Financing professional sports: a new challenge for finance leadership in the 21st century.

• Author: Rosentraub, Mark S.
• Position: Panel Discussion

The public financing of professional sports stadiums has become an increasingly controversial and visible issue confronting finance professionals. Does the use of tax dollars for sports stadiums represent sound economic development or a misuse of public funds? In many regions, elected officials are relying on finance officers to participate in the internal policy debates on this issue. Finance officers are often expected to find "creative" ways to fund stadiums, bargain with sports teams on behalf of mayors and county commissioners/supervisors, and position the government to extract as much public benefit from the transaction as possible.

Like many new issues on the municipal agenda, the financing of public stadiums - like privatization a decade ago - is characterized by rhetorical debates. Scholars and practitioners only now are beginning to assemble systematic evidence on the benefits of public financing of sports. As with many complex policy issues, experience is the key to designing a policy that meets the objectives of the citizenry. The editors of Government Finance Review (GFR) felt that public financing of stadiums is an issue that could benefit from an open debate. The authors below enjoin a lively debate on whether to subsidize sports teams and facilities, and if so, what elements of policy design can extract the highest benefits to the citizenry. GFR will continue to publish articles on this topic - especially empirical evidence on cases where public financing worked, where it did not work, and on provisions in agreements that are the keys to reaching policy objectives. The views in these articles are solely those of the authors.

Fool's Gold? Public Subsidies for Professional Sports Teams

By Mark S. Rosentraub

Connecticut has now joined the ranks of states purchasing fool's gold with the public's taxes. To lure the New England Patriots from neighboring Massachusetts a new $350 million stadium will be built to host the team's 10 National Football League games. In addition, the state also agreed to guarantee the sale of luxury suites and elite club seats. What is the anticipated payoff from this investment? Hartford and Connecticut hope to revitalize downtown Hartford from the new economic activity resulting from attendance at the games and the taxing of players' salaries. Connecticut now joins St. Louis, Nashville, and Baltimore as the latest victims hoping for substantial levels of economic development from sports when all of the available data suggest that sports facilities by themselves are not associated with economic development. Indeed, the only sports strategies that generate economic development are those that also include massive levels of financial investments from the private sector in new buildings and facilities for non-sports-related activities.

Just how much has the public sector spent to attract and retain teams? Since the building of Baltimore's Camden Yards, and through the year 2002, state and local governments will spend in excess of $7 billion for sports facilities. Much of this money is justified in terms of the anticipated economic development or private-sector investment that will follow. Very few deals have "guaranteed" private-sector commitments for development that are part of the public/private partnerships for sports facilities. San Diego's recent agreement with the Padres for at least $450 million in development if a new stadium was built and Indianapolis's leverage of more than $1.5 billion in investment in exchange for more than $300 million of city resources are the rare exceptions. More common is the commitment of massive amounts of public tax dollars with the hope that economic development will follow. Research has indicated that very little economic development actually occurs; in virtually all regions there is no statistical relationship between economic development and the spending of money for sports facilities. Yet these findings have not deterred communities and as the data in Exhibit 1 describes, public subsidies of the facilities for professional sports teams continues at a fever pitch.

The Formal Establishment of Cartels

Why are professional sports teams able to secure these large subsidies for the facilities they use? While the hoped-for economic development is the often-cited justification for the provision of a subsidy to an owner; the real reason teams receive welfare is because the four major sports leagues control the supply of franchises. This control permits a group of owners, not market forces, to decide how many teams will exist. The leagues are careful to keep the supply of franchises at a level that insures there will always be at least one or two regions chasing teams and willing to offer an extraordinary set of incentives or subsidies to secure a team.

While statistical data clearly indicates teams do not generate economic development this does not mean teams and sports are unimportant. To the contrary, sports have been an integral part of western societies for more than 4,000 years. Ancient civilizations relied on sporting events and activities for their civic celebrations just as 20th century society values the Olympics, the World Cup, the Super Bowl, and the World Series. Indeed, the events that probably capture the attention of the most people are also sports-related. The importance of sports permits the leagues that control the franchises or the most important assets in the world of sports to extract huge subsidies to permit cities to have access to sports' most valued events and teams.

How did small cartels get control of sports? Major-league baseball's protections date to 1922 (Federal Baseball Club v. National League). The Federal League emerged to compete with the more established American and National Leagues that had merged in 1903. In 1913, the Federal League formed with eight teams. With both leagues suffering from rising player costs an agreement was reached where two owners of the Federal League teams were permitted to buy franchises in the older leagues and the other owners received compensation for their teams. This settlement did not meet the desires of the owners of the Baltimore franchise in the Federal League who filed the suit that ultimately !ed to the decision that baseball was exempt from anti-trust laws.

In 1966, the two competing footballs leagues, the National Football League (NFL) and the American Football League (AFL) asked Congress for special legislation that would permit the older NFL to absorb the upstart challenger. Owners from both leagues feared that a merger would have been the focus of a legal challenge [TABULAR DATA FOR EXHIBIT 1 OMITTED] as there would be less competition for players. Congress approved this merger which effectively destroyed any hope for the creation of competitive leagues.

The National Basketball Association (NBA) and the American Basketball Association (ABA) were the next leagues to seek permission to merge. The situation confronting these competing organizations was quite different from the environment in which the AFL and NFL sought to merge. The NBA's players, fearing the loss of income from a merger, sued to prohibit the competition for athletes. The judge hearing the case issued a preliminary injunction to stop any discussions of a merger, and then relaxed this order under the condition that the players' representatives be part of the negotiation. An agreement acceptable to all parties was negotiated that involved the inclusion of four teams from the ABA into the NBA. The players received sufficient protections of their interests, but several communities including Louisville, St. Louis, and Richmond (Virginia) lost their teams.

What Can Be Done to End the Subsidies?

For decades the major sports leagues have used their cartel status to secure subsidies and amass substantial profits. The players also have benefited from this system as salaries have soared. All of these gains are being secured through the extraordinary subsidies provided by taxpayers. What can be done to change the system? Congress and the leagues have two options.

First, if the leagues will not dedicate their excess profits from their cartel structure to relieving the tax burden placed on cities then the Congress should simply eliminate the provisions that permitted competitive leagues to merge. Major-league baseball and the NFL should return to their original status of two independent leagues, the American and National. The NBA and NHL could be required to revert to separate leagues, mixing teams from the original leagues with some franchised from the upstart leagues.

Moving teams between leagues for expansion, geographic balance, and when leagues merged is a practice common to each of the four sports cartels. In this manner, nothing is proposed here that the leagues have not already done when it was convenient for their goals. With two leagues in each major sport unable to conspire to limit the number of teams that exist, market forces would be far more powerful in predicting team locations. For example, if one football league elected to abandon Los Angeles or Houston as a market, it would be quite...