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17 USC 102

Flagrant Foul: How Cities Subsidize Stadiums and Why They Shouldn't

May 28, 2019

 


"If you build it, he will come." It is a refrain as old as time, or at least as old as 1989, when Kevin Costner's character in Field of Dreams first heard a voice telling him to construct a baseball diamond in his cornfield. All over the world, from Detroit to Brasilia, this catchphrase has been turned into campaign fodder and has inspired public policy. In almost any major city, someone is scheming to build a gleaming new sports stadium on the taxpayers' dime, arguing that it will bring rewards both tangible and intangible, economic (new construction jobs!) and emotional (civic pride and a sense of being a "major league" city). This naturally begs two questions: first, do these stadium subsidies actually generate economic growth? Additionally, does it even matter to lawmakers, fans, and owners if they do not?

 

Defining Subsidies

As sports TV revenues and franchise values skyrocket, it only makes sense that sports owners will seek to develop gleaming, world-class stadiums to match the fireworks taking place on the field. In Doha, Tokyo, Los Angeles, Las Vegas, Milan, North Texas, and various other places around the world, new sports facilities are currently under construction. These projects, estimated to cost billions of dollars, are, more often than not, funded by the public.

 


The process of public funding of sports venues begins at the federal level. Washington allows state and local governments to issue tax-exempt bonds in order to finance these facilities. The interest payments from municipal bonds have been exempt from federal income tax since the passage of the Sixteenth Amendment in 1913, allowing for state and local governments to borrow at lower interest rates than other issuers of debt, thus reducing the amount a city would have to pay for a project. For all intents and purposes, this is a federal subsidy for local governments to finance massive investments in public projects like schools and roads.

 

Stadiums, while not prohibited to be funded by public money, were originally largely privately funded. With the notable exception of the Los Angeles Coliseum (built in 1923), Chicago's Soldier Field (1929), and Municipal Stadium in Cleveland (1931), all of which were built to attract the Olympics, all major league (MLB, NBA, NFL, NHL) stadiums were exclusively privately financed until 1953. That year, Milwaukee's taxpayers forked over $5 million to lure the Boston Braves to their city and County Stadium. This would have a ripple effect. Several factors, including new western markets for expansion enabled by jet travel and the emergence of television made the 1960s a ripe time for a rise in public funding for new stadiums. As owners began to receive more money from the public, they expected more and more, leading the public cost of sports facilities to increase by a factor of 23 between the 1950s and 1970s.

 

On the other side of the coin,  federal tax exemption also meant a loss of revenue for the federal government. Over a useful stadium life of 30 years, a $225 million stadium will cause an annual federal tax loss of about $2 million per year. In fact, several facilities built in the 1970s and 1980s with the help of tax-exempt bonds, including Giants Stadium in the Meadowlands, the Kingdome in Seattle, and the Silverdome in Pontiac, each caused an annual federal tax loss of more than $1 million until their demolition in 2010, 2000, and 2018, respectively. To this day, the New Orleans Superdome does the same, as it has since its own construction began in 1971. But Washington's subsidies and revenue losses are nothing compared to the efforts of state and local governments.

 

State and local governments, either seeking an expansion franchise or seeking to maintain an existing one, exploit the municipal bonds and then additionally subsidize stadium deals at the demand of team owners. Owners have leverage over local politicians, which they use by threatening to move the franchise unless they receive either (a) a publicly funded new stadium, (b) a publicly funded renovations to the existing one, or (c) a payment to allow the team to keep playing where it already does for the foreseeable future. If an owner plays his or her cards right, they can play politicians to the tune of hundreds of millions of dollars in public money.

 

One popular move is to insert opt-out clauses into a stadium deal, like the Indianapolis Colts and Indiana Pacers have done. These clauses allow a team to leave before its lease expires if it can show losses. Instead of the "insurance policies" these clauses were intended to be, however, it soon became evident that they were a "loaded gun," as owners realized they could just say they were losing money and threaten to bolt town and they would be rewarded with a new stadium or more public money. In fact, this idea has become such common knowledge that a gamer can relocate their team in the Madden video game on "Owner Mode," and the easiest way to get a new stadium is to move to a city that will pay for one. If it looks like grift, that is because it is.

 

The thing is, city councils and state legislatures have been more than willing to accede to these ludicrous demands. Time and time again, generations of politicians propose new property taxes and sales taxes to fund a multi-billionaire's stadium, often accepting team-friendly sweeteners like $1 a year rents for the team and opt-out clauses in doing so. Put simply, pro sports teams are tremendously bad business deals for taxpayers and cities, on a moral basis alone. But luckily, there are some ways that cities can support their local teams without betraying their citizens.

 

 

A Few Recent Case Studies

 

Indianapolis

 

On April 29, Indiana's Republican governor Eric Holcomb signed into law SB 7, which extends the lease of the NBA's Indiana Pacers in Indianapolis through the year 2044. This bill passed in an overwhelming and bipartisan manner by a margin of 79-13 in the Indiana House of Representatives and 44-4 in the Senate.

 

In exchange for his team being allowed to play in the same building and city it already does, Pacers owner and shopping mall mogul Herb Simon will receive almost $300 million in immediate taxpayer money to upgrade Bankers Life Fieldhouse, $12 million more every year for a decade to upgrade the arena's technology, and an additional $14.5 million annually in operating subsidies for 25 years. As the math whizzes out there will note, that adds up to about $600 million. That's an awful lot to pay to get swept out of the first round of the playoffs.

 

But wait, there's more! 

 

This is merely the latest in a series of grifts by Simon of Indiana taxpayers. In 1999, Simon received $79 million in public money and an additional $112 million in hidden subsidies such as property tax breaks to go toward the new $200 million arena that would become Bankers Life. In other words, Indiana effectively fronted $191 million of the $200 million needed to build the arena, or 96 percent of the cost. Then, in 2010, Simon, hardly halfway through his 20-year lease, received another $33.5 million in public money to keep the team in Indy. This public money aimed to assuage the grumblings of Simon about the costs of playing in Indianapolis and his threats to move the team elsewhere. Of course, this was not based in any sense of reality, as what was then known as Conseco Fieldhouse was a mere 11 years old and the Pacers pay $1 a year in rent to play at the Fieldhouse. Put simply, it was legalized extortion. It was Simon holding  a gun up to the Indianapolis City-County Council's head, and the Council caved.

 

Unfortunately for the taxpayers of Indianapolis, Simon had another trick up his sleeve. He utilized an opt-out clause in the Pacers' deal to extend the lease to 2024, but not before asking for and receiving another $160 million in taxpayer subsidies. 

 

My home city of Indianapolis, with its well-institutionalized political-business complex and Republican supermajority in both houses of the state legislature, would deserve to be a first-ballot Stadium Subsidy Hall of Famer on the Pacers deal alone. But like any city hungry to prove itself to be "major league" and completely ambivalent to the costs, through the General Assembly and the City-County Council, Indy came into ownership of two more of the worst sports stadium deals in history. The construction of Lucas Oil Stadium, the current home of the NFL's Colts, cost taxpayers a whopping $725 million in today's dollars, making it the most subsidized stadium in NFL history. On top of that, Indiana taxpayers paid an additional $71 million to refinance the risky debt that was issued to fund construction and Indianapolis is still paying off the debt of the RCA Dome, which was demolished in 2008. 

 

The city, meanwhile, got next to nothing in return, at least compared to the Colts. The Colts pay $250,000 per year to play in the stadium but pay nothing for maintenance, received up to $3.5 million annually in revenue from non-Colts events, receive all $6 million per year from naming rights to the stadium, and get the "profit portion" of concession revenue (about $5 million on any given year), according to The Indianapolis Star. Tally all this up and you get the Colts paying a whopping total of $109.75 million (they paid $107 million in addition to what taxpayers subsidized to build LOS) to date to get $884.5 million (plus maintenance paid for by the city) to date in taxpayer subsidies and revenue even without noting revenue from ticket and merchandise sales, parking, and TV. 

 

Yet for Colts owner Jim Irsay (who is worth an estimated $2.7 billion) and COO Pete Ward, that is not enough. The Colts have an opt-out clause in their contract that comes into effect if the Colts are not among the top five NFL teams in revenue by the year 2030 (which would take either a miracle or creative accounting). Irsay and Ward have not dismissed the possibility of asking for an even newer stadium than Lucas Oil (which will be a mere 22 years old) and threatening to move the team if they do not get it.

 

The second bad stadium deal was authorized by the same bill that birthed the new Pacers deal. The bill Gov. Holcomb signed into law authorizes an additional $112 million in public subsidies for a new Major League Soccer stadium in lively Broad Ripple for the Indy Eleven. As fans of American soccer will quickly note, however, the Indy Eleven are not actually an MLS franchise, but merely an aspiring one that will enjoy an MLS stadium paid for by the city while it waits to actually be accepted into the top-tier of the American soccer triangle. Indianapolis is betting the farm on MLS expansion coming its way, but with several other cities with more political support and longer soccer histories competing with them, that is far from certain.

 

At a time when Indiana faces a teacher shortage, ranks 44th in the country in infant mortality, and has the worst water pollution in the country, its lawmakers see fit to compel taxpayers to subsidize stadiums demanded by multibillionaires like Simon and Irsay. To paraphrase Joe Biden, budgets are an indication of values, and Indiana's values are profoundly troublesome if it continues to show greater compassion to Irsay's pet projects than it does teachers, students, and mothers. 

 

Detroit

 

If only Detroit had taken the midnight train going anywhere instead of the stadium subsidy bandwagon. In 2013, the city sat on the precipice of bankruptcy, but that did not stop the Illitch family of Little Caesar's fame (estimated net worth: $7.2 billion) from requesting a brand-new, partially taxpayer-subsidized arena for the NHL team they owned, the Red Wings. Despite the timing, or to the optimists among us, because of the timing, the Illitch family's argument that the arena would bring new jobs, new housing, and would connect Midtown and Downtown Detroit resonated with Michigan lawmakers. In the blink of an eye, the Michigan legislature and attorney general took a curious understanding of the state constitution and agreed to allocate hundreds of millions of taxpayer dollars originally meant to address Detroit's crumbling public schools to fund the arena and the larger District Detroit project for the surrounding area.


Yet as a recent HBO Real Sports exposé revealed, the promises of the project remain unfulfilled as Detroit's schools continue to literally crumble. First, the Illitch family promised taxpayers that 51 percent of the arena construction jobs would go to Detroiters. Reports indicate that that did not end up happening. The blight that plagued the surrounding area that the Illitches vowed to end? Turns out that was, in part, fostered by the Illitches, whose companies bought up properties and allowed them to rot in order to drive down prices and discourage competing development in the arena's vicinity. Many of the neighborhoods pledged by the Illitches still do not exist, but Illitch-owned parking lots dominate the area.

 


Perhaps the most telling revelation of the District Detroit saga comes from a Real Sports interview with Detroit Francis Grunow of the Neighborhood Advisory Council. The Illitches promised at least 700 residential units would be constructed in the surrounding area. When asked how many units have actually been built, Grunow replied, "None. They have developed none. Zero." The District Detroit saga thus serves as a cautionary tale: when cities pony up subsidies for billion dollar corporations, prosperity fails to trickle down to the community.

 

Cincinnati

 

The Cincinnati Bengals' stadium deal with Hamilton County demonstrates how another type of contract clause can put taxpayers on the hook for more than they imagined paying. The "state-of-the-art clause" is not unique to Cincinnati, as the Charlotte Hornets, Kansas City Chiefs, and others also inserted them into their leases, but it effectively serves as a catalyst for a stadium arms race. 

 


In these leases, "state-of-the-art clauses" allow for a team to opt out of its lease after a given number of years if its facility is not deemed to be "first-tier." Naturally, this creates several issues. First, which categories must be evaluated to determine whether a stadium is "first-tier?" Luxury boxes? Restrooms? Scoreboards? This is not specified. Secondly, what qualifies as "first-tier?"Are NFL locker rooms ranked 1 through 32? Do shorter wait times and Apple Pay compatibility mean a concession area is "state-of-the-art?" This is not specified either, and is often decided by an arbitrator.

 


Finally, because of this uncertainty, cities are constantly in search of cutting-edge technology and amenities that make them "top-tier." This, of course, necessitates that they also regularly spend an exorbitant amount of money on amenities and make outlandish promises about amenities to teams to get them to stay. Nowhere is this more obvious than in Cincinnati. According to the terms of the Bengals' lease, if 14 NFL stadiums have something, then taxpayers must buy the Bengals that certain thing. As Aaron Gordon of Vice writes, "It's like if your parents were contractually obligated to buy you a new iPhone if all your friends got one, every year for 30 years, but if you were a billionaire and your parents were barely breaking even. Good deal for you, bad for your parents." As new stadiums have been built around the league, any amenities present in those stadiums had to be installed in Cincinnati's Paul Brown Stadium, will of the taxpayers and politicians be damned. In fact, the Bengals took this to such an extreme that they have already put into their lease a bill in the name of the county for a "holographic replay system," which, NFL fans may note, has not even been invented yet. But the day some team gets it, the Bengals will too, at the expense of Hamilton County.

 

The Misleading Economic Argument for Subsidies

 

The issue of stadium subsidies is a rare one that unites both progressives wary of the trickle down approach like Rep. Rashida Tlaib and conservative libertarians who decry the government picking winners and losers, like the Koch brothers and their group Americans for Prosperity. However, historical evidence clearly indicates that the idea is supported overwhelmingly by taxpayers and local politicians. The argument that is often made and sells is that visitors coming to spend money at and around sporting events will create enough economic activity to pay for the stadium. This argument falls apart under closer inspection as it relies on misleading terminology and is refuted by economic data.

 

On one count, the proponents of publicly financing stadiums are correct: it is fairly possible that a stadium will generate more in related economic activity than the cost of any public funding, no matter the amount that is subsidized. But economic activity is not the same as tax revenue, which actually funds the government and supports services and programs for constituents. As Jeffrey Dorfman of Forbes writes, it does not matter if nearby businesses make more money than taxpayers forked over to fund the stadium because most of that money is going to the businesses themselves instead of the government. Thus, what truly matters is whether the amount in taxes that is collected from economic activity exceeds the taxpayer cost.

 

To illustrate this concept, allow me to give a brief and simple example. Let us say that I am going to an NCAA basketball tournament game at Little Caesars Arena in Detroit. I might spend $300 on a flight from D.C., $300 on a hotel room for two nights, $100 on food from local restaurants and grocery stores, and then $250 on tickets. On the surface, that may look like a lot of economic activity for a single visitor. But when one considers that the plane ticket will likely generate nothing for local and state governments (even airport fees will just go to funding the airport), the hotel likely generates $60 in sales and hotel taxes for the government, the restaurants produce just $6, and the ticket generates about $15 in tax revenue, it becomes evident that the returns are actually quite minuscule. My $950 in economic activity generates a mere $81 in tax revenue. Even then, some of that tax revenue has to go towards security and preparations for hosting the event, such as extra police or keeping the Detroit People Mover and QLine streetcar system running for later hours. For a more historical example, Baltimore's Oriole Park at Camden Yards generates just $3 million per year in tax revenue and job creation, a woefully poor return on investment for a $200 million ballpark.

 

A second claim often made is that new stadiums will create new jobs in construction and in the stadium, bring tourists and companies to the city (which will create more jobs and spending), and all this new spending will compound, increasing local income and thus creating more new spending and jobs. Unfortunately for subsidy proponents, the economic research on this is as clear as day, as 83 percent of economists agree that "[p}roviding state and local subsidies to build stadiums for professional sports teams is likely to cost the relevant taxpayers more than any local economic benefits that are generated." While construction jobs may be created, they may not go to local workers (as was the case in Detroit) and those jobs may not have protections and benefits for those workers. Most notably, at the end of the day, construction jobs are temporary and will not exist once the stadiums built. Given that construction is a unique and temporary industry in this case, there can be no multiplier effect creating other jobs that endures after the construction is finished. That leaves the jobs inside the stadium, like janitorial staff and those in ticket sales. These jobs also do little to substantially improve the economy of cities and create new jobs because they are seasonal, low-paying, and few and unchanging in number.

 

Finally, stadium subsidy proponents argue that if stadiums are built in an underused part of a city and new businesses and restaurants spring up in the surrounding area, economic activity will increase and small local businesses will thrive. Sure, with their new proximity to a stadium and different types of people coming into the neighborhood, some local restaurants may benefit. More fans will make stopping for lunch in a neighborhood restaurant part of their gameday tradition. But even then, the scale of economic impact is very limited. When these "stadium towns" are built, residents tend to spend their money there rather than another one in another part of the city. Ultimately, little if any new economic activity and development actually occurs, as money going to one business is merely reallocated to another, "reshuffling deck chairs instead of developing anything new," according to Temple University economist Michael Leeds.

 

If building new publicly-funded stadiums has become a cookie-cutter substitute for coherent urban and infrastructure policy, it has become an imperfect and ineffective one.

 

 

How Cities, Governments, and Taxpayers Can Fight Back

 

"If stadium subsidies are such a bad deal, then why do they keep happening, and how can taxpayers fight back?" one might ask. The first part of the question is simple. Taxpayers continue to support subsidies for sports venues because they view their teams as critical to their sense of civic pride. Fans fear not just the loss of a team but also the loss of their city's status as "major league." Nowhere is this more prevalent than in smaller markets like Indianapolis. When Seattle lost the Supersonics, they still had the Seahawks and Mariners and neither could be said to be the city's top export or 
attraction. If Indianapolis lost the Pacers and the Colts, they would be without a major league team, and many (wrongfully, in my own opinion as Indianapolis is home to the Indy 500, a world-class zoo, diverse, top-tier museums, and gorgeous, spacious urban parks) would feel like the city lost its primary sources of national notoriety. Not much has changed in that regard since David Swindell and Mark Rosentraub found in 1998 that much higher percentages of Circle City residents believed losing the Pacers or Colts would hurt the city's reputation than losing the city's museums would. The issue is that fans believe they are powerless and would rather accept a bad deal than live with the possibility of missing out on major league sports due to the greed of an owner. But we can reform the discussion to put pressure on owners to stay and pay while addressing the structural issues that underlie the system.

 

One possible solution would be to end the issuing of tax-exempt government bonds for stadium construction. This has yet to succeed at the federal level despite more than two decades of effort and support from Democratic senators like Daniel Patrick Moynihan and President Barack Obama. However, the sudden support from the Koch brothers for ending the loophole significantly increases the likelihood of a bipartisan bill.

 

Another way of addressing the problem is changing the way teams operate. This can be done by bringing antitrust lawsuits against the leagues (or in baseball's case, ending congressional support for MLB's exemption from federal antitrust law). Breaking up Major League Baseball into economically competing American and National Leagues (similar to how the NCAA has independent conferences in that they collaborate on rules but unable to collude on broadcasting or licensing policy) could make it economically unwise for a team to leave an economically viable city, and even if it did, a team in the competing league would eagerly take its place. It would shift, even in a small way, the leverage from teams to cities (whose taxpayers would be paying lower subsidies, if any at all). However, getting the federal government on board would be quite difficult given the Department of Justice's long history of deferring to the leagues on antitrust matters.

 

For threats of in-market relocations (such as the Washington Redskins moving from RFK Stadium in Southeast D.C. to FedEx Field in suburban Landover, MD), a more obscure method can and should be undertaken. A glaring failure of the public policy debate over stadium subsidies is that congressional action has almost exclusively focused on out-of-market relocations when in-market ones are historically more common. Suburban stadium subsidies, meanwhile, are just as irresponsible, if not more so than subsidies for a team to relocate out-of-market. As Kriston Capps of The Atlantic's CityLab notes, suburban sports venues kill walk-up ticket sales, exacerbate traffic due to a lack of public transit options, and represent missed opportunities to activate an urban area. At the same time, suburban taxpayers are on the hook for the cost and city officials are duped into supporting team-friendly leases while the team continues to benefit from its affiliation with the city it spurned.

 

Enter the Lanham Act.

 

Villanova law professor Mitchell Nathanson proposes that in-market relocations leading to outrageous suburban subsidies can be combated by giving cities greater control over their brands. In accordance with the federal Lanham Act, the names of sports teams are a registered trademark owned by the teams themselves. This is how the Los Angeles Angels can continue to use their name despite playing in Anaheim, fulfilling owner Arte Moreno's desire to appropriate a big market and use it to his advantage when negotiating the Angels' TV deals. But if Nathanson has his way, Moreno would be out of luck and the rights of the citizens of Los Angeles would be protected.

 

Congressional creation of a right to publicity for cities would place the financial burden on teams rather than cities having their names used to get advantageous lease terms by prohibiting the Angels from calling themselves the Los Angeles Angels if they play in Anaheim unless they pay a fee to the city. This amendment would acknowledge that the Angels benefit from their association with the city of Los Angeles and provides the city with adequate compensation for the benefits the team receives from using the name when it takes the field. Of course, should Moreno decline to pony up for the Los Angeles name, he would have to use the Anaheim name under Nathanson's proposal. By forcing each party to weigh the costs and benefits of in-market relocation, the rights of both parties are protected and negotiations can begin with both sides on the same playing field.

 

A final course of action is citizen action. Citizens and taxpayers can lead grassroots campaigns and lobby state and local politicians to refuse to back stadium deals that force taxpayers to subsidize a multibillionaire's stadium while their kids' schools are crumbling and protections for the construction workers building the stadium are gutted. Neighborhood and political groups can educate the public on the ineffectiveness of stadium subsidies and the inequity of the system as residents of Boston, Providence, and Hartford did as New England Patriots owner Robert Kraft sought to move the team to a taxpayer subsidized home. The groups raised hell (as history tells us Massachusetts residents are quite adept at doing) and Kraft was forced to back down and keep the team in Foxborough, as well as fund 100 percent of the stadium's construction himself. The key to the effort was the groups taking power back from the owners and uniting citizens of both Foxborough and the proposed relocation site, as owners will not move a team to a place where they are not wanted.

 

Another effective citizen action tactic is extremely simple: vote against bad stadium deals! In places where referendums have been held on the issue, voters have often defeated plans to subsidize stadium construction. In Milwaukee, San Francisco, San Jose, and Seattle, voters rejected public support for stadiums on ballot initiatives. Unfortunately, the vast majority of these deals are completed without citizens voting on the issue. Thus, if citizen action is to be successful, it must address the need for the public to vote on the issue or lawmakers to hold town halls where voters can express their misgivings about the deals and get a straight answer from their representatives.

 

It is clear that stadium politics has become a more controversial topic in the past decade or so. Yet cities continue to subsidize sporting venues while billionaires receive all the profits from the events held in them. Overturning the status quo that has come to be is going to take revolutionary public policy solutions and relentless citizen campaigning. It is a tall task but cities, the communities who project their hopes and everlasting loyalty upon the athletes they welcome as their own, must realize that stadium subsidies are one game their citizens will always lose.

 

 

 

Photo courtesy Wikimedia Commons

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