Taxpayer-funded stadiums are the billion-dollar bet cities keep losing

Ask five economists a question and you will get six answers and a request for a grant. So when a roomful of them, from the left, the right and the places in between, line up to say the same thing, it is worth sitting up. The thing they say is this: when a city spends public money on a sports stadium, the promised economic boom does not show up.

That finding has been repeated in study after study for a generation, and it has had approximately the effect of a polite cough in a hurricane. The ribbon still gets cut. The bonds still get sold. The mayor still stands at the podium and says "transformational." Then everybody goes home, and the bill arrives on schedule for thirty years.

Sports are a fine thing. A team is a fine thing for a city to have. So is a wallet you still have at the end of the season. Let me show you how the deal works, do the arithmetic on a made-up stadium so nobody can accuse me of picking on a real one, and then take on the best argument the other side has, which is not a bad one.

How a stadium deal is financed

The stadium business has a well-worn playbook, and its first rule is that the team's owner does not want to pay for the building. The owner would rather the public do it. The typical package mixes several pieces.

Tax-exempt bonds. A city, county or stadium authority borrows by selling municipal bonds. Interest on most municipal bonds is exempt from federal income tax, which lets governments borrow at lower rates, and that exemption is a subsidy from the federal Treasury to local officials. Congress has tried to limit the use of tax-exempt bonds for facilities that mainly benefit private parties, and the Tax Reform Act of 1986 tightened the rules, taking stadiums off the list of favored facilities and cutting the private-use and private-payment tests from 25 percent to 10 percent. But the deal makers adapted. Public ownership of the building, lease payments from the team and carefully drawn contracts have kept public financing in the game. If you want the details of how a given deal is structured, the official statement that accompanies the bond sale is a public document, and it will tell you exactly who is on the hook.

Local taxes. To repay the bonds, the city or county dedicates a revenue stream: a sales tax, a hotel tax, a car-rental tax, a ticket surcharge, sometimes a property tax. These are often marketed as falling on "tourists," which is true in part and misleading in the rest, since residents buy meals and rooms too.

Land, infrastructure and tax breaks. Beyond the building itself, the city may supply the land cheaply, build the roads and the parking, and waive property taxes on the facility.

Leases that favor the team. The team often pays rent far below the cost of the building, keeps most of the revenue from tickets, concessions, parking and naming rights, and sometimes keeps the right to leave if the city does not upgrade the building in twenty years.

Notice the shape of that deal. The risk is public. The revenue is largely private. If the team does well, the owner profits. If the team does badly, the owner can threaten to move. The city is the only party that cannot leave, since it cannot take its city hall with it.

The economists' verdict

Now to the evidence. The standard academic references include Roger Noll and Andrew Zimbalist's 1997 book Sports, Jobs, and Taxes, which collected research on the subject and concluded that sports teams and stadiums are not a source of local economic growth and employment. In a 1997 Brookings commentary, the same authors wrote that no recent facility had been self-financing in its effect on net tax revenues. Since then, economists such as Dennis Coates and Brad Humphreys have published a long run of papers looking at what happens to local income and employment when a team arrives or a stadium is built, and their findings have mostly pointed the same way: little or no measurable gain, and for some franchises a lower level of per capita income. Their 1999 study of 37 metro areas from 1969 to 1994 is a good place to start.

I will not pretend that every study says the same thing. A few papers find modest benefits for particular neighborhoods, or find that the value that fans place on having a team is real. But the center of gravity in the literature is plain, and it is rare for economists to agree on anything with this much consistency. When teams and their consultants produce glowing impact reports, those are usually commissioned by the people who want the money. Check who paid for the study before you believe it.

The substitution effect, in plain words

Why does the boom fail to arrive? The central reason is called the substitution effect, and you already understand it from your own life.

A family has a certain amount to spend on entertainment in a year. If they go to a game, they spend less on a movie, a dinner out, a weekend trip or a night at the local bowling alley. The stadium did not create new spending in the town. It moved spending from one set of businesses to another. The team's receipts rise. The restaurant's and the theater's fall. The accountant who counts only the stadium's side sees a boom. The accountant who counts the whole town sees a wash.

This is the old lesson of Frédéric Bastiat, the French economist who taught that you must look at what is seen and also at what is not seen. The seen is the crowd streaming into the stadium. The unseen is the pizzeria across town that quietly lost the customers who went to the game.

Add the leakage problem. Much of the money spent at a stadium goes to players and owners who live elsewhere, and to national companies, not to local workers. And add the crowding out problem. On game days, other visitors avoid the area because of traffic and prices. Even the jobs that a stadium creates tend to be seasonal and part-time: ticket-takers, vendors, parking attendants, who work on game days.

A labelled hypothetical, with the arithmetic shown

Let me build a deal with invented numbers. Nothing here describes a real city or a real team. The numbers are round so you can check them in your head.

The stadium. It costs 1 billion dollars. The team and its league put up 400 million. The city issues 600 million dollars in bonds, to be repaid over 30 years at an interest rate of 4 percent.

The annual payment. For a level payment on a 30-year loan at 4 percent, the annual payment is about 34.7 million dollars. Over the full 30 years, the city pays about 1,041 million dollars, that is, about 1.04 billion, to repay a 600 million dollar debt. The difference, about 441 million, is interest.

The promised benefit. The team plays 81 home games a year, and the average crowd is 40,000. That is 81 times 40,000, or 3,240,000 visits. If each visitor spends 50 dollars at the stadium and around it, the total is 162 million dollars a year. That is the big number on the press release.

The honest correction. Suppose, as the substitution effect suggests, that 80 percent of that spending would have occurred somewhere else in the region anyway, at a restaurant or a movie or a store. Then only 20 percent is new. Twenty percent of 162 million is 32.4 million dollars of genuinely new local spending.

What the city collects. The city's share of that new spending comes through its taxes. If the combined local sales tax rate is 8 percent, then 8 percent of 32.4 million is about 2.6 million dollars a year in new tax revenue.

The comparison. The city pays 34.7 million dollars a year and collects 2.6 million in new revenue. The annual payment is more than thirteen times the new revenue. The gap is about 32 million dollars a year, every year, for thirty years.

Now, reasonable people can fight about my assumptions. Change the substitution rate to 50 percent and the new spending is 81 million dollars, and the new tax is about 6.5 million. The payment is still more than five times the revenue. You would have to believe that almost none of the spending was substituted, that nearly every visitor came from outside the region and would otherwise have stayed home, to close the gap. That is not how families behave. The point of the exercise is not that my numbers are right. The point is that you can run the numbers yourself, and the burden is on the promoters to show theirs.

The best argument for public stadium money

Let me put the other side's case fairly, since it has real force.

Civic pride. A team is part of a city's identity. It gives people something to share on a Sunday afternoon, across every line of income and politics. A city without a team is a city that feels a little smaller. Value, the defenders say, is not just in tax receipts.

Public goods and spillovers. A stadium, they say, can anchor a neighborhood, bring development and give a district a center. It can host events other than the home team's games, from concerts to graduations.

The threat is real. If the city does not pay, another city will, and the team will leave. The question is not whether a subsidy is efficient but whether the alternative is losing the team entirely.

Consumer surplus. Fans get real enjoyment from having a team, and economists accept that this enjoyment has value, even if it does not show up in the tax base.

The answer

1. Civic pride is a real value, and it is a reason to be honest about the price. If the people of a city want to buy themselves a team and know what it costs, that is a decision they are entitled to make through an open vote. The objection is not to the pride. It is to selling the purchase as an investment that pays for itself. Promoters who say the stadium will "generate more than it costs" are making a factual claim, and the evidence says it fails. Sell it honestly as consumption, like a park or a festival, and let voters decide. Many will say no. That is why promoters prefer the other pitch.

1. The spillover claim has a poor track record. The neighborhood around a stadium that is used for about eighty days a year is a poor candidate for a vibrant daily economy. Developers know this, which is why you often see parking lots ringed by a few bars, rather than the promised district. A better use of a billion dollars of public money might do more for the same neighborhood, and the economists' studies suggest that the same dollars spent on other things would produce more local activity.

1. The "they will leave" threat is a negotiating tactic, and the answer to a negotiating tactic is to negotiate. A monopoly sports league limits the number of teams precisely so that cities will compete against each other for the few it allows. That scarcity is created by the league, not by nature. The city that refuses to bid can sometimes find the team stays. And when a team does leave, the city's history suggests it survives, often finds another use for the money and, in some cases, gets another team. Look at the record before you take the threat at face value.

1. Consumer surplus is a reason for fans to pay, through tickets, seat licenses and private financing, not for people who never attend a game to pay. Some of the best stadiums in the country have been built largely with private money. The model exists. It simply costs the owners more, and that is why they lobby for the other one.

1. Public money should meet a public test. The principle conservatives apply to every other spending program applies here: ask who benefits, who pays and whether the benefit exceeds the cost. A stadium deal passes only if the owners and fans, who capture most of the benefit, also bear most of the cost.

What the Founders would say about it

The Constitution authorizes Congress to tax for the general welfare, and state constitutions generally require that public money serve a public purpose. Courts have often been deferential to local governments on what counts as a public purpose. But the founding idea is that government is a trustee. It holds the people's money for the people's benefit, and a trustee who hands it to a wealthy private owner for the owner's profit is not being faithful to the trust.

James Madison wrote in Federalist No. 10 about the danger of a faction using the power of government to serve its own interest at the expense of the community. A small group with a large and obvious stake, such as team owners, who can organize quickly, against a large public with a small and diffuse stake, who cannot, is the textbook case. I have made the same point in the sugar program makes every family pay more so a few growers earn more: when the benefit is concentrated and the cost is spread thin, the benefit wins. The stadium deal is the same structure with a scoreboard.

It also runs against a conservative instinct about the nature of subsidy. A government that is generous with other people's money has a way of finding reasons to be generous. The stadium subsidy sits comfortably alongside the other items I have discussed in Solyndra to Amtrak, why government picks losers when it picks winners: an official decides what is worth backing, the market is overruled, and the public holds the bag. For a broader view of how local spending decisions look when you read the books, see find out what your city and state really spend, a citizen's budget guide.

How to read a stadium deal in your own town

If a stadium proposal comes to your city, here is a short checklist, drawn from what the evidence says.

1. Find the bond documents. The official statement lists the amount, the rate, the term and the revenue pledged to repay it. If you cannot find it, ask the city clerk.
2. Ask who commissioned the economic impact study. If the team paid for it, treat it like a sales brochure.
3. Ask what share the team pays. The principle of fairness is simple: those who profit should carry most of the cost.
4. Ask for the substitution assumption. Any honest study states how much of the spending is new. If it assumes all of it is, the study is not serious.
5. Ask for a public vote. If the project is as good as promised, it can survive a referendum.
6. Ask what happens if the revenue falls short. In many deals the city, not the team, covers the shortfall from the general fund.

The case in brief

1. Stadium deals are typically financed with tax-exempt bonds, local taxes and favorable leases, which put the risk on the public and much of the revenue in private hands.
2. Economists across the spectrum have found little evidence of local growth from public stadium spending, because of the substitution effect, leakage and crowding out.
3. In a labelled hypothetical, a 600 million dollar bond costs about 34.7 million dollars a year while generating a few million in new tax revenue, so the payment exceeds the revenue by more than thirteen to one.
4. Civic pride is a real value, but it justifies an honest vote on consumption, not a promise that the building will pay for itself.
5. The test is the one conservatives apply everywhere: the people who benefit should carry the cost, and the cost should be visible.

What you can do: the next time your city or county proposes stadium money, request the official bond statement from the clerk and ask your council member to put the deal to a public vote.