Do cities gain from subsidizing sports teams?

The National Hockey League season doesn't start for another three weeks, but already hockey fans in Glendale, Ariz., are counting an unexpected victory. Four years after the Phoenix Coyotes went bankrupt and were taken over by the league, prompting endless rumors that the struggling franchise would relocate to Quebec, Seattle or parts unknown, new owners were approved this month who have promised to keep the team in Arizona.

It's a victory, though, that will come at a high price. To secure the sale, the Glendale city council agreed to a new lease that requires the city to pay the Coyotes' owners $15 million a year as an "arena management fee." If the deal runs its full 15-year course — not a given, because the new lease allows the team to leave town if it’s losing money after five years — the Coyotes' new owners, a pair of Canadian investment bankers, will end up collecting more from the city of Glendale to run the team than the $170 million they're spending to buy it in the first place.

City officials say they had little choice. Glendale mayor Jerry Weiers, who in his acceptance speech last fall warned the Coyotes, "Glendale is not your cash register," has now resigned himself to paying for pro sports, saying, "The council made its decision, and my job at this point is to do everything in my power to make this thing a success." His predecessor, Elaine Scruggs, insisted that paying the Coyotes was cheaper than letting the team leave: "What shall we do — lock it up, turn off the lights and then pay the debt on the arena?"

The answer, say many economists and sports business experts, is very likely yes. There's no way a city like Glendale will see enough of a boost to its local economy to make lease subsidies pay off. And, they warn, the Coyotes deal is a sign of a new trend in the sports industry: After a 20-year period during which, according to Harvard researcher Judith Grant Long, about $18 billion in public money was spent on a wave of new stadiums and arenas, team owners looking for a leg up on their competition are now demanding additional cash to run the buildings they got for free.

"They always do come up with clever little tricks," says Rick Eckstein, sociology professor at Villanova University and co-author of the book Public Dollars, Private Stadiums. "Just when we think we’ve seen it all, they come up with something else."

This summer's new lease isn't the first time that Glendale has anted up public cash for its hockey team. The suburb of 230,000 people was already on the hook for $9 million a year in debt payments on its new arena, a building for which the team's owners paid only $1 a year in rent. (Glendale also spent $200 million on Camelback Ranch, a spring-training baseball facility for the Los Angeles Dodgers and Chicago White Sox.) In 2010, after the Coyotes' bankruptcy, Scruggs poured in an additional $50 million in management fees over two years, raiding its landfill, sanitation, water and sewer funds to raise the cash.

The result of all this sports spending has been a massive hit to the city's budget at a time when Glendale was already furloughing firefighters, closing public pools and shortening public libraries' hours. Last month's Coyotes lease subsidy came shortly after the Glendale council discussed a proposal to sell off its city hall to help pay for the previous round of Coyotes payments. 

"Our police and fire departments were the first ones that started seeing their budget cut back," says Ken Jones, a Glendale resident who led several unsuccessful attempts to force a public vote that could have overturned the Coyotes lease deal. "Libraries were hit pretty hard. They raised our water bills 80 percent, our sales tax was raised, and our property tax was raised. They have robbed the things that people really expect to get from their taxes in order to keep supporting sports."

The first sports team owner to cash in on this pay-to-play tactic was the New Orleans Saints' Tom Benson, who in 2001 capitalized on rumors that he was considering moving his NFL team to convince the state of Louisiana to pay him $186.5 million over the next 10 years to keep playing at the Superdome. In 2010, the owners of the Indiana Pacers basketball team followed suit by demanding — and receiving — $30 million in "operating subsidies" over three years to remain at Conseco Fieldhouse, the arena that the city of Indianapolis had spent $183 million to build nine years earlier. (As in Glendale, Pacers owner Herb Simon, a billionaire real estate developer, paid just $1 a year rent.)

To pay off the initial Pacers arena cost — plus the $650 million that it sank into a new stadium for the Colts football team — Indianapolis' Capital Improvement Board had already cut off all of its arts and tourism grants the year before. To help fill the new gap, Mayor Greg Ballard funneled city property-tax revenues to the board, even as he asked city agencies to reduce library hours and close public pools because of budget shortfalls.

"Indianapolis might be a great place to visit, but it should be a better place to live," says Pat Andrews, a longtime Indianapolis community activist and blogger who has closely followed the Pacers deal. In addition to cuts to parks, transit and other services, she notes, the city police force has stopped recruiting new officers because of budget cuts, and murders have risen dramatically this year. "The basic services of the city are suffering at the same time the Simons and [Colts owner Jim] Irsay are making out like bandits."

Simon, meanwhile, agreed only to keep the Pacers in town through 2013 in exchange for his $30 million in cash. The city's Capital Improvement Board has since negotiated a one-year lease extension — along with yet another $10 million in payments to the Pacers — while it works out a long-term deal, one that Andrews worries will cement annual operating subsidies in place for good. (CIB officials declined to comment for this story.)

Even team owners building new stadiums have begun seeking annual operating subsidies. Earlier this year, when Atlanta agreed to provide billionaire Atlanta Falcons owner (and Home Depot founder) Arthur Blank with $200 million in hotel tax money to help pay for a new stadium to replace the 20-year-old Georgia Dome, it tacked on an additional bonus: Any leftover hotel tax money after the first $200 million would spill over into a so-called waterfall fund that Blank could then tap for any future maintenance or operating expenses. Estimated cost: an extra $300 million. 

The Atlanta deal is a perfect example of how subsidies are increasingly buried deep within lease agreements that are seldom if ever carefully scrutinized by politicians or the media. The waterfall fund was only revealed when a local business writer exposed it on her own blog — and even then, it was rarely mentioned in subsequent media stories or in legislative debates.

"You've really got to go through these deals in detail to figure out if they're getting [subsidies] or not," says West Virginia University economist Brad Humphreys. "It's not like the lease agreement says we're cutting you a check every year."

As a result, such hidden subsidies are on the rise, according to Harvard researcher Long's figures: The 121 North American major-league sports facilities in use during 2010, she found, cost taxpayers about $10 billion more than is commonly reported, thanks to the hidden costs of land, infrastructure, operating subsidies and lost property taxes. In some cases, teams effectively pay negative rent, such as the Milwaukee Brewers, whose $1 million or so in annual rent on publicly built and owned Miller Park is dwarfed by the nearly $4 million a year in government checks to pay the team's yearly operating costs.

Milwaukee, which is the nation's 34th-largest TV market, is typical of the kinds of cities that end up providing their teams with annual cash payments, according to Long. "You've got Milwaukee, Cincinnati, Memphis, Oklahoma City, Charlotte," she says. "Small cities who were luring a team from somewhere else, or otherwise second- or third-tier cities, are the common denominator."

When Glendale first built a new arena to attract the Coyotes, says Serena Unrein of the Arizona Public Interest Research Group, "I think everyone looked at it with rose-colored glasses: 'This is going to be great; it'll put Glendale on the map.' The people in Glendale who were making the decisions saw all of the upside and none of the risk for taxpayers."

Economists who've studied sports deals say that spending big to lure new teams, or keep old ones, almost never pays off. In one much-repeated study, Lake Forest College economist Robert A. Baade examined 30 cities that had recently built new sports venues. In 27, there was no measurable impact on per-capita income, while in the other three, income appeared to have gone down as a result. Even if the Pacers, say, had left town after being denied a new round of subsidies, studies indicate that the economic impacts would have been less than dire: When Humphreys and Dennis Coates of the University of Maryland looked at income data for cities that lost their teams, as well as during sports league strikes and lockouts, they found no significant effects. "The departure of a franchise in any sport," they wrote, "has never significantly lowered real per capita personal income in a metropolitan area."

Humphreys, in fact, says that operating subsidies like those handed out to the Coyotes and Pacers are likely to get even less bang for the buck than stadium cash, which at least might create a few thousand temporary construction jobs. "Not only that, but the operating subsidies are almost certainly coming out of general fund revenues," he says. "If there's a ticket tax or anything that looks like a user tax, at least then the people who are enjoying the benefits are paying. But if it's operating subsidies coming out of general fund revenues, that's money that could go to any other alternative use in the city, like education or public safety."

Even public money with strings attached could go to fill other city needs, say budget watchdogs. Ryan Splitlog of Common Cause Georgia, a nonprofit, nonpartisan citizens' lobby, notes that the money going to the Falcons comes from hotel-motel tax revenue that is designated for promoting tourism and convention business. "I think you could paint with a pretty wide brush stroke when talking about what that means for the city of Atlanta," he says, suggesting fixing the "atrocious" roads and sidewalks in the blocks surrounding the convention center campus as one example. "You could talk about infrastructure projects that improve the quality of life for people who actually live here. I think the public would get much more behind something like that."

Roads and sidewalks, though, lack the lobbying power of sports team owners. Both Eckstein and Long note that party affiliation makes little difference in sports deals, with Republican and Democratic mayors equally willing to back subsidies to teams. The key factor, say sociologist Eckstein and his co-author Kevin Delaney, is to have a strong "growth coalition" of business leaders pushing for them — as when Cincinnati's powerful local chamber of commerce helped raise $1 million for a "Keep Cincinnati a Major-League City" campaign to raise sales taxes for new stadiums for the Reds baseball team and Bengals NFL franchise, more than double the city's previous record spending on any ballot initiative.

Still, even Eckstein says he's still surprised at the continued willingness of mayors and city councils to hand out money to team owners time and again, even when the team already boasts a new publicly built stadium.

"It just defies all reason and rationality," he says. "You see the political graveyards filled with corpses of the politicians that supported these things — they get voted out of office, they end up working for the clubs. You'd figure that these people would be savvy enough to learn that it's not in their best political interest to support these things. But they keep doing it."