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 1991-2002.

• 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.