Chicago says "No Games!"
No Games Chicago Update
10 Days To Decision
Daily News

September 21, 2009
The People Speak

The problem is not going to rest solely at the city level. You know that when push comes to shove His Honor will be asking the state to kick in money because "The costs were so unexpectedly high and the Olympics brought fame and money to Illinois as well as Chicago."

His Honor and Mr Ryan would make me feel a lot better if both of them would pledge ALL of their assets plus that of their spouses, including pension plan balances, as security for all Olympic expenses PRIOR to any insurance being used.

Put them fully on the hook before any outside money is needed.

Thomas S, Chicago

Comment on Crain's Chicago web site

Daley approval rating at 35%

Dear Member of the International Olympic Committee:

Crain's Chicago Business is our premier local business publication.
Today they published a review of the 2016 Committee's supposed financial guarantees and found them wanting.

This adds to the growing dis-enchantment with the 2016 Committee, the 2016 bid and Mayor Daley.

Peeling back the coverage

John Pletz - September 21, 2009

Mayor Richard M. Daley and Patrick Ryan assure Chicago taxpayers that a safety net of insurance would insulate them from the financial risks of hosting the 2016 Olympics.

But the insurance policies Mr. Ryan says he'll secure would cover only about $1.1 billion of the $3.8-billion operating budget that the mayor's Olympic point man has drawn up for the games. In many key areas, no insurer stands between taxpayers and the risk of revenue shortfalls or cost overruns.

For example, there's no insurance against the risk that private lenders won't shell out $1 billion to finance construction of the Olympic Village, as Messrs. Daley and Ryan predict they will. And there's no coverage against shortfalls in corporate sponsorship sales, which they predict will rake in $1.8 billion, two-thirds more than London expects to collect for the 2012 games.

Insurance against overruns on the construction of Olympics venues tops out at 10% over budgeted costs, in a city where major public works projects have come in at two or three times estimates. Another uninsured assumption in the budget is $246 million in contributions from private donors, a source already tapped for $72 million to finance the city's bid.

"It's a leap of faith," acknowledges Alderman Joe Moore (49th), a skeptic who ultimately voted to give Mr. Daley authorization to sign the host-city contract with the International Olympic Committee. The contract puts the city on the hook for all costs of staging the 2016 games if the IOC chooses Chicago over Rio de Janeiro, Madrid and Tokyo on Oct. 2.

The primary protection for taxpayers is a projected $450-million operating profit built into the budget. That's a 12% margin for error. While it's enough to cover a few fiscal misses, shortcomings in multiple areas would overwhelm it. More important is sticking to the budget, something many Olympics cities have failed to do, though the track record is better in the U.S.

"The taxpayers are adequately protected by insurance and the validity of our budget, which the IOC found to be reasonable," says Rick Ludwig, chief financial officer of Chicago 2016, the city's Olympic bid committee.

While Mr. Ryan has arranged more than $1 billion in liability and event-cancellation insurance, those haven't proved to be the big risks for Olympics host cities. Experience shows that the primary hazard is cost overruns on venues for games and housing for athletes.

The biggest risk is the Olympic Village. The city hopes to hand it off to private-sector developers, which would transform the former Michael Reese Hospital into athletes' quarters to be sold later as condominiums or rental housing. While Mr. Ryan expects to get surety bonds and other insurance to guarantee on-time completion of the project, he must first sell it to developers and their lenders.
It's hardly a given that lenders will deem the project worthy of financing, as the IOC noted in its evaluation report on the finalist cities. If the private sector won't finance the village, taxpayers must shoulder the $1-billion cost, or the price of some scaled-down version of the project.

Mr. Ryan has obtained a letter of commitment from German insurer Munich Re A.G. to provide $250 million in capital-replacement insurance, an untested type of coverage that would provide money for the Olympic Village if an investor or lender promises financing but backs out after the project starts. That happened in Vancouver, host of next year's winter Olympics. "This doesn't protect you if nobody shows up to develop the project," says Laurence Msall, president of the Civic Federation, which reviewed the city's Olympics plan and found it "reasonable" but pushed to have the insurance included.

Then there's the cost of building athletic venues. Chicago 2016 budgeted for a 10% cost overrun, and it plans insurance for another 10%, unless builders agree to a fixed-price contract. That's far less than the cost overruns for the 2004 Summer Games in Athens, which doubled the original projections, or the 23% overrun Vancouver now expects to incur on venues.

Vancouver has needed a government cash infusion of $110 million and has almost drained a $100-million contingency fund, which is bigger than Chicago's $82-million reserve.

"The long and sad history of cost overruns on venues is something that cannot be ignored," says Rob Baade, an economics professor at Lake Forest College who has studied Olympics financing.
While recent U.S. games, such as Atlanta's and Salt Lake City's, largely were on target for construction, Chicago's history of cost overruns on big projects casts doubt on the bid committee's projections.

"Millennium Park was three times budget; the Dan Ryan Expressway (reconstruction) was two times budget," says Allen Sanderson, a University of Chicago sports economist.

Chicago is planning fewer permanent facilities than any previous games, keeping its venue-construction budget below $1 billion. But the timetable, unlike on Millennium Park, isn't flexible. The estimates are based on preliminary designs, meaning costs could be 20% to 60% higher, according to industry benchmarks.

"Given all the risks we're talking about, 10% contingency seems low," says Neil Miltonberger, a Chicago-based vice-president at Kenrich Group, which mediates construction disputes.
According to the Civic Federation, an additional 20% overrun in venue costs would put a $164-million dent in Chicago's $450-million budget cushion.

If Chicago 2016's revenue projections prove optimistic, no insurer will step in to make up the difference. Chicago expects to sell $1.76 billion in corporate sponsorships - 66% more than London predicts for the 2012 games and more than double Atlanta's take, adjusted for inflation. The IOC calls the target "ambitious but achievable." The U.S. Olympic Committee would cover the first $70 million of any shortfalls.

Ticket sales, at $705 million, the second-biggest source of revenue, would have to be the highest since the 2000 Sydney games. The Civic Federation report says the prices for the most-popular events "may be aggressive." A 20% reduction in prices for premium tickets would cut $68 million from the projected budget surplus, it says.

Chicago also aims to raise $246 million from private donors, 23% more than was raised for Millennium Park. Most of the donations, $177 million, would come from selling naming rights to sports venues. But under Olympics rules, sponsors' names can't go up until after the games are over.

The committee hopes to raise $47 million of the total from selling naming rights to the Washington Park Olympic stadium after it's converted to a 3,500-seat track venue following the games.
"Securing naming-rights donations may be difficult," the Civic Federation report says. If only 50% of the naming-rights donations come through, it would cut $88.5 million from the $450-million cushion.

"It's a milestone event, and we think there will be a lot of interest," Mr. Ludwig, the Chicago 2016 CFO, says.

In the final analysis, insurance doesn't cover all the potential budget miscalculations that could cost taxpayers money.

"Athens was three times over budget; London is four times over budget," Mr. Sanderson says. "I don't see that happening here. But are they going to come in at $4.8 billion? No, I just don't see it."