FREE ESSAY ON AMERICA - SPORTS CONSTRUCTION BOOM

AMERICA - SPORTS CONSTRUCTION BOOM

America is in the midst of a sports construction boom. New sports facilities costing at
least $200 million each have been completed or are under way in Baltimore, Charlotte,
Chicago, Cincinnati, Cleveland, Milwaukee, Nashville, San Francisco, St. Louis, Seattle,
Tampa, and Washington, D.C., and are in the planning stages in Boston, Dallas,
Minneapolis, New York, and Pittsburgh. Major stadium renovations have been undertaken in
Jacksonville and Oakland. Industry experts estimate that more than $7 billion will be
spent on new facilities for professional sports teams before 2006. 
Most of this $7 billion will come from public sources. The subsidy starts with the
federal government, which allows state and local governments to issue tax-exempt bonds to
help finance sports facilities. Tax exemption lowers interest on debt and so reduces the
amount that cities and teams must pay for a stadium. Since 1975, the interest rate
reduction has varied between 2.4 and 4.5 percentage points. Assuming a differential of 3
percentage points, the discounted present value loss in federal taxes for a $225 million
stadium is about $70 million, or more than $2 million a year over a useful life of 30
years. Ten facilities built in the 1970s and 1980s, including the Superdome in New
Orleans, the Silverdome in Pontiac, the now-obsolete Kingdome in Seattle, and Giants
Stadium in the New Jersey Meadowlands, each cause an annual federal tax loss exceeding $1
million. 
State and local governments pay even larger subsidies than Washington. Sports facilities
now typically cost the host city more than $10 million a year. Perhaps the most
successful new baseball stadium, Oriole Park at Camden Yards, costs Maryland residents
$14 million a year. Renovations aren't cheap either: the net cost to local government for
refurbishing the Oakland Coliseum for the Raiders was about $70 million. 
Most large cities are willing to spend big to attract or keep a major league franchise.
But a city need not be among the nation's biggest to win a national competition for a
team, as shown by the NBA's Utah Jazz's Delta Center in Salt Lake City and the NFL's
Houston Oilers' new football stadium in Nashville. 
Why Cities Subsidize Sports 
The economic rationale for cities' willingness to subsidize sports facilities is revealed
in the campaign slogan for a new stadium for the San Francisco 49ers: Build the
Stadium--Create the Jobs! Proponents claim that sports facilities improve the local
economy in four ways. First, building the facility creates construction jobs. Second,
people who attend games or work for the team generate new spending in the community,
expanding local employment. Third, a team attracts tourists and companies to the host
city, further increasing local spending and jobs. Finally, all this new spending has a
multiplier effect as increased local income causes still more new spending and job
creation. Advocates argue that new stadiums spur so much economic growth that they are
self-financing: subsidies are offset by revenues from ticket taxes, sales taxes on
concessions and other spending outside the stadium, and property tax increases arising
from the stadium's economic impact. 
Unfortunately, these arguments contain bad economic reasoning that leads to overstatement
of the benefits of stadiums. Economic growth takes place when a community's
resources--people, capital investments, and natural resources like land--become more
productive. Increased productivity can arise in two ways: from economically beneficial
specialization by the community for the purpose of trading with other regions or from
local value added that is higher than other uses of local workers, land, and investments.
Building a stadium is good for the local economy only if a stadium is the most productive
way to make capital investments and use its workers. 
In our forthcoming Brookings book, Sports, Jobs, and Taxes, we and 15 collaborators
examine the local economic development argument from all angles: case studies of the
effect of specific facilities, as well as comparisons among cities and even neighborhoods
that have and have not sunk hundreds of millions of dollars into sports development. In
every case, the conclusions are the same. A new sports facility has an extremely small
(perhaps even negative) effect on overall economic activity and employment. No recent
facility appears to have earned anything approaching a reasonable return on investment.
No recent facility has been self-financing in terms of its impact on net tax revenues.
Regardless of whether the unit of analysis is a local neighborhood, a city, or an entire
metropolitan area, the economic benefits of sports facilities are de minimus. 
As noted, a stadium can spur economic growth if sports is a significant export
industry--that is, if it attracts outsiders to buy the local product and if it results in
the sale of certain rights (broadcasting, product licensing) to national firms. But, in
reality, sports has little effect on regional net exports. 
Sports facilities attract neither tourists nor new industry. Probably the most successful
export facility is Oriole Park, where about a third of the crowd at every game comes from
outside the Baltimore area. (Baltimore's baseball exports are enhanced because it is 40
miles from the nation's capital, which has no major league baseball team.) Even so, the
net gain to Baltimore's economy in terms of new jobs and incremental tax revenues is only
about $3 million a year--not much of a return on a $200 million investment. 
Sports teams do collect substantial revenues from national licensing and broadcasting,
but these must be balanced against funds leaving the area. Most professional athletes do
not live where they play, so their income is not spent locally. Moreover, players make
inflated salaries for only a few years, so they have high savings, which they invest in
national firms. Finally, though a new stadium increases attendance, ticket revenues are
shared in both baseball and football, so that part of the revenue gain goes to other
cities. On balance, these factors are largely offsetting, leaving little or no net local
export gain to a community. 
One promotional study estimated that the local annual economic impact of the Denver
Broncos was nearly $120 million; another estimated that the combined annual economic
benefit of Cincinnati's Bengals and Reds was $245 million. Such promotional studies
overstate the economic impact of a facility because they confuse gross and net economic
effects. Most spending inside a stadium is a substitute for other local recreational
spending, such as movies and restaurants. Similarly, most tax collections inside a
stadium are substitutes: as other entertainment businesses decline, tax collections from
them fall. 
Promotional studies also fail to take into account differences between sports and other
industries in income distribution. Most sports revenue goes to a relatively few players,
managers, coaches, and executives who earn extremely high salaries--all well above the
earnings of people who work in the industries that are substitutes for sports. Most
stadium employees work part time at very low wages and earn a small fraction of team
revenues. Thus, substituting spending on sports for other recreational spending
concentrates income, reduces the total number of jobs, and replaces full-time jobs with
low-wage, part-time jobs. 
A second rationale for subsidized stadiums is that stadiums generate more local consumer
satisfaction than alternative investments. There is some truth to this argument.
Professional sports teams are very small businesses, comparable to large department or
grocery stores. They capture public attention far out of proportion to their economic
significance. Broadcast and print media give so much attention to sports because so many
people are fans, even if they do not actually attend games or buy sports-related
products. 
A professional sports team, therefore, creates a public good or externality--a benefit
enjoyed by consumers who follow sports regardless of whether they help pay for it. The
magnitude of this benefit is unknown, and is not shared by everyone; nevertheless, it
exists. As a result, sports fans are likely to accept higher taxes or reduced public
services to attract or keep a team, even if they do not attend games themselves. These
fans, supplemented and mobilized by teams, local media, and local interests that benefit
directly from a stadium, constitute the base of political support for subsidized sports
facilities. 
The Role of Monopoly Leagues 
While sports subsidies might ow from externalities, their primary cause is the
monopolistic structure of sports. Leagues maximize their members' profits by keeping the
number of franchises below the number of cities that could support a team. To attract
teams, cities must compete through a bidding war, whereby each bids its willingness to
pay to have a team, not the amount necessary to make a team viable. 
Monopoly leagues convert fans' (hence cities') willingness to pay for a team into an
opportunity for teams to extract revenues. Teams are not required to take advantage of
this opportunity, and in two cases--the Charlotte Panthers and, to a lesser extent, the
San Francisco Giants--the financial exposure of the city has been the relatively modest
costs of site acquisition and infrastructural investments. But in most cases, local and
state governments have paid over $100 million in stadium subsidy, and in some cases have
financed the entire enterprise. 
The tendency of sports teams to seek new homes has been intensified by new stadium
technology. The rather ordinary cookie-cutter, multipurpose facility of the 1960s and
1970s has given way to the elaborate, single-sport facility that features numerous new
revenue opportunities: luxury suites, club boxes, elaborate concessions, catering,
signage, advertising, theme activities, and even bars, restaurants, and apartments with a
view of the field. A new facility now can add $30 million annually to a team's revenues
for a few years after the stadium opens. 
Because new stadiums produce substantially more revenues, more cities are now
economically viable franchise sites--which explains why Charlotte, Jacksonville, and
Nashville have become NFL cities. As more localities bid for teams, cities are forced to
offer ever larger subsidies. 
What Can Be Done? 
Abuses from exorbitant stadium packages, sweetheart leases, and footloose franchises have
left many citizens and politicians crying foul. What remedy, if any, is available to curb
escalating subsidies and to protect the emotional and financial investments of fans and
cities? 
In principle, cities could bargain as a group with sports leagues, thereby
counterbalancing the leagues' monopoly power. In practice, this strategy is unlikely to
work. Efforts by cities to form a sports-host association have failed. The temptation to
cheat by secretly negotiating with a mobile team is too strong to preserve concerted
behavior. 
Another strategy is to insert provisions in a facility lease that deter team relocation.
Many cities have tried this approach, but most leases have escape clauses that allow the
team to move if attendance falls too low or if the facility is not in state-of-the-art
condition. Other teams have provisions requiring them to pay tens of millions of dollars
if they vacate a facility prior to lease expiration, but these provisions also come with
qualifying covenants. Of course, all clubs legally must carry out the terms of their
lease, but with or without these safeguard provisions, teams generally have not viewed
their lease terms as binding. Rather, teams claim that breach of contract by the city or
stadium authority releases them from their obligations. Almost always these provisions do
not prevent a team from moving. 
Some leases grant the city a right of first refusal to buy the team or to designate who
will buy it before the team is relocated. The big problem here is the price. Owners
usually want to move a team because it is worth more elsewhere, either because another
city is building a new facility with strong revenue potential or because another city is
a better sports market. If the team is worth, say, $30 million more if it moves, what
price must the team accept from local buyers? If it is the market price (its value in the
best location), an investor in the home city would be foolish to pay $30 million more for
the franchise than it is worth there. If the price is the value of the franchise in its
present home, the old owner is deprived of his property rights if he cannot sell to the
highest bidder. In practice, these provisions typically specify a right of first refusal
at market price, which does not protect against losing a team. 
Cities trying to hold on to a franchise can also invoke eminent domain, as did Oakland
when the Raiders moved to Los Angeles in 1982 and Baltimore when the Colts moved to
Indianapolis in 1984. In the Oakland case, the California Court of Appeals ruled that
condemning a football franchise violates the commerce clause of the U.S. Constitution. In
the Colts case, the condemnation was upheld by the Maryland Circuit Court, but the U.S.
District Court ruled that Maryland lacked jurisdiction because the team had left the
state by the time the condemnation was declared. Eminent domain, even if constitutionally
feasible, is not a promising vehicle for cities to retain sports teams. 
Ending Federal Subsidies 
Whatever the costs and benefits to a city of attracting a professional sports team, there
is no rationale whatsoever for the federal government to subsidize the financial
tug-of-war among the cities to host teams. 
In 1986, Congress apparently became convinced of the irrationality of granting tax
exemptions for interest on municipal bonds that financed projects primarily benefiting
private interests. The 1986 Tax Reform Act denies federal subsidies for sports facilities
if more than 10 percent of the debt service is covered by revenues from the stadium. If
Congress intended that this would reduce sports subsidies, it was sadly mistaken. If
anything, the 1986 law increased local subsidies by cutting rents below 10 percent of
debt service. 
Last year Senator Daniel Patrick Moynihan (D-NY), concerned about the prospect of a tax
exemption for a debt of up to $1 billion for a new stadium in New York, introduced a bill
to eliminate tax-exempt financing for professional sports facilities and thus eliminate
federal subsidies of stadiums. The theory behind the bill is that raising a city's cost
from a stadium giveaway would reduce the subsidy. Although cities might respond this way,
they would still compete among each other for scarce franchises, so to some extent the
likely effect of the bill is to pass higher interest charges on to cities, not teams. 
Antitrust and Regulation 
Congress has considered several proposals to regulate team movement and league expansion.
The first came in the early 1970s, when the Washington Senators left for Texas. Unhappy
baseball fans on Capitol Hill commissioned an inquiry into professional sports. The
ensuing report recommended removing baseball's antitrust immunity, but no legislative
action followed. Another round of ineffectual inquiry came in 1984-85, following the
relocations of the Oakland Raiders and Baltimore Colts. Major league baseball's efforts
in 1992 to thwart the San Francisco Giants' move to St. Petersburg again drew proposals
to withdraw baseball's cherished antitrust exemption. As before, nothing came of the
congressional interest. In 1995-96, inspired by the departure of the Cleveland Browns to
Baltimore, Representative Louis Stokes from Cleveland and Senator John Glenn of Ohio
introduced a bill to grant the NFL an antitrust exemption for franchise relocation. This
bill, too, never came to a vote. 
The relevance of antitrust to the problem of stadium subsidies is indirect but important.
Private antitrust actions have significantly limited the ability of leagues to prevent
teams from relocating. Teams relocate to improve their financial performance, which in
turn improves their ability to compete with other teams for players and coaches. Hence, a
team has an incentive to prevent competitors from relocating. Consequently, courts have
ruled that leagues must have reasonable relocation rules that preclude anticompetitive
denial of relocation. Baseball, because it enjoys an antitrust exemption, is freer to
limit team movements than the other sports. 
Relocation rules can affect competition for teams because, by making relocation more
difficult, they can limit the number of teams (usually to one) that a city is allowed to
bid for. In addition, competition among cities for teams is further intensified because
leagues create scarcity in the number of teams. Legal and legislative actions that change
relocation rules affect which cities get existing teams and how much they pay for them,
but do not directly affect the disparity between the number of cities that are viable
locations for a team and the number of teams. Thus, expansion policy raises a different
but important antitrust issue. 
As witnessed by the nearly simultaneous consideration of creating an antitrust exemption
for football but denying one for baseball on precisely the same issue of franchise
relocation, congressional initiatives have been plagued by geographical chauvinism and
myopia. Except for representatives of the region affected, members of Congress have
proven reluctant to risk the ire of sports leagues. Even legislation that is not hampered
by blatant regional self-interest, such as the 1986 Tax Reform Act, typically is
sufficiently riddled with loopholes to make effective implementation improbable. While
arguably net global welfare is higher when a team relocates to a better market, public
policy should focus on balancing the supply and demand for sports franchises so that all
economically viable cities can have a team. Congress could mandate league expansion, but
that is probably impossible politically. Even if such legislation were passed, deciding
which city deserves a team is an administrative nightmare. 
A better approach would be to use antitrust to break up existing leagues into competing
business entities. The entities could collaborate on playing rules and interleague and
postseason play, but they would not be able to divvy up metropolitan areas, establish
common drafts or player market restrictions, or collude on broadcasting and licensing
policy. Under these circumstances no league would be likely to vacate an economically
viable city, and, if one did, a competing league would probably jump in. Other
consumer-friendly consequences would ow from such an arrangement. Competition would force
ineffective owners to sell or go belly up in their struggle with better managed teams.
Taxpayers would pay lower local, state, and federal subsidies. Teams would have lower
revenues, but because most of the costs of a team are driven by revenues, most teams
would remain solvent. Player salaries and team profits would fall, but the number of
teams and player jobs would rise. 
Like Congress, the Justice Department's Antitrust Division is subject to political
pressures not to upset sports. So sports leagues remain unregulated monopolies with de
facto immunity from federal antitrust prosecution. Others launch and win antitrust
complaints against sports leagues, but usually their aim is membership in the cartel, not
divestiture, so the problem of too few teams remains unsolved. 
Citizen Action 
The final potential source of reform is grassroots disgruntlement that leads to a
political reaction against sports subsidies. Stadium politics has proven to be quite
controversial in some cities. Some citizens apparently know that teams do little for the
local economy and are concerned about using regressive sales taxes and lottery revenues
to subsidize wealthy players, owners, and executives. Voters rejected public support for
stadiums on ballot initiatives in Milwaukee, San Francisco, San Jose, and Seattle,
although no team has failed to obtain a new stadium. Still, more guarded, conditional
support from constituents can cause political leaders to be more careful in negotiating a
stadium deal. Initiatives that place more of the financial burden on facility users--via
revenues from luxury or club boxes, personal seat licenses (PSLs), naming rights, and
ticket taxes--are likely to be more popular. 
Unfortunately, citizen resistance notwithstanding, most stadiums probably cannot be
financed primarily from private sources. In the first place, the use of money from PSLs,
naming rights, pouring rights, and other private sources is a matter to be negotiated
among teams, cities, and leagues. The charges imposed by the NFL on the Raiders and Rams
when they moved to Oakland and St. Louis, respectively, were an attempt by the league to
capture some of this (unshared) revenue, rather than have it pay for the stadium. 
Second, revenue from private sources is not likely to be enough to avoid large public
subsidies. In the best circumstance, like the NFL's Charlotte Panthers, local governments
still pay for investments in supporting infrastructure, and Washington still pays an
interest subsidy for the local government share. And the Charlotte case is unique. No
other stadium project has raised as much private revenue. At the other extreme is the
disaster in Oakland, where a supposedly break-even financial plan left the community $70
million in the hole because of cost overruns and disappointing PSL sales. 
Third, despite greater citizen awareness, voters still must cope with a scarcity of
teams. Fans may realize that subsidized stadiums regressively redistribute income and do
not promote growth, but they want local teams. Alas, it is usually better to pay a
monopoly an exorbitant price than to give up its product. 
Prospects for cutting sports subsidies are not good. While citizen opposition has had
some success, without more effective intercity organizing or more active federal
antitrust policy, cities will continue to compete against each other to attract or keep
artificially scarce sports franchises. Given the profound penetration and popularity of
sports in American culture, it is hard to see an end to rising public subsidies of sports
facilities.