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
- 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
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
"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
ROSY REVENUE FORECASTS
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
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.
BACK TO THE WEALTHY
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
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."