Sports facility deals not always rosy, says C.D. Howe Institute study

[Bandit]

Show us the payoff

Sports facility deals not always rosy, says C.D. Howe Institute study

By RUSS FRANCIS
Monday Magazine Issue 15 Vol 28, April 11 - 17, 2002


The taxpayer-funded pro-arena forces are pretty clear about the extensive payoffs Victoria will get by building a new multiplex.

“Construction and operation of this building will create new jobs and bring millions of dollars into the local economy,” says the official City of Victoria brochure, distributed last week by the Greater Victoria Chamber of Commerce.

But a new study by a respected Canadian think-tank—the Toronto-based C.D. Howe Institute—suggests a new arena may not bring those millions to Victoria.

According to the right-of-centre institute’s report, completed March 5, spending on sports and cultural events is often simply diverted from other community activities.

“Job creation is minimal,” says the report, Bread and Circuses, conducted by University of Western Ontario economics professor John Palmer.

Chartered accountant Walter Creed, who completed a detailed arena feasibility study in March, 2001, said this week it wasn’t part of his mandate to study spinoff benefits.

However, he’s sure there will be some, such as in construction.

“You’re spending $29 million—you’ve got a whole bunch of economic spinoffs,” says Creed. “I think it’s a win-win.”

But the C.D. Howe study warns against supporters’ claims that government spending on sports or arts facilities leads to spinoff economic benefits: “The multiplier effects are usually small and might even be negative in some instances.”

The claim often made by proponents is that if the project brings $1,000 worth of new spending to an area, whoever gets that $1,000 will re-spend, say, $900 of it. Whoever gets the $900 will re-spend 90 percent of that, and so on.

This is called the “multiplier effect.”

Palmer says this analysis ignores the other things that the government funding might have gone towards, had the pet project not gone ahead.

“Sometimes government spending on one project simply means there will be less government spending on other projects, and the multiplier effect will, on balance, be zero,” says the report.

It could be even worse.

If government spending takes place at the expense of higher taxes—as is the case for Victoria’s arena—it means lower disposable incomes for local residents.

“[T]he multiplier effect might be small, zero, or possibly even negative,” says Palmer, who teaches a course on the economics of sport.

He adds that for spinoff benefits to occur, the spending must be new—not merely spending diverted from one local event to another.

Some people might decide to attend events at the new facility, and therefore might rent fewer videos or spend less at local nightclubs.

“[I]f money spent on meals while attending a sporting or cultural event would have been spent anyway on meals at other restaurants in the area at roughly the same time, it would be inappropriate to consider this amount as ‘new’ spending,” suggests the report.

Palmer advises distinguishing between supporters’ “optimistic projections on the one hand and careful analysis on the other.”

“Although some supporters of local government subsidies of sports have estimated multipliers as high as seven, numerous studies have found the multipliers to be near zero or possibly even zero,” writes Palmer.

The study includes a section on the impact of minor league sports and regional cultural ventures—such as the Western Hockey League team that is part of the Victoria deal. Palmer estimates that the net economic impact of such operations is only 30 to 60 percent of the facility’s revenue.



Jobs for Everyone?

“We need the job creation and the economic spinoff activity,” mayor Alan Lowe told reporters at the March 15 kickoff of his taxpayer-funded arena deal publicity campaign.

But the C.D. Howe study throws cold water on that suggestion, too.

“To the extent that employers hire labour in a competitive market, and to the extent that labour moves freely from nearby communities (or even more distant ones), the job creation argument is bogus,” says the report. “Jobs created by economic activity in one community are often nothing more than jobs lost elsewhere in the province or country.”

However, this influx of workers—people who may take jobs at the new facility and possibly move to Victoria from other municipalities—raises local property values, says Palmer.

Consequently, long-term benefits accrue primarily to the owners of “fixed factors,” especially real estate.

“[T]o the extent that external benefits are captured and internalized within the community, they become gains for the owners of real estate in the community,” says Palmer.

In other words, landlords may do well, while tenants—who form the majority of Victoria residents—could be worse off as rents are raised or owners sell the properties to take advantage of higher values.

Cindy L’Hirondelle, of the Renters Union, worries that the new arena will further Victoria’s “gentrification” and make low-income housing even harder to find.

“It’s going to exacerbate an already difficult situation for low-income tenants,” says L’Hirondelle.

Palmer concludes that the economic benefits of arenas are questionable.

But what about the oft-made assertion that having more sports and culture in a community improves the “ambience, morale, civic pride and desirability” of living in it?

According to the report, these claims are difficult to evaluate.

While benefits do show up in communities where there are internationally recognized festivals, such as Ontario’s Stratford and Niagara-on-the-Lake, it is less clear that sports and other cultural events produce similar effects.

Says the report: “Given the small size of these benefits, proponents of government funding for such activities must look elsewhere for their justification

[Bandit]

Arena seen as unlikely benefit
Experts say Pens' plan offers city little

By Milan Simonich, Post-Gazette Staff Writer
Sunday, March 31, 2002

How much would a new $225 million arena for the Penguins contribute to Pittsburgh's economy?

Experts say the answer is next to nothing.

The benefits of a new $225 million Penguins arena, shown in this artist's rendering, are "minuscule," says Rob Baade, and economics professor at Lake Forest College. "Relying on sport as an economic development tool doesn't work. New stadiums and arenas are for the benefit of owners and players, and fans who want to keep the team in the city." (Click here for a larger version of the artist's rendering.)

"The benefits are minuscule, if they exist at all," said Rob Baade, an economics professor at Lake Forest College in Illinois, who specializes in the business of professional sports.

"Relying on sport as an economic development tool doesn't work. New stadiums and arenas are for the benefit of owners and players, and fans who want to keep the team in the city."

The Penguins, like the Pirates and Steelers before them, want taxpayer help for their proposed arena.

A range of politicians, from U.S. Sen. Rick Santorum, R-Pa., to Democratic city Councilman Sala Udin, have touted the arena project as a means of enlivening two neighborhoods that need a boost.

Santorum said 41-year-old Mellon Arena, the oldest venue in the National Hockey League, "doesn't match up" with buildings in comparably sized cities. Beyond that, Santorum connected the team's desire for a more profitable building to a broader economic recovery project.

Though nobody can say where the money would come from, the Penguins are suggesting that development of a hotel, shops and housing be packaged with their new arena. Team executives estimate the related projects would cost $500 million.

"You've got the Civic Arena, the parking lot and some abandoned buildings sitting beneath the two, and we really have an opportunity to do some good urban planning here, to build a state-of-the-art arena and to build a connection between the Hill [District] and Downtown, which will be beneficial to both," Santorum said.

Economists say such expectations are unrealistic.

They maintain that an arena cannot spark a neighborhood renaissance, especially if a modern arena with luxury suites is merely replacing an existing building with fewer fan amenities.

The list of sports venues that were supposed to help invigorate neighborhoods but failed to do so includes Three Rivers Stadium, which opened in 1970 and was demolished after 30 years.

Backers of Three Rivers projected that the stadium would lead to development of office buildings, a restaurant pavilion, a marina, a children's theme park, a summer festival area, parking garages and a mass-transit connection to Downtown. Holiday Motor Inns of America agreed to build a 15-story, 300-unit hotel. It never materialized.

Tying development to a hockey rink is even more problematic, economists say.

"No indoor arena is special enough to attract tourists or economic activity in its own right," said Steve Walters of Loyola College in Baltimore. "There is no economic justification for subsidizing this one particular business because it has no positive effect on the overall economy."

Jobs created at sports arenas are seasonal, unskilled and generally do not pay well.

As for the millionaire players, they often are not full-time consumers in the city where they make their living.

"How many Penguins players are going to continue to live outside Pittsburgh in the off-season, regardless of whether the arena is new or old?" Baade said. "The fact is, nothing associated with an arena does much for metropolitan economic activity."

Phil Porter, director of the Center for Economic Policy Analysis at the University of South Florida, goes a step further. He says a sports arena financed by taxpayers can hurt a region's economy.

"The taxes are more retarding than any promotional value you get from the venue," Porter said. "It's obvious that building arenas is not a good investment because nobody in the private sector stands up and says, 'I'll do it.' It's a money-losing proposition."

Various politicians are lining up behind a new arena for the Penguins, but the question of where the $225 million would come from remains unanswered.

The federal government did not fund stadiums during the building boom of the past decade that saw 16 of the 32 teams in the National Football League receive new venues. Most of the money for these projects came from local and state taxpayers.

Baseball, basketball and hockey team owners enjoyed a construction bonanza on par with the NFL's. In Pittsburgh, the Steelers and Pirates each got new stadiums, and each was primarily paid for by local and state taxpayers.

Porter said this system puts a drag on regional economies because it diverts public money from other projects, such as roads, subways and industrial parks.

As for what an arena means to a region's economy, he compared the employment effects to a single grocery store.

In a metropolitan area of more than 2 million people such as Pittsburgh's, few pay attention to the comings and goings of neighborhood groceries. Politicians, though, are attuned to the possibility of losing a professional sports franchise and the negative fallout that would come with it.

"Nobody wants to be the mayor that lost the hockey team," Porter said.

"But the question we ought to be asking is, 'How much taxation is any team worth to your quality of life?' If people didn't have a hockey game to go to, they would still find their diversions, whether it's fishing on the Allegheny River or going to a movie."

What sports franchises have for leverage is a link with a city's psyche.

"The last refuge for the teams ultimately becomes that they affect our quality of life, our prestige, our reputation as a city," Walters said.

Mayors and city councils worried about losing a team often compete for the chance to subsidize franchise owners.

In South Florida during the late 1990s, the professional basketball and hockey teams refused to share the 8-year-old Miami arena. So each found a local government willing to accommodate its desire for a new building.

Basketball's Miami Heat received a publicly financed arena in Dade County, and hockey's Florida Panthers got a new building in suburban Broward County.

Both teams abandoned Miami Arena, which did not have luxury boxes. The building still carried construction debt when the Heat and Panthers bolted.

"We're talking about significant excesses and a significant problem of taxation," Baade said. "I don't think it would be too unkind to call it extortion."

The power of team owners to demand stadiums and arenas was first exercised in 1958, when the Brooklyn Dodgers moved west. But it did not become commonplace until the 1980s, when team owners began to see publicly funded arenas and stadiums as a sure way to increase their profits.

Baade chaired a Chicago stadium committee in 1986 that recommended putting baseball's White Sox and football's Bears in the same domed stadium, which also could have been used for myriad shows and conventions.

The proposal flopped.

"Each team wanted its own stadium because each wanted to appropriate all the moneys that came from its facilities," Baade said.

The White Sox received a new Comiskey Park on Chicago's South Side in 1991. That deal ended threats by the team to leave the city.

Unlike new ballparks in Pittsburgh, Cleveland and Baltimore, the new Comiskey has failed to captivate public interest. It remains a secondary attraction to Wrigley Field, the Chicago Cubs park that opened in 1914.

Even so, the White Sox avoided joint tenancy with another team, thereby protecting their profit margins.

Professional sports franchises receive preferential treatment from politicians in other ways, too.

Team owners are rarely asked by governments to open their books, Baade said, even as they seek public money for new arenas.

In addition, most new arenas and stadiums are overseen by a government authority, meaning the buildings that turn profits for sports owners are exempt from real-estate taxes.

"It's another way," Baade said, "of placating the nomadic urges of owners and giving in to the threats they often make about moving."