Show Me the Money: Why Do Local Governments Subsidize Sports? - Part One

Part I: The Benefits of Professional Sports in a Community

While the NFL and NBA recently agreed to new broadcasting contracts worth more than $35 billion combined,[i] cities and states around the country face complex budget balancing acts to find ways to meet their obligations without exceeding revenue.  It’s no secret that U.S. cities and states pour money into stadium development projects and offer millions in incentives for local sports teams in an effort to attract or retain professional sports in the community and reap the perceived benefits.  But at a time when local governments are strapped for cash while professional sports leagues collect higher profits than ever, do these subsidies make financial and legal sense?  And with the NFL’s recent domestic violence issues,[ii] what level of tolerance should the public have for financially supporting sports leagues?

In a series of articles I will look at the legal and financial consequences of sports subsidies, i.e., state and local governments providing public money to fund the costs of stadiums and professional sports teams around the United States.  The first thing we can ask about subsidies is their rationale: at a time that cities and states are cutting spending on higher education and raiding public employee pensions, why do local governments continue to spend so much money on private, for-profit entertainment?

At the heart of this discussion is the existential question: would private financing be sufficient to cover the massive infrastructure and operating costs of sports without assistance from public funding?  The answer is yes and no.  In theory, there is sufficient funding from private entities (whether from leagues as a whole, teams individually, or from team owners themselves) to replace public subsidies from state and local governments.  However, this does not tell the whole story.  Since 1997, 19 of the 20 NFL stadiums built have received some form of public funding (the exception being Met Life Stadium) amounting to an average of 56% of the construction costs associated with building the stadiums.  Significant private financing options have succeeded in St. Louis and San Francisco, but those options are not necessarily replicable elsewhere.[iii]  For example, in St. Louis, the Cardinals previously owned the land on which their stadium was built, eliminating a significant cost in the financing process.

Many argue that government contributions are essential to leveraging private investment in infrastructure projects of such magnitude.[iv]  Aside from the obvious explanation that private investors would rather expose themselves to less risk and invest as little money as possible, there is also a practical obstacle to withdrawing public subsidies: no one else is doing it.  If all cities and states agreed to withdraw funding for stadiums or teams, individual owners or the leagues themselves could still afford to finance construction and operating costs.  But if a single city were to refuse public funding to a team for a new stadium, the team could simply threaten to leave for another city more willing to provide public funds.

Two-thirds of teams in the four major professional leagues and MLS play in stadiums built or significantly renovated in the last 25 years.  Nearly one-third of those teams play in stadiums built or significantly renovated since 2000, so the subsidies battle is one that will continue to be fought as each team seeks to have its stadium renovated or rebuilt.  Moreover, a team’s threat to leave is a serious matter, to which many cities (for example, Seattle) can attest.  Major sports leagues have limited franchises, and the competition among cities to draw sporting events or teams to their markets is intense.  Demand for teams clearly exceeds the supply, leaving owners with bargaining leverage over local governments.[v]

Assuming that public subsidies are necessary to retain sports teams in a particular locale, what are the benefits of sports to local communities and what reasons do local governments have for financially supporting the industry?

One consistent argument for public subsidies to sports teams and stadiums is that they eventually create greater revenue for cities and states in a variety of ways.  First, tourism businesses such as hotels and restaurants generate more income and pay more taxes surrounding sporting events.[vi]  Second, charitable donations by leagues, teams, owners, players, and corporate partners increase.  Stadiums may also have a positive effect on employee income and related taxes.  Charles Santo of Portland State University studied new football and baseball stadiums and found that they have a positive impact on incomes in cities, causing employee wages to rise.[vii]

Improved infrastructure and urban development are also noted benefits of sports financing projects.  The wave of suburban decentralization stadium projects in the 1960s and 1970s reshaped the way municipal planners conceived of urban redevelopment.  The more recent trend in stadium planning has evolved from decentralization to focus on the concept of downtown stadium districts and the theory that a stadium or arena will draw both consumers and businesses into the downtown area.[viii]  The presence of an arena or stadium in a city can also create more entertainment opportunities (concerts, conventions, etc.), which in turn generate more revenue and downtown development.  Case studies of stadium districts have indicated that both population and housing in stadium districts grow more quickly than in other areas of cities while making more efficient use of land.[ix]

The presence of a stadium can spur economic development in urban areas by creating new jobs and increasing spending within the community.  For example, Target Field in Minneapolis led to $36 million in new construction permits for the area around the stadium, a 19.4% increase in hotel occupancy, and a 7% increase in the use of light rail to attend games.[x]  In Denver, Coors Field has helped rejuvenate the Lower Downtown area, increasing the number of local businesses, adding 408% more housing units, and boosting hotel occupancy by 25%.  In total, the economic influence of the stadium was $195 million per year - double what was predicted.[xi]  One analysis of census blocks within five miles of every major professional stadium in the United States concluded that the presence of a sports team increases property values on average by about $198 million.[xii]

But financial benefits are not the only justification used to subsidize sports teams and stadiums.  Supporters also argue that there are significant personal and communal benefits as well.  Those who identify as sports fans tend to have lower rates of depression and higher self-esteem than non-fans.[xiii]  Teams can also affect how residents view themselves and their communities, fostering collective pride. The shocking success of the 2006 Saints provided inspiration to devastated New Orleans residents after Hurricane Katrina.  And stadiums can also act as refugee centers or shelters of last resort for communities.  After Hurricane Katrina, close to 40,000 took shelter in the Louisiana Superdome, while Houston’s Astrodome accommodated around 25,000 refugees.[xiv]  In 2007, the San Diego Chargers’ stadium provided shelter to around 10,000 people after a dangerous wildfire.

None of these reasons alone is a justification for spending millions on sports.  In fact, some (such as the emergency shelter argument) are merely post hoc benefits reaped by communities in rare, catastrophic circumstances rather than stated goals or envisioned benefits of the projects.  But advocates of sports subsidies contend that combined these benefits provide a comprehensive case to support the presence of sports teams and stadiums: higher revenue, urban redevelopment, economic growth, communal pride, psychological benefits, and helpful infrastructure.

Examining only the benefits of subsidies is not enough for governments to make the essential policy decisions about spending, but it provides a starting point from which to compare the beneficial aspects of sports subsidies to their harmful consequences, which I will consider in Part 2.

[i] The NFL agreed to a new deal with DirecTV worth 12 billion over 8 years, and the NBA agreed with TNT on a deal that will pay just under 24 billion over 9 years.

[ii] It should be noted that studies have shown that professional athletes are less violent than similar non-athlete individuals. See Woods, Ron. Does on-field violent behavior lead to off-field violence?, Social Issues in Sports, Second Edition, 2011.

[iii] Gordon, Jon. In San Francisco, the Giants went private for their stadium, Minnesota Public Radio, May 14, 2004.

[iv] Crompton, John; Texas A&M University; Economic Impact Analysis of Sports Facilities and Events: Eleven Sources of Misapplication, Texas A&M University, 1995.

[v] Wilhelm, Sarah. Public Funding of Sports, University of Utah Center for Public Policy & Administration, April 30, 2008.

[vi] Mayer, Frank. Stadium Financing: Where We Are, How We Got Here, and Where We Are Going, Villanova University, 2005.

[vii] However, confounding his analysis, these rises in income occurred during economic boom times in the 1990s.  Santo, Charles. The Economic Impact of Sports Stadiums: Recasting The Analysis in Context, Portland State University, 2005.

[viii] Newsome, Tracy. Changing Intra-Urban Location Patterns of Major League Sports Facilities, University of South Florida, 2000.

[ix] Donnelly, Michael. Stadiums and Smart Growth, Montclair State University, 2012.

[x] Santee, Stadiums That Shape Downtowns: The Impact of Stadiums on Urban Redevelopment, Populous, November 28, 2012.

[xi] Id.

[xii] Feng, Xia, and Humphreys, Brad R. The Impact of Professional Sports Facilities on Housing Values: Evidence from Census Block Group Data, City, Culture and Society, 2012.

[xiii] Wann, Daniel. Are Sports Fans Happier, University of Maryland, April 2012.

[xiv] Duncan, Jeff. Shelter from the Storm: Doug Thornton Reflects on the Superdome in Katrina, The Times Picayune, January 2013.