by Mardee Handler

The economic benefit of major league sports teams, international mega-events and sport venues has become a particularly contentious public finance issue over the past few decades, according to Robert Baade, Ph.D., Professor of Economics and Business at Lake Forest College. Whether to use public funds to finance stadiums, arenas and other venues for sporting events has become an egregious example of the often-differing opinions about how to spend taxpayer dollars. The issue falls against a backdrop of the larger debate regarding the distribution of wealth and income, he says.

In the interview that follows, Professor Baade explains why the economic impact of sports teams, international mega-events and venues may not be as impressive as some crack it up to be.

MuniNet: The Los Angeles Kings celebrated their recent Stanley Cup victory with a sold-out hour-long rally at the Staples Center. Their win came after beating last year’s champions, the Chicago Blackhawks, whose victory celebrations in 2013 convened more than a million fans in Grant Park. Does enthusiasm for a city’s professional sports team translate into economic gain?

Baade: The high level of fan engagement speaks more to the cultural phenomenon that professional sports teams can create than to their economic impact. There is an undeniable emotional connection that is often forged between a team and its fan base, which can have a very positive effect on the city’s morale. Sometimes, “be careful what you wish for” applies to the paradox of a major league sports victory celebration. An extreme case in point: When the Detroit Pistons won the NBA Championship title in 1990, the celebration turned into a riot, including looting, vandalism, and eight deaths.

While most celebrations don’t take this violent turn, cities spend a lot of money on public safety to keep parades, rallies and celebrations safe – and on public works for the clean-up required in its wake.

“Herein lies one major arm of the debate: Is it a good idea to use public funds – i.e., taxpayer dollars – to finance business ventures that primarily benefit non-resident team owners and players?”

MuniNet: Do the revenues from major sports teams and/or their venues have a significant impact on city economies?  Do the Packers and Lambeau Field have a direct, significant impact on Green Bay’s economy?

Baade: The answer is “not really” – at least when you consider most cases. Green Bay is a bit of an anomaly; the Green Bay Packers are actually the only publicly owned sports franchise in U.S. sports major leagues. In this case, the city’s identity and, to some extent, its economic livelihood is closely tied to the team. Take the Packers out of Green Bay, and the city would certainly feel the loss. The impact in Green Bay’s situation, however, is more the exception than the rule.

In cities where residents have many entertainment or leisure activity options – take Los Angeles or New York, for example – the economic impact is far less. In determining economic impact, it is important to consider cash inflows (tax revenues, public parking fees, etc.) as well as outflows, which may include public safety costs, increased congestion, and/or disruption of normal business activities.

The factors that influence the degree of economic impact from a sports team vary, but size, geography, demographics and the character of the city all enter the equation.

Another significant factor to note: the labor market for professional sports is different than any other labor market in that more than 50 percent of revenues goes directly to the players – many (most) of whom are not permanent residents of the city. That means resident fans are, in essence, paying mostly non-resident players, who take their salaries back to their respective home economies.

Even in the case of Green Bay, with its longstanding history and affiliation with the Packers, Brown County found it to be a very tight vote when taxpayers were asked to pass legislation to approve public funding for renovations at Lambeau Field.

Herein lies one major arm of the debate: Is it a good idea to use public funds – i.e., taxpayer dollars – to finance business ventures that primarily benefit non-resident team owners and players?

“Studies comparing cities in the same state have shown that cities which use sports venues as an economic development tool have lower growth rates than cities which use other types of anchors for economic development.”

MuniNet: I’ve heard you refer to the “substitution effect” when assessing economic impact. What does that term mean?

Baade: The substitution effect is most visible when a new sports venue is built. If the fan base is primarily comprised of local residents, is the time and money that they would ordinarily spend at the mall, movie theater, bar, etc. now going to be spent at the new stadium? In these cases, incoming revenues to the city will simply shift from one source to another. But rarely does it result in new or additional revenue, hence the term “substitution.”

If a team can somehow create economic activity over and above the level it would be without the team’s presence, then the financial benefit can be significant. In addition, if the team can attract non-residents to the city to watch games or events, that can also translate into positive economic impact.

MuniNet: Are there specific instances in recent years where the construction of a new stadium has had a direct, significant impact on a city’s economy?

Baade: Generally speaking, it is the team that impacts a city’s economy more than the venue – even a new stadium or arena. The “novelty effect” of a new stadium used to last a lot longer – up to 10 years – in earlier decades, but now generally lasts only two to three years.

Studies comparing cities in the same state have shown that cities which use sports venues as an economic development tool have lower growth rates than cities which use other types of anchors for economic development.

When considering the construction of a new stadium or arena, one of the biggest challenges is in finding ways to prolong the life of the venue – as well as utilizing it more intensively and frequently – to ensure future economic impact. This is particularly relevant for cities that construct facilities to host an international mega-event. The reality is that financial imperatives of the world of commercial sports often serve to shorten the shelf life of stadiums, and promote less intensive use if that serves the interests of the primary tenant.

In 2003, I was commissioned to conduct a study on the economic impact of the Staples Center in Los Angeles, which began operations in October 1999. The City wanted to see if it had achieved its economic development goals after the $71.1 million investment. A full copy of that report, which includes a detailed discussion of the many factors considered in such an analysis, is available online.

MuniNet: Do national or international “mega-events” – from the World Cup to the Olympics and annual Grand Slam tennis tournaments – have a much larger, but less consistent impact on city revenues?

Baade: In Brazil, for example, the government argued that hosting the World Cup would bring enormous economic benefit to the country. However, many residents protested, arguing that the tax dollars spent on stadiums and infrastructure could have a far greater impact if spent on improving the lives of those struggling to make ends meet. They argued that funds diverted to hosting the Cup would be much better spent on increasing educational opportunities and providing other much-needed public services for residents.

Building facilities and infrastructure to accommodate international mega-events raises the question over the most effective use of public funds to finance – perhaps to an even greater extent than cities considering construction of a new stadium for their football team.

About the Expert

Robert Baade, Ph.D. is a professor of Economics and Business at Lake Forest College. He is an internationally recognized expert in the field of sports economics. His research focuses on public finance issues related to professional sports and international mega-sporting events.

Baade has published more than 50 scholarly articles, book chapters, and monographs about the economics of professional and amateur sports. His work on the economic impact professional sports exert on their host communities, in particular, has been recognized by other researchers as seminal. Baade has been involved in numerous country, state, county, and city deliberations relating to large public projects to include stadiums, arenas, and convention centers, in addition to his work as a scholar.

He has considerable practical experience in assessing the economic impact of various projects, including a study that provided an economic rationale for saving Fenway Park in Boston; a study commissioned by the City of Los Angeles to determine the economic impact the Staples Center has had on the economies for the City and County of Los Angeles; an article that assessed the economic impact of the Winter Olympic Games in Salt Lake City; and most recently an article commissioned by the Government of Brazil about the economic impact of mega events on host nation and city economies. Baade has consulted, testified, and presented his findings in the United States, Canada, Europe, Africa, and South America including testimony before the United States Senate Judiciary Committee on issues relating to monopoly practices in professional sports.