Journal of Sport Management, 2003, 17, 156-184 156

Crompton, Howard, and Var

© 2003 Human Kinetics Publishers, Inc.

Financing Major League Facilities: Status, Evolution and Conflicting Forces John L. Crompton Texas A&M University

Dennis R. Howard University of Oregon

Turgut Var Texas A&M University This paper identifies the pervasiveness, magnitude, and trends of public investment in major league sports facilities and describes the forces that typically direct and dictate the debate. In 2003 dollars, the total investment in facilities currently being used by franchises in the four major leagues in North America is almost $24 billion, of which over $15 billion was contributed by public entities. Four eras of funding these facilities are identified and described: the Gestation Era 1961–1969; the Public Subsidy Era 1970–1984; the Transitional (Public-Private Partnership) Era 1985–1994; and the Fully-Loaded (Private-Public Partnership) Era post 1994. There is a consistent trend of private contributions increasing across these eras, but public sector contributions remain substantial. The final section of the paper discusses the four primary sources of momentum undergirding this public investment: owner leverage, the community power structure, the stimulus of increasing costs, and the competitive balance rationale.

Investments in professional sports facilities have increased exponentially over the past decade and their rate of growth is unprecedented. The first part of this paper presents an analysis of trends in the number and cost of new stadiums and arenas constructed for franchises in the four major leagues in North America, the relative contributions to those projects made by the public sector and by the franchises, and of patterns in the evolution of those contributions. This is followed by a discussion of the factors that have contributed to the trend to increasing private sector investments in these facilities in recent decades. The paper concludes with a review of the primary sources of momentum undergirding the public sector investment in facilities for major league teams.

J.L. Crompton and T. Var are with the Department of Recreation, Park and Tourism Sciences, Texas A&M University; D.R. Howard is with the Department of Marketing, University of Oregon.

156

Financing Major League Facilities

157

Trends in the Cost and Number of Major League Facilities Ascertaining the cost of constructing a major sports facility often is not a simple task, because in addition to the cost of the facility itself there are likely to be other costs associated with its construction. These may include the cost, or the opportunity cost, of land; the cost of infrastructure such as enhanced roads, utilities, or parking; and the cost of relocating existing residents or businesses to another site. Decisions have to be made as to which of these ancillary costs, and what proportion of them, should be included in the calculation of a facility’s cost. The challenge is illustrated by the baseball and football stadiums constructed in Baltimore in the 1990s for the Orioles and Ravens. These are listed in Table 1 as costing $235 million and $223 million, respectively. One commentator itemized the costs attributable to the twin stadium complex as follows (Morgan, 1997): Buying the land, relocating businesses, and clearing the site Relocating railroad tracks and rehabbing Camden Station and the signature warehouse Baltimore City contribution of some of its federal highway funds to rebuild a street and construct a new highway access ramp Construction of the baseball stadium Construction of the football stadium Construction of a parking facility Total

(million) $100 $ 18.6 $ 48.2

$106.5 $190 $ 10 $473.3

This example illustrates three points. First, the actual stadium cost may be lower than 50% of the project cost. Thus, the Orioles’ Stadium was constructed for $106.5 million, but in Table 1 the total project cost attributed to the stadium is $235 million. Second, there is a discrepancy between the above itemization and the $458 total for the two facilities listed in Table 1, suggesting that some of the costs were not attributed to the stadiums in the city’s official statement of costs given in the city’s press releases. Third, the allocation of associated costs to a facility beyond its direct construction cost is likely to be somewhat arbitrary, since often it is unclear which improvements have been undertaken because they are essential to the project and which because they contribute to generally upgrading the locale. These kinds of issues make it difficult to compare the cost of one facility with that of another, and they explain why statements specifying a facility’s cost in the popular press or professional literature may differ. The most reputable source for this type of information is widely considered to be the Sports Business Journal (SBJ) (Street & Smith, 2000). Hence, this was used in the analysis presented here, with four amendments. The costs shown on the SBJ list were cross-checked with other sources such as team web sites, press releases and contemporary news reports. Because of the difficulty of allocating costs, discrepancies of less than 10

1962 1964 1966 1966 1966 1967

1970 1970 1971 1971 1971 1972 1973 1973 1975 1976 1976 1976 1980 1982 1984

1987 1989

Tenant

Los Angeles Dodgers New York Mets St. Louis Cardinals Oakland Athletics/Raiders Anaheim Angels San Diego Padres/Chargers

Cincinnati Reds/Bengals Pittsburgh Pirates/Steelers New England Patriots Dallas Cowboys Philladelphia Phillies/Eagles Kansas City Chiefs Kansas City Royals Buffalo Bills New Orleans Saints New York Giants Montreal Expos Detroit Lions San Francisco 49ers Minnesote Twins/Vikings Indianapolis Colts

Florida Marlins/Miami Dolphins Toronto Blue Jays

Dodger Stadium Shea Stadium Busch Stadium Network Associates Coliseum Edison International Field Qualcomm Stadium Total 1961–1969 Average facility cost Cinergy Field Three Rivers Stadium Foxboro Stadium Texas Stadium Veterans Stadium Arrowhead Stadium Kauffman Stadium Ralph Wilson Stadium Superdome Giants Stadium Olympic Stadium Pontiac Silverdome 3COM Park Metrodome RCA Dome Total 1970–1984 Average facility cost Pro Player Stadium Sky Dome

Year opened

27.7 24.0 24.0 25.0 25.0 27.0 152.7 $25.5 $55 $35 $61 $35 $50 $53 $51 $22 $168 $68 $231 $56 $32 $75 $78 $1,069 $71 $145 $383

Construction cost million $

78.4 82.1

23.9 23.9 27.4 27.4 27.4 31.2 33.7 33.7 39.3 42.7 42.7 42.7 57.6 68.0 73.7

15.1 16.2 17.6 17.6 17.6 18.6

C.C. index

Historical and Inflation Adjusted Costs for Stadiums 1961–2003 (2003 Prices)

Facility

Table 1

219.4 177.2 163.1 169.9 169.9 173.6 1,073.1 $178.8 $273 $175 $267 $153 $216 $203 $179 $78 $511 $190 $648 $157 $66 $132 $127 $3,375 $225 $221 $558

C.C.I. adjusted

4.7 24.0 19.0 25.0 24.0 27.0 123.7 $20.6 $55.0 $35.0 $0.0 $35.0 $50.0 $53.0 $47.0 $22.0 $168.0 $68.0 $231.2 $56.0 $32.0 $68.0 $48.0 $968 $65 $30.0 $241.6

Public contribution

20 63

89.0

11.0 80 37

0 0 100 0 0 0 6 0 0 0 0 0 0 9 38

18.0

82.0 100 100 0 100 100 100 94 100 100 100 100 100 100 91 62

83 0 21 0 4 0

% private

17 100 79 100 96 100

% public

158 Crompton, Howard, and Var

1990 1991 1992 1992 1993 1994 1994

1995 1996 1997 1997 1998 1998 1998 1998 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 2002 2002 2002 2003 2003

Tampa Bay Devil Rays Chicago White Sox Atlanta Falcons Baltimore Orioles San Antonio Spurs Texas Rangers Cleveland Indians

Colorado Rockies St. Louis Rams Carolina Panthers Washington Redskins Atlanta Braves Baltimore Ravens Arizona Diamondbacks Tampa Bay Buccaneers Tennessee Titans Cleveland Browns Seattle Mariners Detroit Tigers Houston Astros San Francisco Giants Cincinnati Bengals Denver Broncos Milwaukee Brewers Pittsburgh Pirates Pittsburgh Steelers Detroit Lions Houston Texas Seahawks Cincinnati Reds

Note. The C.C. Index for years 2002 and 2003 is projected.

Tropicana Field Comiskey Park Georgia Dome Oriole Park at Camden Yards Alamo Dome Ballpark at Arlington Jacobs Field Total 1985-1994 Average facility cost Coors Field TransWorld Dome Ericsson Stadium FedEx Field Turner Field PSINet Stadium Bank One Ballpark Raymond James Stadium Adelphia Coliseum Cleveland Browns Stadium Safeco Field Comerica Park Enron Field Pacific Bell Park Paul Brown Stadium New Mile High Stadium Miller Park PNC Park Heinz Field Ford Field Reliant Stadium Seahawks Stadium Great American Ballpark Total 1995–2003 Average facility cost 1962–2003 Total $138 $150 $210 $235 $195 $191 $175 $1,822 $202 $215 $290 $248 $251 $235 $223 $354 $169 $292 $314 $534 $300 $248 $330 $450 $400 $394 $262 $252 $325 $367 $400 $334 7,186.0 $312.4 10,229.2 97.3 100.0 103.6 103.6 105.3 105.3 105.3 105.3 107.8 107.8 110.6 110.6 110.6 110.6 113.8 113.8 113.8 113.8 116.6 116.6 116.6 119.6 119.6 7,795.5 $338.9 14,734.1

84.2 86.0 88.7 88.7 92.7 96.2 96.2 $2,490 $277 $196 $209 $283 $317 $252 $237 $218 $1,520.6 $169 $264 $347 $286 $289 $267 $264 $402 $191 $324 $348 $577 $324 $268 $357 $473 $420 $414 $275 $258 $333 $376 $400 $334 4,527.0 $196.8 7,139.5 100 100 100 94 100 84 100 15.4 78 100 20 28 0 90 71 100 80 93 69 33 68 3 100 75 77 83 70 35 69 75 9 38.0

$138.0 $150.0 $210.0 $220.0 $195.0 $161.0 $175.0 84.6 $168.0 $290.0 $50.0 $70.5 $0.0 $200.0 $253.0 $169.0 $234.0 $293.0 $372.0 $100.0 $169.0 $10.0 $450.0 $300.0 $304.0 $222.0 $175.5 $115.0 $252.0 $300.0 $30.0 62.0

22 0 80 72 100 10 29 0 20 7 31 67 32 97 0 25 23 17 30 65 31 25 91

0 0 0 6 0 16 0

Financing Major League Facilities 159

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Crompton, Howard, and Var

percent were ignored. However, as a result of this cross-check procedure, four of the SBJ costs were changed:

Fleet Center (Boston) Key Arena (Seattle) Corel Centre (Ottawa) Molson Center (Montreal)

SBJ cost (million) $275 119 274 315

Amended cost (million) $160 75 145 230

The reason for the overstatement of the Fleet Center and Key Arena costs is unknown. In the case of the Corel and Molson Centers, at least part of the overstatement may be attributable to a failure to convert the costs in Canadian dollars to U.S. dollars. Description of the Trend Tables

Tables 1, 2, and 3 list the facilities in which professional franchises in all four major leagues play. The facilities listed in Table 3 are separated from the others because they are “outliers.” That is, they are much older, do not group into coherent cohorts, and are too few in number to be useful as reliable indicators of trends over that extended 1912–1958 period. Jacksonville’s Alltel Stadium is omitted because its original construction cost was not available. In cases where teams are in transition—playing in one facility but shortly to move to another which is being constructed—both facilities are listed (examples include the Houston Rockets, Dallas Mavericks/Stars, San Antonio Spurs, Denver Broncos, and Pittsburgh Steelers). This means there is a small amount of double counting included in the grand totals at the end of the tables which aggregate the investment in all facilities. Columns 3 and 4 of the tables show the date and historical cost of construction. These data omit any subsequent renovation cost associated with the facilities. Prominent examples of extensive renovation include: $100 million invested in the 1966 Anaheim Angels field in 1998; $200 million at the 1966 Madison Square Garden in 1991; $100 million at the 1966 Network Associates Coliseum in 1996; $102 million in the 1966 Oakland Arena in 1997; the $295 million expansion and modernization of the Green Bay Packers’ venerable Lambeau Field; and the $138 million at Jacksonville’s Alltell Stadium in 1995. The exclusion of renovation costs which in total exceed $1 billion means that the aggregate totals at the end of the tables underestimate the total real investment in sports facilities currently in use over this time period. Allowances for depreciation have not been made in these calculations. The historical costs in column 4 of Table 1, suggest the Olympic Stadium in Montreal built in 1976 for $231 million, cost almost 50 percent less than the Detroit Lions’ Ford Field which will be completed in 2002 for $325 million. However, such a conclusion would be flawed because it ignores the impact of inflation. Obviously, $100 in 1976 purchased substantially more materials and labor than did the same amount in 2002. To meaningfully interpret trends in costs, it is

1961 1966 1968

1972 1974 1975 1979 1980 1981 1983

1988 1988 1988 1988 1989 1990 1991 1992 1993 1993 1994 1994

Tenant

Pittsburgh Penguins Golden State Warriors New York Rangers/Knicks

New York Islanders Edmonton Oilers Houston Rockets Detroit Red Wings Dallas Mavericks/Stars New Jersey Nets/Devils Calgary Flames

Sacramento Kings Milwaukee Bucks Charlotte Hornets Detroit Pistons Orlando Magic Minnesota Timberwolves Utah Jazz Pheonix Suns/Coyotes Mighty Ducks San Jose Sharks Cleveland Cavaliers St.Louis Blues

Mellon Arena Oakland Arena Madison Square Garden Total 1961–1969 Average facility cost Nassau Veterans Skyreach Center Compaq Center Joe Louis Arena Reunion Arena Continental Airlines Pengrowth Saddledome 1970-1984 Average facility cost Arco Arena Bradley Center Charlotte Coliseum Palace of Auburn Hills TD Waterhouse Arena Target Center Delta Center America West Arena Arrowhead Pond-Anaheim San Jose Arena Gund Arena Kiel Center

Year opened

$22.0 $25.5 $133.0 $180.5 60.2 28.0 $11.9 $18.0 $27.0 $27.0 $85.0 $73.0 $269.9 $38.6 $40.0 $90.0 $58.0 $70.0 $110.0 $104.2 $102.6 $95.0 $120.0 $168.0 $152.0 $171.5

Construction cost million $

80.4 80.4 80.4 80.4 82.1 84.2 86.0 88.7 92.7 92.7 96.2 96.2

31.2 35.9 39.3 45.8 57.6 62.9 72.4

14.7 17.6 19.9

C.C. index

Historical and Inflation Adjusted Costs for Arenas 1961–2003 (2003 Prices)

Facility

Table 2

$179.4 $173.3 $799.3 $1,152.0 384.0 $107.3 $39.6 $54.8 $70.5 $56.1 $161.6 $120.6 $610.5 $87.2 $59.5 $133.9 $86.3 $104.1 $160.2 $148.0 $142.7 $128.1 $154.8 $216.8 $189.0 $213.2

C.C.I. adjusted

$0.0 $0.0 $58.0 $0.0 $110.0 $66.0 $24.6 $45.0 $120.0 $136.0 $152.0 $36.5

$22.0 $25.5 $133.0 $180.5 60.2 $28.0 $11.9 $18.0 $27.0 $27.0 $85.0 $73.0 $269.9 $38.6

Public contribution

0 0 100 0 100 63 24 47 100 81 100 21

100.0

(continued)

0 100 100 0 100 0 37 76 53 0 19 0 79

0 0 0 0 0 0 0 0

100.0 100 100 100 100 100 100 100

0 0 0

% private

100 100 100

% public

Financing Major League Facilities 161

1995 1995 1995 1996 1996 1996 1996 1996 1996 1996 1997 1998 1999 1999 1999 1999 1999 1999 1999 2000 2000 2000 2002 2002

Boston Celtics/Bruins Vancouver Grizzlies/Canucks Seattle Super Sonics Ottawa Senators Philadelphia 76ers/Flyers Nashville Predators Buffalo Sabres Tampa Bay Lighting Montreal Canadiens Portland Trail Blazers Washington Wizards/Capitals Florida Panthers Toronto Raptors/Maple Leafs Miami Heat Indiana Pacers Denver Nuggets/Col. Avalanche Atlanta Hawks/Thrashers Carolina Hurricanes Los Angeles Lakers/Clippers/Kings Dallas Mavericks/Stars Columbus Blue Jackets Minnesota Wild Houston Rockets San Antonio Spurs

Note. The C.C. Index for year 2002 is projected.

1994

Chicago Bulls/Blackhawks

United Center 1985–1994 Average facility cost Fleet Center General Motors Place Key Arena Corel Centre First Union Center Gaylord Entertainment Center HSBC Arena Ice Palace Molson Center Rose Garden MCI Center National Car Rental Center Air Canada Centre American Airlines Arena Conseco Fieldhouse Pepsi Center Philips Arena Raleigh Ent. And Sports Arena. Staples Center American Airlines Center Nationwide Arena Xcel Energy Center Houston Arena SBC Center 1995-2003 Total Average facility cost 1961–2003 Total

Year opened

Tenant

(continued)

Facility

Table 2

$175.0 $1,456.3 $112.0 $160.0 $160.0 $74.0 $145.0 $217.5 $144.0 $127.5 $161.8 $230.0 $262.0 $260.0 $212.0 $178.3 $213.0 $183.0 $170.0 $213.0 $158.0 $375.0 $427.0 $150.0 $130.0 $175.0 $175.0 $4,701.1 $195.9 $6,607.8

Construction cost million $

97.3 97.3 97.3 100.0 100.0 100.0 100.0 100.0 100.0 100.0 103.6 105.3 107.8 107.8 107.8 107.8 107.8 107.8 107.8 110.6 110.6 110.6 116.6 116.6

96.2

C.C. index $217.6 $1,954.2 $150.3 $196.7 $196.7 $91.0 $173.4 $260.1 $172.2 $152.5 $193.5 $275.1 $313.4 $300.2 $240.8 $197.8 $236.3 $203.0 $188.6 $236.3 $175.3 $416.0 $461.7 $162.2 $140.6 $179.5 $179.5 $5,342.4 $222.6 $9,059.1

C.C.I. adjusted $10.0 $758.1 $58.3 $115.0 $160.0 $74.5 $0.0 $32.0 $144.0 $56.1 $102.0 $0.0 $35.0 $60.0 $184.7 $0.0 $39.1 $79.0 $8.8 $62.5 $92.0 $12.0 $125.0 $0.0 $130.0 $175.0 $147.0 $1,833.7 $76.4 $3,042.2

Public contribution

50.6 28 100 37 100 85 0 56 37 100 87 77 13 100 82 57 96 71 42 97 73 100 0 0 16 60.6

39.4

94

% private

72 0 63 0 15 100 44 63 0 13 23 87 0 18 43 4 29 58 3 27 0 100 100 84

49.4

6

% public

162 Crompton, Howard, and Var

Tenant

Boston Red Sox Chicago Cubs New York Yankees Chicago Bears Denver Broncos Milwaukee Brewers Green Bay Packers Arizona Cardinals

Fenway Park Wrigley Field Yankee Stadium Soldier Field Mile High Stadium County Stadium Lambeau Field Sun Devil Stadium Total Average facility cost 1912 1914 1923 1924 1948 1953 1957 1958

Year opened

$0.4 $0.3 $3.1 $7.9 $0.3 $5.0 $1.0 $1.0 $19.0 $2.4

Construction cost million $

91 $22 $93 $235 $4 $53 $9 $8

C.C. index

$29.6 $22.7 $97.5 $247.2 $4.4 $56.1 $9.3 $8.9 $475.5 $59.4

C.C.I. adjusted

0 0 0 7.9 0 5 1 1 $14.9 $1.9

Public contribution

Historical and Inflation Adjusted Cost of Facilities Constructed Between 1912–1958 (2003 Prices)

Facility

Table 3

50.0

0 0 0 100 0 100 100 100

% public

50.0

100 100 100 0 100 0 0 0

% private

Financing Major League Facilities 163

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necessary to take inflation into account. Thus, the question to ask is, “If the Olympic Stadium had been constructed in 2002, would it have cost less than Ford Field, all else being equal?” This question is answered in columns 5 and 6. The U.S. Bureau of Census identifies a number of organizations which track inflation in specific spheres of the economy, and annually develop indexes that adjust for it. The most reputable cost index (CCI) is produced by Engineering News Record (2001) which is a trade magazine published by McGraw Hill. The Construction Cost Index (CCI) is a national average and it is shown in column 5. The CCI was used to adjust all the historical costs in column 4 to 2003 dollars. Thus, in 2003 the numbers in columns 4 and 6 are identical, but the index is used to increase all the historical costs preceding 2003 to account for inflation. Olympic Stadium’s $231 million cost in 1976 translates into $648 million in 2003 dollars when inflation is taken into account. Hence, instead of concluding that Olympic Stadium cost 50 percent less than Ford Field, the appropriate conclusion is that it cost almost 100 percent more than Ford Field. Column 7 reports the dollar amount to which each facility was subsidized with public resources at the time it was built. Columns 8 and 9 show the proportion of each facility’s cost that was contributed by the public and private sectors. The Evolution of Facility Funding

The year cohorts in Tables 1 and 2 are 1961–1969, 1970–1984, 1985–1994, and 1995–2003. These were selected as comparison cohorts because they approximate demarcations of distinctive phases through which the financing of stadium and arena facilities to accommodate major league franchises has evolved. In the earliest days of major league franchises, almost all teams fully financed their own facilities. Indeed, the only exceptions to the norm were the Los Angeles Coliseum (1923), Chicago’s Soldier Field (1929) and Cleveland’s Municipal Stadium (1931) which were all built with the intention of hosting the Olympic Games (Siegfried & Zimbalist, 2000). Tables 1 and 2 show that by the 1961–1969 decade this situation had been reversed. This decade may be termed the Gestation Era. It marks the beginning of a period in which the norm was for governments to finance and construct facilities for the franchises. After building the new stadiums and arenas, local governments became the landlords of the facilities in which professional sport franchises were primary tenants. The arrangement was established through a lease agreement in which the team as tenant, and government entity as landlord, negotiated the terms under which the team would use the venue. The lease specified the annual rent payment the team would pay and spelled out the extent to which the two parties would share specific venue revenues such as those derived from parking and concessions. Interest in professional sports in this era was confined primarily to the Northeast and Upper Midwest, since that is where most of the franchises were located and there was little widespread television interest. The trend of local governments assuming primary fiscal and operational control of sport venues reached its zenith in the Public Subsidy Era. During this

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165

period, which stretched from 1970 to 1984, the popularity of professional sports grew substantially. Growth occurred in the number of franchises, venue attendance and in television viewing. The value of franchises increased exponentially. Funding expectations were set by the precedents of the Gestation Era, so funding was widely perceived to be the exclusive responsibility of public entities primarily using either general obligation bonds or revenue bonds redeemed by some form of sales tax. In Tables 1 and 2, 18 of the 22 facilities listed as being constructed in this period were 100% funded by governments, and two of the remaining four were over 90% subsidized. The high level of subsidies which characterized the Public Subsidy era coincided with the most active period of expansion and relocation of professional teams ever to occur in North America, which transformed major league sports teams from being a regional phenomenon to a national phenomenon. Before this shift, enacted either through migration or expansion of sports teams to Sunbelt cities, major league sports teams were almost entirely confined to major cities in the Northeast and Upper Midwest. The advent of jet travel and the emergent growth and prosperity of cities in the Sun Belt region, made it profitable for the leagues to place teams in those enthusiastic and untapped markets. Owners quickly realized that representatives in western and southern cities were willing to provide fully subsidized playing facilities as an inducement to relocate or expand. Precipitated by the move in the 1950s of the MLB Braves, Dodgers and Giants from Boston and New York City to Milwaukee, Los Angeles and San Francisco, respectively, there was an ongoing emergence of teams in southern and western cities. In almost every instance, local and state governments eager to attract a team, provided generous venue arrangements to team owners. As shown in Table 4, government

Table 4

Proportion of Public and Private Sector Funding by Era

Era

Stadiums

Arenas

% Pub % Priv

% Pub % Priv

Totals % Pub % Priv

Gestation (1961–1969)

82%

18%

100%

0%

88%

12%

Public subsidy (1970–1984)

89%

11%

100%

0%

93%

7%

Transitional (publicprivate partnership) (1985–1994)

85%

15%

49%

51%

64%

36%

Fully-loaded (privatepublic partnership) (1995–2003)

62%

38%

39%

61%

51%

49%

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Crompton, Howard, and Var

generosity resulted in public subsidies reaching an all-time high during this period. From 1970 through the mid-1980s, local and state governments contributed 93% of the development costs for major sport venues built in the U.S. and Canada. During The Transitional (Public-Private Partnership) Era, from 1985 to 1994, governments assumed a progressively diminishing proportionate role in the financing of major new sport facilities. The transition from almost complete government responsibility to increased team financial participation was largely the result of four factors which are discussed more fully in the next section of the paper. Prominent among them was the enactment of the Deficit Reduction Act of 1984 which prohibited the use of tax-exempt bonds to finance luxury boxes, and the Tax Reform Act of 1986 which stated that tax-exempt bonds could not be used to finance sports facilities if more than 10% of a facility’s revenues came from a single tenant such as a professional sports team. It was the intent of these Acts to discourage cities and states from issuing tax-exempt bonds which had been the traditional source of capital financing for professional sports facilities. Tax-exempt interest rates are generally two-percent lower than rates for taxable bonds. The new laws, in effect, required governments to issue taxable bonds. It was anticipated by the sponsors of these new laws that they would require governments to issue taxable bonds and, thus, discourage public sector financing of facilities for major league teams. An interest rate difference of 2% on $200 million in borrowed capital over 20 years could add $20 million to the overall project cost. It was thought that the increased cost of using these traditional financing methods would make it more difficult for government agencies, both fiscally and politically, to assume the entire cost of financing major sport venues. In some instances this anticipated outcome may have occurred, but in others the cities responded by offering more generous leases which required the franchises to pay less than 10% of a facility’s debt charges. The rest of the funds needed to retire the debt were often redeemed from other revenue sources such as sales taxes, carrental fees, and bed taxes. The result was more complex financing structures in which cities used these other revenue sources, but often franchises’ contributions also were more substantial (Tables 1 and 2). In addition to escalating borrowing costs, the development of more luxurious, fully-loaded venues in the early 1990s demonstrated to governments and their taxpaying electorates, that new facilities, especially arenas, had the capability of generating revenues sufficient to pay a considerable share of the construction costs. During this transitional period, the first public-private partnerships, or joint ventures of government agencies and team owners, emerged. These projects were characterized by teams contributing a substantial, albeit minority, share of the venue’s development costs. Notable public-private partnerships of this period were the America West Arena in Phoenix, Gund Arena and Jacobs Field in Cleveland, and the Target Center in Minneapolis. The shared cost model became an acceptable development formula for both parties. Government officials who were anxious to find a solution for accommodating a franchise’s demand for new facilities

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167

found public-private partnerships were effective in ameliorating taxpayer resistance to expensive public subsidies. Teams, on the other hand, were willing to make a significant up-front contribution with the expectation they would realize far greater financial returns from the incremental income produced by the new, fully-loaded facility. Typically, during this period, the public-private development agreements between teams and local government entities were accompanied by lease agreements that were generous to the franchises, guaranteeing them a majority, if not all, of the revenues from luxury suites, concessions, parking, and sponsor agreements. Although joint ventures became prevalent during the early 1990s, a number of major projects at that time, particularly stadiums, still were completely or heavily underwritten with public monies. St. Louis and Baltimore, for example, each anxious to lure NFL teams back to their cities, provided 100% and 90%, respectively, subsidized, state-of-the-art facilities to induce teams from Los Angeles and Cleveland to relocate to their communities. The remarkable growth in the popularity of professional sports during this era was accompanied by the desire of corporations to be associated with them. This was manifested in their willingness to pay high prices for luxury boxes and associated amenities: “The corporate customer is relatively price-insensitive, but he demands his creature comforts” (Swift, 2000, p. 74). In turn, corporate support provided impetus for the franchises to transition from basic multipurpose facilities, into elaborate single-sport facilities. By the year 2000, 60 percent of season tickets in the NBA and the NFL were corporate purchases. The “Fully-loaded” (Private-public) Era from 1995 to 2003 has been an era of extraordinary proliferation in which 47 major new facilities were constructed. This represents approximately 45% of the total inventory of major league franchise facilities. In most cases, facilities from which teams moved were not physically obsolete, rather they were commercially obsolete. The overwhelming characteristics of this era were the escalation in facility cost which accompanied the owners’ accelerated demands for excellent, deluxe, elaborate facilities, and the ability of these fully-loaded arenas to generate substantial revenues. Most facilities are now financed through private-public partnerships. This description reorders the two sectors compared to the Transitional Era (i.e., private-public rather than public-private) to reflect the private sector role moving towards being the primary source of funds. The increased contributions from the franchises reflects the growing unwillingness of taxpayers to wholly fund these projects with property taxes. This has resulted in financial structures being more creative, innovative and intricate. The multiple parties involved and the complexity of the financing and partnership arrangements mean that the planning and construction period is often much longer than it was in previous eras. How Much and Who Pays?

Tables 1 and 2 show that when expressed in 2003 dollars, the total investment in the stadiums and arenas currently being used or under construction for major league

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teams at that time is $23.8 billion—$14.74 billion for stadiums and $9.06 billion for arenas. Of this $23.8 billion, $13.14 billion (55%) was invested between 1995 and 2003. Governments’ share of the $23.8 billion was approximately $15.2 billion (64%). These calculations of total investment refer only to facilities currently in use or shortly to be in use. By 2003, 56% of teams will be playing in facilities constructed after the start of 1990. In most cases, teams playing in facilities constructed in the last decade abandoned a facility elsewhere, and many of those were built since 1960. If the costs of those casualties of the upgrading process were included, then the total investment in major league sport facilities would be substantially higher. Similarly, the large investments in renovation and expansion of some facilities, illustrations of which were cited earlier in the paper, are not included in these investment calculations. The aggregate increase in investment is attributable both to an expansion of the professional leagues and the replacement of facilities for existing teams. The change in magnitude of costs when teams change facilities is vividly illustrated by comparing the “transitional” facilities included in Tables 1, 2, and 3. That is, those stadiums and arenas that were abandoned soon after the 2001 season as teams moved into new facilities. Teams that are in this category are listed in Table 5. The cost differences, even when expressed in inflation adjusted terms, are dramatic, and are reflective of the high quality standards that characterize the contemporary Fully-Loaded Era of facility development. The persistent and substantial downward trend in level of public subsidy is clearly evident in Table 4. Gradually, over the past 30 years there has been a dramatic shift toward franchise owners assuming a greater share of development costs of the venues in which their teams play. This shift is most apparent in arena construction. Until 1984, local governments had assumed complete responsibility for financing arenas dating back to 1961. But, beginning in the mid-1980s, governments assumed a significantly diminished role in arena financing. By 1995, primary responsibility for arena construction had reverted to franchise operators, with team owners supplying almost two-thirds of the construction financing. While not

Table 5

Comparison of Old and New Facility Costs for Selected Teams

Team

Houston Rockets Dallas Mavericks/Stars Milwaukee Brewers Pittsburgh Steelers Denver Broncos

Old facility cost (2003 Adjusted $s)

New facility cost (2003 Adjusted $s)

54.8 65.4 53.4 175 4.2

179.6 461.7 414 265 420

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as dramatic, the trend toward greater owner financing is also evident with respect to recent stadium construction. Since 1995, owners have contributed 38% of the capital necessary to build new stadiums, a major increase over the 15% share they assumed through the mid-l980s. The pivotal year in the shift in responsibility for arena financing was 1988. In that year, the Palace at Auburn Hills was built for the Detroit Pistons. It was a catalyst facility, since it was the first of the single purpose, elaborate special purpose arenas. In the same year, Arco Arena in Sacramento also opened. Both facilities were financed completely from private sources. In each instance, the ownerfinanced projects were capitalized on the basis of the arena’s ability to generate income sufficient to pay for the cost of construction. The Bradley Center, in Milwaukee, was also built in 1988 and was entirely underwritten by a $90 million gift to the State of Wisconsin from the Bradley family. These privately-developed venues, particularly the owner-financed projects, had a transformational effect on sport facility financing. The impact is clearly evident in Table 4 where the swing toward more private investment in arenas in the Transitional and Fully-Loaded Eras is obvious. In the most recent era, from 1995 to 2003, $4.70 billion was spent on building 24 new major arenas in the U.S. and Canada (Table 2). Of that amount, only 39% was contributed from public sources. In a little over a decade, arena financing moved from being almost exclusively publicly subsidized to being primarily financed by franchise owners. However, it is important to point out that in real dollar terms, the average cost of arenas in this most recent era was over $222 million (Table 2). Thus, 39% of the average cost is $86 million, which in real dollar terms exceeds the contribution government was making in the early1969–1984 eras when it was paying 100% of the cost! In the three eras up to 1994, government was almost the exclusive provider of funding for stadiums. The notable exception was Joe Robbie (subsequently renamed Pro Player) Stadium built in 1987 which was the first fully-loaded stadium. The privately financed facility contained 183 luxury suites and 10,209 club seats. The franchise owners’ manifested early responses to this stadium precedent were less enthusiastic than were the responses to the prototype new arenas. However, in the post 1994 era there was a marked change, since among the 23 stadiums built in that period government’s contributions fell to 62% of the $7.14 billion invested. This proportion is still substantially higher than the subsidies provided to arenas over the same period, which is attributable to the greater difficulty of generating revenues in stadiums. While the emergence of premium seating has resulted in substantial increases in stadium revenues, the limited versatility and supplementary use capability of football- and baseball-only venues, and constraints imposed by the weather, make it difficult for them to generate as much revenue as arenas. This is particularly true when the venue’s primary, or anchor, tenant is an NFL football team. Most NFL franchises will play two pre-season games and eight regular-season games in their home stadium. In a particularly successful season, a team may play one or two post-season playoff games at home. Thus, the best-case scenario is that an NFL team will occupy its home venue on 12 dates a year. This

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makes it challenging to produce substantial revenues, even if the football dates are supplemented with occasional concerts, and even in the largest stadiums. FedEx Field, home of the traditionally well-supported Washington Redskins, in a standard 10-game season can accommodate slightly over 800,000 spectators. The Staples Center, by comparison, from its three primary tenants alone (Lakers, Clippers, Kings) attracted over 2 million patrons in the 2000-2001 seasons. When over 100 additional events occurring in the facility are taken into account the Staples Center generates more than three times the number of tickets sold, hot dogs consumed, and cars parked when compared to the most populated NFL venue. New facilities built in Denver and Houston exemplify the current status of who pays for football stadiums. Voters approved subsidies of approximately $300 million and $250 million in Denver and Houston, respectively, for the construction of new stadiums. The estimated cost of each venue was approximately $400 million. The owners of the Broncos and Texans were required to commit $100– $125 million of their own funds toward each project, and to guarantee responsibility for any cost overruns. Thus, the relative contributions to the projects were 70– 75% public and 25–30% private. With 81 home games during the regular season, it is easier for MLB stadiums to produce a positive net operating income. Some teams, like the San Francisco Giants, achieve this by aggressively marketing their ballpark, Pacific Bell Park, as the site for a variety of events beyond baseball. In addition to concerts and other public events, it is rented to local corporations for company outings so employees and their families can have the experience of playing baseball at a major league park. Even though owners now typically pay a greater proportion of stadium construction costs than they did in previous eras, most football and baseball franchises are more profitable as a result of playing in fully-loaded venues, and being supported by sponsorship, licensing and media income streams. This trend of the franchises paying a proportion of the costs has stabilized the magnitude of government subsidy for stadiums. The data in Table 1 show that in real dollar (2003) terms government subsidy of stadiums over the past three decades has been relatively stable. The average subsidy of a stadium in the four funding eras in real dollars (2003) was: Gestation Era Public Subsidy Era Transitional Era Fully-Loaded Era

1961–1969 1970–1984 1985–1994 1995–2003

$147 million $200 million $234 million $210 million

Factors Contributing to Enhanced Private Sector Investment in Major League Facilities The primary trend identified in the first sector of the paper was the shift towards franchise owners paying a greater proportion of facility costs. The shift emerged in the Transitional Era (1985–1994) and was further accentuated in the subsequent

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Fully-loaded (1995–2003) era. In the discussion of those eras two sources of impetus for the shift were suggested. First, was the 1984 Deficit Reduction and 1986 Tax Reform Acts. Their implications were discussed in some detail earlier in the paper. A second impetus was the enhanced revenue streams accruing to the franchises from generous lease agreements which gave them most or all of the revenues from luxury suites, personal seat licenses, concessions, parking, and sponsor agreements. In addition, over the past decade franchises have received considerably increased annual revenues from broadcast rights, merchandising, licensing, and gate receipts. These quantumly increased revenue streams that have emerged have resulted in a widespread perception that franchises should have the financial capacity to make substantial investments in the facilities they use. A third contributing factor is the generic trend over the past 25 years requiring the private sector to invest more in all public services and amenities from which they accrue benefits. During the 1975/76 financial year, the fraction of the gross national product accounted for by government fell for the first time in 50 years. This auspicious trend break marked the beginning of the tax revolt movement (Crompton, 1999). It spread widely and quickly across the United States, so by 1990 only six states were not constrained by some form of statutorily mandated tax limitation (Myers, 1998). These statutory provisions were reinforced by the political actions of elected representatives who recognized that aspiration to, and survival in, office depended on them demonstrating frugality to the electorate. In response to the revised political reality of having reduced tax funds available, governments have engaged in “load shedding” which is designed to shift costs over to the private sector that had previously been absorbed by the public sector. Hence, the shift shown in Table 4 of the private sector paying a higher proportion of the facility cost is consistent with the broad movement of government entities tending to adopt this modus operandi in all services with which they are involved. A fourth factor which has contributed to the shift to more private investment is the increased public contentiousness of the merits associated with subsidizing major league facilities which focuses on the issues of opportunity cost and equity. These issues are discussed in the following sub-sections. Opportunity Cost

Opportunity costs are the benefits that would be forthcoming if the public resources committed to sports facilities were redirected to other public services. The issue was illustrated by a letter writer to the Baltimore Sun who observed: The city is full of ruined houses, the jails are overcrowded, the dome is falling off City Hall, there are potholes in the streets, crippled children can’t get to school, taxes are up and services are going down—but we’re going to have a sports complex. (Richmond, 1993, p. 50) Given the immense fiscal crises confronting governments especially in the major cities, and the numerous social and infrastructure needs requiring additional funds,

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it is incongruous and unconscionable to some that scarce public resources should be committed to such an apparently discretionary and relatively frivolous use. Conceptually, for an investment of public money to be justified, it must meet the criterion of “highest and best use.” That is, it should yield a return to residents that is at least equal to that which could be obtained from other ventures in which the government entity could invest. Opportunity cost is the value of the best alternative not taken when a decision to expend government money is made. Thus, “If an alternative generates $2 million of benefits net of subsidy, and a stadium generates $1.5 million net of subsidy, the stadium can be viewed as imposing a $0.5 million loss on taxpayers, not a $1.5 million benefit” (Cagan & DeMause, 1998, p. 39). It has been stated that, “The issue of opportunity costs is the fundamental social issue associated with municipal investment in professional sports” (Swindell & Rosentraub, 1992, p. 98). The key question is not whether an investment in sports is likely to be a profitable investment for the community. Rather, it is whether more benefits would be generated from any number of other opportunities such as investment in a local college, public schools, transportation infrastructure, health programs, or incentives to attract other kinds of businesses to locate in the community. The conundrum of priorities for the use of public tax dollars was highlighted in Cleveland. The day before the city council approved a large injection of public funds to build a new football stadium, the Cleveland public school system announced it would cut $52 million over two years, laying off 160 teachers, and eliminating inter-scholastic athletics from a school system that its superintendent described as “in the worst financial shape of any school district in the country” (Cagan & DeMause, 1998, p. 23). There is an important caveat that needs to be inserted into this opportunity cost debate, relating to the source of funds. It is that while facility advocates seek funds for capital investments, funding for such needs as hiring more teachers or police officers, or developing new health or welfare programs, originates from cities’ operational budgets. Funds from capital and operating budgets are not directly substitutable. It is generally easier to persuade voters to commit tax funds for capital projects, especially if the source of funds is not property or sales taxes, than it is to persuade them (or their legislative representatives) to accept higher annual tax rates for operating budgets to attack social problems. There are four main reasons why elected officials are much less willing to make substantial increases for services in operating budgets than they are to support major capital projects. First, capital projects are high visibility and it’s easy for elected officials to be associated with them. In contrast, there’s not much high visibility political kudos to be gained from hiring more teachers, welfare workers or maintenance workers. Second, increases in operating budgets often are not endorsed by a referendum, so the resultant tax increases can be tied to those in office at election times and be a focus of criticism. Third, increases in operating budgets are effectively on-going and for ever, whereas capital investments are for a limited time period.

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Finally, sport facility subsidies from capital budgets frequently are serviced by taxes imposed on non-city residents (e.g., hotel/motel taxes, rental car taxes) whereas operational budgets derive primarily from a community’s taxpayers. It may be argued that taxes derived from non-city residents used to finance sports facilities, represent as much of an opportunity cost as those derived from property taxes. However, voters are less likely to perceive such taxes as having an opportunity cost because they are “special” taxes which residents are not required to pay. Since they are designated for a specific project and do not go into a city’s general fund, these tax revenues are not subjected to the competition among different service priorities which characterizes the annual budget debate and highlights the opportunity cost issue. The opportunity cost issue is especially galling among those residing in cities which authorized subsidies for facilities in the 1970s and 1980s, and then watched as franchises departed after a relatively short period for better facilities elsewhere. Typically, the public subsidy was in the form of bonds repayable over a 20 or 30 year period. Thus, these communities continued to make annual multi-million dollar debt payments on facilities which had become “white elephants” because they had no major league team. Meanwhile, there was no money available to rectify deteriorating schools, streets and public services. This emphasizes that the risk on major sports facilities is carried exclusively by the public sector because it is the owner of a depreciating asset, which is another dimension of opportunity cost. The Equity Issue

Equity is concerned with fairness. In the context of allocating public resources it revolves around the question, “Who gets what?” or in normative terms, “Who ought to get what?” In the context of professional sports, two dimensions of equity emerge. The first dimension is relatively narrow and focused. It relates to who wins and who loses among the specific demographic groups located in the area where a major new facility is constructed. A city is not a unitary entity that is impacted uniformly by a major public construction project. Such projects have a “tendency to displace groups of citizens located in the poorer sections of cities” (Wilkinson, 1994, p. 29), either through mandatory relocation or more insidiously by substantial increases in housing and real estate values that may follow public improvements of the area. The people most impacted by such displacement, typically are those who are least able to organize and finance community resistance to such proposals. The second dimension of the equity issue is the financial nexus between who pays for, and who benefits from, major new facilities. Labor strife in professional sports has been characterized as a battle between “the haves and the have mores,” but much of the dispute between the owners and players is over the allocation of “a revenue pool built by the tax dollars of citizens who can only dream of million-dollar salaries” (Rosentraub, 1997, p. 11). In essence, the public subsidies transfer income from ordinary people to highly paid owners, executives and players. It is this perversion of fairness, obvious

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inequity, and irrationality which is galling to many. The essence of this inequity was captured in the headline of a Newsweek column discussing the move of Art Modell’s NFL franchise from Cleveland to Baltimore which read, “Modell Sacks Maryland: Average folks are building suites for rich fans so rich owners can pay rich players” (Will, 1996, p. 70). Another commentator suggested that there should be an adaptation of Winston Churchill’s legendary remark after the air battle for Britain, “Never have so many owed so much to so few” to “Never have so few received so much from so many”! (Rosentraub, 1997). To the ordinary taxpayer, public subsidy seems unnecessary. There is a disconnect between the everyday lives of taxpayers and the economics of professional sports. They are out of kilter. Players are paid too much. Owners’ franchise values and profits are too high. Tickets are unaffordable. Forty-five individuals from the Forbes magazine list of the wealthiest 400 Americans (all with net assets exceeding $500 million) owned a direct interest in a team in one of the four major leagues at the end of the millennium (Siegfried & Zimbalist, 2000). Given these factors, the notion that public subsidy is needed seems ludicrous. The irritation of many taxpayers with this process was epitomized by the acronym formulated by opponents to a new stadium for the NFL’s Chicago Bears: STINCS (This Stadium Tax Is Nothing but Corporate Subsidy)! (Baade & Sanderson, 1997). If public subsidy was not there, then the teams would have to compensate for its unavailability by using more of their revenues to repay the annual facility debt charges. This would leave less money available to remunerate players, owners and executives whose salaries appear outrageously excessive to ordinary people. Without public subsidies, these individuals would still receive very large salaries, but the obviously inequitable transfer of resources from ordinary taxpayer to millionaire beneficiary would cease. However, the principle of the inequity described here is not unique to professional sports; rather it is generic across all types of businesses. In recent years, it has entered the lexicon as “Corporate Welfare,” which has been defined as: any action by local, state or federal government that gives a corporation or an entire industry a benefit not offered to others. It can be an outright subsidy, a grant, real estate, a low-interest loan, or a government service. It can also be a tax break—a credit, exemption, deferral or deduction, or a tax rate lower than the one others pay (Barlett & Steele, 1998, p. 38). All of the subsidy elements cited in this definition have been given to professional sports franchises, but they are only one of many beneficiaries. Indeed, it is unlikely that any business in any community would locate there without receiving a package of subsidy elements from the community. Hence, the subsidy question confronting elected officials in the context of sport facilities is also asked of them by all other sections of the private economy. It is ironic that at the same time federal and state legislatures have engaged in prolonged debates about ways to reduce welfare payments for individuals, they have substantially increased their contributions to corporate welfare!

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Although it is pervasive in all sections of the private economy, proposals to subsidize sports facilities invariably arouse more passion than corporate welfare offered to other types of businesses. There are three main reasons for this. First the scale of the largesse is likely to be greater. Instead of $10-20 million for a new manufacturing plant, Table 1 shows that the subsidy for a stadium is likely to be $200 million. Second, the newsworthiness of professional sports, the high visibility of the beneficiaries, and their extraordinary levels of remuneration, all ensure that a subsidy proposal will receive extensive publicity. Third, the corporate welfare is likely to deliver fewer benefits to local residents than if it were allocated to other types of businesses for two reasons. First, the franchises employ relatively small numbers of people. For example, an NFL franchise is likely to have fewer than 100 full-time employees, including the team members. Second, most of their spending is on player salaries and, many of the athletes may reside for most of the year in a different community and spend most of their dollars there. One commentator observed: The biggest single expenditure of teams—player salaries—gets taken to the players’ posh homes outside the local area. When I attend a game at (Yankee Stadium), I am helping the economy of (New York) less than that of Katy, Texas, where Yankee pitcher Roger Clemens takes his $15 million salary. (Euchner, 1995, p. 31)

Sources of Momentum Undergirding Investment in Major League Facilities Although the proportion of private sector investment in major league facilities has consistently increased, the data in Tables 1 and 2 show that the public sector’s contributions remain substantial. Further, despite their reduced role in financing capital facilities, net public subsidies to franchises have often increased as a result of the teams receiving more generous leases. This section of the paper explores the reasons for this public support. In the 1960s, 1970s, and 1980s, the momentum for investment in major league facilities emanated primarily from two sources. First, the ability of the professional leagues to restrict the supply of teams enables franchise owners to threaten to relocate, which provides them with substantial leverage to obtain public investment either from a threatened government entity or from a receptive, new host jurisdiction. A second traditional source of momentum has been the community power structure in which those who control “the system” often have a vested interest in new facilities. In the Transitional (1985–1994) and Fully-Loaded (post 1994) Eras, two additional sources of momentum have contributed much to the acceleration of investment in new facilities (Greenberg & Gray, 1996). They may be termed: the increasing costs stimulus and the competitive balance rationale. The role of each of these four sources of momentum is reviewed in the following sub-sections of the paper.

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Owner Leverage

The baseball, football, basketball, and hockey leagues within which franchises play are unique in their ability to restrict the supply of teams. This, in effect, endows them with the characteristics of a cartel. In addition to controlling the number of franchises, the leagues effectively operate as cartels in three major ways: (a) by attempting to restrict interteam competition for players, thereby reducing competitive bidding between teams for player services; (b) by controlling the location and relocation of teams; and (c) by controlling the rights to the national over-the-air broadcast of games and by creating rules that enable teams to exercise control over their over-the-air local broadcast territories (i.e., the sale of home games not included in the national broadcast package and the right to protect the local listener/viewer market from infringement by broadcasts from other teams in the league). (Ingham, Howell, & Schilperoot, 1987, p. 455) The leagues have used their cartel-like power to limit expansion. In effect, leagues are able to specify not only how many teams will exist, but where they will play (Rosentraub, 1997). Historically, the number of cities seeking professional sports franchises has outnumbered the available supply of teams. Major sports appear to be a culturally unique experience for an influential segment of the U.S. population, in that they cannot be replaced by other forms of entertainment. Further, the increased popularity of professional sports has exacerbated the situation because it means that the size of population that can support a team is shrinking. This is exemplified by the presence of major league franchises in relatively small cities such as Nashville, Jacksonville, Charlotte, and St. Petersburg. This popularity also means that larger metropolitan areas are able to support multiple franchises. The imbalance of supply and demand creates a competitive environment that leads cities to escalate their offers of public inducements as they attempt to outbid one another for franchises. It has been noted that “teams manipulate cities by selling them against each other in a scramble for the limited number of major league teams. While the cities fight each other, the teams sit back and wait for the best conditions and terms” (Euchner, 1993, p. 179). If major league baseball, for example, had 40 or 50 teams rather than 28, then much of the leverage used to garner public subsidies would be removed. Franchise owners in recent decades have consistently demonstrated their readiness to take advantage of this leverage potential. Thus, in the 1980s in the NFL, there were moves of the Raiders from Oakland to Los Angeles, the Colts from Baltimore to Indianapolis, and the Cardinals from St. Louis to Phoenix. The moves of the Raiders and Colts occurred despite long histories of sellouts and financial and playing success. This trend accelerated to the point where in 1995 it was estimated that 49 of the 113 major league franchises were considering a move unless they got a new arena or stadium, or a more favorable deal from the government entity that owned their building (Dallas Morning News, 1995). An owner’s threat to relocate a franchise elsewhere may be reinforced by the league threatening

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to veto any proposal to replace that team with a new franchise in the future in the host community, implying that failure to meet an owner’s demands will lead to the permanent absence of a franchise in the community. In the last two decades, almost every major city in the U.S. and Canada has been involved in negotiations with major league owners seeking to exploit their position of leverage. In the 1980s and early 1990s, the city of St. Petersburg, Florida was a primary victim of this tactic. In 1988, the city invested $130 million of public monies to build a domed stadium for the express purpose of attracting a major league baseball franchise. Instead of attracting a team, St. Petersburg was cynically used by other teams to leverage more public funds from their existing communities. St. Petersburg was involved in serious franchise negotiations on six occasions, but they failed to consummate an agreement with the 1984 Minnesota Twins, 1985 Oakland A’s, 1988 Chicago White Sox, 1988 Texas Rangers, 1992 Seattle Mariners, or the 1992 San Francisco Giants (Shropshire, 1995). The Chicago White Sox, for example, who played in the oldest stadium in baseball, successfully parlayed a threat to move to St. Petersburg into receiving a fully state-funded ($150 million) ballpark, the new Comiskey Park, from the Illinois State Legislature. This prompted a local official in St. Petersburg to comment, “We’ve been used as a nuclear threat to other communities to make them give their teams whatever they want.” (Corliss, 1992, p. 52). The ability to limit the supply of teams gives the leagues extraordinary power with which to intimidate cities. An example of this occurred when the owners of the San Francisco Giants committed to selling the team to a group in St. Petersburg in 1992. The owners subsequently withdrew from this commitment, and the first reaction of St. Petersburg officials was to seek substantial damages through the courts for breach of contract. However, they did not follow through with a suit because they realized that such an action would likely have led to an informal blackballing of the city, which would have negated any chance of St. Petersburg’s ever obtaining a franchise. By collective action, baseball owners would have been able to enforce this informal sanction against St. Petersburg, and they could afford to do it because of the great demand for teams from other cities. In the end, the city’s perseverance was rewarded. In 1997, MLB owners awarded St. Petersburg one of two expansion franchises. The new team, the Tampa Bay Devil Rays, occupies the domed-stadium which was extensively upgraded to accommodate the new franchise and is now known as Tropicana Field. Expansion of the number of teams in a major league is a careful balancing act. It has to be fast enough to deter new leagues from forming, but slow enough to ensure there are enough cities without a franchise available that owners’ threats to relocate to one of them from their existing host community have to be taken seriously. Thus, one reason the leagues schedule exhibition games in non-franchised cities is to encourage those communities to visualize themselves as future hosts of franchises. It has been suggested that, “Having two or four potential cities seems the right number in most leagues; for example, in the case of Major League Baseball the current potential cities would be Washington, D.C., Las Vegas, Sacramento, and Portland, Oregon” (Siegfried & Zimbalist, 2000, p. 99).

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The leverage exerted by franchises stems not only from the fiscal packages offered by other cities, but also from the sunk costs incurred by their current host cities. It has been noted that, “The fundamental fact of life concerning stadiums and arenas is that once they are built, they are fixed in place, while the teams that use them are potentially mobile. This puts an enormous bargaining advantage in the hands of teams playing in publicly owned stadiums” (Quirk & Fort, 1992, p. 172). The Community Power Structure

In his classic article on community power, Molotch (1976) argued that “the city is for those who count, a growth machine” (p. 310). When it is perceived that financial benefits may accrue to a coalition of powerful interests in a community then they “typically operate in the following way: an attempt is made to use government to gain those resources which will embrace the growth potential of the area unit in question” (p. 311). In the context of this paper, franchises and the construction of stadia and arenas which accompany them, tend to be enthusiastically recruited by powerful vested interests in communities such as banks; real estate developers; elements of the tourism industry like restaurants and hotels; insurance companies; and construction firms. Consider, for example, the role of bond lawyers who are hired by a government entity as consultants to develop the legal documentation associated with issuing bonds. If a major bond issue of the magnitude required to fund a stadium or arena is approved, their fee is likely to approximate $1 million (Cagan & DeMause, 1998). The classic interest group dynamic is that economic benefits are conferred on a numerically small set of actors, while the costs are widely distributed among the public (Brown & Paul, 1999). Thus, team owners and other proponents are likely to have both the incentive and the resources to invest heavily in a pro-team publicity campaign soliciting public support for a proposed subsidy, while opponents are unlikely to have either the incentive or access to similar resources. The difference in incentive between the two groups is explained by the distribution of benefits and costs that accrue from a new facility. Substantial financial benefits accrue to team owners and a select number of others, motivating them to become politically active. In contrast, the cost to ordinary residents is likely to be $25-$50 each per year in additional taxes, which may be too small to motivate them to engage in active opposition (Siegfried & Zimbalist, 2000). Similarly, the resources available to community elites and owners are likely to be substantial. The actions of the owner of the Seattle Seahawks are illustrative. The owner needed to expedite the placement of a football stadium referendum on the Washington state ballot before his option to buy the Seahawks expired. He offered the state $4.2 million to avoid the time-consuming signature-gathering phase which is usually required to authorize a proposal on the state ballot. The state legislature accepted. He then spent a further $5 million in six weeks on a public relations campaign to persuade the public to vote positively, which they did (Cagan & DeMause, 1998). In another example, supporters of a referendum to ratify a .5% sales tax increase, which generated $540 million to build two new stadia in Cincinnati for

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use by the Bengals NFL and Reds MLB franchises, raised $1.1 million while opponents spent less than $30,000: The television and radio campaign is impressive in magnitude, as were the major efforts made in direct mail, telephone contact, and yard signs. The campaign benefitted from professional consulting, daily tracking phone calls, and a major “Voter ID/Get-Out-the-Vote effort...In what was surely a symbolic gesture, the anti forces ran one 30-second radio spot on one station” (Brown & Paul, 1999, pp. 230–231). Government goals are often achieved as a result of the informal relationship which exists between city hall and the business elite, rather than through the formal machinery of government. This elite may be termed an urban regime (Stone, 1989), that is, an informal group that complements the formal working of the local government entity. Their access to institutional resources enables this business elite to have a sustained influential role in governing decisions and the allocation of public resources. They are the major “movers and shakers” in their communities. Elected leaders may be able to reciprocate the support they receive from the business elite and consolidate their own political position through the subtle patronage of key supporters that large scale projects sometimes foster. This latter role was identified by a commentator in Detroit, who after ten years of watching the city’s politicians manoeuver to build a new baseball stadium concluded: The local politicians, particularly the mayor and the county executive, know that they get far more mileage out of having a big new project than out of a renovation. They have the ability to say who gets the contracts, whose land is used, which developers are employed, which bond attorneys do it—and all of these people are the people who contribute to their war chest. That’s why expensive projects like new stadiums win out over small-scale ones. . . . Not because they are intrinsically better for the city, or better for the team or anything. There is a political interest in doing it. (Cagan & DeMause, 1998, p. 105) Major projects such as shopping malls, business parks, airports, professional sports facilities, or whatever, are favored by some elected officials because they believe they will be perceived as highly visible, tangible evidence confirming that a community is “moving forward.” It is anticipated voters will view such projects as bold initiatives that are manifestations of elected officials’ leadership ability. Some politicians have built careers around the development of major sports facilities. From a political perspective, whether it performs as projected in the pro forma financial statements often is not of central concern to officials. It is likely to be many years after the project was authorized before any negative financial outcomes emerge, by which time those who authorized it may no longer be in office. Further, if the financial targets are not met, the community may still have a professional franchise and facility of which it can be proud. In contrast, if public investment in a business park or a shopping mall fails, there are no redeeming community benefits. In a referendum campaign, media, paid and free, are the principal means by which those pro and con the issue communicate with the voters (Brown & Paul,

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1999). The local media are likely to be strongly supportive of public subsidy for major league facilities because of the added news and sports interest a franchise brings: Sports editors freely acknowledge the symbiosis that exists between the news media and pro sports. Newspapers create excitement among fans, who drive up ticket sales. And while pro teams themselves don’t create a lot of advertising, a thriving franchise attracts readers to the paper who might not otherwise pick it up. In Seattle, press runs of newspapers the day after a game are increased by anywhere from 10 to 20 percent, depending on which team played and whether it won or lost. (Cagan & DeMause, 1998, p. 12) Potential for media conflicts of interest is enhanced as increasing numbers of media owners become owners of professional sports franchises. Three of the largest media corporations in the U.S., Disney, News Corporation and Time-Warner, control the Los Angeles Dodgers, Atlanta Braves, Atlanta Hawks, Anaheim Angels, and the Mighty Ducks of Anaheim. The Chicago Tribune owns both the Cubs and their broadcast outlet, WGN. The Arizona Republic newspaper is a part-owner of the Arizona Diamondbacks which places it in an interlocking relationship with the majority owner who owns three of the four major league teams in Phoenix (Cagan & DeMause, 1998). Media owners invariably maintain that an impenetrable wall between reporters and management protects society against conflicts of interest. However, this is unlikely to be convincing to skeptical opponents when these media add their voice in support of public subsidization of the owners’ teams. The elite business and political interests in a community who control much of its decision making have a number of incentives to work enthusiastically to invest public funds into a major league facility. This coalition controls “the system,” that is, the financial, knowledge, information dissemination, and legal resources needed to bring a major project to fruition. Their actions are legitimized by fans who want a sports franchise in their community, and who are likely to be vociferous in their support and advocacy. The word “fan” is short for “fanatic” and such people are likely to be sufficiently myopic in their focus that they do not care if it means that a majority of their fellow taxpayers who are not fans will have to pay for it also. The political and economic power of supporters, and the difficulty of forming and sustaining organized opposition without resources, makes it challenging for those who oppose such projects to be heard. The Increasing Costs Stimulus

In the past decade, players’ salaries and the cost of purchasing professional sport franchises have both escalated exponentially. This has made it more challenging for owners to receive satisfactory returns on their equity investment if they rely for most of their revenues only on gate receipts and television income. The solution to resolving this conundrum was to develop facilities that featured new revenue opportunities: luxury suites, club boxes, elaborate concessions, catering, parking, advertising, naming rights, theme activities, and even bars, restaurants and apartments with a view of the field (Noll & Zimbalist, 1997).

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It was noted earlier that the first of these elaborate, single purpose, enhanced revenue producing facilities was the Palace at Auburn Hills, constructed in 1988 for the NBA’s Detroit Pistons. The arena was designed to hold 180 luxury suites and over 2,000 club seats. Both the number and quality of these premium seating options were unprecedented. In the late 1980s, most arenas had only a small inventory of suites. Indeed, two other major arenas built at the same time as the “Palace,” the Charlotte Coliseum and Miami Arena, contained only 12 and 16 luxury suites, respectively. The large inventory of suites and club seats was presold generating $18 million in annual revenues. The $13 million derived from luxury suites sales alone serviced the facility’s annual construction debt payments. In contrast, the NBA Hornets, occupants of the newly-constructed Charlotte Coliseum, in 1989 received just $989,000 in total revenues from the twelve suites available. As early as 1991, analysts declared the Charlotte Coliseum “economically obsolete” (Noll & Zimbalist, 1997). The success of the Detroit Pistons arena precipitated what might be called a “Palace Revolt.” It was the first to demonstrate the income generating capability of a “fully loaded” sports venue. Its success prompted owners across all leagues to push for their own sports “palaces” incorporating the latest technology (fiber optics) and a wide array of revenue generating amenities, and enhancement of more basic service elements such as increased number and improved quality of restrooms. Thus, by the year 2000, the average NBA arena contained 82 suites and 2,152 club seats (Stadium Insider, 2000). While the “Palace” showed the way, subsequent arenas have taken the return on investment capability of these facilities to an entirely different level. The substantial income-generating ability of a contemporary arena is exemplified by the Staples Center. While the Palace at Auburn Hills generates gross revenues of $40 million per year, the $375 million Staples Center, which began operating one decade later, produced more than $120 million in venue-generated revenues during its first year of operation (Simers & Wharton, 1999). Home to four major league teams (NBA’s Lakers and Clippers, NHL’s Kings, and WNBA’s Sparks) as well as an arena football league team, the venue is guaranteed at least 156 dates per year from the regular league games alone. Including playoff games and the numerous concert and cultural events the arena hosts annually, in 2001 the Staples Center booked 250 events. The Competitive Balance Rationale

The lack of competitive balance among teams is most pronounced in MLB and the NHL which do not share revenues among the owners. Thus, those teams in smaller cities with lower gate attendances and smaller television markets have difficulty in competing with teams in larger cities. Without the revenue streams associated with new facilities, their non-competitiveness seems inevitable. Even where there is revenue sharing of gate attendance (NFL) and television revenues (NFL and NBA), there is still disparity between those who have facilities with high revenue potential and those that do not.

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Income derived from the lease of premium seating (luxury suites and club seats) is not part of the revenue sharing arrangement of either league. Therefore, teams like the Dallas Cowboys (with 350 suites) and the Los Angeles Lakers (with 160 suites from $197,500 to $307,500 per season) are able to generate millions of dollars which are retained exclusively by their franchises. These teams have a substantial financial advantage over teams that are playing in facilities with limited premium seating sales opportunities. In 2001, the Charlotte Hornets netted less than $1 million from the 12 suites (from $73,500 to $126,000 per season) available in the Charlotte Coliseum, placing them at a severe competitive disadvantage to the Lakers and many other teams in the NBA. Teams with fewer resources to expend on players cannot remain competitive on the playing field. This is likely to create a spiral: poor results lead to lower attendance and revenues; which leads to fewer resources to expend on players; which leads to poor results, etc. In these situations, teams are likely to argue convincingly that their only salvation is an injection of public funds to help them build a new stadium containing the desired revenue enhancing amenities.

Conclusion Major league sports have become a cultural icon in America. The franchises and their facilities are perceived by many as being critical to the positive image and collective morale of a community. This elevated status, newsworthiness and visibility, and the scale of investment involved is likely to ensure that vigorous debate surrounding public investment in them will continue. The outcome of referenda on bond issues for these facilities have been mixed since 1995, but approximately 60 percent have passed. The forces within a community that influence decisions about funding major sports facilities are dynamic. The debate on how much public subsidy should be invested in a facility ebbs and flows. The intent in this paper has been to identify the pervasiveness, magnitude, and trends of public investment, and to describe the forces which typically direct and dictate the debate. It is the desire of the authors that this analysis will inform future debates on the issue. The paper’s focus has been limited to exploring the changing relationship between the public and private sectors in financing major league facilities, and the reasons which explain the dynamics of this relationship. It is recognized that this is only one dimension of the complex financial relationship between cities and major league franchises. Other dimensions include the extent of in-kind contributions for which cities may take responsibility (e.g., provision of land, roads, utilities, etc.), and the terms of leases which embrace a wide array of issues including the distribution of revenue streams; maintenance and renovation of the facility; and scheduling of the facility for events unrelated to the team’s franchise. Data in the paper show that the proportion of public investment in major league facilities has fallen, and that the facilities now generate more and higher revenue streams than those of earlier generations. However, the public sector entity often receives less income from these revenue streams than in earlier eras.

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Hence, even though the proportionate investment of public resources into facilities may have declined, the net annual public subsidy to the franchises often has increased. Using the data reported earlier in the paper relating to the average cost of stadiums in real dollars in the four funding eras, the following scenario can be developed to illustrate this point. A Public Sector Era (1970–1984) facility costing $200 million may have been 100% publicly funded, with the franchise paying a rental of $2 million per year. The average cost of a new version of the stadium built in the post 1994 Fully-Loaded Era would be $339 million of which the public sector would pay on average only 62%. However, the 62% translates to $210 million in real dollars, so the dollar contribution is higher, and if no rent or other revenue stream is paid to the city then this represents an increase, not a decrease, in the net public subsidy. Despite the potential distortions to the financial relationship which these other dimensions provide, the issue of the extent of public subsidy and its relationship to private investment in major league facilities remains critical because the public frequently are required to vote on whether public resources should be invested in such projects. In these situations, negotiation of “the deal” cannot be undertaken only by city councils and community elites. In contrast, many of the other dimensions of the financial relationship can be negotiated by these small special interest groups without involving the broader public.

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