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Public Funds for Professional Sports Arenas� Stadium Issues

USAToday: The excitement from that playoff run (in 1997), and the excitement you provided as a young superstar, saved baseball in Seattle. Do you feel in some way that Safeco Field is the House That Junior Built?

Ken Griffey, Jr.: No. The people of Seattle built it. They’re the ones who went out and said “yes” to keep this ballclub here. The 25 guys on the field helped, but it was eventually the people of Seattle who said they wanted the ballpark and wanted the team to stay. They could have said “no” and we would have ended up somewhere else.

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Building Stadiums

Cities dream that a new stadium will work wonders
They hope that it will attract new tourists who will

Generously spend before, during, and after the game and see other points of interest in the city

They see this as a way to revitalize old cities
They hope that fans will identify with the team
“New” is a key word

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The Sports Building Boom Continues

2000-2010--$17 billion + of new major league stadium and arena construction in USA expected to be completed.
Most of that in the US financed by taxpayers.
Includes:

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Lucas Oil Stadium Indianapolis�About $600 million public money

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Nationals Park Washington, DC�$611 million public money

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SoFi Stadium�$100 million in reimbursements

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Teams Benefit From New Facilities

Construction costs for football and baseball stadiums now approach or exceed $1 billion

Even basketball arenas cost over $600 million

Ebbets Field, a extravagant structure, cost $750,000 when it was built in 1913

Accounting for inflation, this is equivalent to a little over $17 million in 2011
Something has changed!

Broadcast serves as a substitute

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LUXURY BOXES

NFL teams retain most of the revenue from luxury boxes
The average NFL team has 140 luxury boxes,

Over 50 percent more than in the NHL, which has the second most boxes

The NFL’s reliance on luxury seating is still growing

Table 6.1 shows financial and luxury seating information for the five most valuable NFL teams in 2010
They also have the five highest revenue streams

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The “Honeymoon Effect”

Studies show that a new park brings higher attendance for about 10 years in baseball
The effect is shorter for other sports

Baseball games do not typically sell out, so there is more room for growth

Eventually, attendance is a result of wins

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The League Role in the Stadium Mess

Leagues maintain an artificial scarcity of teams. The league leaves credible threat locations open.
Existing owners are endowed with bargaining power for subsidies.
Build it, and they might come. Fail to meet subsidy demands, and viable threat locations will become new homes to unsatisfied owners.

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Public Funds: �Uneven Playing Field

Given the nature of Professional Sports Leagues there are more cities who want teams than teams available.

Team owners have a credible threat.
Cities do not.

Major sports leagues are monopolies. As a result, cities are thrust into competition with one another to procure or to retain teams. A bidding war results whereby cities pay their maximum willingness to pay for a team (Noll and Zimbalist 1997).
So what determines the willingness to pay?

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Theory of public funds

Public Choice Theory—

Large gains to a few, small costs to many.

Winner’s Curse—

City who wins bid for team overestimates worth.

Public Funds are efficient—

Benefits to city from team outweighs cost of public funds.

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A Public Choice Perspective

James Buchanan won the Nobel Prize for his work in this field
Politicians act “economically”

Pursue own self-interest
Linked to political fortunes

Interest groups press own agenda
Highly organized groups have advantage

Well-defined goals
Access to political power

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Rational Actor Politics

If voters pursue self-interest, and politicians wish to garner their votes, then representative democracy typically will produce a predictable result:
Benefits will go to politically powerful special interest groups while the costs of providing these benefits will be dispersed over those without political power.
If a group is not fighting for you on a particular issue, you will tend to pay rather than receive!

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Rational Actor Result

Politicians know that only subsets of their constituency will ever vote in the first place. So politicians satisfy groups that figure prominently in reelection.
Concentrated groups get the benefits of political actions. Rationally ignorant non-participants pay the costs.
Large benefits to a few; large cost to many

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Winner’s Curse

The winner's curse is a phenomenon that may occur in common value auctions, where all bidders have the same (ex post) value for an item but receive different private (ex ante) signals about this value and wherein the winner is the bidder with the most optimistic evaluation of the asset and therefore will tend to overestimate and overpay.
Example

City A $100 million
City B $90 million
City C $70 million
City D $50 million
True value $75 million
Winner’s curse $15 million

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Winner’s Curse

The winner's curse occurs in four situations in the sports economy. When bidding to host a mega-sporting event, the winner's curse reveals in cost overruns. When bidding to attract a sport franchise, it appears that the host city is not better off. When television channels bid to acquire broadcasting rights over a sport event, they pay more than its value. When teams are overbidding to recruit free agent and superstar players, they happen to end up in the red. Indices are suggested to verify the existence of a winner's curse in the four cases.

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One Justification for Public Funding

Sports are said to produce tangible economic benefits for the community at large

More jobs
Higher incomes
Increased tax revenues

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Direct Benefits

The direct benefit of the Cubs to Chicago is the new spending the team generates
New spending takes one of two forms

The Cubs might cause Chicagoans to spend more—and save less—than they otherwise would
More importantly, the Cubs stimulate net exports by Chicago

The Cubs sell their games to “foreigners”—residents from outside of Chicago

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Estimating the Size of Benefits

According to the Fan Cost Index, a family of four would spend ~$300 on a trip to Wrigley Field in 2012
If the renovations to Wrigley Field attract 250,000 additional fans and the index remains unchanged

They will generate over $18 million in additional spending per year

This overstates the impact on Chicago

Cubs fans would have spent much of that money elsewhere in Chicago if there had been no renovation to Wrigley Field or even if Wrigley Field did not exist

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Direct Impacts are Often Overstated

Proper evaluation must count only new spending

Much spending on teams is just reallocated
It would have been spent on another local activity

Teams are often conduits – not magnets

Revenue comes in – but it also goes out
Team pays salaries to players who live elsewhere
Items sold at concessions are typically made elsewhere

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The Direct Benefits are Small

MLB generates less revenue than Fruit of the Loom
Three cities have all 4 major sports within city limits

Chicago, Denver, and Philadelphia
Chicago has 5 teams inside the city
The 4 sports combined account for less than ½ of 1% of total personal income in each city

The immediate effect of a new stadium on a city is thus small

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Multiplier Effects

The direct effect is amplified by indirect effects

More spending generates additional income
Higher incomes increase spending

It is like throwing a pebble in a lake

The pebble generates ripples across the lake
The impact of a team spreads through the economy

Ripples in a lake slowly fade away

The impact on the economy also fades to zero
What determines the size of the ripples?

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effectively, $4 million is spent in the economy.

Here, a $1,000,000 injection is spent, received as payment, saved and spent, received as payment, saved and spent … etc. … until …

Expenditure

stage

Additional income�(dollars)

Marginal propensity �to consume

Additional consumption�(dollars)

For simplicity (here) it is assumed that all additions to income are either spent domestically or saved.

1,000,000

750,000

562,500

421,875

316,406

949,219

750,000

562,500

421,875

316,406

237,305

711,914

Round 1

Round 2

Round 3

Round 4

Round 5

Total

4,000,000

3,000,000

All others

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The Multiplier Principle (Exhibit 1)

The multiplier concept is fundamentally based upon the proportion of additional income that households choose to spend on consumption: the marginal propensity to consume (here assumed to be 75% = 3/4).

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The Multiplier Principle

The term multiplier is also used to indicate the number by which the initial change in spending is multiplied to obtain the total increase in output.

In the previous example, a $1 million initial increase in spending expanded output by a total of $4 million. Thus the multiplier was 4.
The size of the multiplier increases with the �marginal propensity to consume (MPC).
Specifically the relationship between the MPC and the multiplier follows this equation:

M =

1 - MPC

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The Marginal Propensity to Consume (Mpc)

The MPC shows how much of the added income a consumer spends (ΔC/ΔY)

MPS = marginal propensity to save
MPC +MPS = 1

A bigger MPC means bigger ripples

Added income generates more spending

Bigger ripples mean a bigger multiplier
The multiplier adds the ripple effects

It includes direct and indirect effects
The total effect is a multiple of the direct effect

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The Open Economy Multiplier

In a closed economy, a person either consumes domestically or saves
In an open economy, a person can purchase goods from abroad
Purchases of imports do not have a domestic ripple effect
MPI = marginal propensity to import
In a city, imports come from outside the city

The multiplier becomes 1/(1-MPC+MPI)

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The Multiplier for a Sports Franchise

Players get much of a franchise’s income

Players have more reason to save than others

Their high incomes last only a few years
The wealthy have lower MPCs

Athletes’ low MPC reduces ripples & multiplier

Much income leaks out of the local area

Few players & executives live in town
Leakages are especially severe in smaller cities

People spend their added income elsewhere

Local multipliers are closer to 1 than to 10

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Studies of Economic Impact

Most studies examine how stadiums or teams affect economic variables

Median income, employment, or wages
They find little or no impact

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Economic Impact

Does the sports team:

Promote the general economic development of a metropolitan area.
Significantly assist in maintaining the vitality of the central city
Stimulate micro-development in a small defined district within the city

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BUT—They do not!

Mountains of evidence that sports produce

Few new jobs
No rise in incomes—perhaps even a fall in incomes
Little new tax revenue

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Another Justification for public Subsidy

Sports are said to produce Intangible Benefits—civic pride, community spirit, etc.
Paradox—the intangible benefits are highly visible, but their value is difficult to measure
Teams cannot sell these intangible benefits—People do not have to pay for them

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Economists Call these Intangible Benefits

PUBLIC GOODS

The problem with sports public goods—since the team cannot charge for them, the users of the public goods cannot be required to pay for the team or the stadium

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Public Goods Enjoyed Mostly by Fans

Reading about the team
Discussing the team
Listening to sports talk radio
Game-day parties
Fantasy leagues
Betting on games

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Sports Public Goods Everyone Enjoys

Championship pride
Civic pride in “major league” status
Community harmony--“It’s what the janitor, valet parker, lawyer, and venture capitalist can all talk about when they are in an elevator together.”

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Edmonton Oilers & Civic Pride

“[Cam Nichols] is the man who saved the Edmonton Oilers and with it, maybe a city. Certainly, a city’s identity.”—Scott Burnside, ESPN.com, June 9, 2006

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Civic Pride and City identity

Have influenced public policy explicitly in the case of the Pittsburgh Penguins.
They declared bankruptcy 1998 and were on verge of being sold to out-of-town owners and being moved out of Pittsburgh

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Importance of Sports Public goods

“The Penguins are as much a part of the warp and woof of this community as are its …museums, parks, theaters and ethnic neighborhoods. As important as [the creditors’] interests are, they may have to give way when the interest of the community at large so dictates.” -- U.S. Bankruptcy Judge Bernard Markovitz, March 1999

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But What is Civic Pride Worth?

Judge Markovitz did not put a dollar value on it.
Since no markets for civic pride, major league status, or community harmony exist, we don’t know what people are willing to pay, how much they want, or what the goods are worth.

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How do you measure value�of Public Good

Revealed Preferences

Travel Cost Method
Hedonic Price Method

wages and housing prices

Stated preferences

Contingent Valuation

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How Does a New Sports Stadium Affect Housing Values? The Case of FedEx Field
Charles C. Tu
Abstract
This study investigates how the construction of a sports stadium affects residential housing values. Hedonic analyses are conducted to assess the price differentials between housing units in close proximity to FedEx Field (home of the Washington Redskins) and comparable units away from it. Using a difference-in-difference approach, the study finds that properties near FedEx Field sold at a discount; however, this price differential was narrowed after the completion of the stadium. Contrary to neighborhood activists’ concern that sports venues adversely affect property values, the findings of this study indicate that a new stadium improves housing values in the surrounding area. (JEL R53, R31)

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City, Culture and Society

The impact of professional sports facilities on housing values: Evidence from census block group data
Xia Feng and Brad R. Humphreys
Abstract We estimate the effect of proximity on residential property values in US cities using a hedonic housing price model with spatial autocorrelation. Estimates based on all 1990 and 2000 Census block groups within five miles of every NFL, NBA, MLB, and NHL facility in the US suggest that the median house value in block groups is higher in block groups closer to facilities, suggesting that positive externalities from professional sports facilities may be capitalized into residential real estate prices. The existence of external benefits may justify some of the large public subsidies for construction and operation of professional sports facilities

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Overall Results

Recent studies have looked at property values

Property values reflect the desirability of a city to residents
Some studies find a positive impact

These findings now seem to stem from unique features of the data they used

Recent studies find a small impact that drops off rapidly as one moves away from the facility

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Contingent Valuation Method CVM

Contingent Valuation Method (CVM) surveys allow this to be estimated.
Developed by environmental economists.
People are asked their willingness to pay for public goods contingent upon a hypothetical scenario described to them in the survey.

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Types of Values

Use value
Non-use value

Existence value
Option value
Altruistic value
Bequest value

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Penguins Hypothetical Scenario

Play in oldest arena in NHL
Local owners might not have money to challenge for Stanley Cup
Team might have to leave Pittsburgh
Loss of Penguins would tarnish city image
Never again would Pitt have Stanley Cup

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How Much Would You Be Willing to Pay?

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Respondents asked about

PRIVATE GOODS—how many games do you attend?
PUBLIC GOODS:

Read
Discuss
Major league—on the map
Racial harmony
Celebrate Stanley Cup

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Respondents also asked about

Socioeconomic variables

Age
Sex
Income
Education
How long they have lived in town
Etc.

These questions allow us to correlate WTP to consumption of public goods, private goods, and socioeconomic variables

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Some interesting stats

Many people read about, discuss, etc.

In other words—widespread consumption of sports public goods

74% think Jags make Jax “major league”
43% think Jags improve race relations

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Perhaps Most Interesting of All

Willing to pay > 0

38% for NHL in Pittsburgh
46% for NFL in Jacksonville
38% for NBA in Jacksonville

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What Determines WTP?

Higher Income 🡺 higher likelihood of WTP
The more they read about or discuss the team, the more likely to be WTP.
Those who think team makes Jacksonville major league or who think it improves race relations are more likely to be WTP
Those who attend games
In Pittsburgh, people who experienced Stanley Cup were willing to pay more

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WTP for Sports Public Goods

Team (study year)	$millions (2006)
Pitt Penguins (2000)	$57
Jax Jaguars (2002)	$28
Jax NBA (2002)	$21
Alberta Amateur Sports (2006)	$189
Portland MLB (2003)	$60
London Olympics (2004)	$3849

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Implications

The value of public goods for all of these projects is far below the subsidies paid
But public good benefits do exist for sports teams so some public funds are efficient

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The Impact of Special Events

Special events are large, one-time events

They are also called mega-events because they tend to be larger than regular season games
Examples include the Super Bowl, World Cup, or the Olympics
There are not ongoing events, like a franchise

A special event is more likely to draw tourists from outside the region and thus have a greater impact on the local economy

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Retrospective Studies of � Mega-events

Does the Super Bowl bring in new money?

It is often held in tourist areas (e.g., Miami )
Does it just displace other tourists?

Porter’s study of the Super Bowl

Compares spending in counties with Super Bowls to those in counties that did not host one
Finds little or no impact

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Retrospective Studies of the Olympics

Baade and Matheson studied the 1984 Olympics

They found little effect on the Los Angeles economy
The Games brought some tourists in but kept others away

Conflicting findings for the 1996 Atlanta Games

Hotchkiss et al. find they increased employment and pay
Baade and Matheson claim the impact was transitory
Fedderson and Maenning confirm Baade and Matheson’s results

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Prospective Studies of�Mega-events

Event studies look at investors’ expectations

How does an event affect expected profits?
Can measure using stock market data
Can apply to specific firms or to entire economies

Several studies ask how the announcement that a country will host the Olympics affects stock markets
The findings are mixed

No impact found for Sydney Games in 2000
Positive effect found for Athens Games in 2004
Small, temporary effect found for Beijing Games in 2008

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