America Sports Construction Boom

.. have escape clauses that allow the team to move if attendance falls too low or if the facility is not in state-of-the-art condition. Other teams have provisions requiring them to pay tens of millions of dollars if they vacate a facility prior to lease expiration, but these provisions also come with qualifying covenants. Of course, all clubs legally must carry out the terms of their lease, but with or without these safeguard provisions, teams generally have not viewed their lease terms as binding. Rather, teams claim that breach of contract by the city or stadium authority releases them from their obligations. Almost always these provisions do not prevent a team from moving.

Some leases grant the city a right of first refusal to buy the team or to designate who will buy it before the team is relocated. The big problem here is the price. Owners usually want to move a team because it is worth more elsewhere, either because another city is building a new facility with strong revenue potential or because another city is a better sports market. If the team is worth, say, $30 million more if it moves, what price must the team accept from local buyers? If it is the market price (its value in the best location), an investor in the home city would be foolish to pay $30 million more for the franchise than it is worth there. If the price is the value of the franchise in its present home, the old owner is deprived of his property rights if he cannot sell to the highest bidder. In practice, these provisions typically specify a right of first refusal at market price, which does not protect against losing a team.

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Cities trying to hold on to a franchise can also invoke eminent domain, as did Oakland when the Raiders moved to Los Angeles in 1982 and Baltimore when the Colts moved to Indianapolis in 1984. In the Oakland case, the California Court of Appeals ruled that condemning a football franchise violates the commerce clause of the U.S. Constitution. In the Colts case, the condemnation was upheld by the Maryland Circuit Court, but the U.S. District Court ruled that Maryland lacked jurisdiction because the team had left the state by the time the condemnation was declared.

Eminent domain, even if constitutionally feasible, is not a promising vehicle for cities to retain sports teams. Ending Federal Subsidies Whatever the costs and benefits to a city of attracting a professional sports team, there is no rationale whatsoever for the federal government to subsidize the financial tug-of-war among the cities to host teams. In 1986, Congress apparently became convinced of the irrationality of granting tax exemptions for interest on municipal bonds that financed projects primarily benefiting private interests. The 1986 Tax Reform Act denies federal subsidies for sports facilities if more than 10 percent of the debt service is covered by revenues from the stadium. If Congress intended that this would reduce sports subsidies, it was sadly mistaken.

If anything, the 1986 law increased local subsidies by cutting rents below 10 percent of debt service. Last year Senator Daniel Patrick Moynihan (D-NY), concerned about the prospect of a tax exemption for a debt of up to $1 billion for a new stadium in New York, introduced a bill to eliminate tax-exempt financing for professional sports facilities and thus eliminate federal subsidies of stadiums. The theory behind the bill is that raising a city’s cost from a stadium giveaway would reduce the subsidy. Although cities might respond this way, they would still compete among each other for scarce franchises, so to some extent the likely effect of the bill is to pass higher interest charges on to cities, not teams. Antitrust and Regulation Congress has considered several proposals to regulate team movement and league expansion.

The first came in the early 1970s, when the Washington Senators left for Texas. Unhappy baseball fans on Capitol Hill commissioned an inquiry into professional sports. The ensuing report recommended removing baseball’s antitrust immunity, but no legislative action followed. Another round of ineffectual inquiry came in 1984-85, following the relocations of the Oakland Raiders and Baltimore Colts. Major league baseball’s efforts in 1992 to thwart the San Francisco Giants’ move to St. Petersburg again drew proposals to withdraw baseball’s cherished antitrust exemption.

As before, nothing came of the congressional interest. In 1995-96, inspired by the departure of the Cleveland Browns to Baltimore, Representative Louis Stokes from Cleveland and Senator John Glenn of Ohio introduced a bill to grant the NFL an antitrust exemption for franchise relocation. This bill, too, never came to a vote. The relevance of antitrust to the problem of stadium subsidies is indirect but important. Private antitrust actions have significantly limited the ability of leagues to prevent teams from relocating.

Teams relocate to improve their financial performance, which in turn improves their ability to compete with other teams for players and coaches. Hence, a team has an incentive to prevent competitors from relocating. Consequently, courts have ruled that leagues must have reasonable relocation rules that preclude anticompetitive denial of relocation. Baseball, because it enjoys an antitrust exemption, is freer to limit team movements than the other sports. Relocation rules can affect competition for teams because, by making relocation more difficult, they can limit the number of teams (usually to one) that a city is allowed to bid for. In addition, competition among cities for teams is further intensified because leagues create scarcity in the number of teams. Legal and legislative actions that change relocation rules affect which cities get existing teams and how much they pay for them, but do not directly affect the disparity between the number of cities that are viable locations for a team and the number of teams.

Thus, expansion policy raises a different but important antitrust issue. As witnessed by the nearly simultaneous consideration of creating an antitrust exemption for football but denying one for baseball on precisely the same issue of franchise relocation, congressional initiatives have been plagued by geographical chauvinism and myopia. Except for representatives of the region affected, members of Congress have proven reluctant to risk the ire of sports leagues. Even legislation that is not hampered by blatant regional self-interest, such as the 1986 Tax Reform Act, typically is sufficiently riddled with loopholes to make effective implementation improbable. While arguably net global welfare is higher when a team relocates to a better market, public policy should focus on balancing the supply and demand for sports franchises so that all economically viable cities can have a team. Congress could mandate league expansion, but that is probably impossible politically.

Even if such legislation were passed, deciding which city deserves a team is an administrative nightmare. A better approach would be to use antitrust to break up existing leagues into competing business entities. The entities could collaborate on playing rules and interleague and postseason play, but they would not be able to divvy up metropolitan areas, establish common drafts or player market restrictions, or collude on broadcasting and licensing policy. Under these circumstances no league would be likely to vacate an economically viable city, and, if one did, a competing league would probably jump in. Other consumer-friendly consequences would ow from such an arrangement.

Competition would force ineffective owners to sell or go belly up in their struggle with better managed teams. Taxpayers would pay lower local, state, and federal subsidies. Teams would have lower revenues, but because most of the costs of a team are driven by revenues, most teams would remain solvent. Player salaries and team profits would fall, but the number of teams and player jobs would rise. Like Congress, the Justice Department’s Antitrust Division is subject to political pressures not to upset sports.

So sports leagues remain unregulated monopolies with de facto immunity from federal antitrust prosecution. Others launch and win antitrust complaints against sports leagues, but usually their aim is membership in the cartel, not divestiture, so the problem of too few teams remains unsolved. Citizen Action The final potential source of reform is grassroots disgruntlement that leads to a political reaction against sports subsidies. Stadium politics has proven to be quite controversial in some cities. Some citizens apparently know that teams do little for the local economy and are concerned about using regressive sales taxes and lottery revenues to subsidize wealthy players, owners, and executives. Voters rejected public support for stadiums on ballot initiatives in Milwaukee, San Francisco, San Jose, and Seattle, although no team has failed to obtain a new stadium.

Still, more guarded, conditional support from constituents can cause political leaders to be more careful in negotiating a stadium deal. Initiatives that place more of the financial burden on facility users–via revenues from luxury or club boxes, personal seat licenses (PSLs), naming rights, and ticket taxes–are likely to be more popular. Unfortunately, citizen resistance notwithstanding, most stadiums probably cannot be financed primarily from private sources. In the first place, the use of money from PSLs, naming rights, pouring rights, and other private sources is a matter to be negotiated among teams, cities, and leagues. The charges imposed by the NFL on the Raiders and Rams when they moved to Oakland and St. Louis, respectively, were an attempt by the league to capture some of this (unshared) revenue, rather than have it pay for the stadium.

Second, revenue from private sources is not likely to be enough to avoid large public subsidies. In the best circumstance, like the NFL’s Charlotte Panthers, local governments still pay for investments in supporting infrastructure, and Washington still pays an interest subsidy for the local government share. And the Charlotte case is unique. No other stadium project has raised as much private revenue. At the other extreme is the disaster in Oakland, where a supposedly break-even financial plan left the community $70 million in the hole because of cost overruns and disappointing PSL sales.

Third, despite greater citizen awareness, voters still must cope with a scarcity of teams. Fans may realize that subsidized stadiums regressively redistribute income and do not promote growth, but they want local teams. Alas, it is usually better to pay a monopoly an exorbitant price than to give up its product. Prospects for cutting sports subsidies are not good. While citizen opposition has had some success, without more effective intercity organizing or more active federal antitrust policy, cities will continue to compete against each other to attract or keep artificially scarce sports franchises.

Given the profound penetration and popularity of sports in American culture, it is hard to see an end to rising public subsidies of sports facilities. Education.