IT’S THE ECONOMY, STUPID! : IMPACT ON LOCAL ECONOMY OF PUBLICLY SUBSIDIZED NFL STADIUMS

A Project

Presented to the

Faculty of

California State Polytechnic University, Pomona

In Partial Fulfillment

Of the Requirements for the Degree

Master of Science

In

Economics

By

David Raymundo

2015

SIGNATURE PAGE

PROJECT: IT’S THE ECONOMY, STUPID! : SUPER BOWL IMPACT ON LOCAL ECONOMY OF PUBLICLY SUBSIDIZED NFL STADIUMS

AUTHOR: David Raymundo

DATE SUBMITTED: Spring 2015

Economics Department

Dr. Bruce Brown ______Project Committee Chair Professor of Economics

Dr. Greg Hunter ______Graduate Coordinator Professor of Economics

ii ACKNOWLEDGEMENTS

I would like to thank my parents, Octavio and Lilia Raymundo, for their love and support throughout my life. Thanks to their guidance and support, the completion of this project would not have been possible. I will forever cherish many memories I share with my parents and because of them I am truly blessed to have them in my life. As a child, I did not believe that I would be able to graduate with a college degree, but because of my mom and dad I was able to achieve my master’s degree.

iii ABSTRACT

This paper examines the economic impact on a local community based on the city hosting the grandest game in the NFL, the Super Bowl. The impact that the city generates from the Super Bowl becomes clear evidence if whether or not taxpayers should subsidize league stadiums. The way that this paper arrives to a conclusion about publicly subsidized stadiums is by first looking at the history of NFL stadiums built and the total cost of the projects. Secondly, the amount of public funds is viewed for the stadiums that have been built and how the NFL had an impact on more stadiums being built. Lastly, the

Super Bowl impact on the host city is observed. The NFL is the first to claim that having a franchise in a city generates jobs, income, revenue, taxable sales, etc. However, others have found that the statements that the NFL makes are over inflated. In fact, more jobs and revenue are indeed generated by the construction of the stadiums and merchandise sales on game days, but the amount produced does not justify for subsidizing millions of dollars to wealthy NFL owners. Thus, the conclusion that this paper reaches is that of the latter; that there is no real benefit for a city to subsidize league stadiums. At the end of this paper, the question about Los Angeles is briefly brought up. This paper can serve as a perfect example for the city to examine the costs and benefits of getting a professional football franchise back to the City of Angles in more than 20 years.

iv TABLE OF CONTENTS

Signature Page…………………………………………………………………………….ii

Acknowledgements………………………………………………………………………iii

Abstract…………………………………………………………………………………...iv

List of Tables……………………………………………………………………………..vi

List of Figures……………………………………………………………………………vii

Chapter 1: Introduction……………………………………………………………………1

Chapter 2: Literature Review……………………………………………………………...7

Chapter 3: Stadium Financing…………………………………………………………...14

Chapter 4: The Stadium Revolution……………………………………………………..18

Chapter 5: Super Bowl Impact on Local Economy……………………………………...26

Chapter 6: Conclusion……………………………………………………………………31

Bibliography……………………………………………………………………………..34

v LIST OF TABLES

Table 1 Sources of Public Funds for Stadium Construction……………………...16

Table 2 NFL Stadiums Built Since 1995 Expansion……………………………..21

Table 3 Direct Visitor Super Bowl Spending 2002-2014………………………...29

vi LIST OF FIGURES

Figure 1 Annual League Revenue 2014…………………………………………….2

Figure 2 Annual TV Revenue 2014………………………………………………...2

vii CHAPTER 1

INTRODUCTION

Among the various sports leagues in America, the continues to be the most popular sports franchise in the United States. League revenue has been increasing year after year, with annual revenue being more than $10 billion this year alone. Among the revenue that the NFL earns, $6 billion is from television rights alone! The other $4 billion comes from the likes of merchandise and sponsorships.1

Similarly with league revenue, NFL team values have skyrocketed since the early 2000’s.

Today the average NFL team is valued at around $1 billion compared to $700 million in

2004.2

In comparison to the other popular sports leagues in America, the NFL earns much higher total annual revenue and TV revenue. The next closest sports league close is the MLB with $8 billion in total league revenue. The NBA comes in a distant third with only $4.56 billion league revenue. Figure 1 shows how much each of the three sports leagues generated in revenue in total for the year 2014. Also, Figure 2 displays total annual TV revenue each league makes. NFL revenues are far greater than the competition when it comes to TV revenue with $6 billion compared to only $1.5 billion for MLB and

$930 million for the NBA. League and TV revenue will only continue to grow as the next set of contract agreements with local TV producers are about to take place. This is a clear indication that the NFL has greater popularity than the other two most popular sports leagues in America.

1 Quinn, Kevin G., ed. 2012. The Economics of the National Football League: The State of the Art. n.p.: Sports Economics, Management and Policy series., 2012. 2 Murphy, Kevin M., and Topel, Robert H. “The Economics of NFL Team Ownership.”

1 Annual Revenue 2014

NBA

MLB Annual Total Revenue (billions)

NFL

$0.00 $5.00 $10.00 $15.00

Figure 1. Annual league revenue 2014

Annual TV Revenue 2014 (millions)

$930

$1,500 NFL MLB

$6,000 NBA

Figure 2. Annual TV revenue 2014

2 While the NFL has certainly succeeded in growing its league to unprecedented heights, other sports leagues cannot even come close to this type of revenue while hosting more games in a season overall. Some say that because of this the NFL has leverage when it comes to each individual franchise in their respective home markets. Some may even say that the league has some type of monopoly power since they know that the type of success that they have endured cannot be easily replicated. To this extent, the economics of the NFL is an interesting topic to study on.

To some, understanding the way that the NFL does business is difficult. Others are able to comprehend exactly what they intend on doing. It involves more than simply signing players to lucrative contracts and winning championships. There is also the business aspect of the league that is indirectly seen on the field every Sunday. The league must figure out a way to continue increasing its revenues and its product as well or else fans may jump ship to other sports leagues. Part of making the product better is by having a state of the art stadium. With no stadium then there are no games to be played and having an exceptional stadium not only enhances the experience for the fans but may also benefit the host city in which the team plays.

Since 2000, approximately 14 new NFL stadiums have been built and another stadium is to be finished being built in 2016.3 With the average NFL stadium

(approximately $1 billion) becoming more and more expensive to build, team franchise are continuously asking local government in their respective markets to pony up tax payer dollars to help build these expensive stadiums. The most expensive stadium that

3 Kaempfer, William H. 1998. "Sports, jobs, and taxes: The economic impact of sports teams and stadiums." Journal Of Economic Literature 36, no. 4: 2188-2190.

3 has been built to date and paid for in part by tax payers is that of the in which $444 million of the total $1.2 billion stadium was paid for by public funding.4 In

1998, the owners of the Tampa Bay Buccaneers did not have to pay a single penny for their stadium to be built. It was completely funded by the public through sales tax increase and state bonds.

In return for having NFL stadiums being subsidized, the argument is that by having a franchise in a local community, most in the community gets to benefit from it.

By having the stadium built tourists come to the games on Sundays and spend on merchandise, hotel, food, attractions, etc., and because of that local economies gain tax revenue. Advocates in favor of having sports teams in a local city argue that having a team is better than not having one because of the economic implications. Even though the city would need to subsidize part of the stadium for the team to play in, the economic benefits are still greater than the cost of the stadium. On the contrary, there are naysayers who are strongly against the idea of subsidizing stadiums because they state that the revenue that is gained from NFL games does not outweigh the cost of a stadium.

Although tax revenue does increase due to events, in the long run it does not benefit the city. Bates is one of those who oppose using public funds would describes it as,

4 Ibid

4 Subsidies for professional sports are often rationalized on the grounds that teams generate substantial economic values for host cities. If sports franchises and stadiums generate economic profits for hotels, restaurants, and retailers, for which team owners receive no compensation (i.e. external benefits), the free market will lead to an underprovision of teams and facilities that can be corrected through subsidies. Numerous academic economists such as Coates and Humphreys and Baade, however, have generally found no significant correlation between new facilities or franchises and citywide incomes or employment. The most common explanation offered up by economists for this, perhaps, surprising lack of economic impact is that spending on professional sports is simply a substitute for spending on other goods and services in the local economy so that while the economic impact of a sports franchise may be large in a gross sense, teams have little net effect on a city’s economic variables.5

Another argument for having an NFL franchise in a local municipal is because of the impact of the labor market. The argument here is that having a football franchise is the city increase the number of individuals that are employed and the income effect takes place; the individual gets paid and in return uses it to pay for goods and services that he/she needs and the cycle continues. How much of the labor market is affected is where the real argument begins. Some studies have found that it does have an impact on the economy while other researchers have found that it does not affect it as much and therefore can be ignored.

However, because the NFL is such a popular sport there is a huge demand by fans to have a host team in their city and since the league can use that as leverage, if it does not get what it wants it can threaten to relocate elsewhere. Due to the overwhelming support of the NFL by the fans and arguments for and against having an NFL franchise in a city, the main research topic of this paper is therefore examining tax revenue of local

5 Baade, Robert A., Robert Baumann, and Victor A. Matheson. 2008. "Selling the Game: Estimating the Economic Impact of Professional Sports through Taxable Sales." Southern Economic Journal 74, no. 3: 794-810.

5 cities with and without football franchises, stadium subsidies, and on the local city labor market. Before all that, the following literature review will go into detail on what other researchers have found about the topic.

6 CHAPTER 2

LITERATURE REVIEW

The NFL Players Association, the union of the players, asked Murphy and Topel to study the claim by team owners that under the current salary cap and free agency system, the teams could no longer operate economically. Topel and Murphy identified that the best source of data to verify this claim would be the audited financial statements of the NFL and of all the teams in the league. However, NFL owners were not willing to grant that that type of information to the public or the players union. The only way to get close enough information was to obtain the financial states of the , who are the only publicly owned franchise. Based on Murphy’s and Topel’s research, their analysis of statements that were obtained came to some of the following conclusions: That NFL owners have on average done financially well and continue to do well with preceding collective bargaining agreements; Also, the values of the owners’ teams have quadrupled since 1998, with the average team now being worth more than $1 billion.6

Every year, NFL cities bid to win the right to host the Super Bowl. Research done by Davis and Christian revealed that successfully winning a Super Bowl bid increases both personal income of local individuals in the city as well as the local municipalities.7

Their research came to a conclusion that the economic benefits spread beyond just winning a Super Bowl bid. They go on to explain that cities receive an additional source of tax revenue as thousands of fans from all over the U.S. come to the host city. Davis

6 Murphy, Kevin M., and Topel, Robert H. “The Economics of NFL Team Ownership.” 7 Davis, Michael C., and Christian M. End. 2010. "A Winning Proposition: The Economic Impact of Successful National Football League Franchises." Economic Inquiry 48, no. 1: 39-50.

7 and Christian also explain how a team’s winning percentage has an important effect on real per capita personal income on the team’s local economy. Coates and Humphreys, two other researchers who Davis and Christian take into account, observed similarly if a local team winning a championship had an encouraging effect for the local municipal area in terms of per capita personal income. Despite Davis and Christian’s research that winning Super Bowl bids having a net impact in the local economy, they also found out that in Coates and Humphreys research the only factor that had a noteworthy effect on income was for the local team winning the Super Bowl.8

Advocates for sports teams always emphasize the economic benefits that professional sports teams bring to local economies and the reason for cities to construct new stadiums at the public expense. Past studies have shown that there is an increase in economic activity by hosting the Super Bowl or other mega events in terms of tax revenue for the city.9 However, Baade and his colleges have exposed that this claim is false with a detailed regression analysis of taxable sales in Florida from 1980 to 2005.

They claim that although there may be some economic advantage to build new stadiums in the short run, these stadiums and sports franchises in the host city likely reduce taxable sales instead of increasing them.10 Similarly, when there are strikes and lockouts in the league, it has not lead to a huge reduction in local taxable sales. This can be recently seen when there was a threat of a lockout over negotiations of the collective bargaining agreement in the NFL.

8 Ibid 9 Baade, R. A., Baumann, R. W., & Matheson, V. A. (2008). Assessing the Economic Impact of College Football Games on Local Economies. Journal Of Sports Economics, 9(6), 628-643. 10 Ibid

8 Kaempfer’s research includes multiple papers that study the basic economic justification for publicly subsidizing sports stadiums and arenas. With the study that he conducted, Kaempfer followed an outline about the agreements that come into place for financing stadiums. This research goes further into depth on the economic impact of the facilities, how the facilities impact employment in the local market, those who benefit from the stadium being subsidized, and the so called stadium mess that goes into the agreements to subsidize stadiums. There is also research regarding the behind the scenes in politics for subsidizing stadiums and how city and state governments agree to pay for the new sports facilities. One such example is the current proposals to build a new NFL stadium to replace the aging Candlestick Park in San Francisco. It takes years for governments to agree to help subsidize a new stadium and critics argue that the benefit does not outweigh the cost of paying for the stadiums.11 Another topic worth mentioning in these papers is connection between sports, jobs, and taxes.

Although there are other sports leagues in the country, the NFL holds monopoly power for its product (often referred to as the shield which represents the sports logo) that most businesses don't have. The NFL has worked long and hard in establishing a model in which local cities must compete with each other to get the winning Super Bowl bid.

Lotterman states that by having this monopoly power, there is a common economic feature. He argues that monopoly power creates “economic rents,” a term also used by economist David Ricardo. Ricardo’s statement in “economic rents” was that profits could

11 Kaempfer, William H. 1998. "Sports, jobs, and taxes: The economic impact of sports teams and stadiums." Journal Of Economic Literature 36, no. 4: 2188-2190.

9 be attained above what the free market would get.12 Relating this to the NFL, team owners of a scarce and valuable asset, such as a Super Bowl championship game in their stadium, have total control over that asset. Monopolies tend to cause inefficiency when using economic resources, but the government may not have much they could do to restore that efficiency. Those in favor claim that the NFL is an industry association. The revenue from events like Super Bowls get passed to the players, which in turn part is paid in relevant taxes.13

The research done by Vrooman argues that threat of lockout in 2011 by the owners was credible but that their reasons for it are not. He states that owners claim that there was an increase in player costs, which is not justified by the evidence made available to the owners and some to the public. NFL owners try to profit squeeze the league by polarizing a loophole in regards to not having to share stadium revenue with other owners or even city governments. The league has periodic collective bargaining and since the 1993 collect bargaining agreement the NFL has used its monopoly power to gain public stadium subsidies and use of quasi-perfect price discrimination to increase its media revenue.14 The current economic problem of the NFL does not have to do with owners and its players but instead between the veteran players and the rookies. Since the

1993 collective bargaining agreement, this imbalance of profit maximizing venues does

12 Lotterman, Edward. 2014. "Real World Economics: NFL Acts as One Would Expect." TwinCities.com. December 14, 2014. 13 Coates, D., & Humphreys, B. R. (2011). The Effect of Professional Sports on the Earnings of Individuals: Evidence from Microeconomic Data. Applied Economics, 43(28- 30), 4449-4459. 14 Vrooman, John. "The Economic Structure of the NFL."

10 not justify for stadiums to be subsidized when at the end the owners are the ones who profit from them the most.15

In his individual study, Quinn gathers surveys of leading sports economists on major topics in relation to the NFL, which in part leads to the basic foundation of NFL economics. Quinn’s research consists of three parts. He provides the basic overview of the business of NFL teams from an economist’s view in part one. Part two deals with a collection of surveys in which Quinn gathered about the most important revenue streams that the NFL receives. The NFL’s revenue includes media, fan attendance, and merchandising goods that fans purchase. The third part of the paper focuses on labor economics of the NFL. Included in the third part of the paper which is related to labor economics are player and coach labor markets, the rookie player draft, and contract structure for coaches and players. Part five of Quinn’s study is composed of competitive balance, sports gambling, Super Bowl impacts on economies, league issues impacting behavioral economics, and antitrust issues in the league. All of the parts combined give in depths look as to how the NFL conducts its business economic impact on a micro level.16

Quirk and Rodney discuss the business side and economic side of professional team sports such as the NFL. They examine the popularity of sports franchises and the capital gains owners accrue in the form of increasing values of franchises, tax implications of owning a sports team, and the subsidy provided by city governments in the form of publicly owned stadiums. This research also goes into depth about the labor market economics and impacts of free agency under a labor agreement. The research

15 Ibid 16 Quinn, Kevin G., ed. 2012. The Economics of the National Football League: The State of the Art. n.p.: Sports Economics, Management and Policy series., 2012.

11 done by Quirk and Rodney reflects the problem of sustaining a balance between teams while still being competitive and the argument that restrictions is needed to be placed on the labor market in order to preserve that competitive balance in sports.17 As a result from this, they explore the economic benefits that fans and players receive from other sports leagues. The conclusion they reach shows the reasons why other leagues failed and others have succeeded.

Similarly, Coates and Humphries’ research article goes into detail about the impact of sports teams on the labor market using data from the Current Population

Survey. The data collected involves occupational groups of workers employed in large

U.S. cities from 1983 to 2002. The end result from a wage scale model imply the football teams increase the hourly and weekly income earnings of employed males in similar occupations.18 There is a growing trend within the different sports leagues to have competition amongst each other over the labor market. Coates and Humphreys research the direct impact of how the increasing pay scale of NFL players affects the local city economy in which the team is located. The results that they find support evidence that sports teams such as the NFL affect respective labor markets.19 However, the mixed results of having sport teams in cities and earnings from those teams offer little to no economic reason for governments to subsidize stadiums for the teams.

In his research study, Scully examines the market structure of sports teams from all over the U.S. and gives an overview about the economics of those sports franchises.

17 Quirk, James, and Rodney D. Fort. 1997. Pay dirt: The business of professional team sports. n.p.: Second edition., 1997. 18 Coates, D., & Humphreys, B. R. (2011). The Effect of Professional Sports on the Earnings of Individuals: Evidence from Microeconomic Data. Applied Economics, 43(28- 30), 4449-4459. 19 Ibid

12 He also takes into account anticompetitive practices that have been tolerated by the leagues for many years. Scully conducted his research in part on the player distribution of salaries across the various leagues and how it impacts the rules of the game. In relation to this, Scully analyzes how a club’s win percentage, whether the team is known as a winner or loser, affects the value of the franchise and how fast the team is able to be sold. As with the research done by Murphy and Topel, Scully also goes into the details of operating profits in sports. In part he claims that the profit that each team generates affects the value of the franchise.20 A team with high operational profits will be worth more in value that other teams who are barely able to make any profits. The labor market, as seen by other researchers, is an interesting topic to study when talking about sports and so Scully investigates whether the firings of managers or coaches, as well as signing and cutting certain players, generally improve the team’s wins percentages.

20 Scully, Gerald W. 1995. The market structure of sports. n.p.: and London:, 1995. EconLit.

13 CHAPTER 3

STADIUM FINANCING

Financing a venue for NFL teams requires cooperation from all government entities of the state. There must be an agreement between the city, county, and state as to how they decide to divide the cost of the stadium. Throughout these negotiations, the league and the teams are also part of it in order to get a more favorable deal or else threaten to relocate. After a decision is agreed upon all parties to finance either all or part of the stadium through public funds, a method of taxation must also be agreed upon so that it can generate the sufficient revenue to finance the project of this magnitude.21 Not only should an efficient tax system generate the sufficient amount of revenue needed, but also one that is designed so that taxpayers are able to understand it. A consumer may get confused with a lack of transparency in the tax code or also requires an investment in information that can exceed the benefits to the individual.

The parties, most importantly the government officials, must also consider economic incidence of the tax.22 The burden of the tax should be split between the producer and the consumer when the government imposes any type of tax. Most of the burden will fall on local consumers in the form of lower prices leading to lower wages and profits, although, some portion of the tax will also be paid by out-of-towners.23 Table

1 shows recent NFL stadiums built with the use of public subsidies. That is why it is

21 Baade, Robert A., Robert Baumann, and Victor A. Matheson. 2008. "Selling the Game: Estimating the Economic Impact of Professional Sports through Taxable Sales." Southern Economic Journal 74, no. 3: 794-810. 22 Ibid 23 Ibid

14 becoming less and less viable for public subsidies on NFL stadiums. However, financing team stadiums has taken a revolutionary turn compared to past years.

15 Table 1. Sources of public funds for stadium construction

Year Public Referendum Public funding source Built Contribution Atlanta 1992 100.0% No 2.75% Hotel tax

Carolina 1995 22.9% No PSL

Sales tax, hotel tax, ticket charge, Jacksonville 1995 90.7% No general funds

2.5% hotel tax, general funds ($257 St. Louis 1995 100.0% No mil.)

Washington 1997 27.0% No

Baltimore 1998 89.3% No Lottery

Oakland 1998 100.0% No PSL

Tampa Bay 1998 91.2% Yes 0.5% sales tax

Buffalo 1999 100.0% No General funds

Hotel tax, car rental tax, sin taxes, Cleveland 1999 70.7% Yes PSL

Tennessee 1999 75.3% Yes Hotel tax, PSL ($72 mil.)

0.5% sales tax, ticket charge, PSL Cincinnati 2000 94.4% Yes ($25 mil.)

Denver 2001 62.2% Yes Sales tax

Ticket charge ($14 mil.), PSL ($42 Pittsburgh 2001 59.0% No mil.), other

Detroit 2002 26.5% Yes 1% hotel tax, $2 car rental tax

Hotel tax, car rental tax, ticket charge, 2002 72.9% Yes sin taxes, PSL

New 2002 17.2% No

16 England

Sales tax, 2% hotel tax, 10% ticket Seattle 2002 63.7% Yes charge, lottery, PSL ($17 mil.)

Chicago 2003 66.1% No 2% hotel tax, PSL ($60 mil.)

0.5% sales tax, ticket charge ($92.5 Green Bay 2003 57.3% Yes mil.)

Philadelphia 2003 36.4% No

Arizona 2006 66.2% Yes 1% hotel tax, $3.50 car rental tax

Source: Baade, R. and Matheson, V. 2006. “Have Public Finance Principles Been Shut Out in Financing New Stadiums for the NFL?” Public Finance and Management, Vol. 6, No. 3: pp. 284-320.

17 CHAPTER 4

THE STADIUM REVOLUTION

The media revolution that has happened over the last half-century has put the

NFL in a different category in regards to its league revenue. The stadium revolution over the last quarter-century has served to make the media revolution minimal. Since the NFL granted expansion teams to Carolina and Jacksonville in 1995, there have been new or renovated stadiums for 27 out the 32 NFL franchises.24 The stadium revolution can be traced back to two influential owners of the league: Joe Robbie of the Miami Dolphins and Jerry Jones of the Dallas Cowboys. After continually back and forth argument with the City of Miami and Dade County over renovations to the Dolphins NFL stadium, owner Joe Robbie decided to build a privately owned stadium in 1984, which would be backed by luxury-seat revenues.25 The design of the stadium combined club seats similar to Kansas City Chiefs’ Arrowhead Stadium along with twin tiers luxury suites as in the

Dallas Cowboys’ football stadium. The new stadium that was owned by Robbie opened in 1987 outside of Dade County with a total cost of $115 million. The state of Florida contributed $13 million to the cost of the stadium.26 At the time, the inside-out design was such a revolutionary step forward that it caused price discrimination between the lower bowl and upper deck seating. The financing part of the stadium involved leasing

216 luxury suites between $29,000 - $65,000 per season for 10 years. There were also about 10,214 club seats that would be leased at about $600 - $1,400 per season. Due to

24 Vrooman, John. "The Economic Structure of the NFL." 25 Ibid 26 Ibid

18 the annual payments of $16 million from luxury-seat revenue alone, the debt of Dolphins’ stadium was completely paid off in 10 years.27

The second phase of the stadium revolution occurred after owner Jerry Jones paid a record at the time of $150 million for to lease Texas Stadium for the Dallas Cowboys in

1989. In the 1990s, when the Cowboys were having their most successful years in history, Jones made series of licensing deals for Texas Stadium that would also directly compete with sponsorship agreements negotiated by the NFL. Commissioner Rozelle created these league sponsorships in 1963 as the merchandising element of this new

“league-think” model. However, the conflicting sponsorships of the Cowboys and the

NFL resulted in lawsuits that challenged collectivism by the NFL. What ended up happening at the conclusion of the lawsuits was that local venue money increased. The court hearings were resolved by legal distinction separating the NFL and the Cowboys brand from Jones and Texas Stadium. The separation between the NFL and the Cowboys attached revenue to Texas Stadium and also increased unshared cash flow for the NFL teams that had full control of its own football venue.28

A revenue-sharing problem was created for the rest of the teams by the private funding of Dolphins Stadium owned by Joe Robbie. It was later solved when the other owners came to an agreement to waive the visiting team share of luxury seats if the fees were used in the construction of the stadium. In 1996 after the Carolina Panthers sold

$122 million in personal seat licenses to come up with 76.3% private funding of Bank of

America Stadium, the visiting team share waiver was also extended to personal seat

27 Ibid 28 Ibid

19 licenses used for venue construction.29 Personal seat licenses are paid licenses that entitle the owner of the license the right to buy season tickets for a certain seat in the stadium the team plays in.

What also could be credited as the most important factor of the stadium revolution is the NFL’s extension of premium waiver into the formation of credit facility to finance stadiums. In 1999, after the abandoned their efforts to relocate to

Hartford, the NFL then started a G-3 program (NFL Constitution and Bylaws, 1999

Resolution G-3) where the league would give out stadium loans that would be repaid from 34% visiting team share of club seat premiums.30 For franchises located in the six largest TV markets, the NFL would loan up to 50% of private costs (maximum amount of

$150). Teams located in the smaller TV markets would get a loan up to 34% of private costs (maximum amount of $100). Table 2.2 shows the 25 stadiums built since 1995 and are split into the costs of the stadiums along with the G-3 loan program.

29 Zimbalist A (2010) Reflections on salary shares and salary caps. J Sports Econ 11(1):17–28. 30 Quinn, Kevin G., ed. 2012. The Economics of the National Football League: The State of the Art. n.p.: Sports Economics, Management and Policy series., 2012.

20

21 When creating the G-3 loan program, the NFL had also clearly designed it in a way to discourage teams, particularly in large TV markets, from relocating much often to smaller markets. For example, the Chicago Bears contributed roughly less than one-third of the total $632 million cost for Soldier Field, which opened in 2003. The Chicago Bears were responsible to pay $200 million, $100 million of which came for the NFL’s G-3 loan program and $70 million came from personal seat licenses.31 Therefore, the Bears were only required to pay for $30 million of the total stadium cost. There is a transparent wealth transfer from the visiting team share of smaller market teams to the large market clubs playing in new stadiums under the G-3 program. The salary cap base that teams must abide by does not include premium seat waivers and G-3 loans.32 This is a way for large market owners to protect TV rights and also shift venue costs to players, as well to the smaller revenue teams.

With the league’s rising stadium revolution, public funds have begun to be used for about half the total cost of building a venue. Under the $1.1 billion G-3 program, 12 stadiums have averaged 59% private funding and one-fourth of it came from G-3 loans.

Since the relocation/extortion period in the NFL, the 13 stadiums built averaged 26.6% private financing and 60% of it came from personal seat licenses.33 An important aspect of the G-3 program was that it was shifting financial burden to the owners of the NFL teams rather than having the general public use taxpayer funds. However, the owners were then able to find a way to pass the internal private burden along to smaller market

31 Quirk, James, and Rodney D. Fort. 1997. Pay dirt: The business of professional team sports. n.p.: Second edition., 1997. 32 Zimbalist A (2010) Reflections on salary shares and salary caps. J Sports Econ 11(1):17–28. 33 Vrooman, John. "The Economic Structure of the NFL."

22 teams through the use of the premium waiver and since stadium costs were exempt from salary cap revenue, owners would pass along the burden to the players as well.

Usually when the league and NFL clubs negotiated during the relocation/extortion phase, the percentage of public funds that would be used would vary with the market size of the city. To get a better picture as to how the venue extortion game functioned, the

1995 expansion event is a perfect example. The cities that were among the finalists in the expansion phase were Jacksonville, Memphis, Baltimore, Charlotte, Oakland, and St.

Louis. Three of the cities had lost teams already to previous NFL relocation, but there were some surprise expansion cities in Charlotte and Jacksonville. With 158 suites and

11,300 club seats, along with $158 million in personal seat licenses, Carolina was chosen because of the economics of the stadium design34. Jacksonville, conversely, was chosen as the other city to host a franchise due to the advanced sale of 10,000 club seats for $75 million.35

Willing to hand out public funds for new stadiums, the other four finalists became targets of relocation for existing NFL teams. In 1995, when the LA Raiders moved back to Oakland, 100% of public funds were used to renovate the Oakland Alameda County

Coliseum, which had 143 luxury suites and 6,300 club seats.36 That same year the LA

Rams moved east to St. Louis with 100% public subsidy being used towards the Edward

Jones Dome, which held 142 suites and 6,200 club seats.37 M&T Bank Stadium opened in 1998 with 108 suites and 7,900 club seats when the relocated to

Maryland becoming the Baltimore Ravens in 1996 with 87% public financing for the

34 Ibid 35 Ibid 36 Ibid 37 Ibid

23 stadium.38 The Houston Oilers moved to Tennessee because 76% public funds were used to build the 143 suite and 9,600 club seats LP Field.39 Personal seat licenses were used for the relocation structures, but not for the cost of stadium construction. The NFL would receive $29 million from each city as a relocation fee and each city paid the relocating teams a direct personal seat license subsidy.

The NFL would then have another expansion phase in 1999, bringing the Browns back to Cleveland with 75% public subsidy being used for the new Browns Stadium.40

The new stadium would have 147 suites and 8,800 club seats. With the postponements of competing LA investment groups in 2002, the NFL would bring back a team to the

Houston market for 71% public funding of the 191 suite and 8,300 club seat Reliant

Stadium.41 In order to outbid LA, the Houston Texans paid an expansion fee of $700 million. The Cleveland Browns only paid a fee of $476 million. Again this would leave the second largest US TV market without a NFL franchise. However, many see this as not being a problem for two reasons. First, when the Raiders and Rams were in LA they would rarely sell out games when played in the LA Coliseum. Not selling out games would be subject to the NFL’s TV black out rule and roughly 5.65 million TV households would not be able to see the games live.42 Secondly, at least one major market being left open is preferred by the NFL for other clubs to use as venue extortion. The threat of

38 Ibid 39 Ibid 40 Ibid 41 Ibid 42 Vrooman J (2009) Theory of the perfect game: competitive balance in monopoly sports leagues. Rev Ind Organ 34(1):5–44.

24 relocating to LA has been used by many clubs including the , Arizona

Cardinals, Colts, and San Diego Chargers.

During the stadium revolution, several problems emerged for the league and NFL teams to figure out. The most obvious of all is the shift towards increased reliance on stadium revenue that is unshared. Also, stadium privatization exposed by Joe Robbie allowed owners to benefit because of the large amounts of public funds being used that were leveraged through the threats of relocation after the 1995 expansion phase. Third, most of the costs that the teams would be responsible for would be financed and eventually paid off with the use of personal seat licenses and luxury seat packages schemes.43 Consumer surplus of the marginal fan would be drained by the take-it-or- leave-it perfect price discrimination used by NFL teams.44 In both the media and stadium revolutions, fan exclusion strategies have become nearly the same. Fewer and fewer fans have been charged more money for the same season ticket package by the NFL league cartel and its local monopoly teams.45 The transformation of a multipurpose public stadium designed to maximize fan welfare to publically subsidized football only stadiums designed for maximum profit has thus been seen over a short period of time in regards to the venue structure of an entire league.

43 Vrooman, John. "The Economic Structure of the NFL." 44 Vrooman J (2009) Theory of the perfect game: competitive balance in monopoly sports leagues. Rev Ind Organ 34(1):5–44. 45 Ibid

25 CHAPTER 5

SUPER BOWL IMPACT ON LOCAL ECONOMY

Part of the agreement with subsidizing NFL stadiums is that the league guarantees the host city with a Super Bowl bid. The Super Bowl is considered to be the biggest event the NFL has to offer. It is thought that hosting the Super Bowl is economically beneficial for the local municipality as tax revenue increases due to the event-taking place. By using public funds to attract franchises and host events, it is expected to have a generous estimate of what the local community can expect to benefit in return from the events.

However, some results have shown that the NFL has overestimated the results that they expected the city to gain in the form of economic impact, but there are also other times where the NFL’s estimate is right on the dot. The purpose then is to view recent Super

Bowl cities and how it impacted the city. A determination will then made upon the results whether or not subsidizing NFL stadiums are really worth it.

For the most recent Super Bowl, which took place in Arizona, the NFL committee estimated that the economy surrounding the Phoenix area would generate

$500 million.46 However, according to an independent study, the actual amount that the city would benefit from is between $30 million and $130 million. The reason for such the low estimate is that the 100,000 or so visitors expected to come to Arizona for the Super

Bowl are displacing the visitors that generally come anyways to the warm-weather states.47 The local citizens who go to the game and spend money on Super Bowl merchandise won’t be spending it elsewhere as well. In general, estimating economic impacts can be difficult as Adam Jones states from the 2008 Super Bowl prediction being

46 Berr, Jonathan. "The Super Bowl's Economic Impact: Super-hype?" CBSNews. January 30, 2015. 47 Ibid

26 lower than expected, “This year’s projection is the second highest on record, however the inflation adjusted result is approximately two percent lower than our estimate for

Arizona’s last Super Bowl in 2008.”48

On the contrary, Super Bowl XLVI in 2012 resulted in a $324 million economic impact for the city of Indianapolis. This increase in economic activity was due to the weekend long festivals in preparation for the Super Bowl. By being able to host the mega event, many sectors of the Indianapolis economy were affected. Hotels, restaurants, retail vendors, entertainment venues, rental car companies, etc. were the ones who comprised the direct economic impact of the city.49 Super Bowl XLVI resulted in a direct impact total of $176 million. The indirect impact of hosting the Super Bowl was $67 million.

Those who also benefited from the Super Bowl were businesses that supplied material, supplies, labor, and services.50 Also, as is a current argument in favor of hosting major events, is that businesses hire employees and pay wages, which in turn is spent on goods and services. Businesses that were involved in game related operations supported an estimated 3,600 jobs.51 Apart from the total economic impact by hosting the event once a year, there is also an impact due to the taxes that must be paid on merchandise, hotels, food, transportation, etc. Nearly $89 million was generated due federal, state, and local taxes from the Super Bowl.52 The state of itself was able to benefit $25 million through sales taxes while local governments shared roughly $21 million.53

48 Ibid 49 "The Economic Impact of Super Bowl XLVI." Rocketport Analytics. July 1, 2012. 50 Ibid 51 Ibid 52 Ibid 53 Ibid

27 Taking a closer look at a big city, such as /New Jersey, economic impact is expected to be larger than those in smaller markets. The Super Bowl was brought to the New York/New Jersey area in 2014 with an estimated $600 million impact on the economy. However, many economists argue against this estimate and even goes as far as one economist forecasting the impact being as low as $60 million.54 Also according to multiple researchers,

One study on the subject found that the Super Bowl contributes only one-quarter of what the NFL promises. And in fact, even though most do provide an accounting return (money taken in covers or exceeds amount spent) almost all result in a negligible or negative overall impact on the economy. According to the economics professor Robert Baade of Lake Forest College, boosters and special interest groups who stand to gain from public support for the even almost always inflate their estimates.55 Another factor worth looking at is the historical forecast on direct spending from visitors due to the Super Bowl game. The following table demonstrates how much visitors spend in host cities of previous events. Breaking the costs and benefits is a difficult thing to do for both New York and New Jersey. However, according to other researchers, the cities closest to the stadium will pull in most of the spenders of the Super Bowl while the

Meadowlands will likely be the one to bear the brunt of costs.56 Matheson, an economics professor, puts it best when he says “This is probably a pretty poor deal for New Jersey overall. The average person who spends four days in town for the Super Bowl is going to spend almost none of that that time on New Jersey soil.”57

54 Pinckard, Cliff. "Super Bowl XLVIII's Economic Impact on New York, New Jersey Being Questioned: A Closer Look (poll)." Northeast Ohio Media Group. January 31, 2014. 55 Ibid 56 Ibid 57 Ibid

28 Table 3. Direct visitor super bowl spending 2002-2014

Direct Visitor Super Bowl Spending 2002-2014 250

200

150

100 Spending (in millions) 50

0

Source: Sullivan, S.P. “Super Bowl's economic impact on N.J.: At least 75% below NFL estimates.”

29 Upon these three examples that were provided, the trend is very similar to the rest of the team venues. Whether the Super Bowl was hosted in Texas, Florida, or Detroit, the actual impact on the economy was just a fraction of initial estimate. The NFL has a tendency of over estimating Super Bowl impact on local cities when in reality it is much less than anticipated. However, since the game of football is widely popular based on demand, cities would rather gain a little than not have anything at all. Even though the use of public subsidizing stadiums is becoming less and less popular, cities and states will continue to use part of the public funds to help build these venues because they see it as too much of a risk to let the team move elsewhere.

30 CHAPTER 6

CONCLUSION

All in all, the idea of subsidizing NFL stadiums has grown less popular with the mass public. The results continue to suggest that, as with this research, the economic impact is not large enough to justify the use of public funds towards venues. The main reasons why city governments still advocate for building stadiums for NFL teams are because of jobs! Not only that, but proponents claim that building facilities improve the economy in four different ways. The main argument is that by building venues create construction jobs. The fans that attend game events or also work for the franchises generate new spending within the local community and expanding employment further.

Also, teams attract tourists and companies to the city, which then expand local spending and creating additional jobs. Lastly, with all the new spending created there is a multiplier effect, which causes yet even more spending and job creation.

Supporters of subsidizing stadiums claim that economic growth is spurred that eventually they become self-financing. However, by the time that point is reached, the team may have relocated to another city. The subsidies that are used become offset by the revenues from ticket sales, sales tax on merchandise, and also on property tax from the economic impact from the stadiums. However, as the results tend to show, arguments in favor of using public funds due to the resulting economic impact are false. The NFL inflates economic impact when a city hosts the Super Bowl. The research done revealed that when a Super Bowl event takes place in a host city, the actual economic impact on the city is just a fraction of the total amount the NFL initially stated. Cities subsidize on

31 average half of the total cost of the venue, yet by hosting a Super Bowl only yields a fraction of the public funds that were used.

On the contrary, the NFL is such a popular league that fans demand it overwhelming. Since franchises know this, if public funds are not used towards stadium financing then they use the threat of relocation. This action then forces officials to act quickly and usually end up in subsidizing the venues. A clear example of this is in the St.

Louis market. The team is looking to relocate to Los Angeles while officials in St. Louis are coming up with a stadium plan to keep the team with roughly half in public funds being used. However, the city of St. Louis is still paying off the bonds on the old venue.

If the new stadium gets built the city will end up having to extend the bonds causing taxpayers to continue to pay for the stadiums for an additional thirty years. Yet, data shows that by having a Super Bowl in the city will not result in economic growth large enough to pay off the debt of the stadiums. Therefore, it should not be in the best interest of the St. Louis community to help subsidize a venue for the franchise.

The question then turns to whether or not the Los Angeles market should help subsidize a stadium for an NFL team. The league continues to flirt with the idea of having a professional football team in the Los Angeles area only if it is good for both the

NFL and the city. Right now there are two competing Los Angeles area stadiums to attract NFL teams. The Inglewood project estimates that 40,000 jobs would be generated and $1 billion per year would go to the local economy due to the events. The Carson stadium would create more than 13,000 jobs and about $530 million in economic growth.

These estimates are known to be inflated, however, whether it is due to the added revenue or job growth, cities will still see some impact that they will benefit from. The

32 community must therefore come up with an agreement between the costs and benefits of subsidizing an NFL stadium.

To conclude this research, therefore, this paper once again synthesizes and analyzes what previous research has shown for years; that subsidizing NFL stadiums does not generate the needed economic impact in the city in order to justify the use of public funds on an estimated billion dollar venue. However, this outcome really depends on the cities and individuals. If by using public funds on a stadium to get people back to work, then the benefit may outweigh the cost because the government will then look great by creating jobs, especially in a depressed city. For the most part, though, the conclusion is that public subsidies are not worth the fraction of economic growth generated from the stadiums.

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