Taxpayer-financed stadiums (revised 4-Dec.-2008)

Ballparks and team revenues A team’s ballpark affects its revenues. –Attractive, comfortable, conveniently located parks draw more fans. –Luxury suites and skyboxes raise venue revenues a lot (and are easier to build in new parks). –If the increased revenue is used to improve the team, the improved team quality will keep revenues high. Most teams do not pay for their own ballparks. –Team’s costs are less if they can get someone else to pay for it. Most parks are publicly financed (taxpayer financed). –Team’s costs may be less if they can lease it from the city or state. “SWEETHEART LEASE” –team gets most of the park’s revenues, bears little of its costs.

Ballparks and team revenues (cont’d) The stadium directly affects: –GATE REVENUES (ticket-sale revenues) Gate revenues vary wildly from team to team. 2007: –Red Sox, Yankees ~$170 M –Rays, Marlins, Royals < $25 M Stadium not the only factor, but a significant one. –Both prices and attendance usually shoot up when team moves into new stadium. –VENUE REVENUES (non-ticket $ from stadium) $ from luxury suite rentals, personal seat licenses; concessions and parking revenue (depends on terms of lease); naming rights; advertising in stadium. Venue revenues vary even more wildly than gate revenues.

Ballparks and team revenues (cont’d) Forbes estimated venue revenues for 1997 season –Ranged from $34.9 M (Yankees) to $1.5 M (Reds). –Five teams had $21-27 M, 3 teams had < $2 M. –All but one (Yankees) of top six were in new parks. –Bottom seven teams ranged from $1.5 M to $3.7 M. Five got new stadiums (Reds, Brewers, Tigers, Pirates, Mariners) One made major renovations (Angels) One was slated for elimination (Twins) and now has a new stadium in the works

Ballparks and team revenues (cont’d) A glut of new ballparks? The revenue boost from a new ballpark often wears off quickly. –Two months into 2003 season: Attendance drop from 2002 was most severe (nearly 16%) for teams who moved into new parks in Team with brand-new park (Reds) had mediocre attendance. “The bloom is off the rose a little bit regarding new stadiums” -- Bob DuPuy, president of MLB –The Pittsburgh Pirates’ PNC Park Opened 2001, considered one of the best in MLB. In 2008 Forbes estimated the park’s contribution to the team’s value at just $48 million (16% of team’s total value). –Fourth-lowest in MLB. –~ Same as two small-market teams looking for new stadiums (Tampa Bay, Minnesota).

A good ballpark can help a team a lot... Forbes estimated parks’ contributions to team values: –Median in 2008 was ~ $100 M, ~25% of total team value Typically the park contributed 20-25% of total team value. Teams with the most valuable parks: –Yankees ($237 M, but only 18% of team value) –Red Sox ($177 M) –L.A. Dodgers ($176 M) Teams with the least valuable parks: –Marlins ($26 M, 10% of team value) –Twins ($47 M, 14% ") –Royals (50 M, 16% ") –Pirates... but how much does it help the city it’s in? -- Time to review two economic concepts.

Opportunity cost A resource is SCARCE if there’s less of it than we would like. –Most resources have more than one use. The OPPORTUNITY COST of using a scarce resource is the (forgone) value of its best alternative use. Ex.: coming to class vs. catching up on sleep –TRADEOFFS If you want more of one thing, you must settle for less of another. –The opportunity cost of using scarce taxpayer dollars to build a new baseball stadium is …

The multiplier Recall: GDP is the sum of various types of spending (C + I + G + NX) An initial increase in spending can have a ripple effect and raise total spending by a multiplied amount –chain of spending, as money gets spent and re-spent MULTIPLIER = the total increase in GDP caused by a $1 initial increase in spending –Very important, if government is trying to raise GDP through fiscal stimulus (new spending).

The multiplier (cont’d) The multiplier is smaller than one might think because of leakages from the spending stream. –Income and sales taxes, imports, inflation… –Real-world multiplier for U.S. = 1.5 (approx.) –Real-world multiplier for cities = much less Import leakages are much greater for cities For a city, expect the multiplier to be < 1.

“Field of Schemes”: Ballparks and Local Economies How much do ballparks help a local economy? Is a new stadium a good public investment for a city? –Economists agree: Not much. NO. –Independent empirical studies consistently find little positive impact. Stadiums and sports teams create very little new spending. They divert spending from other forms of entertainment (opportunity cost). The multiplier associated with building a new ballpark is very small -- most of the income generated is re-spent outside the city.

Ballparks and Local Economies (cont’d) Components of a team’s effect on local GDP: –(1) injection of new consumer spending From local market, this is about $0 – people have a ~fixed entertainment budget (more for sports means less for dining, etc.) From neighboring markets, will tend to be more (esp. for small localities); typically small, though. –(2) multiplier effect, as money gets re-spent Very small for sports teams – leakages are very large. –Leakages are especially large in small localities. –  Net impact of a sports team on local GDP is small.

Ballparks and Local Economies (cont’d) Payoffs from alternative projects (e.g., roads, hospitals, schools) typically much higher. Dennis Coates & Brad Humphreys (2000): study of 37 cities with pro sports teams. –Average net impact of getting a team was to lower local income slightly. In per-capita terms: + $67 in new spending - $73 in higher taxes, decreased services = - $6 (net loss)

Why do cities subsidize pro sports stadiums? (1) Team owners tend to be politically powerful (main reason). –They typically threaten to leave the city if they don’t get a publicly-financed stadium. –Cities tend to be in a weak position to counter threats to leave. Sports-league monopolies do not make it easy for cities to attract another team. (Ex.: Los Angeles and NFL.) (2) Mayors and other local politicians often envision a team and/or stadium as part of their legacy. –Because voters frequently reject referendums for tax-financed stadiums, politicians often do not put it up for a public vote. (3) Social or psychological value attached to having a pro sports team (4) Many people mistakenly think that sports stadiums do make a big contribution to the local economy.