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Sunday, July 08, 2007

Should Stadiums be Subsidized?

Roger Noll of Stanford on subsidies for sports stadiums:

Are stadiums worth the high price?, by Roger G. Noll, Commentary, SFGate.com: ...[A]re new stadium[s]... really a good fit for the fans, the teams and [a] cities' taxpayers?

For fans, a new facility is a nicer place to watch a game because the design and technology of sports facilities has improved. These benefits, however, can be offset if a new facility is less convenient, whether that translates into longer travel times to the stadium or more headaches in the parking lot.

The teams themselves look at these stadium proposals from a different perspective. For ... sports franchises, a new facility is a good idea only if the team can earn a reasonable return on its share of the investment. [Many current] ... proposals ... involve direct or implicit subsidies, but these are relatively small compared with the open-wallet era of stadium construction in the 1990s. ...

In general, sports facilities are not good investments. Owners can add more concessions and high-cost seating such as luxury suites and theater-style reserve seats. But even during the robust early years of the stadium, these features bring in annual profits of only $25 million to $50 million -- not enough to justify an investment of $500 million.

For a stadium investment to make sense, the team needs some free money.

One potential source is a subsidy... Another potential source is personal seat licenses, which amount to a price increase for season tickets that, when tied to a new stadium, seems not to generate as much fan resistance as an ordinary price increase.

But the big innovation in stadium finance is to tie the stadium to a real estate deal. [For example, the] original 49ers plan was to replace Candlestick with a stadium, a shopping center and perhaps a gambling casino. The A's and Earthquakes facilities are tied to larger developments that require rezoning large, undeveloped parcels. The expectation of the team is that by making the stadium part of a larger development, the team will earn an adequate overall return on investment. ...

For local governments and their taxpayers, the desirability of a facility depends on two things: the magnitude of the subsidy for the team, and the impact of the stadium on the local economy and local tax revenues. ...

Can cities expect a significant financial benefit that will offset their investment?

The economic benefits of a sports team are the most contentious issue surrounding new stadiums. Economic consultants working for teams typically claim annual benefits to a city of hundreds of millions of dollars, thereby implicitly offsetting even a 100 percent subsidy in a few years. If true, these returns would make sports facilities a terrific investment -- sort of like getting stock options from Google just before its initial public offering.

But these studies vastly overstate the economic returns of sports facilities. Before-and-after studies of new stadiums show no statistically significant effect on local employment, income and retail sales, and more often than not the effect can be slightly negative. These results make sense. Sports teams employ few people in relation to the revenue they generate. To the extent that fans reduce spending on other entertainment and recreation to attend sports events, the effect is to reduce employment. Moreover, many professional athletes do not live where their team plays, so less of their high salaries are spent in the local economy.

For local governments, sports facilities generate only a limited amount of new tax revenue. Typically, stadiums are exempted from property taxes. Facilities do generate sales tax from tickets and concessions, but most of this goes to the state. Local governments are not likely to collect more than a few million dollars per year in new revenue, which is not sufficient to justify an investment of $100 million or more.

When stadiums are part of larger developments, the local economic impact can be more favorable. Residential development generally is not exempt from property tax. Shopping centers provide sales taxes. Yet the tax return would be even larger if the stadium were not part of the package.

Notwithstanding the limited local economic benefit of a sports team, citizens still may regard a public subsidy as worthwhile. But the basis for this conclusion must lie in the consumption value of having a local team, rather than the return on public investment. Cities invest in many cultural and recreational facilities that do not earn much return on investment, such as libraries, playgrounds and high school sports facilities. Whether stadiums for pro teams fall in this category is up to citizens to decide for themselves.

[The original article has a fairly detailed description of stadium plans in the San Francisco Bay Area]

    Posted by on Sunday, July 8, 2007 at 01:27 PM in Economics, Market Failure, Policy | Permalink  TrackBack (0)  Comments (16)


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