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

Part II: The Costs of Professional Sports in a Community

This is the second part of a series on public subsidies for professional sports.  In Part One, I introduced the problem of subsidies and the rationales that local governments use to justify them.  So we know why governments provide subsidies to sports – to redevelop urban centers, to generate economic development, to create a sense of civic pride, and especially out of fear that a team will leave for another city or state.

It’s important to remember that even though I mostly examine stadium subsidies in this series due to their high cost, public subsidies go to a variety of sports projects.  This year, Chicago invested millions in the NFL draft, and Louisiana recently passed a law to fund bids for major sporting events such as the Super Bowl.  Every time a new subsidy is approved we hear about the value of the team to the community, the fan experiences in the new stadium, or the tourist dollars and other revenue that will eventually be produced by the presence of sports in the area.  So why did 85% of economists agree that local and state governments should eliminate subsidies to professional sports franchises?

A Closer Look at Rationales

Local governments often issue press releases about how much more revenue stadiums will generate than it takes to build them.  Yet somehow, the debt from stadiums lingers, sometimes even after the stadiums are gone.  Cuyahoga County borrowed $120 million to build the Cleveland Cavaliers’ arena, which opened in 1994, but still owed more than half of that amount as of last year.  The old Giants Stadium still carried about $110 million in debt in 2010, the same year it was demolished.  That same year, Seattle’s King County still owed more than $80 million for the Kingdome.  The same Kingdome that was demolished in 2000.  And Seattle is still paying it off, using the Seahawks’ recent successes to help.  In practice, stadium subsidies are treated as no-brainer decisions that will easily pay for themselves.  To understand why projects sold to the public as ready-made success stories go bad so quickly, let’s look a little more closely at the rationales discussed in Part One.

One of the more important rationales that cities rely on is the concept of urban redevelopment, using a stadium and sports team to rejuvenate a local neighborhood, often central downtown areas that are in decline.  However, property values decrease by an average of 1.5% relative to the surrounding area after stadium construction.  The substitution effect is also a mitigating factor in downtown development.  Teams or leagues will often commission studies relied upon by public officials which discuss the economic benefits of a stadium in a vacuum, but these studies often overlook or ignore the substitution effect as a factor.  For example, suppose you build a stadium that seats 80,000 in the downtown area of a city.  For a Sunday football game, that’s 80,000 people that might not have otherwise come to downtown on that day.  They are spending money at restaurants, bars, souvenir shops, and hotels, creating more revenue for those businesses and more tax dollars as well.

But this does not capture the full effect on the economy.  How many of those fans who went to the game would have done absolutely nothing on that day without the team playing in town?  Would some have gone to the theater to see a movie or a play?  Maybe some would have gone to a museum or a music venue.  Many would have gone out to eat in other parts of the city.  Though it may be true that not all 80,000 fans would have been patronizing local businesses and perhaps not at the same financial level, you can still understand that not all the money that a local team generates for the economy is created by the team’s presence.  Much of it would have still been spent on other leisure and entertainment activities elsewhere in the city if the game did not take place that day.  That is the substitution effect, and failing to account for it can lead to gross overestimates in revenue predictions.

Revenue projections in turn are presented to the public with disingenuous comparisons. For example, a team might argue that a $200 million investment in a stadium is worth it because the stadium will generate $350 million in economic growth for the city.  But the real issue is not how much the stadium will help the economy, but how much tax revenue the city will receive.  Much of that $350 million goes to wages, overhead, rent, and other expenses, only a percentage of which winds up back in government’s coffers.  Hypothetically, a government might only expect to recoup $50 million in taxes from a $200 million investment.[i]  That means taking a 75% loss on the project, a crippling loss for the budgetary process of states and municipalities.  To make matters worse, economic growth estimates are often wildly inaccurate.  As of 2012, only eight of fifty-five in-use stadiums constructed with at least 25% public funding have succeeded in spurring economic development in their surrounding areas.

So now you have a better idea of how municipalities can end up still paying the bill for a stadium that no longer exists.  But let’s complete the economic picture.  If they are not talking revenues, government officials are touting job creation and wage increases.  However, according to one study, the average effect of a professional sports team on employment in the services sector of a city’s economy was a net loss of 1,924 jobs.  And in a study of basketball arenas completed between 2001-2009, each facility was associated with a per capita income decline of more than $2,000.  Other case studies of cities have shown significant negative impacts on metropolitan income as a fraction of regional income.

Moreover, many teams promote the idea that new sports facilities will attract more visitors to a city, who will spend more money on hotels and restaurants for other events such as Super Bowls or Final Fours.  In some cases, tourism is increased: Minneapolis saw an increase in hotel occupancy surrounding Target Field of 19.4%.  However, multiple studies show that overall there is little to no increase in hotel occupancy rates, retail sales, or airport traffic in cities that host these types of events over the last ten years.  The substitution effect likely plays a role in these overestimates as well.

The Legal Costs of Sports in a Community

Faulty rationales are not the only reasons to criticize sports subsidies, however.  The real world effects that stadiums have on individuals and communities can be devastating.  As Jeremy Jarrett has detailed, violence in stadiums can take its toll on fans in the stadium.  And sporting events can cause spikes in crime.  One study of eight cities over two years, found that football stadiums were associated with higher crime on home game days.

Eminent domain is another tool governments use when attempting to lure or retain professional sports teams in a community.  Eminent domain is the power of government to seize private property for public use, typically in exchange for compensation.  Although the Constitution does not expressly give Congress the power of eminent domain, the power to take property is implied in the other powers granted to the federal government.[ii]  Specifically, the Fifth Amendment provides in part, that private property shall not be taken for public use without just compensation (the “Takings Clause”).  This prohibition also applies to the states through the Due Process Clause of the 14^th Amendment.[iii]  The Supreme Court has interpreted the “public use” language of the Takings Clause to mean “public purpose,” and held that a city has the power to take private property and transfer it to a private developer because of the public benefits of the proposed development, a ruling which bears directly on the purpose of stadiums.[iv]

About half of the post-1990 stadium and arena construction projects have involved eminent domain property seizures.  The primary victims of eminent domain tend to be low-income and working class homeowners, local stores, and small businesses.  Minorities who are victims of eminent domain also “become more likely to live in public housing, less likely to be employed, and more likely to be displaced.”  Eminent domain also has a hidden cost for taxpayers: in an effort to avoid costly litigation from homeowners, governments often have an incentive to overvalue properties, passing on the cost of the property compensation to taxpayers.[v]  So eminent domain often becomes a social and economic drain: marginalized citizens are further imperiled; properties are overvalued, costing taxpayers more; and displaced citizens often drain public funds even more with increased costs associated with public housing and welfare.  But as we will see, eminent domain does not even scratch the surface of hidden costs.[vi]

Hidden Costs

Sometimes, cities can recoup their investments over time.  For example, revenue from naming rights should help Arlington, Texas pay off the debt incurred to help build the Cowboys’ AT&T Stadium in fifteen years.  In a vacuum, this long-term process of return on investment might make sense, but it’s just not how stadiums and professional teams work in reality.  AT&T Stadium will require technology and facility upgrades long before those fifteen years are over, involving even more public subsidies.  In 2010 alone, professional sports facilities in the five major sports leagues required $43 billion in investments from major renovations or new construction, with about half of that investment coming from the public.  When factoring in additional investments over the life of these stadiums, taxpayers end up paying an additional $10 billion, sometimes increasing the public’s contribution to 75% of the cost.

Meanwhile, the average cost of subsidies is rising. In the 1990s, the average subsidy given to stadium projects was $142 million.  By 2010, that number had risen 70% to $241 million.  That’s not even counting the costs of renovations and improvements, municipal services such as security, and the tradeoff of lost property taxes (and eminent domain over-appraisals discussed above).

Stadium costs are skyrocketing as well.  Since the construction of the $1.3 billion AT&T Stadium in Dallas, none of the four NFL facilities built since have cost less than $1 billion.  The ten NFL stadiums built prior to AT&T Stadium averaged $428 million. And the cost of MLB stadiums has nearly doubled over the past ten years from an average of $341 million to an average of $626 million (excluding the two New York stadiums which cost even more at $800 million and $1.3 billion).  Atlanta is dedicating more than $1 billion in public money to new stadiums for the Braves and Falcons.  The cost of the Falcons’ new stadium rose $400 million over 18 months.  The Vikings’ new stadium will cost $1 billion despite initial estimates of $400-500 million.  Technology upgrades are driving part of the increase: larger and higher quality screens, more WiFi capability and access, LED lighting, etc.

Increased technology costs remain largely unnoticed despite contributing substantially to the cost of stadiums.  Local governments are often stuck footing the bill for these costs in order to comply with the increasingly common “state of the art” clause in subsidy contracts.  A typical example is the Bengals’ lease with Hamilton County, which requires any new technology installed by at least fourteen other NFL teams also be installed in Paul Brown Stadium at the county’s expense.  The Charlotte Hornets, Kansas City Chiefs, St. Louis Rams, and Minnesota Vikings all have state of the art clauses in their leases, and the Chargers had one until 2004.  Two new stadiums for the Braves and Vikings both have state of the art clauses.  The Rams’ clause is more expansive than the Bengals’.  It allows the team to break its lease every ten years if the Edward Jones Dome is no longer a “first tier” NFL facility (i.e. it must remain among the top 25% of NFL stadiums).  In practice, this meant that the Rams could require St. Louis to spend $700 million upgrading their $280 million stadium, rather than the $124 million upgrade that the city proposed.

To make matters worse, there is no clear explanation of what “state of the art” or “first tier” means.  The Rams lease leaves those details to an arbitrator to decide.  In 2005 when the clause’s meaning was disputed, the arbitrator sided with the Rams, resulting in a $30 million stadium upgrade in 2009.  Eventually, these clauses may become a vicious and impossible cycle, in which all stadiums in a league must be “state of the art.”  What would it mean to have thirty-two different stadium contracts, each requiring the stadium in question be ranked among the top ten in the league?  It simultaneously creates a race to the top in which each new improvement must be copied by all other stadiums and in which local governments can never fulfill their obligations.[vii]  How can thirty-two stadiums be top ten?

Sometimes, the costs of stadiums are so high that they are worth more than the total value of the sports franchises that will use them, leading some to suggest it would be more cost effective for cities to purchase and own the teams themselves.  Washington D.C. planned to spend $183 million for a MLS stadium despite D.C. United being valued at only $50 million, and the city gave the Nationals $700 million in subsidies despite the franchise’s sale price of $450 million.  Dade County and the city of Miami spent more than $800 million on the new Marlins stadium at a time when the franchise was unofficially valued at only $277 million.  Glendale, Arizona provided subsidies to the Coyotes that were worth $50 million more than the price of the team itself.

Conclusion – Are Sports Worth the Cost?

After reading this, you may say there is no way that subsidizing professional sports is worth the enormous costs to a community.  And from an accounting standpoint you would be absolutely right.  Stadium subsidies almost never pay for themselves, resulting in enormous bills that governments are paying off even after the stadium is no longer in use.  Rising costs of construction, technology costs, and state of the art clauses lock governments into a death spiral of more subsidies.  Stadiums can increase violent crime, and the use of eminent domain to build them often harms marginalized citizens the worst while simultaneously overburdening taxpayers.

But just because they cannot be quantified, non-economic benefits should not be ignored.  Cities and states often invest in projects that are economic duds because the public believes the investment is worth it.  Symphony halls, art museums, and public parks are all examples of projects that are not funded with the goal of recouping an investment, so much as merely making available a generally recognized public good.  Some argue that sports benefit communities’ quality of life by increasing the satisfaction and happiness of residents, even among those who do not attend or watch games.

We should not forget that even if professional sports do not merit public investment from local governments, they still have value as a private enterprise.  Rooting for teams and players has enriched the lives of billions of people around the globe.  Athletes capture our imaginations the same way painters and musicians do because at their peak what they do is art.  Moreover, a unique feature of sports is the power to unite communities.  Think of moments of healing for ravaged communities and you often think of a sports moment. A perfect presidential pitch at a Yankees game after 9/11.  The Saints blocking a punt on Monday Night Football after Hurricane Katrina.  David Ortiz’s emotional and powerful speech after the Boston Marathon bombing.  Sports are cathartic and empowering, even (and sometimes especially) for fans.

In the end, there must be a balance.  As sports fans, we should not shun our passion or eliminate it merely because it is wasteful.  At the same time, as responsible citizens we should be aware of the financial and economic toll that sports can have on a community.  Most predictions about the benefits of professional sports to a community are overly optimistic at best and bald deception at worst.  Citizens should be aware of the full costs of what they are paying for.  Governments should neither jump so eagerly at the chance to spend public money on a boondoggle, nor sell it to the community as an economic win.  The first demand of a policymaker considering whether to approve a public subsidy for professional sports should be “show me the money” – how does our community gain a return on this investment?

[i] Baltimore’s Oriole Park generated only about $3 million in tax revenues per year as return on a $200 million investment.

[ii] Kohl v. U.S., 91 U.S. 367 (1875).

[iii] Chicago, Burlington & Quincy R.R. Co. v. City of Chicago, 166 U.S. 226 (1897).

[iv] Kelo v. City of New London, 545 U.S. 469 (2005).

[v] For example, this Nevada study indicated a 17% over-appraisal of properties taken by eminent domain above market value.

[vi] Interestingly, some local governments have tried to use the law of eminent domain as a weapon against professional sports teams to seize teams themselves for the public benefit.  In the 1980s, the city of Oakland and state of Maryland tried to block the Raiders’ and Colts’ moves to Los Angeles and Indianapolis respectively.  Both attempts were unsuccessful.

[vii] Examples of improvements that local governments can be on the hook for due to state of the art clauses: holographic replay systems, “smart seats,” next generation video screens and sound systems, and ticketless entry. systems, among others.  For example, despite numerous past renovations and upgrades, Louisiana still managed to have to subsidize $6 million for brand new video boards for its two major sports venues.