1. The Economics of Sports
FIFTH EDITION
Chapter 7
THE PUBLIC FINANCE OF SPORTS: WHO PAYS AND WHY?
Michael A. Leeds | Peter von Allmen

2. Introduction: The Face of Evil
In the late 1950s, two New York reporters—independently --choose Stalin, Hitler and Walter O’Maley as the most despicable human beings who ever lived
Why O’Malley?
He was the Brooklyn Dodgers owner
He moved the team – in the middle of the night – to Los Angeles
Recall that a team can become a public good
He realized that he had market power
Many never forgave him

3. Learning Objectives
Appreciate the connection between the mobility of sports franchises and the increase in public funding of stadiums and arenas
Understand the ways that sports teams, leagues, and institutions exercise monopoly power in their dealings with municipalities
Grasp the impact that exchange rates and stadium location have on the ability of cities to retain franchises and subsidize facilities.
Appreciate the advantages and disadvantages of different methods of financing public support of sports facilities

4. 7.1 How Cities Came to Fund Stadiums
Today it seems normal for teams to threaten to find a new home unless their current host city builds a new facility or restructures the rental agreement on the current one
This section provides a historical context for the growing mobility of sports franchises and their consequent increase in market power

5. Teams on the Move The Dodgers left Brooklyn after the 1957 season
They were not the first team to move
The Braves, Browns, & A’s moved earlier
But they were all neglected stepsisters in cities
The Braves’ move ended MLB’s “Golden Age”
Golden Age lasted fifty years:
It was a period of absolute stability
No teams entered or left MLB
No teams moved
Major parks were built (Shibe, Forbes Field, Comiskey)
Boom ends in 1923 with Yankee Stadium

6. The Dodgers Were Different
The Dodgers did not have to move
They were the most profitable MLB team in the 1950s ( )
They accounted for 47% of the National League’s profits
They were a “cultural totem” for Brooklynites and all Americans

7. Opportunity Costs
The Dodgers moved because they could earn even more in LA
Staying in Brooklyn imposed a high opportunity cost
Accounting profit = revenue-explicit costs
Economic profit = revenue – all costs (explicit as well as implicit) – revenue that could have been earned with the given resources elsewhere
Dodgers revenue was much higher in LA (2 million fans) than Brooklyn (1 million fans)

8. The Three Eras of Stadium Construction
Judith Grant Long identifies three phases of stadium funding
The “entrepreneurial period” lasted from 1890 to 1930
The “civic infrastructure” period lasted from 1953 to 1980
The “public-private partnership” began after 1980 and is still ongoing

9. Era #1: 1890 – 1930 All facilities are called “Park” or “Field”
The names reflect pastoral origin of baseball
The term stadium was not used until Jacob Ruppert applied the name to his new “Yankee Stadium” in 1923
All facilities bear the name of a team owner who built the stadium to house his team
Exception – sort of – Wrigley Field
It was originally “Weeghman” Field built by Federal League
The team and stadium were later bought by Wrigley
Public financing of facilities is an exception
Answer to trivia question: Yankee Stadium – the owner felt the Greek term added dignity to the facility

10. Era #1: 1890 – 1930 (cont.)
“Golden Age” kept teams in the facilities they built in the early 20th century
Football teams rented space in baseball parks – got their names from them (Bears/Cubs; Lions/Tigers; Giants/Giants)
Most no longer exist (Wrigley; Fenway are exceptions)

11. Era #2: 1953 – 1980
Cities started to view teams and stadiums as centerpieces of urban development
Cities frequently bid against one another to attract or retain teams
Names reflect change of funding source
Facilities are municipally built and leased to teams
Named for city, geographic trait, or patriotic theme
Most of these have also disappeared

12. Era #3: 1980 – Present
Local and state governments have funded about half the construction costs
Some are completely publicly funded (FedEx Forum)
Firms have sought new revenues
They sell “Naming rights” to firms
Extra
Dallas had the first football only stadium (1971)
Edward Jones built for the Rams in St. Louis (1995) even though the baseball team was still there

13. How Teams Exploit Monopoly Power
The Dodgers’ move fundamentally altered the relationship between teams and the cities that host them
If the highly profitable Dodgers could be uprooted, so could any team
Cities have bid for teams to keep them or to lure them
They offer better facilities to do so
Cities have exploited their monopoly power and used the all-or-nothing demand curve
Cities have also fallen prey to the winner’s curse

14. Leagues, Cities, and Market Power
North American sports leagues have limited the number of teams
They seek to increase both competitive balance and profits
Before WWII, neither the LB nor NFL had any teams on the west coast
The Depression delayed any moves
After WWII, both MLB and the NFL placed teams on the West Coast, but neither sport increased the number of teams

15. Westward Ho The NFL’s Rams left Cleveland for Los Angeles in 1946
This was in response to the creation of the Cleveland Browns of the new All-American Football Conference
MLB almost admitted the Pacific Coast League (PCL) as a third major league
The PCL was a high minor league where Ted Williams and Joe DiMaggio had once played
The deal fell through when MLB refused to honor PCL contracts
Instead, MLB allowed the Giants and Dodgers to move to the West Coast

16. Baseball’s Expansion after 1961
The expansion had two goals
Appease Congress, which was angered by the move of the Senators to Minneapolis–St. Paul (where they became the Twins)
Congress threatened to mull over the anti-trust exemption
Prevent the formation of a new league
Branch Rickie wanted new teams in NY and Houston, two key cities for MLB
MBA created the Angels in LA (to help round out the American League)
It created new teams in NY, Houston, and DC

17. Football’s Expansion The NFL’s first expansion came in 1960
The NFL tried to prevent the creation of American Football League (AFL)
The NFL put franchises in Dallas and Minneapolis to prevent the AFL from putting teams there
Its second expansion was also tied to AFL
It was linked to AFL/NFL merger in
Limited antitrust exemption needed the support of a Louisiana Congressman and Senator
The New Orleans Saints were born as a result

18. Missteps by Cities and Leagues
Some cities have committed to funding before seeing what the cost would be
This enhances the teams’ monopoly power
Cleveland overpaid millions for Gund (now Quicken Loans) Arena and Jacobs (now Progressive) Field in 1990 as a result
Some feel that MLB & NHL have over-expanded
The lack of bidders for franchises lessens their monopoly power
Few cities bid for the Expos when MLB sought to move them from Montreal
Australian Rules Football teams lack monopoly power because of the regional appeal of their game
10 of the18 teams are located in or around Melbourne

19. The All-or-Nothing Demand Curve
When NASCAR sought a host city for its Hall of Fame, it did not offer cities a choice of how much material they wished to house
It was the whole collection or nothing
The all-or-nothing choice gave NASCAR an advantage that very few monopolists ever get to exercise
Even the most powerful monopolist cannot tell consumers how much to pay and how much to buy

20. All-or-Nothing Demand
Surplus P Q D Pe Qe
In a competitive market
At Pe consumers buy Qe
Consumers get blue surplus
Even a monopolist is restricted to a demand curve: chooses Pe or Qe, not both

21. Firms Can Extract Surplus
Consumers must choose Qm or nothing
They cannot buy Qe
Consumers lose red area
To get the surplus they must absorb the loss
They are still better off because the blue area is larger than the red
Surplus Q D Qe Qm
Loss Pe

22. How Far Can The Firm Go? P Consumer buys Qe as long surplus > loss
Buying Qm beats buying nothing
The maximum Qm sets loss equal to surplus
Area of red triangle = Area of blue triangle
Surplus Q Qe Qm
Loss D Pe

23. Present Value
To value facilities and mega-events today, we must consider their future cash flow streams
Benefits often occur over many years
Funding also occurs over many years
Future costs and benefits are not worth the same as current costs and benefits
We would rather have $1 today than $1 tomorrow
We must discount future costs and benefits
Assume a stadium brings benefits over T years
Each year’s benefits are given by Bt
The total value of the stadium is less than B1 + B2 + B3 + … + BT

24. The Arithmetic of Discounting
If the interest rate is r
Having $1 today can bring $1*(1+r) in one year
The future value of $1 in one year is $1*(1+r)
This means that having B1 in one year is like having B1/(1+r) now
B1/(1+r) is the present value of B1
By extension, having B2 in two years is like having B2/(1+r) in one year
Or [B2/(1+r)]/(1+r) = B2/[(1+r)2] today
B2/(1+r)2 is the present value of B2
The value of the stream of benefits is thus:
B1/(1+r) + B2/(1+r)2 + B3 /(1+r)3 + …BT/(1+r)T

25. Contingent Valuation (CV)
CV surveys ask residents what they would be willing to pay to attract or retain a franchise
There are three types of CV surveys
Open-ended: “What would you be willing to pay?”
Bracketed: “Which of the following would you be willing to pay?”
Closed-ended: “Would you be willing to pay $X?”
Drawbacks of CV surveys
They are non-binding so there is no penalty for giving a large answer
Some believe that respondents undervalue the burden of a stream of future payments so the answer varies with the payment method

26. The Winner’s Curse The buyer pays more than the good is worth
This occurs in auctions with an uncertain payoff
First noted in auctions for oil leases as winners overbid
Now seen in bids to host teams, facilities, or major events
In an auction the winner is willing & able to bid the most
The winner expects greatest payoff because he is
The bidder best suited to exploit the opportunity or
The most (over-)optimistic bidder or the bidder most intent on winning for the sake of winning
This result is the winner’s curse

27. 7.3 Stadium Location and Costs
In 2012, Minnesota approved a new stadium for the Vikings
The anticipated cost of the new stadium is $975 million
This is over $900 million spent on their old facility in 1982
This reflects a general skyrocketing of construction costs
Why have costs risen so dramatically?
New facilities are far more elaborate
New stadiums take up more space to accommodate all the extra amenities they offer
The per-unit cost of urban space has risen, so location becomes important
Location decisions also take place on a larger scale when leagues cross national boundaries

28. How Exchange Rates Affect Costs
Hockey Returns to Winnipeg—a round-trip story
In 1996, the NHL’s Winnipeg Jets left for Phoenix to become the Coyotes
The Quebec Nordiques had left the year before
Some felt that soon only the Montreal Canadiens and Toronto Maple Leafs would remain
In 2011, the Atlanta Thrashers moved to Winnipeg, and the Jets were reborn

29. Explanation There are several reasons for this reversal
Greater revenue sharing
An improved – equally shared – US TV deal
A much stronger Canadian dollar, on which we now focus
See Figure 7.2 for the determination of exchange rates
Seven of the 30 NHL teams are located in Canada

30. Exchange Rates and Sports Franchises
Assume that a Canadian NHL franchise:
Receives revenue in Canadian dollars
Pays salaries in U.S. dollars
To pay players it must exchange C$ for US$
For most of 2011, C$1 has equaled US$0.95 to US$1.00
In early-mid 2000s C$1 was worth about US$0.62
When the C$ was weak v. US$
Players became more expensive
Canadian teams became less competitive on the ice and off
Many moved to the US

31. Why Most Stadiums Are Not in the Center of Town
A sports facility typically provides the greatest benefits to a city if it is integrated into the fabric of the city
Nevertheless, most facilities are located on the outskirts of cities
Arenas and stadiums take up a lot of space
Land costs are a large component of their costs

32. A Circular Model Consider a circular city
Firms are identical except for location
Residents are uniformly distributed
A & B move to the center of the circle
That is why central business districts are central
The competition for space drives up land prices at the center A B

33. The Cost of Space: The Rent Gradient
Urban economics is another branch
Land farther from the center of town is cheaper
It is cheaper to build a stadium on the outskirts
Cost of land
Distance from city center

34. 7.4 Stadium Costs and Financing
Between 1995 and 2009, teams, leagues, and cities spent almost $18 billion on sports facilities
Teams spent a little over $7 billion, while the public sector spent over $10 billion, almost 60 percent of the total
This section examines how cities underwrite the construction of new facilities
It shows that the actual subsidy might be far greater than what the official figures indicate

35. Bidding Wars Cities do not literally bid for teams
All major leagues forbid municipal ownership
Teams would be immobile
Teams would have to disclose their finances
Teams must have individual majority owners
Instead cities bid for the right to host the team
Cities do not generally offer cash
They typically offer payment in kind (it is a barter!)
Common subsidies are funding for stadiums, practice facilities, or land

36. Explicit Costs
Table 7.1 shows the total cost and public share of facilities built for major league sports teams since 2000
Adding up the figures in Table 7.1 shows that $11.34 billion has been spent since 2000 to construct new facilities for the major North American sports leagues
About $6.1 billion has come from state and local governments
The spending on sports facilities comes even when the city has other pressing needs

37. Table 7.1

38. Table 7.1 Cont.

39. Additional Costs
The data in Table 7.1, however, tell only part of the story
These data alone can lead analysts to misstate the full burden of a facility on a city
Construction costs are not the only expenditure that a city makes on a sports facility
The city also pays for infrastructure, such as roads and utilities, and for support services, such as police and sanitation

40. Public Participation
As Table 7.1 shows, the public share of the expenditure on individual facilities has ranged from 0 to 100 percent
This variation is reflected in the facilities’ ownership structure
Five facilities have been built since 2010
Amway Center and Marlins Park—are owned and operated outright by the cities
Target Field and Consol Energy Arena—are run by public authorities created for them
MetLife Stadium, is jointly operated by Giants Stadium LLC and Jets Development LLC

41. 7.5 Paying for Stadiums
There are two reasons for publicly funding sports facilities
Public goods
If people can enjoy the team without paying, they will not do so
Governments have a hard time determining how to allocate the burden because the benefits are so intangible
Externalities
Teams and facilities provide benefits to people who do not go to a game
Markets under-provide goods that have positive externalities
This section examines ways cities and states fund facilities
What sales tax should a city apply?
Is debt a good idea?

42. Three Criteria for Taxation
Ramsey rule for efficient sales taxes
An efficient tax minimizes deadweight loss
Thus, the tax is inversely related to the elasticity of demand
Compare the deadweight loss in Figures 7.5 and 7.6
Vertical equity compares the impact of the tax on citizens with different income levels
Those with the greatest ability to pay should pay the most
Horizontal equity suggests that equals should be treated equally
Those who benefit the most from a facility should bear the highest tax burden

43. Figures 7.5 and 7.6

44. Who Pays a Sales Tax?
Tax burdens are sometimes borne by people who were not the target of the tax
Hotel taxes are popular ways to fund facilities
They “export” the tax to out-of-towners
Taxing those who come to town to watch a game is horizontally equitable
Why do hotel owners object to such taxes?
The tax raises the price of a hotel stay
It rises by less than the tax
Some of the tax is “paid” by local hotels
See Figure 7.5

45. Sin Taxes
Sin taxes are levied on “sinful” products, such as cigarettes and alcohol
Cleveland funded its facilities with a sin tax
Sin taxes are billed as having two virtues
They raise funds
They discourage undesirable behavior
Unfortunately, achieving one of these goals precludes achieving the other
Figure 7.5 shows that when demand is elastic, a tax discourages activity but fails to raise many funds
Figure 7.6 shows that when demand in inelastic, a tax raises funds but fails to discourage the activity

46. Tax Incremental Financing (TIF)
TIF does not impose new taxes
TIF earmarks added tax revenue for a project
San Diego and San Francisco expected hotel stays to rise because of new baseball stadiums
More hotel stays would cause hotel tax revenue to rise
The added tax revenue would pay for the ballpark
TIF assumes a sustained rise in hotel revenue
Without a sustained rise, there will not be enough revenue
That seems to be a problem now in San Diego

47. Taxes That Spread the Burden
Milwaukee funded Miller Park with a five-county sales tax
The wider tax increases horizontal equity
Wealthier suburbanites help pay the burden
Wealthier suburbanites are the largest beneficiaries
Seattle funded Safeco Field in part with a sales tax on restaurants & bars in King County
The tax on businesses that benefit from the stadium increases horizontal equity
The tax was too broad at it burdened fancy French restaurants across town as well as sports bars across the street

48. The Benefits of Debt Borrowing does not let cities escape taxation
They must eventually pay back debt by raising taxes
The “equivalence theorem” posits that the two are equivalent – taxpayers anticipate the future burden
Tax laws give debt an advantage
Municipal bonds are tax deductible – see Figure 7.7
Lower tax burden means cities can pay less interest
Tax law reduces tax burden on city residents
This increases the tax burden on taxpayers elsewhere

49. Figure 7.7

50. Who Benefits from Borrowing?
Tax breaks may save the Yankees $786 million
The Miami Marlins might be in legal trouble
The SEC is investigating whether the team misled local officials by claiming that the team could not afford a new stadium without public support
Borrowing from future residents might be efficient
If they also benefit – they should also pay
Unfortunately, they often pay without benefiting
They often pay for an empty stadium
New Jersey still owed $100 million in bond debt on Meadowlands Stadium when it was demolished in 2010