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- Editor's Note Updated 12/03/1999 -

November 29, 1997

Public Funded Fresno Stadium

Gross Overestimate Of Economic Benefits
Understated Economic Costs

By Howard Hobbs, Daily Republican Contributing Editor

FRESNO - City Hall still has a sports stadia hysteria going in full bloom this week. Mayor Patterson is moving to recoup a City Hall deal with the Diamond Group tabled by the City Council recently. But, Fresno taxpayers have an allergic reaction to public funding of trivial pursuits and pastimes like publicly funded baseball. There is good reason for caution. The economic impact of sports stadiums has long term consequences.

Taxpayers say the sports fans who receive the benefit of stadiums should pay the bill. But, the relationship of benefit to burden is not well understood by elected politicians on the Fresno City Council who advocate the building of a downtown baseball stadium [with potential for other uses] that will be subsidized through general obligation bonding by the City.

In Fresno, like most other cities touting minor league sports stadiums that would be publicly funded, City taxpayers are beginning to feel like a deer caught in the headlights of oncoming traffic.

Dennis Zimmerman, of the Congressional Research Service at the Library of Congress, was interviewed on C-SPAN's Washington Journal Thanksgiving Day.

Zimmerman told his early morning audience that proponents of municipal owned sports stadia often distort the true facts in their zeal to convince the unwary. Even local economists caught up in the hysteria lend their support to such promotions by suggesting that such sports generate enough economic activity to pay for themselves and therefore it shouldn't be any concern that the public sector is subsidizing their construction and start-up cost.

There is, however, ample empirical evidence on this subject. Based upon close examination of the true facts, The DR has concluded that there will never be enough extra-taxes generated by a publicly funded baseball stadium in downtown Fresno to make it a painless experience for Fresno taxpayers.

Partisan forecasts made by some local economists have grossly overestimated the economic benefits and understated the economic costs of the Diamond Group's proposed publicly funded minor league baseball team stadium.

Taking the Diamond Group's proposal on face value, the Daily Republican Newspaper examined a number of cases and found this to be true in every case of a municipal stadium project in the past few years.

Some of the publicly funded sports stadia cost $200 million or more. These municipalities are located in Baltimore, Charlotte, Chicago, Cincinnati,Cleveland, Milwaukee, Nashville, San Francisco, St. Louis, Seattle, Tampa, and Washington, D.C.

Still others have been announced by various municipalities in the planning stages include Boston, Dallas, Fresno, Minneapolis, New York, and Pittsburgh.

Still other major publicly owned stadium renovations have obligated taxpayers in Jacksonville and Oakland.

Worse yet, building industry experts for this type of municipal construction job estimate that more than $7 billion in municipal tax resources will be spent on new sports facilities for professional sports teams before the year 2006.

Most of this $7 billion will come from the public treasury as a subsidy. This is a profitable incentive for professional sports team owners who would otherwise be required to obtain conventional financing at convention al interest rates. So, the City Hall municipal government sweetens the deal by issuing tax-exempt bonds to help finance sports facilities.

Owners of professional sports franchises like this method. 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. Taxpayers eat the losses and City Hall eventually ends up with an empty sports stadium after the sports franchise moves on to greener pastures. Taxpayers end up with an empty treasury at City Hall.

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.

This is common. Ten of these municipal sports 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.

Sports stadia now typically cost their host city about $10 million annually. Even the most successful new baseball stadium analyzed by the Daily Republican, Oriole Park at Camden Yards, costs Maryland residents $14 million a year. 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 few have the will to deplete the public treasury at City Hall to obtain a minor league sports team, as has been announced in Fresno.

The economic rationale for any cities' willingness to subsidize sports facilities seems to be the essence of the campaign slogan for a new stadium for the San Francisco 49ers Build the Stadium--Create the Jobs! Proponents there claim that sports facilities improve the local economy in four ways.

Proponents make an over-simplified argument that building a sports stadium does create construction jobs. And, people who attend games or work for the team generate new spending in the community, expanding local employment. Usually, a team attracts tourists and companies to the host city, further increasing local spending and jobs. Moreover, all this new spending has a multiplier effect as increased local income causes still more new spending and job creation.

In Fresno, public stadium advocates were even arguing that the new stadium would spur so much economic growth that it would be self-financing.

If that argument held water, it would mean that the City Hall subsidy would be offset by revenues from ticket taxes, sales taxes on concessions and other spending outside the stadium, and according to Council member Dan Ronquillo, the property tax valuation increases of ' of one percent...' arising from the stadium's economic impact.

Fundamentally flawed, these arguments contain bad economic theories that lead to overstatement of the benefits of stadiums and a complete covering-up of the true costs of such expenditures over time.

Anyone who knows economics fundamentals is aware that economic growth takes place only when Fresno's resources [people, capital investments, and natural resources like land] become more productive. Increased productivity, it will be remembered, can arise in two ways. One of these comes from economically beneficial specialization by the community for the purpose of trading with other regions. The other, comes from local value added that is higher than other uses of local workers, land, and investments.

When is building a publicly financed stadium good for the Fresno economy? Only when a stadium is the most productive way to make capital investments and use Fresno workers.

Readers will be shocked at the waste of public resources on the current sports stadium hype across this nation. Before, leaping into this form of municipal irresponsibility, carefully examine the Fresno City Council member's local economic development argument. The DR took a close look at the other Cities going down the public financing road and analyzed the effect of specific facilities, and made comparisons among cities that have and have not sunk hundreds of millions of dollars into sports development.

Zimmerman also made detailed economic analyses of business records on file with the Library of Congress for those same municipalities we examined. What the Library of Congress economists found was that a new sports facility has an extremely small effect on overall economic activity and employment in any geographic area where it is located.

Not surprisingly, there was not one stadium that earned anything approaching a reasonable return on investment. Worse yet, not one recent facility has been self-financing in terms of its impact on net tax revenues.

It did not seem to matter whether the economics was confined to local neighborhoods, a municipality, or an entire metropolitan statistical area, the economic benefits of sports stadia are not profitable for City Hall.

Sports stadia attract neither tourists nor new industry. Probably the most successful one studied was the one in 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 a half-hour from Washington D.C. which has no major league baseball team.

Still, the net gain to Baltimore's economy in terms of new jobs and incremental tax revenues has been only about $3 million a year - not much of a return on a $200 million public expenditure.

Most professional major league players make inflated salaries for only a few years. Those on the minor league teams are not paid well. As a result there is a lot of player movements in and out of an area where the farm team has its stadium.

Finally, though a minor league baseball stadium in Fresno might draw good attendance, ticket revenues are shared in baseball with ticket purchases for major league games in the Southern California and the Bay Area. On balance, these factors are largely offsetting, leaving little or no net local Fresno export gain to this 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 and imply that those kinds of gains could be realized in the Fresno sports market, which will never happen.

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.

It appears that Fresno promotional economists' statements also may have selectively ignored differences between sports and other industries in income distribution. Most Fresno sports revenue would go to a relatively few managers, coaches, and executives who typically earn extremely high salaries well above the earnings of people in Fresno who work in the industries that are substitutes for sports.

In fact, 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.

Another overly simplified argument made in support for the Fresno municipal stadium is that stadiums generate more local consumer satisfaction than alternative investments. The fallacy of that argument is that professional baseball teams are very small businesses that capture public attention far out of proportion to their economic significance.

Because radio, television broadcast, and newspapers give so much attention to baseball and other sports events many people who are fans do not actually attend baseball games or buy sports-related products. The benefit enjoyed by consumers who follow sports but do not purchase baseball game tickets is a sort of 'public good' the value of which cannot be known. And clearly that 'public good' is not shared by everyone. As a result, sports fans are likely to accept higher taxes or reduced public services to attract or keep a minor league team in Fresno, even if they do not attend games themselves. This is a support group that may or may not constitute a base of political support for publicly subsidized baseball in Fresno.

Moreover, even a minor league baseball subsidy in Fresno would be a monopolistic structure unworthy of public finance. Why? Baseball leagues maximize their members' profits by keeping the number of franchises below the number of cities that could support a team. To attract and keep even a minor league baseball team, for example, Fresno City Hall must compete through a bidding war, whereby other municipalities bid its willingness to pay to have a team, not the amount necessary to make a team viable. So, here, suspicion immediately arises as to the extent of Fresno City Council members involvement in negotiations (bidding wars) behind closed doors in violation of the public meeting law, the Brown Act.

This should be a major concern for local Fresno taxpayers. Monopoly leagues convert City Council member willingness to pay for a team into an opportunity for teams to extract tax revenues. In most cases, local and state governments have paid over $100 million in stadium subsidy, and in some cases have financed the entire enterprise through political leverage brought to bear on local public officials. Is there some reason to expect that Fresno City Hall would not be subjected to this practice, as well?

The tendency of baseball teams to seek new homes has given rise to the elaborate stadia that feature numerous new revenue opportunities such as luxury suites, sky boxes, elaborate concessions, catering, signage, advertising, theme activities, and even hot-tubs & bars, restaurants, and adult entertainment 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.For this reason, stadium proponents seek to maintain architectural control of design and construction.

Abuses from exorbitant stadium packages, sweetheart leases, and footloose franchises, have left many citizens and politicians crying foul.

Whatever the costs and benefits to Fresno taxpayers 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.

In 1996 senator Daniel Patrick Moynihan(D), 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 Fresno City Hall might respond this way, it would still compete among other municipalities for scarce franchises, so to some extent the likely effect of the bill is to pass higher interest charges on to cities, not teams.

The relevance of antitrust to the problem of stadium subsidies is indirect but important. Private antitrust actions have significantly limited the ability of baseball 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.

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.

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 flow 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.

The final potential source of reform is taking root in places like Fresno. Behind the scenes there is a deep grassroots political reaction against granting a subsidy to a pastime like minor league baseball. Especially for use in the most blighted part of the City, downtown no-man's land.

Stadium politics have proven to be quite deadly in Fresno for these many reasons. To the chagrin of stadium promoters, some Fresno taxpayers 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, executives and those with leisure time necessary for the pursuit of pastimes like baseball games in the early afternoons. Ordinary folks are at work while idlers and gamblers are at play.

Voters rejected public support for stadiums on ballot initiatives in Milwaukee, San Francisco, San Jose, and Seattle, although no major league team has failed to obtain a new stadium.

Still, more guarded, conditional support, and empty political war chests can cause City Hall to be less concerned about negotiating stadium deals than carrying out the necessary and routine functions of getting the most bang for the tax revenue buck in delivering well organized and limited City governance. That is the function of an informed public electorate and the role of this newspaper in achieving it.

[Editor's Note: Related economic analyses are available on-line in an excellent article at The Brookings Review, Summer 1997, vol 15, no. 3]

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