Year of Publication

2006

College

Martin School of Public Policy and Administration

Date Available

9-4-2014

Executive Summary

For the first time in its history, the World Equestrian Games (WEG) will be held outside of Europe in 2010. Kentucky has won the bid to host the event at the Kentucky Horse Park (KHP) in Lexington. The games will last two weeks in the fall of2010 and organizers estimate ticket sales of 300,000, and over 1,000 athletes from 50 countries are expected to compete (Commonwealth of Kentucky).

However, for the Horse Park to be a suitable location to host WEG, it must have a climate controlled indoor arena. The current proposal for the arena plans for a 6,000 seats, 200,000 square feet, climate controlled arena which would result in a $35 million bonded project (Nicholson). According to Mr. John Hicks of the Kentucky Office of the State Budget Director, the annual debt service is estimated to be $3,343,000 which represents tax-exempt bonds for a 20 year term at an estimated interest rate of 6.5%. The debt service is to be collected out of the general fund. The Fletcher administration has argued that the arena will continue to generate revenues well after the completion of the 2010 WEG by attracting shows that the Horse Park could not previously host without a climate controlled arena. Consequently, the administration argues, the arena would eventually pay for itself. It is the object of the paper is to verify whether or not it is possible, and if it is, when is the likelihood.

Mr. John Nicholson, Executive Director of the KHP, has compiled a list of events targeted for relocation at the Horse Park. Previously, these events could not come to the Park because a climate controlled arena was necessary for their events. Furthermore, some events already located at the KHP would rather be in the future arena than on the outdoor facilities. Their moving to the arena would free up outdoor facilities that could be used to recruit other events. Therefore, the events that would come from elsewhere to relocate in the arena and in the newly freed up outdoor facilities would all bring revenues that can be directly associated with the arena. Mr. Nicholson linked a net income to each of these events with a formula taking in consideration the number of horses, people and the duration of the event. But the direct income generated from events at the KHP is not the only way that these events would generate money. Many of these events are located in Oklahoma, Georgia or Texas. If these events relocate to Lexington, it would bring in people that would stay in hotels and eat in restaurants. For this reason, a formula taking this into account has been designed. Although the revenues from the events and the revenues from the sales tax go in different accounts, this study wants to look at Kentucky as a whole and to find out the real impact on taxpayers. The model couples these revenues together and matches a probability with it to obtain the expected revenues of each event and then compares it with the debt service.

The results of the study show the annual deficit the arena would have in meeting its debt service if we allocate the events equally (fair share) to the 11 venues competing for them. In this case, the arena would generate approximately between $659,591 and $476,391 depending on the rotating events and its debt would consequently vary between $2,683,409 and $2,866,609. If the top 16 grossing events (above $100,000 in net income) are isolated by keeping the probability of obtaining the 16 less profitable events at the "fair share" level, then it is possible to find the probability needed to obtain the most lucrative events in order to meet the debt service. According to the model, the KHP must have between 73.5% and 78.5% chance of obtaining every single one of the top 16 events to meet its debt service. The opposite calculation-isolating the 16 less profitable events by leaving the top 16 at the fair share level-shows that it is mathematically impossible for the Park to meet its debt if it only has a "fair share" of the top 16 grossing events. Lastly, the probability of obtaining all the events if we set all of them equal in order to pay off the debt service varies between 59.5% and 63.5%, again depending on the rotating events. The model can also demonstrate the impact on total expected revenues of increasing the probability by 1 %. If the probability of obtaining all the events is increased by 1%, total expected revenues will in tum increase by $52,933. If the same task is performed on the 16 top grossing events the impact is $41,328, and $11,305 for the 16 less profitable events. In the event that the Park secures the 2 most grossing events (Arabian Nationals and Morgan Nationals), it would be better off by some $600,000 than if it got its fair share of every events. If the Park was to obtain the 4 most grossing events, it would take care of half its debt service.

By in large, the results of the model tell us that it is almost impossible to have the arena generate enough revenues-both directly and indirectly-to meet its debt service. The study also finds out that the arena can only be responsible for $3 million of the economic impact of the WEG and would therefore not have an important impact over the lifetime of the bond. Since the project is already well on its way, the results of the model would recommend to the KHP to focus its entire recruiting efforts on a few top grossing events to minimize the annual deficit caused by the arena.

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