By Ryan DeLoughry. Wesleyan University
This paper was inspired by Raymond J. Keating’s article “Economic Woes of Pro Sports: Greed of Government?” Keating proposes that governments cease funding stadiums in an effort to stop bidding wars between cities that harm the average taxpayer. This paper supports Keating’s claim that publicly funded stadiums are harmful investments by analyzing the case of Nationals Park, a baseball stadium that opened in 2008, completely funded by the taxpayers of Washington, DC. The paper is divided into four main sections: Background/Financing Overview, Estimate Flaws, Negative Externalities of Stadium and Lease Agreement, and Summary.
The crack of the bat and the roar of the crowd at a baseball game are sounds that have been held holy by many Americans for decades. The public’s love for the tradition and thrill of baseball is certainly not a secret. However, a disturbing trend among team owners is beginning to corrupt the national pastime. As stadiums age or teams look to move cities, instead of privately building new stadiums, many Major League Baseball (MLB) franchises convince local governments to pay for a sizeable portion of their new homes with the public’s money. Touting local economic benefits and job creation, franchise owners pit city against city and encourage bidding wars, seeking the most lavish stadiums available – largely at the expense of city taxpayers. One recent example of this practice is the construction of Nationals Park, the current home of the Washington Nationals baseball team. This form of corporate welfare harms the citizens of Washington, DC.
Before they were the Nationals, the Nationals were the Montreal Expos, a franchise struggling to fill their seats and pay their bills. In an attempt to save the franchise, the Expos were purchased by Major League Baseball to facilitate a move to greener pastures. After a bidding war, the Washington, DC plan for a new stadium in the Navy Yard neighborhood was selected. Financed almost entirely by DC, the cost was $670 million for the construction alone (Cranor, 2013). This amount included $135 million in an upfront payment from taxpayer funds (Cranor, 2013). The rest of the sum, about $535 million dollars (Cranor, 2013), was funded by municipal bonds, putting the city deeply into debt. A recent estimate put the total cost after debt service to be upwards of $1 billion (Suderman, 2012). Washington, DC, the owner of the facility, must also put $1.5 million aside per year for general upkeep and repairs (Cranor, 2013).
In addition to the stadium construction costs, the city also spent almost $83 million to upgrade the local metro station and other infrastructure to accommodate game day crowds (Cranor, 2013). Per their contract with the Nationals, Washington, DC can only host eight non-baseball events at Nationals Park a year (Dupree, 2012). This means that the transportation upgrades only serve a purpose on the 81 days the Nationals play a home game, plus 8 possible days for non-baseball events, for a total of 89 days out of the year, or only 24.4% of the time, a severely inefficient allocation of funds. The stadium requires a capacity of 15,000 riders per hour from the Navy Yard Metro station on game days (Nakamura, 2007), necessitating the upgrade, even though the upgrade is unnecessary when the Nationals are not in town. To make matters worse, the Nationals refuse to pay the $29,000 per hour cost of operating the Metro after normal service hours, which is required on days when games end late. This is another cost levied on the city (Stein, 2014). In addition, to control game day crowds, the city must pay tens of thousands of dollars for increased police presence, and the large and potentially intoxicated crowds impose a social cost by depriving non-spectator Navy Yard residents of safety and quiet. One estimate put the additional police cost for a single playoff game in 2012 between $65,000 and $76,000, the cost of hiring 75 police officers and 60 traffic officers (Ford, 2012). In addition to taking the fiscal risk and responsibility for the construction and upkeep of Nationals Park, Washington, DC must also foot the bill for the costs associated with the crowds the Nationals draw.
To cover its bond debt, some $535 million plus debt service, the city uses four methods to raise funds (Suderman, 2012). Two of the methods, the Nationals’ yearly rent and a 4.25% tax on merchandise and food sold inside the ballpark are sensible and appropriate ways to tax those who enjoy the ballpark. However, the remaining two methods, a gross receipts tax on all DC businesses and a share of the utility taxes paid by all businesses in the city, are questionable at best. Blanket taxes like the latter two do not intend to tax those who benefit from the stadium. The utilities tax simply makes operating a business more expensive for every business owner in the city, potentially raising market prices for consumers. The gross receipts tax makes even less sense. Any business that takes in $5 million or more in revenue is taxed (Suderman, 2012). It does not matter if the business turns a profit or is in danger of failing. As long as the business reaches $5 million in revenue, the city takes some of its revenue to finance Nationals Park, which is mostly likely irrelevant to the interests of the business. A blind tax like this disincentivizes companies to expand their businesses above the $5 million revenue level, thus preventing the opening up of new positions and the hiring of more workers. This disincentive distorts the labor market, creating a deadweight loss that harms job seekers. It has the potential to hurt the consumer as well. If companies do not expand production because they are deterred by the tax, they cannot spread their fixed costs over as many units, forcing higher prices on consumers. It also has the potential to lead to the downfall of struggling, large companies that employ many workers. If this tax is the proverbial straw that breaks the camel’s back and a company goes bankrupt, it could cause layoffs of DC residents.
During the 2011 fiscal year, the two baseball-related taxes raised roughly $14 million while the non-baseball business taxes raised $44.5 million (Suderman, 2012). This means that only about a quarter of the funding for the stadium comes from taxes directly related to Nationals baseball. A much better solution to the funding problem would be to privately fund the stadium and price tickets and merchandise at average cost instead of marginal cost as they are priced now. The consumer would pay for the cost of the item as well as the cost of bringing the franchise to Washington, DC until the stadium is paid off, a fair expectation for those who wish to attend a baseball game in DC. If the fixed cost of the stadium (plus property tax and maintenance costs) is spread over millions of tickets as well as thousands of hats, jerseys, beers and hot dogs, over the course of 20 or 30 years, the overall effect will not be very noticeable to the average fan. Additionally, most fans come to the ballpark with the intention of spending leisure money and would not be very harmed by average cost pricing as opposed to marginal cost pricing. The same cannot be said for consumers of essentials like food or medicine who must pay the higher prices caused by the business taxes levied.
In 2003, the DC-based economic consulting firm Brailsford & Dunlavey (which had advocated in 1996 for what is now M&T Bank Stadium, home of the NFL’s Baltimore Ravens) was hired by a group of baseball boosters to present Washington, DC officials with a report of the projected economic benefits of a new baseball stadium in the Navy Yard neighborhood (Timber and Asher, 2002). The report released by Brailsford & Dunlavey claimed over $1.1 billion in benefits over the life of the 30-year lease, for a net present value of $526 million in 2003 (Brailsford & Dunlavey, 2003). The stadium looked like a lucrative investment for Washington, DC. The only problem was that Brailsford & Dunlavey expected the construction costs of the stadium to be just under $272 million (Brailsford & Dunlavey, 2003). Considering the fact that the four Major League Baseball stadiums that opened between 2003 and 2006 (which were either brand new or under construction when Brailsford & Dunlavey created their projections) had average construction costs of $391 million, the Brailsford & Dunlavey estimate was extraordinarily low (“Current Ballpark Comparisons,” 2015). In addition, the former Montreal Expos had no association with the DC area. Washington, DC would have to make an attractive offer to MLB to land the Expos. This meant promising perks to entice baseball executives that would cause the cost of construction to skyrocket well beyond the $272 million initially proposed.
Washington, DC certainly delivered, building thousands of “club” and “suite” seats as well as a 500-seat “Founder’s Club” to attract rich corporate clients. In addition to the normal food and drink stands, DC also footed the bill for a restaurant and bar inside the stadium (“Nationals Park,” 2015). Deemed unnecessary by many fans, these add-ons helped drive up the cost of construction to $611 million (“Nationals Park,” 2015). The final tally was 225% of the expected cost provided by Brailsford & Dunlavey (Brailsford & Dunlavey, 2003). The citizens of Washington, DC did not get a better, more beneficial stadium for the increased cost. The stadium’s capacity of 41,888 spectators is actually below the MLB average of 43,823 (“Current Ballpark Comparisons,” 2015), and there is no evidence to support the idea that the ritzier stadium caused greater benefits for the local economy. The real victor is Major League Baseball, which is now better able to compete for the public’s entertainment dollar by attracting individuals who are not very interested in baseball, but are more inclined to attend games because of the restaurants and suites. The MLB and Nationals organization gain a luxury entertainment dimension they can leverage to attract a new breed of customer, with Washington, DC paying the cost.
Another shortcoming of the Brailsford & Dunlavey report is their attendance projection. In their calculation, they estimated 3 million fans during the first year and an average of 2.5 million every year thereafter. Although the recession of 2008 definitely dragged down attendance, the club did not surpass 2.5 million fans until 2013 (“Nationals Year-By-Year Results,” 2015). The Nationals attracted 2.65 million fans in 2013, 2.58 million in 2014, and 2.62 million in 2015 (Nationals Year-By-Year Results,” 2015). However, this appears to be the result of exceptional play by the Nationals. Winning an average of 88 games over those three seasons, the Nationals either made the playoffs or were in contention for a playoff berth late in the season, which drew fans eager for postseason magic to the stadium. This above average performance by the team is likely unsustainable over 30 years, the term of the stadium lease. Even historically great franchises in the MLB like the New York Yankees have not been able to string together thirty consecutive seasons of playoff contention. As a result, the 2.5 million attendance benchmark is unrealistic. In contrast, the Nationals’ win-loss record was an anemic 59-103 in 2009 and only 1.82 million fans attended (Nationals Year-By-Year Results,” 2015), although attendance was also dampened by the economic recession. Clearly, the Brailsford & Dunlavey attendance projection is an overestimate if current trends hold and if the Nationals do not find a way to maintain fan attendance in times of less than excellent play.
Negative Externalities of Stadium and Lease Agreement
Due to the spike in property values in the Navy Yard neighborhood, the ugly process of gentrification is in full swing. The median income in the Navy Yard neighborhood rose 147%, from $38,000 to over $93,000, during 1999 to 2012 (Rabinowitz, 2015). Considering that the vast majority of jobs created by Nationals Park are low paying (i.e., peanut vendor, ticket taker, etc.) with a maximum of 89 workdays annually (for 81 Nationals home games and 8 non-baseball events), this massive growth cannot be attributed to Nationals Park employment, but is attributed to the positive externality Nationals Park creates. Being in close proximity to Nationals Park is valued by some individuals, so they are willing to pay more for property close to the stadium. This drives up property values and incentivizes owners to charge higher rents to tenants or to sell their properties. Tenants with lower disposable incomes (often families) are forced out of their homes, and owners are forced to pay much higher property taxes. One telling statistic is that over the same 1999-2012 time period, the Navy Yard neighborhood saw a 51% decrease in the proportion of the population under the age of 18 (Rabinowitz, 2015). Additionally, the proportion of African Americans in the Navy Yard neighborhood population dropped 48% over that time period (Rabinowitz, 2015).
A reasonable explanation for these trends is that the construction of Nationals Park and the subsequent property value spike and real estate growth forced many lower-income African American families out of their homes, in favor of wealthier non-African American singles or young couples. The relationship between change in income and change in proportion of African Americans is particularly strong, with a correlation of -0.92 (Rabinowitz, 2015). Additionally, the fact that 85% of fans attending Nationals games are from outside of Washington, DC (Fisher 2012) begs the question: is the stadium doing anything at all for the residents of Washington, DC? The attraction of higher income young adults to the area certainly boosted the local economy to some degree, but property values skyrocketed and nullified the benefit of any low-skill job growth that may have taken place. It is clear that stadium jobs and jobs at local restaurants, coffee shops, etc. did not enable the original Navy Yard residents to weather the rising housing costs. Nationals Park effectively inspired a new Navy Yard, a desirable place to live for richer young non-African Americans, but not for the low-income African American families who had lived there for years. This phenomenon of using public money to benefit wealthy non-DC residents while harming low-income DC residents who need public money is a massive negative externality caused by Nationals Park.
One example of this process in action is the destruction of the Temple Courts public housing complex. Nine months after the first pitch in Nationals Park in 2008, the Temple Courts property was demolished. A private developer had promised to build a $700 million residential development with at least 570 units of affordable housing for those displaced (Khalek, 2014). Today, a parking lot sits on the former site of Temple Courts (Khalek, 2014). Charging $8 per hour, the lot caters mostly to Nationals fans on game days (Khalek, 2014). A 2013 report found that 178 families of the 200 displaced by the razing of Temple Courts were still displaced (Samuels, 2013). Publicly funded construction only calls for 59 low-income units to be built, not nearly enough to house the displaced families of the former Temple Courts community (Samuels, 2013). On the other hand, Washington, DC is making almost $183,000 per year leasing the Temple Courts property to the company that operates the parking lot (Samuels, 2013). As property values across southeast DC rise due to the stadium-catalyzed development, even the government is inspired to get a piece of the profit, choosing a parking lot over public housing and causing low-income residents to suffer.
Another, less obvious negative externality is related to the fact that Nationals Park is leased for only 30 years. The Nationals have no ownership in the stadium, so there is no sunk cost to anchor them in Nationals Park. If another city offers them a new stadium deal, if fan interest dries up, or if the team owner simply wants a change of scenery for personal reasons, there aren’t very many economic barriers to relocation. Travel is inherent in being a professional athlete, especially in baseball where most players play for a variety of minor league teams in a variety of locations nationwide and are traded between organizations frequently. Because travel “comes with the territory,” relocating the Nationals would not be a huge issue for most MLB players, as it might be for employees in other professions. Aside from the front office brass, most baseball franchise employees, like equipment managers or trainers, are not highly specialized. They are replaceable if the Nationals leave Washington, DC. This lack of commitment has disastrous implications for the District of Columbia.
If the Nationals were to leave, it would spell trouble for the Navy Yard area, as development projects would stall and property values could fall. The Nationals are heralded as the centerpiece of the Navy Yard neighborhood, so if they decide to leave, local residents and businesses would undoubtedly suffer. Stadium jobs selling concessions, selling tickets, ushering and the like would be lost, and money-spending fans would no longer be drawn to the Navy Yard, causing nearby businesses, like bars, apparel stores, and restaurants, to go under. This has the potential to put many residents out of work, and all DC would have to show for their investment would be an empty stadium.
To avoid this scenario, DC would have to cave in to the wishes of the Nationals’ owners. This would start the entire process over again, forcing DC taxpayers to pamper the Nationals with stadium upgrades, remodeling, or something else. A similar scenario is playing out currently in St. Louis, Missouri. The National Football League’s St. Louis Rams have played in the 96% publicly financed Edward Jones Dome since 1995 but are threatening to move (“Edward Jones Dome,” 2015). They are actively exploring options in Los Angeles. As of 2015, St. Louis officials are attempting to create plans to build a new state-of-the-art $1 billion stadium to entice the Rams to stay, while still paying the debt on the Edward Jones Dome (The Editorial Board, 2015). This situation could very easily play out in Washington, DC in 2038, forcing DC to sink back into debt or lose the Nationals and the commerce and increased property values they bring with them. This possibility was already evident in 2013. The Nationals, only 7 years into their lease at the time, petitioned Washington, DC to build a $300 million retractable roof for the stadium (DeBonis and Wagner, 2013).
This is why the cost-benefit calculations for Nationals Park are limited to 30 years. In all likelihood, the Nationals will twist DC’s arm, forcing the District to funnel more taxpayer money into the stadium. As of 2015, twenty-four of twenty-eight MLB stadiums are less than 30 years old (“Current Ballpark Comparisons,” 2015). This does not include Fenway Park or Wrigley Field, built in 1912 and 1914, respectively. These hallowed ballparks are considered untouchable gems from another era. At best, the taxpayers of Washington, DC will be asked to upgrade the stadium. At worst, and in all likelihood if the current trends hold, DC taxpayers will be asked to finance the construction of an entirely new ballpark. Instead of being content with upgrading and modernizing their homes, MLB franchises have been so pampered that they now expect brand-new parks entirely, or they threaten to pack up and move.
Had the construction costs for Nationals Park been held to $300 million, the stadium would have been a decent economic investment for Washington, DC. Although it still would have displaced low-income residents in the Navy Yard neighborhood, the increased government revenue from stadium-driven business and property taxes could have been allocated to assist those forced out of their homes. However, the cost-benefit analysis shows that Nationals Park is an economic loss, even when all increased property tax revenue is attributed to the stadium. When the negative externalities created by the stadium are considered, the claim that Nationals Park is a good investment for the taxpayers of Washington, DC does not hold water. New stadium construction for Major League Baseball has reached a tipping point. Stadiums similar to those built 20 years ago are no longer acceptable. It appears that greed has won out among MLB owners, as they demand more luxury stadium features from municipalities. There is no longer an overlap between an owner’s demands and what is economically sensible for a city to provide. The ugly result of this new situation is Nationals Park, an economic net loss with disturbing negative externalities affecting the most vulnerable DC residents. Nationals Park is just one example of the corporate welfare trend in the MLB.
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