Blowing the whistle on publicly funded arenas
by Mark Paul
Deputy editorial page editor
April 14, 2002
To start a basketball game, the referee tosses up a jump ball. To start a public debate about subsidizing a professional basketball arena, a highly paid consultant throws out a study purporting to show that a new arena will provide an economic benefit to the community.
The referees do a so-so job. The consultants touting economic benefits invariably throw to the wrong side.
“Few fields of empirical economic research offer virtual unanimity of results,” economists John Siegfried and Andrew Zimbalist wrote in a recent survey of research on the economics of sport facilities. “Yet, independent work on the economic impact of arenas has uniformly found that there is no statistically positive correlation between sports facility construction and economic development.”
In plain English, economists almost universally agree that subsidizing sports teams doesn’t yield more jobs or higher incomes for a city.
Would Sacramento, if it builds a new downtown arena for the Kings, be any different?
Mayor Heather Fargo thinks so. She sees an arena in the Union Pacific railyards as a unique “catalyst” for economic development of downtown’s 21st century frontier.
The consultants hired by the city, the railroad and Maloof Sports and Entertainment, owner of the Kings, agree. In their recent report, they found that a new, publicly owned arena in the railyards could stimulate development downtown and provide a “significant net incremental economic impact to the city.”
But all the evidence accumulated by economists who have looked at other cities says otherwise.
“A new sports facility has an extremely small (perhaps even negative) effect on overall economic activity and employment,” write Stanford University economist Roger Noll and Smith College economist Andrew Zimbalist, editors of a recent collection of economic studies on teams and their playing fields published by the Brookings Institution.
“No recent facility appears to have earned anything approaching a reasonable return on investment. No recent facility has been self-financing in terms of its impact on net tax revenues. Regardless of whether the unit of analysis is a local neighborhood, a city or an entire metropolitan area, the economic benefits of sports facilities are de minimus.”
How do cities routinely conclude otherwise? They arm themselves with consultants’ reports, like the one recently delivered at City Hall, that promise a bounty if the public opens its pocketbooks to the local team to build a new arena or ballpark.
The reports follow a common pattern. They tote up the jobs and the incomes that will come from building a new arena or ballpark. They add in the flows of spending at the new arena. Then they apply a “multiplier,” measuring the increased local income as the dollars earned by the waitress in the luxury suite get spent in turn for rent, groceries, etc. The result is almost always some impressive number that a sports team owner or a politician can use to justify a public subsidy.
It’s no different here. The report on the downtown arena estimates it will produce more than $49 million a year in direct spending that yields, after the multiplier, $91 million in total output in the city economy.
But economists point out that this common methodology suffers from a major flaw. It treats the money fans spend at the ballgame on tickets, luxury suites and beer as new spending.
In the real world, it’s not. Residents of the region have only a fixed amount to spend on entertainment. A new sports team or a new arena will indeed attract some of those dollars. But unless those dollars are imported into the region from the outside, they do not add to local output. They are simply subtracted from the tills of other entertainment businesses.
That’s doubly true when the issue is whether to replace an existing arena. The spending associated with the Kings - the money the team pays in salaries to players and Arco Arena employees, the money the fans pay for Chris Webber jerseys and nachos in the luxury suites - is already part of the regional economy. Where is the economic advantage from a new arena?
In fact, the report, read carefully, shows very little. Because the consultants believe that fans at a downtown arena would be more likely than Arco fans to drop in after a game at a nearby store, restaurant or bar (a questionable assumption, as we’ll see in a moment), they estimate that visitor spending for out-of-arena extras would go up by $10 million a year within the city of Sacramento. But they admit that total regional spending of this kind wouldn’t go up; all of downtown’s gain would come at the expense of stores and restaurants outside the city.
Indeed, when looked at from a regional perspective, the report’s tables show only one increase in direct spending from a new arena: a $35 million increase in the category of team spending. Those are the dollars that go to player salaries and other basketball expenses.
This should come as no surprise. Economists generally agree that public taxpayer subsidies for sports arenas serve to redistribute income away from average-wage workers toward the high-income players and owners.
The other major flaw in optimistic consultants’ reports is treating the investment in new sports facilities as manna from heaven. When public dollars are involved, economists insist that measuring the economic impact of a new arena requires comparing the spending it yields with the “opportunity cost” of taking tax dollars from some other use, either public or private.
In purely economic terms, this opportunity cost analysis is not kind to those supporting subsidies. Economists at the Federal Reserve Bank of Kansas City recently calculated that net present value of the economic impact of hosting an NBA franchise for 30 years is only $29 million, far below the subsidy cost of a new arena. (The consultants found a downtown Sacramento arena would likely require a subsidy of around $300 million, counting retirement of the city’s existing loan to the Kings.)
More damning still, in another published study of 37 cities with sports franchises, economists Dennis Coates and Brad Humphreys found that having a team did not increase the growth rate of a city and actually decreased the level of per capita income. What consultants typically project as an economic boon to communities turns out in retrospect to be an economic drag.
But even if a downtown arena wouldn’t add to the region’s overall economic well-being, at least it would be a good thing for downtown, right?
After all, as the consultants’ report describes, new downtown arenas in other cities have stimulated nearby investment in shops, restaurants and apartments. Like Fargo, mayors around the country have latched onto publicly financed arenas and ballparks as catalysts to bolster central cities and reverse or stem the centrifugal forces moving jobs and populations to suburbs.
Again, the research doesn’t bear out the hopes. Mark S. Rosentraub, dean of the college of urban affairs at Cleveland State University, studied a number of cities that had built downtown sports facilities and compared the success of their downtowns with those in cities that hadn’t built arenas or ballparks.
“The experience of cities with these assets is not encouraging,” he wrote. He found that the sports downtowns lost population faster and saw jobs decline at the same rate as non-sports downtowns. Only Indianapolis, which pursued a broader strategy of becoming the amateur sports capital of the nation by attracting the headquarters of many amateur sports organizations, had much success.
“The factors that attract people and businesses to suburban locations are more powerful than the roar of the crowds or the crack of a bat,” he found.
Rosentraub says that visitors to downtown arenas are more likely to spend some of their entertainment dollars in the neighborhood when they go to games or other events. But the crucial question, he says, is whether that “likelihood converts into ongoing businesses.”
In Cleveland, the construction of Jacobs Field and Gund Arena has stimulated development nearby. But Rosentraub notes that the effect “dissipates after a block or two.” Part of the problem is that the economic goals of teams are at odds with the development goals of cities.
Cities want sports fans to come downtown to see a game and then spend some money in the neighborhood. But sports team owners design the new ballparks and arenas to be self-contained entertainment complexes, offering within their walls a wide variety of foods, sit-down restaurants and stores to sell merchandise.
With such complexes, “the potential market is swept by the arena,” Rosentraub says. Some of the businesses that located near the sports complex in Cleveland have already gone bankrupt, he notes.
Why then do sports owners and politicians try to justify public subsidies for sport facilities as a spur to local economies when the economic evidence says otherwise? The answer may be that Americans, heirs to a Puritan tradition, like to justify sports in dollars and cents terms because the alternative requires admitting that publicly financed sports palaces are a subsidy for happiness and frivolity.
Yet the fun that comes from having a professional sports team in a city has real worth in modern society. It knits communities together and gives citizens from various walks of life a common sense of belonging.
Unfortunately, economic research doesn’t provide much guidance about how to value that public good.
In 2000, one group of economists asked Pittsburgh area residents how much they would be willing to pay annually in additional taxes to keep the Penguins NHL hockey team in the city. The results showed that residents would be willing to pay from 83 cents to $2.30 apiece. To put that in perspective, other studies have shown that people value one fewer rainy day a year at $12.
The findings in Pittsburgh aren’t necessarily applicable to Sacramento’s arena decision. For one thing, Pittsburgh residents, who have the Steelers football and Pirates baseball teams, probably place a lower value on keeping a hockey franchise than Sacramentans would on keeping the Kings, the city’s only major league team.
Also, the arena question here isn’t tangled up with a threat that the Kings might leave (or at least not yet). The team’s owners have made no public demand for a public subsidy for a new arena, and Fargo says they have not raised the issue with her in private.
Even so, the arena issue in Sacramento will probably come down to the question of how much the prestige and fun of having an NBA team play in a new arena are worth to taxpayers.
If the consultants are correct that a downtown arena would require a public subsidy of around $300 million, the annual cost to city residents would likely exceed $500 per person, a daunting figure.
But if the public subsidy were smaller and the costs were spread regionally to all those who share in the fun of having a new downtown arena for an NBA team, the cost per person would get closer to the value of one less rainy day. And at that level, the region might have a real debate about the value of basketball happiness.