James Krein October 13, 2006 Computer Skills for Economics Module 4: Research Essay

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1 James Krein October 13, 2006 Computer Skills for Economics Module 4: Research Essay What are the arguments regarding the use of public funds to subsidize sports venue construction, and what role does corporate naming rights have in the argument? In this paper, I will discuss the arguments, both for and against the public subsidization of sports venues by means of increased taxes. I will first look at the arguments against subsidization, and following with the arguments for stadium proponents. Afterwards, I will introduce corporate naming rights into the study and examine how the revenues generated from name sales reduce the costs of public subsidization. Stadium subsidization is a highly disputed topic in the field of sports economics. But, along with the attention by those interested in sports, much attention has also been paid by regional and city economic planners and financers. The question that they all seem to be asking themselves, is whether or not using public funds to construct stadiums and other sports venues is a worthy investment for each individual city. Different studies on this subject have produced many different results, although the vast majority of the research concludes that stadium subsidization results in negative net benefits for the community and the individual taxpayer. In the article entitled, The Impact of Stadiums and Professional Sports on Metropolitan Area Development, by Robert Baade and Richard Dye, the authors give their reasons against subsidization by stating that, the presence of new or renovated stadiums has an uncertain impact on the levels of development, and possibly a negative impact on local development relative to the region. i Their statement leaves the gap open, that in some places, positive benefits can occur. In Mark Rosentraub s, The Local i Baade, Robert A.; Dye, Richard F. The Impact of Stadiums and Professional Sports on Metropolitan Area Development. Growth and Change Spring Pages 1-14.

2 Context of a Sports Strategy for Economic Development, he presents the Gateway area of downtown Cleveland as an example of a city that saw positive returns after the subsidization of not just one, but two sports venues. ii Thomas Chema also uses Cleveland as an example for when subsidization went right in his pro-subsidization article, When Professional Sports Justify the Subsidy, which was written as a reply to another article by Robert Baade, who I have already mentioned above. iii The article by Baade that Chema attacked above, Sports Stadiums and Area Development: A Critical Review, concludes that public financing is irresponsible, and that it should be up to the taxpayers to decide whether or not they want to split the bill. iv This is without a doubt the argument that I most agree with. In an evolutionary paper written by John Siegfried and Andrew Zimbalist titled, The Economics of Sports Facilities and Their Communities, both trace the subject from back in 1910 to the present day. They note that as time has progressed, the chunk of the bill being placed on taxpayers has increased to where as of 1999, the average major league sports city is paying $ million (in 1997 dollars) every time a new stadium in being built. v This figure is approximately 73.4% of the total cost of stadium construction as of vi A final article that conveys the strongest anti-subsidy sentiment is, The Economic Impact of Postseason Play in Professional Sports, by Dennis Coates and Brad Huphreys, who ii Rosentraub, Mark S. The Local Context of a Sports Strategy for Economic Development. Economic Development Quarterly Vol. 20, no. 3, August Pages iii Chema, Thomas V. When Professional Sports Justify the Subsidy: A Reply to Robert Baade. The Journal of Urban Affairs Vol. 18, no. 1, 1996 iv Baade, Robert A.; Dye, R. F. Sports Stadiums and Area Development: A Critical Review. Economic Development Quarterly Vol. 2, Pages v Siegfried, John; Zimbalist, Andrew. The Economics of Sports Facilities and Their Communities. Journal of Economic Perspectives Vol. 14, no. 3, summer Page 96. vi Siegfried, John; Zimbalist, Andrew. The Economics of Sports Facilities and Their Communities. Journal of Economic Perspectives Vol. 14, no. 3, summer Page 96.

3 state that, Overall, economic benefits flowing from future possible postseason appearances cannot justify public expenditures on professional sports franchises or facilities. vii Since we see that most published research leans away from using public funds, let me start by looking at why they believe so. The first argument against subsidization is that it makes franchises richer while financially straining the teams support base, the local taxpayers. Most stadiums that are built are done so without any investment made by the team and its owners or ownership group. This means that, not only do they acquire of a brand new stadium and field for free, but since it s subsidized by the public therefore giving ownership to the public, the team does not have to pay taxes on it. Also, any future renovations that may be needed will most likely also be financed by taxpayers. For most cities, this is a financial waste because the only usage fee the team pays for is often at a discounted rate the team negotiates for by stating that if they don t get it, they could move to new city. A second complaint is that stadiums do not provide permanent employment opportunities to the community. Most of the jobs offered by these facilities are for jobs during game times during the season, which at most is for only 81 days a year (MLB) and for only four hours at a time. viii Even at that amount, the bulk of stadium jobs only provide 324 hours (81*4) of work per year, just over the equivalent of eight 40 hour work weeks. These jobs are often only low wage jobs, not providing a large enough salary to cover anybody s cost of living. Most of the higher paying executive jobs are selective vii Coates, Dennis; Humphreys, Brad R. The Economic Impact of Postseason Play in Professional Sports. Journal of Sports Economics Vol. 3, no. 3, August Page 291. viii Chema, Thomas V. When Professional Sports Justify the Subsidy: A Reply to Robert Baade. The Journal of Urban Affairs Vol. 18, no. 1, 1996

4 and candidates are brought in from around the country to interview, so often they give no boost to the wages of locals. The increase to the local construction industry lasts at best 3 years, then the project is finished and these jobs go away as well. The third argument against subsidies is more of a rebuttal to what many conceive to be a positive outcome of new stadium construction. It is often noted that the new facility will attract local investment, such as restaurants, entertainment clubs, and other local shops, which add to the ambiance and to the money spent in the area surrounding the stadium. ix In actuality, the additional revenue spent at these locations is just spending taken away from another location in the city. Siegfried and Zimbalist (2000) call this the Substitution Effect. x All that you are doing is rearranging the spending and economic activity in an urban area, [you] are not likely to add much to it. xi The only time there is a real boost to a city s economy due to spending in the neighborhoods surrounding a stadium is if the city s hosting a national sporting event, such as the Super Bowl, where people come from miles away and in-flow their finances. Another negative concern brought about by stadium subsidization is that most teams using the facilities are allowed to keep the game day revenue they make on ticket and merchandise sales, partial revenue from concessions, and all of the money given to them by their parent league (NFL, NBA, NHL, MLB) from advertising and programming contracts. Teams are not forced to re-invest any of it into the community, allowing the profit margin to expand as the taxpayer s wallets get contract. Some teams even have ix Rosentraub, Mark S.; Turner, Robyne S. Tourism, Sport, and the Centrality of Cities. Journal of Urban Affairs Vol. 24, no. 5, Page 489. x Siegfried, John; Zimbalist, Andrew. The Economics of Sports Facilities and Their Communities. Journal of Economic Perspectives Vol. 14, no. 3, summer Page 105. xi Siegfried, John; Zimbalist, Andrew. The Economics of Sports Facilities and Their Communities. Journal of Economic Perspectives Vol. 14, no. 3, summer Page 105.

5 contracts with their host city, a provision that the city has to purchase the remaining tickets up to a certain amount so that the team remains profitable; it is quite the raw deal. A final argument, we a final two arguments against the issue at hand is that today s stadiums are not quality built, and become obsolete as technology improves yearby-year. According to Robert Baade, many stadiums are quickly deemed economically obsolete and fears spread that the teams using the wont be able to compete with other forms of local entertainment. xii Baade uses the Minneapolis Metrodome as an example, as it has only been 15 years since its completion and it has been deemed inefficient. xiii Talks have already begun in Minneapolis for both a new baseball and football stadium. The location of new stadiums often also has a negative impact on a city. Teams usually want their facilities in high traffic and accessible areas, and this often means that some more profitable ventures by scale are forced out of an area, either by buyout or more popular these days, eminent domain. Proponents on the other side of the debate insist that venue subsidies do indeed provide a lasting benefit to the individual city and the community surrounding the city, some of the responses to the negative claims by subsidy opponents quite convincing at their rational face value. When discussing employment factors, proponents argue that any additional jobs are better than no jobs at all, and many of the low skill positions provide opportunities for those with only minimal skills. Any survey of the age of workers at any sports venue, especially baseball ushers, shows that many of these jobs xii Baade, Robert A. Stadium Subsidies Make Little Economic Sense for Cities: A Rejoinder. The Journal of Urban Affairs Vol. 18, no. 1, Page 30. xiii Baade, Robert A. Stadium Subsidies Make Little Economic Sense for Cities: A Rejoinder. The Journal of Urban Affairs Vol. 18, no. 1, Page 30.

6 help provide retirees with extra disposable income they may need to afford the rising cost of health care. Neighborhood revitalization is another positive effect that can occur if stadiums are used as a tool to do so. If placed in a neglected part of town, the increase in complementary services may provide employment opportunities and pump money into the area economy. This logic may soon be tested in Washington D.C. as one of the places the owners of the Washington Nationals of the MLB, are currently looking at property in one of D.C. s most neglected areas. Washington Post writer, Eric Miller states in an article, that the construction could bring 380 part-time jobs, and the possibility of spurred economic development. xiv Another argument is that up till now, only the direct costs and benefits for sports events have been examined in studies. Just like any investment in public infrastructure, says Thomas Chema, like a road, a bridge, or water line, the return on the investment comes indirectly as well a directly. xv The use of venues for other events such as concerts, political conventions, trade shows, plays, or those Disney ice skating shows is often not including in many studies. Finally, and perhaps most importantly, proponents point out that nobody has argued what could be a better, more profitable alternative to building a new stadium. An interesting paper would be to explore the comparative costs and benefits between building a new sports stadium or something else like a hospital. One more recent neglected area of research is the impact of corporate naming rights on the facility subsidization debate. Since 1973, when the Rich Products xiv Miller, Eric A. Taxpayers Should Cry Foul Over Stadium Subsidies. The Washington Post, July 24, Taken from The Tax Foundation website, xv Chema, Thomas V. When Professional Sports Justify the Subsidy: A Reply to Robert Baade. The Journal of Urban Affairs Vol. 18, no. 1, Page 27.

7 Corporation paid $1.5 million for the naming rights of the stadium of the NFL s Buffalo Bills, a spending frenzy has been undertaken by corporations bidding to get their name attached to major league team s facilities. xvi As time has progressed, costs for these naming rights have sky rocketed to the point where Reliant Resources has paid the Houston Texans $10 million each year for the next 30 years for the naming rights to Reliant Stadium in Houston, TX. xvii Even minor league sports teams and colleges are receiving money to put names on their team s stadiums. As more and more stadiums acquire corporate names, the competition has heated up, driving the costs of naming rights through the roof. As naming rights have increased in price, the costs to the public have decreased tremendously. Naming rights have become a new type of subsidy, one that very few economists have included in the debate over whether subsidies provide net benefits to the community after their construction. With average lump sum price of for the name and logo for a major league stadium going for about $45 million dollars, the costs of stadium construction has decreased by a tenth. As more and more companies buy into the advertising tool that stadiums provide for the wide array of services they provide to a community, the average figure is likely to rise. The decrease in costs to taxpayers will make stadium subsidization worthwhile. As more and more studies are done that include stadium naming rights into the cost of stadium subsidization, the sentiment should change from against subsidies to for xvi DeSchriver, Timothy D.; Jensen, Paul E. What s in a Name? Price Variation in Sports Facility Naming Rights. Eastern Economic Journal Vol. 29, no. 3 summer, Page 361. xvii Revenues from Sports Venues. Updated September 26, 2006 Mediaventures PDF file accessible form either the Ohio University Libraries, or from

8 them. Since the current pace of research is that subsidies are not worthwhile and there is some decent by others, who say they can be beneficial, the difference made by a $50 million corporate subsidy should push the argument the other way. An NBA arena in Sacramento and the construction of a new baseball stadium in Miami, both have recently failed by a slim margin during public elections where voters were defiant that they had to pay for the complete cost of the stadium. Perhaps the additional cost reductions that corporate naming money would have alleviated, would have shifted taxpayer s opinions, and mad public subsidization a worthwhile venture. References: DeSchriver, Timothy D.; Jensen, Paul E. What s in a Name? Price Variation in Sports Facility Naming Rights. Eastern Economic Journal Vol. 29, no. 3 summer, Pages Accessed using Rosentraub, Mark S.; Turner, Robyne S. Tourism, Sport, and the Centrality of Cities. Journal of Urban Affairs Vol. 24, no. 5, Pages Accessed using Siegfried, John; Zimbalist, Andrew. The Economics of Sports Facilities and Their Communities. Journal of Economic Perspectives Vol. 14, no. 3, summer Pages Accessed using the EconLit database. Coates, Dennis; Humphreys, Brad R. The Economic Impact of Postseason Play in Professional Sports. Journal of Sports Economics Vol. 3, no. 3, August Pages Accessed using the EconLit database. Miller, Eric A. Taxpayers Should Cry Foul Over Stadium Subsidies. The Washington Post, July 24, Taken from The Tax Foundation website, Revenues from Sports Venues. Updated September 26, 2006 Mediaventures PDF file accessible form either the Ohio University Libraries, or from

9 Baade, Robert A.; Dye, R. F. Sports Stadiums and Area Development: A Critical Review. Economic Development Quarterly Vol. 2, Pages Chema, Thomas V. When Professional Sports Justify the Subsidy: A Reply to Robert Baade. The Journal of Urban Affairs Vol. 18, no. 1, 1996 Baade, Robert A. Stadium Subsidies Make Little Economic Sense for Cities: A Rejoinder. The Journal of Urban Affairs Vol. 18, no. 1, Baade, Robert A.; Dye, Richard F. The Impact of Stadiums and Professional Sports on Metropolitan Area Development. Growth and Change Spring Pages Rosentraub, Mark S. The Local Context of a Sports Strategy for Economic Development. Economic Development Quarterly Vol. 20, no. 3, August Pages

Introduction [to The Economics of Sports]

Upjohn Press Book Chapters Upjohn Research home page 2000 Introduction [to The Economics of Sports] William S. Kern Western Michigan University Citation Kern, William S. 2000. "Introduction." In The Economics