Public Financing of Sports Stadiums

In today's modern professional sporting leagues, athletes are being paid record-breaking salaries in all major sports. The owners of professional teams have changed as well. We are beginning to see a new trend in ownership, where many of the owners are so called "new money" rather than inherited money, and enjoy throwing their riches around a bit more frivolously. As times change in sports, technology changes as well, and this combination paves the way for teams to require newly built, larger stadiums to house their ever-growing fan base and increase profitability for the organization. These professional teams have grown so much that they are larger economic contributors in any city that they reside in, and provide substantial boosts in tourism, retail sales, and taxes, to name a few. Ultimately, a professional organization is usually a major plus for the city, the team, and the owner, which leads them to clash over which party should be responsible for the stadiums in which the teams play. In this essay, we assume that the city is either lobbying to attain a team or keep an existing team from leaving based on the construction of a new stadium.

New sports stadiums are important to teams because they increase team revenues through opportunities to lease luxury boxes, sell club seating tickets at premium prices, increase concession revenues, and expand advertising revenues such as signage in the stadiums or even leasing the naming rights of the stadium itself (Kern 2000, pg. 55). It has become a major bargaining instrument for owners of teams when deciding which city they decide to anchor their organization in. Multiple teams such as the Rams and the Raiders of the National Football League, and possibly the Florida Marlins of Major League Baseball, have left cities based primarily on the city's unwillingness to contribute in whole or part to a new stadium.

A major motivation for a city to allocate funds for a stadium would be the obvious: it keeps the professional team from leaving. Major League teams are purposely limited to a number around thirty per league because it makes the acquisition of teams competitive between markets, since there are not enough teams to have one in each state. "Teams do not exist in a free market. In North America the supply and location of teams is not determined by market demand but by cartels that maximize their profits. Teams are kept artificially scarce so that local governments will subsidize stadium construction" (Sandy 2004, pg 220). The markets and owners (which are approved by the league) are further limited by purposely incorporating a team's financial means as a deciding factor. Certain markets are handpicked and are expected to accommodate mediocre teams with a minimum amount of star players, while others, such as New York City, are expected to consistently house the best players. Professional leagues such as Major League Baseball, the National Football League, and the National Basketball Association provide indirect public consumption benefits to the community. Many "external benefits may arise from increased self-esteem enjoyed by residents who believe that they are better off living in a 'big-league city,' or who at least believe that their lives are enhanced if others view their community as a 'major league place" (Kern 2000, pg 58). While these may not seem like important factors, the image factor that a new stadium brings leads to increased attraction by consumers.

There is an ongoing debate between critics and proponents of public financing for sports stadiums based on the true effects on economic development and whether the effects are substantial enough to warrant public interest. The critics argue that "virtually all well-conducted studies of the economic development effects of professional sports teams and/or new stadiums or arenas find no impact whatsoever does not undermine the possibility of external benefits, although it casts doubt on their magnitude" (Kern 2000, pg. 58). Those in favor of public financing point out that economic impact studies commissioned by new stadium proponents typically identify thousands of new jobs, more than $100 million of economic impact, and substantial increases in tax revenues at all levels of government as the outcome of spending on a professional sports team (Kern 2000, pg. 28). While this differs between regional markets, there is no doubt that sports franchises and new stadiums increase the level of economic activity in a specific area in a positive way.

In the bidding wars that culminate into a team's decision on their location, the characteristics of a stadium's owner can have a substantial impact on the team's choice of venue. Stadiums being owned by local government leads to subsidies being a given to local franchises and leads to a greater likelihood of team relocation to that particular city. Subsidies are defined as monetary assistance granted by a government to a person or group in support of an enterprise regarded as being in the public interest. This also shows the team that the city is truly interested in the team itself. In many instances, the owner chooses to finance the stadium individually. When the stadium owner is also the sports franchise owner, the owner now has a large incentive not to relocate. Sports franchises that own their own stadiums have a lower likelihood of moving (Fizel 1999, pg 77). The owner already has invested a large sum of money into the land and construction of the stadium, and it would take a lot for them to be convinced that their investment would be better used in another city.

Subsidies are a major driving force in the relocation of a professional team, especially when stadiums are involved. During the most recent expansion of the NFL, the league heavily favored placing a team back in the Los Angeles market. Los Angeles had two NFL teams at one point, the Rams and the Raiders, but both chose to leave the large metropolis for smaller cities offering large subsidies. The competing city was Houston, which had also lost a team, the Oilers, to a smaller city offering a higher subsidy. Houston's offer turned out to be higher than Los Angeles, and they were awarded the NFL franchise that would eventually become the Houston Texans. The decision of the mayor and other elected officials of Los Angeles not to act was based directly on an assessment of the value of the intangible benefits of the team (Sandy 2004, pg. 220). Houston's voters decided that they were willing to allow a tax bill that would allow them to attract the franchise. "The eventual franchise owner agreed to pay $700 million for the right to own the team...and required a firm commitment from the public sector to pay a substantial part of the cost of a new stadium while permitting the team to retain most of the revenues generated from the amenities built into the new stadium" (Sandy 2004, pg. 222). The difference in the two cities was directly influenced by the public's interest and the subsidies they would allow.

In any case where public financing is an issue, the main question is whether the taxpayers are willing to pay for the stadium, and if so, at what cost and what benefits do they require doing so. An interesting approach to this is called contingent valuation. Contingent valuation is "a survey technique to estimate nonuse values by asking respondents how much they are willing to pay or accept for a change in the good in a hypothetical market framework" (Sandy 2004, pg. 220). Contingent valuation provides a way for governments to estimate the value of intangible benefits to taxpayers and residents and therefore provides a framework for assessing whether or not there is a sufficient level of benefits to warrant the use of public funds. Teams and facilities alone do not generate enough levels of economic benefits to warrant the use of public funds, but their presence does have the ability to move economic activity from suburban to inner-city areas, which can be a large enough benefit to the community to warrant public funding. If a team moves from a suburban location to a downtown location, "this may enhance a particular city's revenue flow through the collection of local taxes or the attraction to the area of some other businesses, then an important public policy goal, balancing growth, may be achieved. That benefit is worth some level of public investment" (Sandy 2004, pg. 226).

According to contingent valuation, the individual sport, professional level of the league, and the team image itself can have a significant impact on whether the city justifies the expenses. In a 2001 paper by Johnson, Groothuis, and Whitehead that emphasizes the use of the Contingent Valuation Method (CVM), "the key finding in the paper is that the external benefits of an NHL team are unlikely to be high enough to justify a tax-supported arena even in a city as large as New York. They also find not enough external benefits to justify taxing the public for a minor league baseball team" (Sandy 2004, pg. 221). This makes a lot of sense, since minor league baseball and professional hockey teams don't generate the same size fan base as a Major League Baseball or NBA team in the United States. Contingent valuation studies consistently show that "public sector subsidies toward a sports facility in order to generate external benefits should be much less than the full cost of the stadium" (Sandy 2004, pg. 226).

Public financing of sports stadiums is something that I believe is a combination of financial statistics and public opinion. The specific team and sport matter just as much in the decision as the financial obligations do. We could make this argument with the Hartford Whalers and the New England Patriots in Connecticut, or even UConn teams, but that might take up a whole new paper itself. Regardless, cities each have their own criteria for what they will do to entice a franchise to relocate to their confines, and then it is up to the owner to decide which area is most profitable for his business investment. I truly believe, after writing this paper, that luck has just as much to do with a decision as anything, and that ultimately, it is the correct pairing of owner, team, and city that makes for the decision to publicly finance a new stadium. If only Hartford knew this when they were trying to lure the New England Patriots.

Works Cited

Kern, William S.. The Economics of Sports. 1st Ed. Kalamazoo, Michigan: W.E. Upjohn Publishing, 2000.

Fizel, John. Sports Economics- Current Research. 1st Ed. Westport, CT: Greenwood Publishing Group, 1999.

Noll, Roger. Government and the Sports Business. 1st Ed. Washington, DC: Brookings Institution, 1974.

Sandy, Robert. The Economics of Sport-An International Perspective. 1st Ed. New York, NY: Palgrave Macmillan, 2004.

Quirk, James. Hard Ball. 1st Ed. Princeton, NJ: Princeton University Press, 1999.