It's Time to Get Government Out of the SPORTS BUSINESS

Raymond J. Keating

"... Politicians are attracted to sports subsidies like moths to a flame, but it is the taxpayers who get burned."

THE 1990s were a decade of hyperactivity regarding new ballparks, stadiums, and arenas for professional sports teams. While Chicago's Comiskey Park II was the first new major league baseball stadium to open during the 1990s, the decade's second ballpark would set the architectural trend. In Baltimore, Oriole Park at Camden Yards--combining the look and feel of old-time ballparks with all the modern amenities--opened in 1992 at a taxpayer cost of $210,000,000.

One of the signs of the 1990s was the large number of stadiums and fields that were paid for mostly by taxpayers, but named for owners or corporations:

* In 1994, the Cleveland Gateway Complex opened Jacobs Field for baseball's Indians and the Gund Arena for the National Basketball Association's Cavaliers. Costs for the project rose to $462,000,000, of which only $157,000,000 was covered by the private sector.

* The taxpayers picked up $200,000,000 of the $215,000,000 total cost for Coors Field in Denver, home to baseball's Colorado Rockies.

* Arizona taxpayers absorbed $238,000,000 of the Diamondbacks' $355,000,000 Bank One Ballpark in Phoenix, which boasts a retractable roof, natural grass field, and a Jacuzzi and swimming pool over the right-center-field wall.

* Taxpayers in St. Petersburg, Fla., spent $138,000,000 on spec for Tropicana Field (formerly known as the Thunder-Dome)--a domed stadium offering AstroTurf with dirt base paths and various fan amenities, including a cigar bar--and fortunately managed to attract the Tampa Bay Devil Rays. Or maybe it was not so fortunate, since the Devil Rays proceeded to upgrade it at a cost of $70,000,000, with $62,000,000 coming from the taxpayers.

* A bit south of St. Petersburg, the National Hockey League's Florida Panthers christened the National Car Rental Arena. Broward County built the rink at a cost of $185,000,000.

Even today, not all stadiums are built at taxpayer expense, or at least not primarily. The Atlanta Braves moved into the $232,000,000 Turner Field on Opening Day 1997. It was originally built for the 1996 Olympic Games and was generally financed with private funds. In fact, the deal included all construction costs, the stadium's conversion to baseball after the Olympics, the demolition of the old ballpark, and the retirement of the debt on the former facility.

The National Football League's Jack Kent Cooke Stadium for the Washington Redskins, since renamed FedEx Field, cost $180,000,000 in private and $75,000,000 in public funds. The United Center in Chicago was largely financed with private dollars. The total cost of $175,000,000 included a mere $10,000,000 from the state for infrastructure improvements. A new arena for which the private sector picks up 94% of the tab isn't perfect, but nowadays, it is pretty good.

New ballparks and stadiums will continue to come on line, with politicians ready to offer lavish taxpayer subsidies. For example:

* In July, 1999, baseball's Seattle Mariners moved into Safeco Field. The retractable-roof, 45,600-seat ballpark is estimated to have cost $498,000,000, of which taxpayers are on the hook for $372,000,000. Elected officials specifically ignored the will of the people on the stadium issue. In September, 1995, King County taxpayers voted against a hike in the sales tax to pay for a new ballpark, as well as for repairs to the old park, the Kingdome. Weeks later, the Mariners were in an exciting playoff series with the New York Yankees, and team and government officials took advantage of the fact to approve a taxpayer-financed facility.

* There is more suffering to come for Seattle taxpayers. The NFL's Seahawks will move into a new stadium in 2002, estimated to cost $430,000,000. Team owner Paul Allen, cofounder of Microsoft and America's third-richest man, is kicking in $130,000,000. Costs to the taxpayers are supposedly capped at $300,000,000.

* The 1998-99 Super Bowl champion Denver Broncos are scheduled to move into a new stadium in 2001. In November, 1998, voters gave the okay to a $360,000,000 stadium, for which the team would lay out $94,000,000 and the taxpayers would be billed $266,000,000. A legislative review of the stadium project, however, found that costs could go as high as $460,000,000.

* Opening Day 2000 promises to be busy for new baseball stadiums. The Houston Astros are scheduled to move into a 42,000-seat, retractable-roof ballpark. Estimates place total costs at $250,000,000, with $180,000,000 from rental car and hotel taxes. The Milwaukee Brewers hope to move into Miller Park. Costs are estimated at $367,000,000, with taxpayers paying $277,000,000. After four votes against publicly financed ballparks for the San Francisco Giants in recent years and a failed attempt to move the team to Florida, the Giants will take up residence in the mostly privately financed, $306,000,000 Pacific Bell Park. However, taxpayers will spend $26,000,000 for land and infrastructure.

* The New York Mets have announced plans for a stadium with a retractable roof and a movable grass field. The ballpark's costs are estimated at about $500,000,000. It could be opened by 2002, with 45,000 seats--including 78 luxury suites and 5,000 club seats. Although the full financing scheme is yet to be announced, New York taxpayers could be on the hook for about $390,000,000.

* Meanwhile, crosstown rival George Steinbrenner has been pining for a new Yankee Stadium for several years. Even though the Yankees are flush with revenue (especially from television contracts), they maintain that they cannot compete with other teams that play in new ballparks, ignoring the fact that they won the World Series in 1996, 1998, and 1999. So, since at least 1995, Steinbrenner has been performing the baseball version of Hamlet, trying to decide whether he should keep his team in the Bronx (in a completely refurbished Yankee Stadium, which, incidentally, was completely rebuilt in 1974-75 after decaying since its 1923 opening) or move to a new facility on the west side of Manhattan. Moving the team to New Jersey is another proclaimed option, though the latter state has exhibited no interest in picking up the tab.

Republican Mayor Rudolph Giuliani has made it clear that he is willing to do anything to make sure the Yankees remain somewhere within the Big Apple's borders. Giuliani even made sure that a November, 1998, referendum regarding public tax dollars for a new stadium on the West Side was removed from the ballot, so voters will have no direct voice in the Yankee Stadium question.

If the Yankees were to move to Manhattan, the price tag for a new ballpark is estimated at more than $1,000,000,000, while a refurbished Yankee Stadium in the Bronx is projected to cost $535,000,000. Given New York's ability to underestimate the true costs of such ventures, the actual costs of any of the proposed projects will undoubtedly rise considerably, with $1,500,000,000 for a West Side ballpark well within probability.

Stadium matters remain in flux in New York. In his state-of-the-city address on Jan. 14, 1999, Giuliani appeared to change course on the Yankees while generally growing more ambitious in terms of sports subsidies. His latest scheme calls for new ballparks for the Mets and the Yankees, new minor league stadiums in Brooklyn and Staten Island, a new domed football stadium on Manhattan's West Side--perhaps to lure the Jets back from the swamps of New Jersey--and a new Madison Square Garden for the NBA Knicks and NHL Rangers. One estimate places the cost of the entire venture at $5,000,000,000.

During the 20th century, more than $20,000,000,000 were spent on major league ballparks, stadiums, and arenas. This includes, based on a very conservative estimate, a minimum of $14,900,000,000 in government subsidies for the four major league sports--over $5,200,000,000 since 1989 alone. Before the Great Depression, no subsidies was the rule. Afterwards, no subsidies was clearly the exception.

In the foreseeable future, considering what is already agreed to and what various clubs and cities are seeking or proposing, another conservative estimate indicates that at least $13,500,000,000 more may be spent on new ballparks, stadiums, and arenas. Taxpayers can expect to pick up more than $9,000,000,000 of that amount.

Politics and subsidies

Is there any justification for such extravagance? Do the lavish handouts to sports franchises stand up to economic analysis?

The sports fan is particularly susceptible to pleas from team owners that a new facility is needed in order to compete with other teams that are getting new venues chock full of revenue-generating club seats, luxury suites, and skyboxes. After all, who wants to root for a team that has a miniscule payroll (by professional sports standards) and thus, perhaps, little chance of winning a championship?

Surely, though, the competitiveness of a team is a matter to be dealt with by the particular organization or league. Taxpayers--many of whom are not even sports fans--should not be forced to contribute to a club's payroll. Indeed, the only people regularly calling for subsidies to keep franchises competitive are the owners and the players--a fact that should surprise no one, since those two groups are the real beneficiaries of sports subsidies.

Taxpayer funding of stadiums and arenas provides enormous benefits to teams. First, they are relieved of facility financing costs, which can run $10-20,000,000 or more annually. Second, new and expanded revenues are tapped through luxury suites, club seats, stadium naming rights, signage and other advertising, income from other facility events, and higher ticket prices.

As for ticket prices, sportswriter Tom Farrey has noted: "But what goes unsaid during the campaigns to get public money approved is the facilities are largely for new fans--wealthier individuals and corporations that can afford the seats in these often, ironically, smaller stadiums and arenas. Cheap seats remain at these facilities, but not that many and not as close to the action as they used to be [especially in basketball and hockey arenas]. The net effect is long-time fans and middle-income families are increasingly driven from the games, replaced by corporations that can buy larger blocks of tickets and use them as tax writeoffs."

Third, teams often do not have to pay property taxes on new facilities. For instance, no property taxes are paid to New York City on Madison Square Garden so long as the Knicks and Rangers use it as their home. The new revenues or alleviated costs mean more dollars are available to boost owners' bottom lines and players' salaries. Roger Noll and Andrew Zimbalist authors of Sports, Jobs and Taxes, have asserted: "Professional athletes receive salaries that are roughly proportional to the revenues that they generate, so that much of the revenue enhancement from a new stadium inevitably goes to players." Mark Rosentraub, author of Major League Losers, has estimated that the players garner about 55% of the gains from subsidies and the owners get 45%. It doesn't take a math degree to see what that leaves for everyone else.

According to data from Financial Worm magazine, new venues meant skyrocketing valuations for major league franchises between 1991 and 1997. The average valuation for baseball teams with new parks rose by 79%, compared with a league average of 11%. Clubs with a new football stadium rose 156% in value, compared with the NFL average of 111%. In the NBA, teams with new courts jumped 70% in value, compared with 55% for league teams overall. NHL clubs skating in new rinks increased in value 133%, compared with a league average of 105%.

Voters may be tempted by the glitz of taxpayer-funded sports facilities. After all, the image of a shiny new stadium or arena jammed with cheering fans is quite seductive. Voters and taxpayers may also be tempted to support big subsidies for sports teams after hearing grand assertions that a new facility will "pay for itself' and act as an "economic engine."

In judging the economic-engine claims, one must view the entire economic landscape, not just a small portion. For any given period, a family has only so much time and income it can dedicate to leisure activities. The amount of those resources will not be changed much due to the existence or nonexistence of a stadium or arena. Leisure dollars will be spent one way or another. So, if no ballpark existed in a city, a family might go bowling, take in a concert, go to the movies, or undertake some other recreational activity. Stanford University economist Roger Noll claims that the majority of fans attending games come from within a 20-mile radius of the facility, so money spent at the ballpark would have been spent on some form of local entertainment or recreation in any case. In that light, government-subsidized stadiums tend, at best, to be zero-sum endeavors--a shifting around of resources.

How can that be? Team owners and politicians seeking new sports facilities always present analyses showing significant gains for the local economy if only the taxpayers will build a ballpark, stadium, or arena. In their studies, the money spent on building facilities, the dollars laid out by fans, and other revenues are multiplied by some estimated multiplier to come up with a guess at the total amount of economic activity generated by such venues. The multipliers are based on input-output models, which have only a tenuous relationship to what happens in the real economy. In addition, such analyses assume that everything earned by players, owners, and concessionaires is repatriated to the local economy--a grossly unrealistic assumption. For example, the local community receives little benefit from skyrocketing sports salaries since few, if any, of the players live around the facility.

Nonetheless, this is the shaky foundation undergirding most of the studies that claim big gains from sports teams and facilities. So, the New York City Comptroller's Office can claim that the Yankees, Mets, Rangers, Islanders, Devils, Knicks, Nets, Giants, and Jets account for $1,150,000,000 in annual economic activity in the New York City region, based on multipliers ranging from 1.85 to 2.11. Although those estimates are wildly optimistic, it is interesting to note that, even if they are accurate, they mean that these nine sports teams account for a mere 0.3% of the New York City regional economy.

Economist Edwin S. Mills of Northwestern University's Kellogg Graduate School of Management argues that the negative multiplier effect of taxing citizens largely offsets any positive multiplier: "Everybody who pays a dollar in taxes to support the facility must reduce his or her spending.... The diminished spending goes round and round, just like the ... positive multiplier effect." Mills notes that the studies supporting stadium plans "never mention" that countereffect, assuming that "the cost of capital is free."

Rather than simply speculating on the possible future economic impact of a new stadium or arena, sound economic analysis should examine the empirical evidence. Economist Robert Baade of Lake Forest College examined the evidence from 36 U.S. metropolitical statistical areas (MSAs) that hosted pro teams in one of the major league sports and 12 areas that did not host such teams between 1958 and 1987. He found that pro sports is not statistically significant in determining economic growth rates. Baade and University of Chicago economist Allen R. Sanderson looked at the employment impact of adding a pro sports team or stadium. Based on evidence from 10 MSAs over the period 195893, they found that leisure spending was realigned, not increased, and an insufficient number of fans were attracted from beyond the area to contribute significantly to the city's economy--hence, no new net job creation occurred.

Michael Walden, a North Carolina State University economics professor, looked at the determinants of growth in jobs from 1990 to 1994 in 46 cities and found that cities with major league sports teams grew more slowly in the 1990s. Indeed. University of Maryland economists Denis Coates and Brad Humphreys note that new stadiums and teams actually make cities poorer. Their study shows a $100 drop in per capita income for cities with new ballparks and a $400 decline in income for cities with new baseball teams.

Another major downside to government-built and -owned ballparks is that clubs are transformed from owners to renters. It is always easier for a renter to move to get a better deal. So, government officials who advocate taxpayer-funded sports facilities to attract or keep a team virtually ensure that teams will continue issuing threats and moving. Teams have every incentive to pit city against city and state against state. When somebody else is footing part or all of the bill, teams can jack up their demands for accoutrements in new facilities. Indeed, older ones are becoming "obsolete" at a faster and faster rate. Donald J. Lonegran, a vice president at Legg Mason Real Estate Services, has noted that, from the owners' standpoint, NBA and NHL arenas less than 10 years old are already economically obsolete.

The Heartland Institute's Joseph Bast recently offered three reasons that stadiums are subsidized. First is bidding among cities for teams. "The number of professional sports franchises is kept below the number of cities that could support a team, thereby forcing cities to bid against one another for the privilege of hosting a team." The word "forcing" is an exaggeration, leading one to believe that elected officials have no choice but to dole out tax dollars for sports. Second, Bast correctly cites the financing arrangements within leagues, particularly that each league allows teams to keep all nonticket revenues generated by a facility--luxury suites, advertising, concessions, signage, and so on. Those opportunities lead teams to seek ever more elaborate means of generating revenues. That does not mean taxpayers have to pay for such amenities. Third, he points out that subsidy backers often win because they have more at stake than taxpayers do.

The final point is the critical one. Subsidy seekers are determined, well-organized, well-financed, and politically connected; those opposed to subsidies are usually not well-organized, are underfunded, and work outside the world of politics. For the subsidy seekers, the potential windfall is huge, but the cost per taxpayer for a new sports venue may not be enough to mobilize most voters against such pork projects. That, of course, is the fundamental problem with excessive government in all areas.

Finally, one should remember that Federal taxpayers are paying some of the cost of subsidies on most government-financed sports facilities while gaining nothing from the construction of a new ballpark, stadium, or arena. After all, what benefit does a taxpayer in Los Angeles receive from a new ballpark in Boston?

Nonetheless. few politicians--conservative or liberal--can resist the impulse to spend tax dollars on sports. Maybe it is the "edifice complex," or the sheer enjoyment of cutting ribbons and sticking shovels in the ground. Or, like Rudy Giuliani when it comes to the Yankees. maybe they are just rabid sports fans. Whatever the reason may be, politicians are attracted to sports subsidies like moths to a flame, but it is the taxpayers who get burned.

Looking for solutions

The big question remains: How can taxpayer subsidies for professional sports be stopped? Given the fact that such government activism continues to roll on, it is not a problem with an easy solution. Let's first dispose of the so-called "solutions" that promise only to make matters worse.

Solutions that aren't. There is actually a movement afoot for government ownership of sports teams. State legislators in New York have suggested using eminent domain to seize teams that try to move out of state. Such an idea takes the already bad situation of government subsidizing pro sports teams and makes it worse by having government actually buy sports teams. Imagine the taxpayer expenses and losses, the patronage opportunities, and the constant "investing" in facilities. As poorly as sports leagues and teams may be managed today, things would certainly get worse under government, which has no incentive to control costs, be efficient, or serve the customer. The answer to government involvement in sports is not more government involvement in sports.

Another proposal along these lines is the "municipal capitalism" idea floated by Rosentraub in Major League Losers. First, he says that governors and mayors should form a pact not to dole out tax dollars for sports. That would be fine, but, as we know, somebody always breaks cartel-like pacts. Next, he calls for a Federal law forcing the majors to expand the number of teams in their respective leagues if investors in a community have sufficient resources to pay a franchise tee. That would be an unwarranted and unconstitutional intrusion by government into the operations of a private business. In effect, the Federal government would dictate where particular businesses--i.e., Major League Baseball, the NFL, the NBA, and the NHL--must do business and who must be admitted into their business. It also is likely to lead to taxpayers having to build even more stadiums and arenas.

Rosentraub advocates requiring the league to supply an expansion franchise if a team leaves a stadium that was in any way publicly subsidized. Once again, that would be government managing a business, He also proposes that, if a team leaves a government-subsidized stadium, the government providing the subsidies should be entitled to that portion of the team's wealth that is tied to the subsidy. Calculating such shares would be a monumental task, likely plagued by politics. Moreover, such a requirement would provide states and cities with added incentives to tap taxpayers for sports venues--a costly proposition indeed.

Real solutions? The following proposed remedies to the sports subsidies mess deal more directly with the real problem--i.e., government taking money from the many and handing it over to professional sports team owners and players--but face perhaps insurmountable political obstacles.

The first solution is to elect individuals to office who oppose corporate welfare for sports teams and will privatize sports venues currently owned by the public sector, as in St. Louis and Toronto, However. this is a daunting task. Politicians often fail to take stands on such issues. Even when they do, they sometimes change their minds later. For example, in 1994, the newly elected governor of New Jersey, Christine Todd Whitman, put a stop to her predecessor's plan to bring the NBA's Philadelphia 76ers to a new $135,000,000 arena in Camden.

Another option is to make sure the voters at least have the final say about public investment in sports facilities through a referendum. In his book, Home Team, Michael Danielson notes that voters were friendly to new ballparks in the optimistic 1950s and 1960s, rejecting just two of nine stadium referendums, but turned more skeptical in the sometimes austere 1970s and 1980s, voting down 13 of 15 stadium proposals. In the early 1990s, voters once again looked with favor on millionaire team owners, voting for 12 of 17 proposals between 1990 and 1996. (It should be noted that the 1996 vote in favor of the new San Francisco Giants ballpark involved no public dollars, just an exemption from building restrictions.) In 1997-98, results were more mixed: seven votes for public funding and six against. So, over the years, the results have been mixed when stadium issues have been placed on the ballot, but at least voters' voices have been heard.

Another idea is to extend baseball's antitrust exemption to the other leagues. Although state or local government solutions are almost always preferable to distant Federal action, there may be some limited role for the Federal government when it comes to stadium and arena subsidies. Given the endless, destructive bidding between states and localities for professional sports teams, it is difficult to imagine a lasting solution coming at those levels of government.

First, it must be understood that Major League Baseball, the NFL, the NBA, and the NHL are in no legitimate economic sense monopolies. In reality, they are more like partnerships. In North American Soccer League v. NFL, Supreme Court Justice William Rehnquist observed: "The NFL owners are joint ventures who produce a product, professional football, which competes with other sports and forms of entertainment in the entertainment marketplace. Although individual NFL teams compete on the playing field, they rarely compete in the marketplace.... The league competes as a unit against other forms of entertainment."

Sports leagues are merely part of the larger entertainment industry. They compete for consumer dollars with movies, participatory sports and recreation, television, concerts, books, games, etc. Antitrust regulation of sports leagues does not rest on sound economics and should be ended.

Restoring leagues' power

Most important, ending Federal antitrust regulation of sports will restore to the leagues the power to set rules guiding franchise locations. Leagues obviously should have control over their own business decisions--including location of teams--to promote league growth, competitiveness, and stability. Major League Baseball is by far the most stable in terms of team movements (the last time a baseball franchise switched cities was in 1972), in part because it enjoys a general antitrust exemption that allows it to stop a team from moving if such a move is deemed not to be in baseball's best interests. The other major league sports--particularly the NFL, which has had its decisions restricted by antitrust threats--would clearly benefit from baseball's antitrust exemption and gain some stability, since numerous franchises have switched cities in the last two decades.

An antitrust exemption will not be enough, though. In recent years, even Major League Baseball has once again appeared to look favorably on teams' threatening to leave their home cities if new ballparks are not built. Since former Milwaukee Brewers owner Bud Selig, a recipient of taxpayer subsidies, is now the full-time baseball commissioner, expect more threats and possibly a move by one or two baseball teams in the next few years. The Montreal Expos, Oakland A's, and Minnesota Twins are likely candidates.

Eliminating the Federal tax exemption for public financing of sports venues would raise costs for cities and states and might have the impact of killing some subsidies. Sen. Daniel Patrick Moynihan (D.-N.Y.) has proposed legislation to limit tax-exempt financing by restricting such debt to $5,000,000 or five percent of total stadium costs, whichever is less. Actually, it would make even more sense to prohibit any stadium and arena costs from being financed with Federally tax-exempt debt.

In fact, the Federal tax exemption for all state and local borrowing creates unwarranted economic distortions. From an economic perspective, it makes no sense to provide tax exemptions for politically driven projects, which often have little or no relationship to the nation's economic well-being. Such subsidies merely provide an incentive to expand government at the state and local levels. Meanwhile, returns from productive private-sector ventures--including those that compete directly with government-funded projects, such as privately financed stadiums--are fully taxed through levies on interest income, corporate profits, dividends, capital gains, and personal income.

Even though a Moynihan-style bill would raise project costs, the fact that politicians are spending other people's money will probably lead them to continue handouts for sports ventures. In addition, when closing tax loopholes, such as a Federal tax exemption for interest on state and local debt, it is always preferable to lower overall tax rates commensurately so as not to increase the tax burden and in order to move to a flatter, simpler, growth-oriented tax code.

Commentator Keith Olbermann, formerly with ESPN and MSNBC and now with Fox Sports, has called tongue in cheek for a constitutional amendment whereby any official of any government "who pays, suggests his government should pay, or promises a sports franchise or any single voter that it will pay money towards building a stadium or refurbishing an existing one, that official will be sentenced to a life of hard labor in a Federal penitentiary." This may be a bit extreme, but the sentiment is appealing. A constitutional amendment prohibiting any kind of Federal, state, or local corporate welfare would be a solid policy change, though perhaps nearly impossible to turn into political reality.

Raymond J. Keating is chief economist, the Small Business Survival Committee, Washington, D.C., and a partner with Capitol Hill Research, a political and economic analysis service. This article is based on a Cato Institute Policy Analysis.

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