Public Subsidies for Arenas are a Farce: Sacramento Kings Edition

Professional sports facilities don’t have an influential impact on local economies, and public money spent on them is largely wasted with no positive economic return. This isn’t an opinion I hold but a fact, the near consensus view of scores of economists who have studied the issue. Public subsidies for stadiums is the global warming of the sports world, an issue somehow dumbed down to a he-said she-said debate where one side holds all of the facts and the other holds none. This has been apparent for at least 20 years, and it is disheartening that we are still talking about it this way.

Here is economist Robert Baade writing for The Heartland Institute in 1994:

After a thorough examination of an unprecedented quantity of data related to professional sports and host area per capita personal income, the author finds no factual basis for the conventional argument that professional sports stadiums and teams have a significant impact on a region’s economic growth.

Here are economists Dennis Coates and Brad Humphreys writing for Econ Journal Watch in 2008:

No matter what cities or geographical areas are examined, no matter what estimators are used, no matter what model specifications are used, and no matter what variables are used, articles published in peer reviewed economics journals contain almost no evidence that professional sports franchises and facilities have a measurable economic impact on the economy.

Most research on the economic impact of professional sports facilities has been done on baseball and football, not basketball, facilities. The conclusions are the same, however, with George Washington University PhD candidate Geoffrey Propheter finding in the Journal of Urban Affairs:

After controlling for a range of covariates past research has identified as possible predictors, I find little evidence that basketball arenas are primary catalysts of development. I conclude that the context of the city, not the facility, is what drives the economic development capacity of basketball arenas.

It is this framework—a null hypothesis that public money spent on sports stadiums and arenas is wasted—that must be adopted when evaluating plans for a new one. Anything else is intellectually dishonest.

***

There are circumstances in which professional sports facilities aren’t an absolute boondoggle, but only a small one. Colgate undergrad Peter Koehler looked at 55 MLB and NFL stadiums and concluded that 8 of them “succeeded in spurring economic development in their surrounding area”. He found that the successful projects generally had a downtown location with easy access to public transportation, and were built in cities that were smaller, richer and had a lower crime rate than the average professional sports city. These findings make a lot of intuitive sense. Successful stadiums need to be easily accessible, the surrounding neighborhood needs to feel safe so that people can walk around spending their money, and oh by the way it helps if the attendees are wealthier than average.

It is important to note that even a study that asserts some stadiums can spur economic development contained a number of enormously important caveats. Koehler acknowledges that the literature shows that “stadiums have no effect on city-wide economic or demographic measures and that their impact can only be seen on a smaller, neighborhood-scale level” and that, “stadiums only have the power to redirect spending”.

Koehler bases some of his examples of successful stadium examples on Mark Rosentraub’s Major League Winners. In the book Rosentraub notes that successful stadium projects either limit the public subsidy or ensure that it is far exceeded by private development, to ensure that the stadium is just one small part of a much larger plan to revitalize the area.

In summary, the caveats are much more important than the “successful” examples. Stadiums almost always fail to benefit the cities they are built in, and are a waste of public money. “Successful” stadiums must fulfill very specific criteria, like being built downtown in an already above average wealthy city. Even then, stadiums don’t have widespread benefits for their city, and the benefits to the neighborhood aren’t net for the city, but rather is entertainment spending that is redirected from a different area in the city. Finally, the successful arenas don’t actually use a lot of money, and/or are far exceeded by billions in private development.

One of these “successful” stadiums is Nationals Park, completed in 2008, 15 blocks away from the US Capitol (and a mile away from my house). The stadium location fulfills most of Keohler’s criteria: it is downtown-ish, has good access to both a freeway and public transportation, and Washington is a smaller and richer city than most other sports towns. Sprouting up nearby are shiny condo after shiny condo, in an area that was previously desolately industrial. Seemingly, the stadium has spurred a lot of economic development.

But it is important to keep in mind Propheter’s finding, that “the context of the city, not the facility, is what drives the economic development capacity of basketball arenas.” From the 11th floor of my office building (built in 2011) I can see over a dozen cranes dotting the part of the city I work in. You can’t drive a quarter mile in Washington without being inconvenienced by some new construction site. The city is undergoing a massive amount of infrastructure development, and those condos would’ve been built with or without the presence of Nationals Park.

***

I bring all of this up because the NBA is about to enter a phase of arena building. Barclays Center was completed in 2012 and the Amway Center in 2010, but before that no new NBA arena had been constructed since 2005. But now the Warriors are planning a new San Francisco arena for the 2018 season, the Bucks were recently sold with outgoing owner Herb Kohl “generously” “donating” $100 million towards a future arena, and last night the Sacramento City Council approved the plan for a new downtown arena.

The Warriors arena will be entirely privately financed—they know voters won’t approve of any public financing, especially after the Giants successfully built their gleaming jewel of a ballpark with no public financing 15 years ago—and the plans for the Bucks new arena aren’t developed enough to evaluate. But the Kings plans are out there and fully digestible, and par for the course, they’re bad for the people of Sacramento.

Like every single other arena or stadium project, the Kings arena won’t actually generate economic development for the city. The “Arena Facts” section of the arena developer’s propagandaish website laughably states that, “over a thirty year period the Sacramento region will receive over $7 billion in economic activity” due to the arena. This would be an amazing accomplishment if it could possibly be true, but of course it isn’t. As The Sacramento Bee reported, however, according to a study commissioned by supporters of the arena, 90% of the supposed economic activity is just shifted from elsewhere in Sacramento. In other words, almost all that money would’ve been spent at bars, restaurants, movie theatres and other places in Sacramento even without a new arena.

Even that smaller sum of economic activity related to the arena is under dispute, with a Stanford sports economist who reviewed the study believing Sacramento can only expect $10 million to $15 million a year in net money from the arena, a “small, incremental benefit…[that] would not justify a huge government investment.” If that is true, Sacramento would get a better return on investment by simply cutting taxes by the same amount of money they were going to pay for a new arena.

Arena supporters claim that it will “revitalize” a neglected area of downtown because of the over one billion dollars of pledged private investment surrounding the arena. We should always be skeptical of “pledged” money—see the thousands of jobs and billions and dollars promised for the Barclays Center neighborhood that never materialized—but there is a very real possibility that the new arena will rejuvenate the Downtown Plaza area. But at what cost?

The first question to ask is what benefit a gleaming shopping and entertainment has for the majority of Sacramentans? We already know that it will only affect a small part of Sacramento, and that almost all of its economic benefits (say, in increased tax revenue) will be offset by losses in other parts of the city as entertainment dollars simply shift to the Downtown Plaza. Why is the city underwriting $300 million in bonds to build what is essentially an upper-middle class playground? It certainly isn’t the people in poor neighborhoods that benefit from a new arena, condos and upscale sushi restaurants.

But the even better question is what were the alternatives that the city could’ve spent hundreds of millions of dollars on? It could’ve improved schools. It could’ve cut taxes. Hell, it could’ve spurred economic development in the Downtown Plaza area without an arena, which would’ve at least had the chance of being an efficient use of money.

***


I have been somewhat disappointed in the silence on these issues from Kings writers, and especially bloggers, but I can’t say I exactly blame them. As Jacob and I wrote in a lengthy piece last year, there is no right way to save your team, and there is no doubt that the people of Sacramento love the Kings. I have said before that if the choice were between Oakland ponying up hundreds of millions of dollars it doesn’t have or the Warriors leaving town, I’d hope the town would let them go. Oakland has numerous problems, and paying the Warriors to stay wouldn’t solve any of them.

But the truth is, that’s a choice I won’t ever have to make. The Bay Area is one of the largest and wealthiest markets in the country. Residents of San Francisco don’t put up public funds for sports facilities because they don’t have to (though the Giants were very close to leaving for St. Petersburg in 1992). I can intellectually advocate a position I know that I likely won’t ever have to actually take.

I just wish fans of the Kings—and other teams receiving public subsidies—would simultaneously advocate for the future of their favorite team while acknowledging that a new arena is ultimately a terrible deal for the city. I just wish that they wouldn’t parrot arena developer’s propaganda, or at least acknowledged that in nearly every single case the promised economic development never materialized, and that their city isn’t likely to be the exception. I just wish they only made arguments on non-economic grounds—that the existence of the Kings is so tightly woven into the identity of the city, that there is immense psychological and therapeutic value in keeping this Sacramento institution.

It is a collective action problem. Sonics fans saw what happened when their City Council took the correct stand and refused to pay for a new arena—the NBA aided and abetted a shady deal that moved the team 2,000 miles away. As long as there are cities willing to pay-to-play, every city has to pay or they risk losing their team. Sacramentans aren’t unique, they’re just the latest people to be held hostage by professional sports.

That doesn’t mean this needs to continue, however, and the first step is for everybody—even those fearful of losing their favorite team—to acknowledge that ALL professional sports facilities are a terrible use of public dollars.

That’s just a fact.

Correction: The article has been updated to reflect the fact that the Warriors new arena will not be the first entirely privately financed arena in the NBA. It appears that Madison Square Garden, the Air Canad Centre and The Palace of Auburn Hills were all built without public financing. 

About Kevin Draper

Kevin “Franklin Mieuli” Draper was born and raised in Oakland, California, and loves it more than you can possibly imagine. Follow him on Twitter @kevinmdraper
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7 Responses to Public Subsidies for Arenas are a Farce: Sacramento Kings Edition

  1. kennadog says:

    You are woefully ill-informed about the specifics of the Sacramento region. I don’t have the time to point out the many fallacious assumptions your article makes about the specific circumstances of our city and the geographical region involved.

    • Kevin Draper says:

      You have the time to comment that I am wrong, but don’t have the time to point out any actual place where I am wrong?

      That is very weird behavior.

  2. ahuegouiq says:

    OK, since my main man Mr. Kennadog above me didn’t do it, I’ll say that the Kings’ downtown arena is in a neighborhood with a relatively high crime rate and Sacramento is not a particularly rich city. However, the proposed arena location is also a block away from I-5, 12 blocks from Highway 50 and 20 blocks from Business 80, and right in the middle of downtown, once the site of a bustling shopping mall and a much lower crime rate. There are multiple, ready-made lightrail stops at the site, whose access stretches pretty far south and east, and may or may not extend to the airport at some point in the future. Also, while downtown is mostly home to not-rich state workers, it is also 3 blocks down the street from the California state capital, which includes all the lobbyists for a state with a population of 30 million, who need to schmooze their clients at things like NBA games. The area is also right on the long-neglected K Street Mall, which, along with the surrounding area, has been slowly creeping toward local affluence with new buildings for nearly a decade, with fancy condos, overpriced lofts, fine dining and nightclubs. I would also add that the city has been trying to reupholster this area for years and hoping for it to coincide with a new arena in the train yards nearby, way back when people actually thought the Malooves were good owners. I would also argue that no NBA team is as inextricable from the culture of its city as the Kings, in a smaller-than-average pro sports city with no other team.

    This is not to disagree with anything you wrote, I agree that if an owner wants to buy a team in the ’80s for $10 million and sell for $500 million, or buy for $450 million in 2010 and sell for billions in 20 years, they should be willing to pay for an updated workplace. And because the Kings bloggers have all taken up this issue as total zealots – no price is too high for the city to keep its team – we need more people condemning all this fruitless public financing. But I think it would’ve helped your post to include some specifics about the Kings deal, like the parking revenue bond or the hotel, office tower and shopping establishments tied to the deal. Even including something like the downtown crime rate, which would’ve helped your argument. There’s a lot of local pushback on the arena in Sacramento, but they’re not as well organized as Kevin Johnson and the Kings supporters who’ve been trying to get this done since the proposed plan was at Cal Expo. However, most informed Kings fans believe they’ll be that ninth city to “succeeded in spurring economic development in their surrounding area.”

    • Kevin Draper says:

      Thanks for the great comment.

      For many of the reasons you have pointed out, the Kings arena deal is a better use of public money than most arena deals. It is downtown, it uses less public money than most, it is paired with the promise of private investment, it has decent transport etc. This isn’t the over TWO BILLION DOLLARS in debt Miami-Dade County will have to pay for Marlins Park, or the almost $700 million the city of DC is paying for Nationals Park. But being better than really really really bad just means that it is really bad, not that it is good.

      I didn’t include specifics about the Sacramento arena situation for a couple of reasons. First, because there are plenty of thorough examinations out there, such as in the Sacramento Bee, the Sacramento News Review or on Field of Schemes.

      But the larger reason I didn’t include them is because the specifics don’t matter. Economic literature is quite clear that even if the Kings new arena is the ninth that “succeeds in spurring economic development”, it comes at a great cost. The credit for spurring economic development in those previous eight primarily goes to the city/economy, not the facility. Furthermore, that same growth could’ve been spurred with a public investment in that are that was NOT an area, and that investment would’ve been more efficient. Being one of the nine that spurred economic development doesn’t mean those were nine good ideas, it means they were nine ideas that were less terrible than every other idea.

      • Michael Riordan says:

        Really, the specifics don’t matter? Even if you don’t want to look at the specifics of the actual development and the context of the city, it wouldn’t take much effort to include the specifics of the financing. I would think these specifics would would be crucial to an exploration of whether or not this specific deal is a good one. They are also not all that complicated to understand and write about (the entire agreement is available online through the city’s website if you don’t want to rely on the city’s reports or media reports). Basically, if you want to look at what the city is “spending” (or “investing”, depending on your point of view) you could take the value of the land that the city is contributing and add it to the debt payments minus the direct revenue generated (lease payments from the Kings [easy] plus parking and other revenues directly generated by the arena [not as easy, I think it was laid out by the city manager at the council meeting where the agreement was approved]) to get a figure for what the city is actually putting into this project. Then you could look at what the city is getting for that money (keeping the Kings for 35-45 years, drawing investment downtown, direct and indirect addition of jobs, and any thing else you want to add onto the “benefits” side) and have a discussion about whether or not this is a good deal for Sacramento based on the actual costs and benefits. The pro-arena side has been willing to do that with a great deal of detail and transparency, but I have yet to see anyone against or skeptical of this deal give an actual assessment of the actual deal as opposed to transplanting their pre-developed general argument against arena subsidies onto Sacramento.

  3. David Gersovitz says:

    I’m not sure what you mean when you say the new Warriors’ arena will be the first built entirely with private financing. I believe there are several, certainly in the East. Madison Square Garden is one, though it doesn’t pay municipal realty taxes because of a side deal with the city. The Air Canada Centre in Toronto was paid for entirely by the owners, and pays C$13m in realty taxes annual to the city, although the economics of Toronto are similar to those of San Francisco, and the building boom around the ACC reflects favorable economic conditions – a condo boom – although the arena owners did build a major hotel/condo complex adjacent to the arena that has become a focal point for development in that part of downtown Toronto. Nevertheless, your overriding point, that some smaller markets shouldn’t be funding arena construction, is pretty much spot on.

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