Misplaced Priorities: Additional Subsidies Not Necessary for Professional Sports Teams January 2006 1 January 2006 Misplaced Priorities: Additional Subsidies Not Necessary for Professional Sports Teams By Tom Kruckemeyer Chief Economist An agreement to potentially spend $575 million for renovating the Truman Sports Complex in Kansas City (Arrowhead/Kauffman Stadiums) was announced December 23, 2005. The proposal was agreed to by officials from the Kansas City Chiefs National Football Team, the Kansas City Royals Major League Baseball Team, Jackson County, and the state of Missouri. Major improvements to both stadiums would be financed as follows: • A 3/8 cent Jackson County Sales Tax $425 million* • Contribution from the Chiefs $75 million • Contribution from the Royals $25 million • State of Missouri Tax Credits $50 million** Total $575 million *subject to voter approval in April, 2006 **subject to approval by the Missouri Development Finance Board1 Tax support for professional sports is unwise public and fiscal policy. There are several reasons that the Missouri Development Finance Board, which must approve the state tax credits, should reject this unwise use of public funds. I. The Missouri General Fund Remains Under Strain The most important reason for rejecting the tax credits for Kansas City’s sports teams is that Missouri has much more pressing needs than providing additional state subsidies to professional sports interests. It is important to note that the state currently incurs about $18 million per year of sports- related spending. These are: $12 million debt service on the Edward Jones Dome in St. 1 Amounts as reported in the Kansas City Star – Dec. 23, 2005 2 Louis; $3 million for stadium maintenance at the Truman Sports Complex in Kansas City; $3 million for debt service for the Mizzou Arena in Columbia.2 After declining in both fiscal years 2002 and 2003, Missouri net General Revenue (GR) collections have grown at respectable rates over the last 2.5 years. Despite the improvement in net General Revenue, many areas of the budget remain under-funded. Some examples for Fiscal Year 2006 (beginning July 1, 2005) include: About 90,000 Missourians will lose Medicaid coverage. The majority of those cut—68,000—are low-income, working parents. State support for four-year colleges and universities is nearly 8% below the level attained in Fiscal Year 2001. This has led to tuition increases of nearly 60% in five years. The state’s basic K-12 school funding formula is under-funded by about $800 million. Two hundred thirty seven school districts in Missouri have sued the state to achieve adequate funding for education. Missouri state employees are the lowest paid state employees in the nation. There are many other areas of the state budget where inadequate funding has and continues to cause hardship. Even if net General Revenue grows at decent rates over the next few years, new revenues will not be nearly sufficient to deal with the state’s many budget difficulties. In the near term, Missouri is unlikely to be fiscally sound enough to justify allocating an additional $50 million in sports subsidies. II. Public Subsidies for Professional Sports; A Questionable Investment In recent years, many American cities have built new or have substantially renovated sports facilities to attract or retain a professional sports franchise. According to research performed by the National Sports Law Institute of Marquette University Law School, 83 of the 92 teams that make up “major league” baseball, football and basketball play in facilities that were built to some degree with public funds.3 The desire or at least the willingness of the public along with their elected representatives to acquiesce to the requests of team owners to subsidize stadium construction/improvements is largely due to their ability to convince the public and politicians that the economic benefits of the team’s presence exceed the costs to the taxpayers. Generally, these assertions are based on “consultant” reports that are paid for by the team seeking the tax subsidy. These reports, in tandem with direct or implied threats to relocate the team have often resulted in substantial public funds being used for stadium construction. This process has been summarized and chronicled by Greg Leroy in his 2005 book The Great American Jobs Scam.4 However there is a much more substantial body of economic literature (not funded by team owners) which generally conclude that public subsidies in professional sports venues rarely yield 2 Missouri Office of Administration Executive Budgets 3 Marquette University School of Law – Website: law.marquette.edu 4 Greg Leroy, The Great American Jobs Scam, (Berrett-Koehler Publishers, San Francisco, CA 2005) 3 the promised economic benefits and may not represent an optimal use of tax dollars. Mr. Leroy’s book discusses the findings of several of the more recent studies and summarizes this section of his book with this quote from Dr. Andrew Zimbalist (an economist at Smith College and a leading authority on this subject) “Few fields of empirical economic research offer virtual unanimity of findings. Yet, independent work on the economic impact of stadiums and arenas has uniformly found that here is no statistically significant positive correlation between sports facility construction and economic development.” (See endnotes for citations of several recent books/studies on this subject). Given that there are many areas of the state budget that continue to receive inadequate funding, numerous better uses of the $50 million at stake here can almost certainly be found. The studies cited above conclude that most of the benefits of tax subsidized sports facilities accrue to team owners along with a relatively small number of well paid athletes. Allocating this money to education, health care and economic infrastructure is certain to yield greater economic benefits to the public. In general, allocating scarce public dollars to subsidize professional sports is not optimal. Given the particulars of the situation in Kansas City, the case for state assistance to the Kansas City Chiefs and Royals becomes much less compelling. III. Kansas City Professional Sports Do Not Need State Assistance A closer look at the Kansas City teams provide further evidence that additional taxpayer support is not necessary. The Truman Sports Complex, which includes the football and baseball stadiums, already receives an annual state payment of $3 million for facility maintenance.5 Kansas City Chiefs There are few businesses in Missouri less in need of public subsidy than the Kansas City Chiefs. According to estimates published by Forbes magazine, the Chiefs have realized pre-tax profits of $184.3 million for the 1998-2004 seasons.6 This is an average of $26.3 million per year. All Chiefs home games play to sellout crowds of about 78,000 fans.7 In 2005, the Chiefs ranked third of 32 NFL teams in home game attendance. The Chiefs have ranked either third or fourth in home game attendance every year since 2001. Finally, according to articles published in the USA Today, effective for the 2006 season, the Chiefs (and all NFL teams) will receive an increase of about $42 million in revenues annually from the new national television contracts that were negotiated last April.8 5 Missouri Office of Administration Executive Budgets 6Forbes Magazine publishes an annual report on NFL team finances, usually in one of their September issues. The most recent report was in the Sept. 19, 2005 issue and the lead author is Kurt Badenhausen. 7NFL team attendance figures found at: www.ESPN.com 8April 19, 2005 USA Today article by Michael Hiestand, page C3. 4 Proponents of the stadium renovation plan believe that these improvements are necessary to keep the Chiefs in Kansas City. While Arrowhead Stadium is 33 years old and maintenance or improvements may be needed or desirable, the team would seem to be quite capable of financing any improvements with their profits along with the existing state annual funding. While some may argue that the Chiefs could leave Kansas City if stadium improvements are not made, the above facts show that the team is unlikely to find a more favorable economic environment in another city. The probability is that the Chiefs will remain in Kansas City with or without additional state assistance. Kansas City Royals The Kansas City Royals play at Kauffman Stadium, which is part of the Truman Sports Complex. Despite being 33 years old, Kauffman Stadium is a baseball-only stadium and remains a first- rate venue for watching baseball. Indeed, the Royals official team website says that Kauffman stadium “is recognized throughout baseball as one of the game’s most beautiful ballparks.” Unlike the Chiefs, who have been able to consistently field a competitive team, the Royals have had very little on-field success since 1985, which was the last year they reached the post-season. The Royals’ problem is that, unlike the National Football League (NFL), Major League Baseball (MLB) inadequately shares league revenues, making it very difficult for “small market” teams such as the Royals to be competitive. For the 2005 season, the Royals team payroll was about $37 million. This was about half of the MLB team average ($73 million) and more importantly, was $92 million below the average of the top four American League teams. Each year, four American League teams advance to the playoffs. (Source of Data: www.usatoday.com). The Royals have little chance to field a contending, profitable team unless and until MLB adopts a revenue- sharing plan comparable to that used by the NFL. The Kansas City area has provided the Royals with excellent fan support. For the last 15 seasons (1990 thru 2005; excluding the strike-shortened 1994 season), the Royals have drawn about 24.6 million fans, or average of about 20,500 per game.