Mar)! We, as a city, need to understand what we are getting into going forward.
I would caution the City Council not to rely too much on cash flow analyses. Discounted (or multiplier) cash flow analyses can be a very deceiving number in a capital-intensive business (where you have lots of depreciation expenses). For example: if you look at an airline company (that owns its jets), remove all capital expenditures and depreciation expenses, the business looks great! Add in capital expenses and depreciation and “voila” things don’t look so good.
I have no axe to grind. My only concern is the financial well being of the City of Del Mar. The City narrowly “escaped” a big financial hit from the Del Mar Shores property purchase by selling off other City assets (Balboa property). Now we are looking at the possibility of continuing losses as far as the eye can see. Where will the money come to finance these losses? Build a mega-hotel on the Fairgrounds? Sell off more property? Sell naming rights to the Del Mar Fair?
-- Preston Vorlicek is president CommSystems Corp.
