77K- Regional Economist • April 2001

- • • • ' • • • ' • • ' " " " " • " • " —

Should Cities Pau for

Sports "We play the Star-Spangled

Banner before every game—

you want us to pay taxes, too?"

—Bill Veeck

Faculties?by Adam M. Zaretsky

Americans love sports. Watching the home team in any

of the four major sports—baseball, football, basketball and

hockey—march to victory in the World Series, Super Bowl,

NBA Finals or Stanley Cup Finals arguably generates more

excitement and local pride in a town than any other event.

Fans love when the hometown boys win. But even when they

don't, fans stick by their teams. By and large, so do the cities

these teams play in. In fact, cities with home teams are often

willing to go to great lengths to ensure they stay home. And

cities without home teams are often willing to dangle many

carrots to entice teams to move. In either case, the most visi-

ble way cities do this is by building new stadiums and arenas.

CRACKER JACK1" is a registered trademark used by Frito-Lay

[5]

Between 1987 and 1999, 55 stadiumsand arenas were refurbished or built inthe United States at a cost of more than$8.7 billion.1 This figure, however,includes only the direct costs involved inthe construction or refurbishment of thefacilities, not the indirect costs—such asmoney cities might spend on improvingor adding to the infrastructure needed tosupport the facilities. Of the $8.7 billionin direct costs, about 57 percent—around$5 billion—was financed with taxpayermoney. Since 1999, other stadiums havebeen constructed or are in the pipeline(see table on page 8), much of the costof which will also be supported withtax dollars. Between $14 billion and$16 billion is expected to be spent onthese post-'99 stadiums and arenas,

N.Y., and began charging admission,making it the first recorded baseball"stadium" in the United States. Thefacility was quite attractive to the fledg-ling sport of baseball because it enabledthe exclusion of non-paying spectatorsand impressed the up-and-coming play-ers, for whom teams were beginningto compete. By the time the NationalAssociation was formed in 1871, ownersof such enclosed ballparks had a distinctadvantage in the competition for teams.

In many ways, not much has changedsince then. Teams today are still attractedby modern facilities, and cities go outof their way to provide them. In otherways, though, much has changed.Nowadays, facilities are not usuallyowned privately by individuals, but,

The u O l m r S being inuested in sports facilitiesare quite substantial considering the ouerall contribution

the industry makes to the BCOllOltllJ

with somewhere between $9 billion and$11 billion of this amount coming frompublic coffers. The use of public fundsto lure or keep teams begs several ques-tions, the foremost of which is, "Arethese good investments for cities?"

The short answer to this question is"No." When studying this issue, almostall economists and development special-ists (at least those who work independ-ently and not for a chamber of commerceor similar organization) conclude that therate of return a city or metropolitan areareceives for its investment is generallybelow that of alternative projects. Inaddition, evidence suggests that citiesand metro areas that have invested heav-ily in sports stadiums and arenas have,on average, experienced slower incomegrowth than those that have not.

Why, then, would cities engage insuch activities? This question is actuallyharder to answer than the former onebecause, more often than not, the rea-sons cited are not quantifiable. In otherwords, the reasons are not as easilymeasured as, say, costs, because theyinclude many intangible variables, suchas civic pride and political self-interest.Moreover, cities generally justify thesedecisions—and convince taxpayers oftheir virtue—with analyses that manyeconomists consider suspect becausethe studies generally overlook somebasic economic realities.

Not Always Built with Tax Dollars...

In 1862, William Cammeyer enclosedthe Union Club Grounds in Brooklyn,

rather, publicly by a government agency.And even though public financing of sta-diums is a more common practice today,cities did pony up for a few of the older,well-known stadiums in times past.

Some prime examples of government-owned stadiums from yesteryear arethe Los Angeles Coliseum and SoldierField, both of which are still in use today.Other famous venues, such as FenwayPark, Ebbets Field, Wrigley Field, YankeeStadium and the original Comiskey Park,were all privately financed and owned.In fact, prior to World War II, of the 28major league sports facilities that werebuilt—for which data are available—only five were paid for in part or wholewith taxpayer dollars.2 Since WorldWar II, however, of the roughly 140sports facilities that have been builtor refurbished, only 14 did not usetaxpayer dollars.

...But When They Are, Are TheyWorth It?

The dollars being invested in sportsfacilities are quite substantial consider-ing the overall contribution the industrymakes to the economy. In testimonybefore the U.S. Congress, economistRobert Baade said that Chicago's profes-sional sports industry—which includesfive teams—accounted for less thanone-tenth of 1 percent of Chicago's1995 personal income.3 Baade furthercommented that even when comparedwith the revenue of other industries,professional sports teams contributesmall amounts to the economy. He

[6]

noted, for example, that "the sales rev-enue of Fruit of the Loom exceed [ed]that for all of Major League Baseball(MLB), while the sales revenue of Sears[was] about thirty times larger than thatof all MLB revenues."

Still, cities are driven by the idea thatplaying host to professional sports teamsbuilds civic pride and increases local taxreceipts from the team-related sales andsalaries. When it comes to salaries, how-ever, economist Mark Rosentraub notedin a 1997 article that there is no U.S.county where professional sportsaccounts for more than 1 percent ofthe county's private-sector payroll.

Although sports facilities certainlygenerate tax revenues from their sales,the pertinent question is whether theserevenues are above and beyond whatwould have occurred in the region any-way. To address this question, city pro-posals to use taxpayer money to financesports facilities are routinely accompa-nied by "economic impact studies."These studies, which are often commis-sioned by franchise owners andconducted by an accounting firm orlocal chamber of commerce, generallyuse spurious economic techniques todemonstrate the number of new jobsand additional tax revenues that will begenerated by the project. The assump-tions that are made in these studies—such as how much of the newly generatedincome will stay in the region and howmany "secondary" jobs will be created—often cannot be substantiated by eco-nomic theory.

Estimates of income that will be gen-erated and, hence, spent in the regionare often overstated. Most of the "big"money in sports goes to the owners andplayers, who may or may not spend themoney in the hometown since manylive in other cities. And because athleticcareers are usually short-lived, muchof the players'income is invested.Moreover, league rules often requireticket revenues be shared with franchiseowners in other cities as a way to subsi-dize teams in smaller markets. In the caseof the National Football League, everyvisiting team leaves town with 34 per-cent of the gate receipts from each game.

On top of all this, the value of thesubsidy a team receives when a cityfoots the bill for a new stadium or arenaoften shows up as a higher team resaleprice, which then ends up in the owner'spocket. For example, Eli Jacobs boughtthe Baltimore Orioles for $70 million in1989, just after the team had convincedthe state of Maryland to build it a new$200 million ballpark from lottery rev-enues. The enormously popular OriolePark at Camden Yards opened in 1992.The following year, Jacobs sold the

Orioles for $173 million. The sale net-ted Jacobs an almost 150 percent return,with no money out-of-pocket for thenew ballpark.4

And the Dollars Keep Turning Over

Economic impact studies also tend tofocus on the increased tax revenues citiesexpect to receive in return for theirinvestments. The studies, however, oftengloss over, or outright ignore, that thesefacilities usually do not bring new rev-enues into a city or metropolitan area.Instead, the revenues raised are usuallyjust substitutes for those that would havebeen raised by other activities. Any stu-dent of economics knows that house-holds have budget constraints that arebinding, which means that familieshave only so much money to spend,particularly on entertainment. If thefamily chooses to spend the money atthe ballpark, for example, then thosefunds cannot be spent on other activi-ties. Thus, no new revenues are actuallybeing generated.

Public funds used for a stadium orarena can generate new revenues for acity only if one of the following situationsoccurs: 1) the funds generate newspending by people from outside the areawho otherwise would not have come totown; 2) the funds cause area residents tospend money locally that would not havebeen spent there otherwise; or 3) thefunds keep turning over locally, thereby"creating" new spending.

Very little evidence exists to suggestthat sporting events are better at attract-ing tourism dollars to a city than otheractivities. More often than not, touristswho attend a baseball or hockey game,for example, are in town on business orare visiting family and would have spentthe money on another activity if thesports outlet were not available.5

Economists Roger Noll and AndrewZimbalist have examined the issue indepth and argued that, as a general rule,sports facilities attract neither tourists nornew industry. A good example, onceagain, is Oriole Park at Camden Yards.This ballpark is probably the most suc-cessful at attracting outsiders since it isonly 40 miles from the nation's capital,where there is no major league baseballteam. About a third of the crowd at everygame comes from outside the Baltimorearea. Noll and Zimbalist point out that,"Even so, the net gain to Baltimore'seconomy in terms of new jobs andincremental tax revenues is onlyabout $3 million a year—notmuch of a return on a $200million investment."6

The claim that sport-ing facilities cause

VicRrgipnnl Hcvnouiist • Apri l 2001

- • • • ' • - ' • • • » = • • " = " " • " • " —

residents to spend more money in townthan they would otherwise is harder tosubstantiate. To prove such a claim, theagency performing the analysis wouldneed for its report both detailed infor-

IW THE PIPELINE• Plans for new stadiums often count on taxpayers' support.

Team or City

Cincinnati Reds

Seattle Seahawks

St. Louis Cardinals

San Diego Padres

Chicago Bears

Houston (new NFL)

Philadelphia Eagles

Philadelphia Phillies

Boston Red Sox

New England Patriots

Total

280430370411587310395345550325

Public Dollars

2803002502753871952341742000

Percent Public

10070686766635950360

I^HBBBHBBBHBBBHHiSOURCE: Teams and local newspapers

mation about the spending patterns ofhouseholds and the ability to ferret outthe information about their spending inother regions, which, at best, is extremelydifficult and may even be impossible.Without such information, the report'sauthors could back into this claim onlywith some fancy footwork and shakyassertions. That is, they would have tocontend that residents are spendingmore in town because of higher incomesthat enable households to devote moreof their entertainment budgets towardlocal sporting events. Then, the authorswould have to demonstrate thatincomes arc up because money wasspent on the stadium. If they can't, theargument falls apart since the only con-clusion is that incomes rose for unre-lated reasons; throwing tax dollars atthe stadium did not affect households'spending patterns.

Multipliers: A StadiumPromoter's Friend

Of the three circumstances describedthat purportedly generate new revenues,the third—funds keep turning overlocally, thereby "creating" new spend-ing—is probably the most spurious froman economist's viewpoint. Such a claimrelies on what are called multipliers.Multipliers are factors that are usedas a way of predicting the "total" effectthe creation of an additional job or thespending of an additional dollar willhave on a community's economy. Itworks something like this: A stadiumis built, which creates new jobs in theregion. Because more people are work-

ing, they spend money in the area (forlunch, parking, etc.), which in turnrequires local businesses to hire addi-tional workers to support the increaseddemand. These extra workers furtherincrease demand for goods and ser-vices in the area, requiring more newjobs...and so on. That is, the dollarskeep turning over locally. The story isthe same for fans spending money atthe arena, which provides income forarena workers, who then spend themoney, generating incomes for otherworkers...and so on.

On their faces, these are compellingarguments. Some researchers have evenattempted to quantify these effects,developing precise multipliers that tellanalysts how much the new spendingor job creation should be "multiplied"by to arrive at the "total effect" thespending or job creation will have onthe local economy. These multipliersare often specific enough to distinguishbetween various industries, occupationsand locations. Thus, economic develop-ment specialists and planners willgenerally latch onto multipliers andconfidently proclaim that the 1,000new jobs created by this industry willactually create 4,355 new jobs and gen-erate $5.5 million in new revenue inthe community when all is said anddone.7 Makes for great headlines,but are such outcomes believable?

Probably not. As Mark Twain oncesaid: "It's not what we don't know thathurts. It's what we know that just ain'ttrue." For one thing, these new jobsmost likely just lure workers away fromother jobs in town and do not actuallylead to a net change in jobs in the area.For another, many of the jobs are low-paying, part-time and needed only ongame days. Moreover, authors of theseeconomic impact studies often choosemultipliers arbitrarily or with clients'wishes in mind to get the desired out-come. As economist William Hunterhas pointed out, multiplier analysis canbe used to justify any public worksproject because "even the smallestmultiplier will guarantee communityincome growth in excess of publicexpenditures."8

Even if economic impact studies aretaken at face value, however, the costof creating these jobs is usually out ofthe ballpark. In Cincinnati, for exam-ple, when two new stadiums were pro-posed to keep the NFL Bengals and theMLB Reds in town, the economicimpact study claimed that 7,645 jobswould be created or saved because ofthe stadium investment. Since theproject was estimated at $520 million,each new or saved job was reported tocost about $68,000.

[8]

When economists John Blair andDavid Swindell examined the $68,000figure a bit closer, though, they discov-ered it was too low because the study'sestimate of 7,645 new or saved jobswas too high. Blair and Swindell thenre-evaluated the report, corrected fordouble-counting and other problems,and concluded that only 3,530 jobswould be created or saved if the stadiumproposal passed. Thus, the cost per jobwas actually going to run more than$147,000. In contrast, state economicdevelopment programs spend about$6,250 per job to create new jobs.9

Those Old Economic Saws

Another glaring omission from theseeconomic impact studies is the value ofthe next-best investment alternative—what economists call the opportunitycost. "There's no such thing as a freelunch" is a favorite economist expres-sion because it sums up exactly whatopportunity cost means: When makinga choice, something always has to begiven up. The value of the "losing" choicemust be considered when making thedecision and when calculating the value,or return, of the "winning" choice. Inother words, when a city chooses to usetaxpayer dollars to finance a sports sta-dium, the city's leaders must considernot only what the alternative uses ofthose funds could be—such as schools,police, roads, etc.—but they must alsofigure what return the city would receivefrom these other ventures. Then, thereturn from the city's next-best alterna-tive (for example, schools) must besubtracted from the total return of the"winning" choice to arrive at the "actual"return of the stadium investment. Thisadjusted calculation, though, is almostalways missing from sports stadiumimpact studies. Why? Because in justabout every case, the adjusted calculationwould show that the next-best alterna-tive was actually the better alternative.

Has financing sports stadiums everbeen the best alternative? Researchshows "No." In their book, Noll andZimbalist—along with 15 other collabo-rators—examined the local economicdevelopment argument from a widevariety of angles. In every case, the con-clusions were the same. "A new sportsfacility had an extremely small (perhapseven negative) effect on overall economicactivity and employment. No recentfacility appears to have earned anythingapproaching a reasonable rate of returnon investment. No recent facility hasbeen self-financing in terms of itsimpact on net tax revenues. Regardlessof whether the unit of analysis is a localneighborhood, a city, or an entire met-

ropolitan area, the economic benefitsof sports facilities are de minimus."10

In fact, research has shown that sub-sidizing sports facilities usually does notaffect a city's growth and, in some cases,may even hurt growth since funds arebeing diverted from alternatives withhigher returns. In a 1994 study thatexamined economic growth over a30-year period in 48 metropolitan areas,Robert Baade found that of the 32 metroareas that had a change in the numberof sports teams, only two showed asignificant relationship between thepresence of a sports team and real per-capita personal income growth. Thesecities were Indianapolis, which saw apositive relationship, and Baltimore,which had a negative relationship.

Moreover, Baade found that of the30 metro areas where the stadium orarena was built or refurbished in theprevious 10 years, only three areasshowed a significant relationshipbetween the presence of a stadiumand real per-capita personal incomegrowth. And in all three cases—St. Louis, San Francisco/Oakland andWashington, D.C.—the relationshipwas negative.

The "Build It and They WillCome" Syndrome

Cities go to great lengths to lure anew team to town or to keep the hometeam home. They feel compelled tocompete with other cities that offernew or updated facilities; otherwise,the home team might make good onits threat to leave. The weight of eco-nomic evidence, however, shows thattaxpayers spend a lot of money andultimately don't get much back. Andwhen this paltry return is comparedwith other potential uses of the funds,the investment, almost always, seemsunwise. Still, cities eagerly proposespending the funds, and taxpayerswillingly support the proposals. Why?Because home teams strike an emotionalchord with the community—that intan-gible "civic pride" is evidently a powerfulforce. Thus, attacks on stadium propos-als, no matter how persuasive, likelyfall on deaf ears. More-convincingarguments would spell out the civicinitiatives—education, housing andtransportation, for example—that arepassed over or forgotten in favor ofa new stadium.

Adam M. Zaretsky is an economist in the ResearchDivision of the Federal Reseive Bank of St. Louis.Paige M. Skiba and Abbigail J. Chiodo providedresearch assistance.

TheRiyoiml l:coitoiiiift • April 2001

wwvw.stls.frb.org

ENDNOTES

1 This sum is about $10.7 billion in2000 dollars. These data are fromKeating (1999).

2 See Table 1 in Keating (1999) for acomplete list of these facilities.

3 See Roberts, et. al. (1995).

4 See Lane (1994).

5 See Noll and Zimbalist (1997a),chapters 2 and 15.

6 See Noll and Zimbalist (1997b).

7 This example is hypothetical andsolely for expository purposes.

8 See Hunter (1988).

9 See Noll and Zimbalist (1997a),chapter 9 (Blair and Swindell) fordetails.

10 See Noll and Zimbalist (1997b).

REFERENCES

Baade, Robert A. "Professional Sportsas Catalysts for MetropolitanEconomic Development/'/oM/™/ ofUrban Affairs (Spring 1996), pp. 1-17.

. "Stadiums, ProfessionalSports, and Economic Development:Assessing the Reality," The HeartlandInstitute, Heartland Policy StudyNo. 62 (April 4,1994).

Baseball Almanac. http://baseballal-manac.com/stadium.shtml

Bast, Joseph L. "Sports StadiumMadness: Why It Started, How ToStop It," The Heartland Institute,Heartland Policy Study No. 86(February 23,1998).

Hunter, William J. "Economic ImpactStudies: Inaccurate, Misleading,and Unnecessary," The HeartlandInstitute, Heartland Policy StudyNo. 21 Quly22,1988).

Keating, Raymond J. "Sports Pork: TheCostly Relationship Between MajorLeague Sports and Government,"Cato Institute, Cato Policy AnalysisNo. 339 (April 5,1999).

Lane, Randall. "Bread and Circuses,"Forbes (June 6,1994), pp. 62-65.

Merrifield, John. "A NeoclassicalAnatomy of the Economic BaseMultiplier, "Journal of Regional Science(May 1987), pp. 283-94.

Mutti, John. "Regional Analysis fromthe Standpoint of InternationalTrade: Is It a Useful Perspective?"International Regional Science Revieio(Winter 1981), pp. 95-120.

Noll, Roger G., and Andrew Zimbalist,eds. Sports, Jobs and Taxes: TheEconomic Impact of Sports Teams andStadiums (Brookings InstitutionPress,1997a).

. "Sports, Jobs, and Taxes:Are New Stadiums Worth the Cost?"The Brookings Rcvirw (Summer1997b), pp. 35-39.

Roberts, Gary R., Stephen F. Ross, andRobert A. Baade. "Should CongressStop the Bidding War for SportsFranchises?" Hearing before theSubcommittee on Antitrust, BusinessRights, and Competition, SenateCommittee on the Judiciary(November 29,1995).

Rosentraub, Mark S. "Are Tax-fundedSports Arenasa Good'Investmentfor America's Cities?"Insightjjfcepternber 27,1-997), pp. 25-27.

Siegfried, John, and Andrew Zimbalist."The EoonprrVies.of Sports Facilities-.and Their Communities," Journal of*' -Economic Perspectives (Summer 2000),pp. 95-il4. ' ' ' : ' " ' ' ; •

[9]