Stadiums typically poor investments for cities

Don't tell the Cardinals, but according to a recent analysis issued by an economist with the Federal Reserve Bank of St. Louis, investing public funds to attract and keep professional sports teams is not a good investment for cities.

However, in spite of the economic issues, cities often incur the expense for other intangible reasons, such as civic pride and political self-interest, according to the analysis of Adam M. Zaretsky, an economist with the Federal Reserve Bank of St. Louis.

Zaretsky looked at the demons in the details behind sports facilities for the April 2001 issue of The Regional Economist, the St. Louis Fed's quarterly journal of business and economic issues.

Since World War II, of the roughly 140 sports facilities that have been built or refurbished, only 14 did not use taxpayer dollars.

All told, between 1987 and 1999, 55 stadiums and arenas were refurbished or built in the United States at a cost of more than $8.7 billion, with about $5 billion of that figure financed with taxpayer money.

Since 1999, other stadiums have been constructed or are in the pipeline and are expected to cost between $14 billion and $16 billion, with somewhere between $9 billion and $11 billion coming from public coffers.

"Cities are often driven by the idea that playing host to professional sports teams builds civic pride and boosts local tax receipts from the team-related sales and salaries," Zaretsky said in a press release. "The pertinent question is: Are these revenues above and beyond what would have occurred in the region anyway?"

To address the question, Zaretsky took to task the "economic impact studies" that generally accompany many cities' proposals to use taxpayer money to finance sports facilities.

These studies, often commissioned by franchise owners and conducted by an accounting firm or local chamber of commerce, generally use "spurious" economic techniques, Zaretsky asserted, to demonstrate the number of new jobs and additional tax revenues that will be generated by a new sports facility.

"Some of the assumptions in these studies such as how much of the newly generated income will stay in the region and how many secondary' jobs will be created often cannot be substantiated by economic theory," Zaretsky said.

"For example, estimates of the income that will be generated and spent in a region are often overstated because most of the big money in sports goes to the owners and players, who may or may not spend the money in the team's hometown since many of them live in other cities. Also, because a career in sports is often short-lived, many professional athletes invest their money rather than spend it."

Zaretsky acknowledged, however, that public funds used for a stadium or arena can generate new revenues but only if one of the following situations occurs:

The funds generate new spending by people from outside the area who otherwise would not have come to town;

funds cause area residents to spend money locally that would not have been spent there otherwise; or

The funds keep turning over locally, thereby "creating" new spending.

"Based on what are called multipliers, these economic impact studies often tout the number of new jobs and amount of new revenues that will result from the spending on or at the new stadium," Zaretsky said. "Most of the new jobs created, however, likely just lure workers away from other jobs in town and do not actually lead to a net change in jobs in the area.

In addition, many of the jobs are part-time, low-paying and needed only on game days."

Another problem that Zaretsky noted regarding these economic impact studies is that the value of the next-best investment alternative, or what economists call the "opportunity cost," is generally missing.

"When a city chooses to use taxpayer dollars to finance sports stadiums," he said, "the city's leaders must consider not only what the alternative uses of those funds could be schools, police, roads, and so on but they must also figure what return the city would receive from those other ventures.

Then, the return from the city's next-best alternative must be subtracted from the total return of the winning' choice to arrive at the actual' return of the investment in a stadium. This calculation is almost always missing from these studies because the next-best alternative is often the better choice."

Moreover, Zaretsky said that the evidence suggests that cities and metro areas that have invested heavily in sports stadiums and arenas have, on average, experienced slower income growth than those that have not.

For example, one independent economic study found that of the 30 metro areas where a stadium or arena was built or refurbished in the previous 10 years, only three areas showed a significant relationship between the presence of a stadium and real per-capita personal income growth. And in all three cases St. Louis, San Francisco/Oakland and Washington, D.C. the relationship was negative.

So, if the return on sports facilities to the taxpayer is paltry at best and there are better alternatives in which communities can invest, why do cities turn a deaf ear to the economic arguments and keep rushing to build new stadiums and arenas?

"Home teams strike an emotional chord with most communities," Zaretsky said. "That intangible civic pride' is evidently a powerful force."

The full article in The Regional Economist can be accessed at the St. Louis Fed's Web site, www.stls.frb.org.