The Economic Impact of a New Bucks Arena
Separating fact from fiction, what does the data show?
When it comes to sports districts, Wisconsin law makes the following assertions:
The legislature determines that a district serves a public purpose in the district’s jurisdiction by providing recreation, by encouraging economic development and tourism, by reducing unemployment and by bringing needed capital into the district’s jurisdiction for the benefit of people in the district’s jurisdiction.
A version of this paragraph–229.820(2)—appears in legislation establishing sports districts around Lambeau Field in Green Bay and Miller Park in Milwaukee. It is also included in the proposed language in Governor Scott Walker’s budget for a new Milwaukee Bucks basketball arena.
The appealing vision of economic prosperity conveyed in this statement runs counter to the consensus among sports economists who have studied the issue. Summarizing a number of studies, John Siegfried and Andrew Zimbalist reported in The Economics of Sports Facilities and Their Communities that “independent work on the economic impact of stadiums and arenas uniformly found that there is no statistically positive correlation between sports facility construction and economic development.”
In their review of the debate on the economic effects of professional sports and their role as an engine of urban economic redevelopment, Dennis Coates and Brad R. Humphreys summarize the divide between economists and advocates of public support for sports facilities and franchises:
Local political and community leaders and the owners of professional sports teams frequently claim that professional sports facilities and franchises are important engines of economic development in urban areas. These structures and teams allegedly contribute millions of dollars of net new spending annually and create hundreds of new jobs, and provide justification for hundreds of millions of dollars of public subsidies for the construction of many new professional sports facilities in the United States over the past decade. Despite these claims, economists have found no evidence of positive economic impact of professional sports teams and facilities on urban economies.
Research assessing the impact of sports franchises compares the local economic performance of areas with and without stadiums, arenas, and teams. Various models have tried to separate the effects of building new facilities or attracting or losing teams from other factors contributing to prosperity of the home cities.
Three factors are often pointed to as explanations for the lack of measurable economic effects:
- Substitution: The audience is mainly drawn from the local area. Given constraints on the entertainment budgets of consumers, spending on sports substitutes for other recreation and entertainment spending.
- Leakage: In terms of employment sports teams are actually very small businesses. Many of the athletes live outside the team’s home city, so that there is high leakage of revenues to other places.
- Impact on public budgets: Tax expenditures on sports facilities may crowd out higher priority uses, such as additional policing.
If public expenditures cannot be justified through their direct economic benefits perhaps they can be justified by making their cities more attractive places to live. Economists describe things like clean air or bike trails as “hedonic” benefits. To the extent that having a major sports team builds civic pride, its benefits may extend beyond the paying audience. In economic terms, the presence of a sports team or facility becomes “a nonexcludable public good.”
How does one measure whether a public good has made the city more attractive? Two possible indicators are rent and property values. Assuming people value something for the pleasure it brings, they should be willing to pay more to live in a city with that thing. They also should be willing to accept lower wages for the opportunity to live in a more attractive environment. By analogy, consider two cities which are identical, except for air pollution. Economists would expect pay to be lower in the city with clean air; the difference would reflect the value workers place on clean air. One reason that pay is so high in the Bakken oil fields of North Dakota is that living conditions are so miserable.
About ten years ago a study was published that aimed at quantifying the hedonic effect of sports teams. It compared cities that had gained or lost an NFL team between 1993 and 1999 to matched cities with NFL teams throughout the period. The authors concluded that within the city itself rents were 8 percednt higher in cities with a team than those without. For the entire metropolitan region, the rent differential dropped to 4%. They also found wages were 2 percent lower but the difference was not statistically significant.
A response praised the approach, but questioned the results. Among the criticisms were that the 8 percent differential seemed implausibly large, that the result was very sensitive to which cities were selected, and that the wage differential should not have been prominently displayed because it was statistically insignificant.
It is not clear, however, that this hedonic benefit is susceptible to measurement. The original estimate of an 8 percent rent increase from an NFL team does seem implausibly high. In Milwaukee, if an 8 percent rent increase were translated into property values and the tax rate was unchanged, tax collections would rise by over $200 million, enough to pay off the proposed public portion of the arena in a little over one year.
Even a 1 percent increase in property values would be enough to pay off the proposed $250 million public subsidy over a 20 year period, assuming an 8 percent interest rate. But given the many difficulties in separating out other factors and the small sample size of team or facilities that make changes, it may be impossible to detect a 1 percent change.
Perhaps the lack of published reports in the ten years since publication of study attempting to measure hedonic effects may reflect the difficulty of measuring hedonic effects. If the effect were clear, one would expect to see more reports quantifying the effect using various time periods and sports.
By contrast, a recent paper found that the Supersonics move from Seattle to Oklahoma City actually had a positive effect on property values near the Seattle arena:
After controlling for these different price dynamics, we find that the departure of the Seattle SuperSonics resulted in positive excess price appreciation for condominiums located within one mile of Key Arena. This result is robust to various measures of distance from Key Arena and impact periods over which the departure of the team might affect property values. The evidence supports the idea that the traffic, crowds, noise, trash, and other activities associated with NBA games in Key Arena represented a disamenity in the immediate neighborhood.
The results have important policy implications. Sports facilities and teams have generally been thought to generate positive amenity effects in nearby neighborhoods. Recently, TIF districts have become a popular financial mechanism for publicly funded stadium and arena construction projects. If these facilities generate important local disamenities, then TIF districts may not generate sufficient new tax revenues to pay for the facility construction, especially if the TIF district is relatively small. Also, existing local residents who live near new sports facilities may experience declines in the value of their dwellings… suggesting transfers to local residents from the owners of sports franchises are more appropriate.
Since the consensus of research is that sports teams and facilities do not alone bring significant economic development, attention has turned to their possible use as part of a broader effort, including as the core of an “arena district.” A paper on Detroit, based mostly on panels of development experts, concluded that “sport alone cannot revitalize the city, but the conﬂuence of hospitality, mixed use planning and re-imaging of downtown areas may make an effective combination for incrementally heightening the likelihood of success.”
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The Columbus Arena District is generally considered a success, particularly in attracting businesses back from the suburbs. While the arena itself (for hockey) was built with private funds, the city itself had invested approximately $36 million by 2008. The Metropolitan Milwaukee Association of Commerce, a strong supporter of the proposed Bucks arena, sponsored a paper by a Marquette finance professor. This paper estimates the employment effect of the proposed arena district in Milwaukee, as shown in the table to the right.
Most of the estimated jobs come from retail and offices, which in turn are based on projected square footage and rules of thumb for the number of employees per square foot. But the Milwaukee market for office and retail space has been weak in recent years. This could mean the arena district, rather than creating new jobs, would draw them from elsewhere in the city.
Economically, sports leagues are cartels, setting the rules to favor their members, the owners. To effectively negotiate with a cartel, one must be willing to walk away. A belief that Milwaukee cannot live without the Bucks has effectively shifted the negotiating advantage away from the taxpayers to the owners.
Historically, the big money in professional sports has been capital appreciation, the increase in value when the team is sold. Stadiums and arenas are losers, obsolete after 20 or 30 years. Any deal in which the taxpayers absorb the depreciating part without getting an interest in the appreciating part should be approached with great caution. Because of this, I would be far more comfortable with the deal if the taxpayers were given an equity position in the Bucks in exchange for their substantial financial investment in a new arena.
Note: An earlier version of the story included a study that used the wrong population and muddied the waters, and therefore was removed.