Subsidies and Stadiums: Maryland’s Moment of Truth

Maryland’s so-far successful attempt to attract Art Modell’s Cleveland-based NFL franchise to Baltimore is a spectacular example of corporate welfare, regardless of Modell’s February 21 consent to contribute $24 million himself. The deal still involves involves a 30-year, no-rent lease on an estimated $200 million stadium to be built almost entirely at state expense, and near 100 percent of revenues from concessions, parking, etc.

So, why did the Browns agree to leave their perpetually sold-out stadium in Ohio? Simple – because Maryland agreed to pay for it. Browns’ owner Art Modell had hoped for a free refurbishment of Cleveland’s Municipal Stadium, at an estimated cost of $154 million to local taxpayers. However, to his credit, Cleveland Mayor Michael White put together a proposal that required a monetary contribution from the Browns. Of course, Cleveland’s non-football-attending majority would still have been hit. White’s proposal called for a $2-per-day rental car tax and a downtown parking tax to pay the city’s share of the improvements.

But this was small potatoes: Maryland’s Governor Glendening offered Modell a package worth much more than $154 million. Even Cuyahoga County’s pathetic last-minute bid to sweeten Cleveland’s offer by increasing alcohol and tobacco taxes on all residents, football fans or not, was insufficient to kill the Maryland deal.

Cleveland then reacted to the proposed move by going to court. It sued both the Browns (to enforce performance of the team’s contractual obligation to play in Cleveland for three more years) and the Maryland Stadium Authority (for inducing the Browns to breach their contract with Cleveland). Not to be outdone, Maryland sued the NFL for the alleged “antitrust violation” of deferring action on Modell’s request to move the team pending the outcome of the Cleveland lawsuit.

It is true that all suits have now been dropped, following a February 8 deal among NFL owners allowing Modell to move to Baltimore but also allowing Cleveland to retain the right to the name “Browns” for a subsequent team in the city (one of which must move or be created by 1999).1 Nonetheless, while lawyers for all parties have been getting richer, let’s pause to consider whether the benefits promised to the Modell team make any economic sense at all.

Governor Glendening’s aides have told Marylanders that this is a fabulous deal. They estimate that the team’s positive impact on the state of Maryland will exceed $3.3 billion, with annual state and local tax revenue of $9.3 million and 1,394 jobs created.2 Ridiculous figures like these may make Modell feel foolish for agreeing to move to Baltimore for a mere $300 million or so, but he needn’t worry: He snookered the state.

First, more recent analysis by the state legislature’s Department of Fiscal Services shows the governor’s figures to be overstated; the department suggests that the state’s take may be more on the order of $5.1 million to $7.5 million in revenue and 534 to 689 jobs.3

Second, academic conferences and research papers have concluded that, creative accounting aside, subsidies for football teams are virtually always losing propositions for society.4 Such subsidy schemes represent direct transfers of payments to teams and their owners. Under current league contracts, much of each NFL team’s general revenue is shared with the other teams in the league. This is not the case with stadium-specific revenue. Thus, a key element driving the recent spate of NFL relocations is that state governments,5 including Maryland’s, have pledged to owners just about all of the revenues from skyboxes, novelties, concessions, parking and what are delicately called “seat options.” (This term refers to personal seat licenses, or PSLs. These are securities entitling a holder to purchase a season ticket. PSL revenues are additional to revenues derived from the sale of the season ticket itself, as the approximately $1,500, one-time PSL fee simply gives one the right to buy the ticket. In the case of Modell’s team, PSL revenues are expected to exceed $80 million. The team will keep the first $75 million, which it plans to use to pay for its moving costs. The state’s take is limited to $5 million.6 The Modell team will keep any surplus.) It is just these forms of income that teams need not divide among the other teams under the revenue-sharing agreement. Thus the Maryland agreement represents a direct payment to the new Baltimore team, and to the Baltimore team alone. Is is far less obvious that the state makes out well at all.

Economist Robert Baade has studied 48 American cities’ economies between 1958 and 1987.7 Thirty-six of these cities hosted one or more professional franchises in a major team sport (baseball, football, basketball and hockey), while 12 had no stadiums and served a control population for the model. Baade’s unequivocal conclusion: While a pro sports franchise may draw dollars into a small town – for instance, like Green Bay, Wisconsin – such teams have “no significant impact” on large metropolitan or state economies.

This is because much of the amount spent on a professional franchise is in fact merely a diversion of leisure dollars from other activities. People essentially allocate a given percentage of their budgets and time to entertainment. Thus, what is spent on football is not spent on bowling, theater, movies, tractor pulls, etc. It must be especially galling for Maryland’s bowling alleys, theaters and so on to be compelled to pay corporate taxes in effect to subsidize enterprises competing with them for Marylanders’ leisure time.

Baade found no evidence suggesting that professional sports franchises have any “multiplier effect” leading to the choice of the stadium city as a business set-up location. This multiplier effect is often cited by stadium promoters in Maryland as a prime reason for expending public funds to attract a football franchise. The Baltimore Sun claims such spending is necessary to show the business community and the world that Charm City is a “first-rate” city.8 However, not only is the multiplier effect generally absent in cities that have constructed stadiums, in many cases stadium construction is associated with negative growth. Of Baade’s 36 stadium cities, no fewer than 19 witnessed below average per-capita income growth relative to national, comparative trend lines.9 This is due to the fact that stadium employment tends to pay very poorly, while the money spent on stadium construction represents funding lost to other sectors. Moreover, job creation is minuscule when the team entering a city has as few home dates as does an NFL franchise. Unlike a baseball team, whose 81 home appearances make satellite businesses feasible, a football team’s 10 appearances just are not enough to have serious job impact.

Often overlooked in the debate is the fact that state money spent on stadiums could be spent elsewhere. This truism holds even if the public funds are so-called “free money” from lotteries (which will provide about half of Maryland’s grant to Modell). Maryland law stipulates that this lottery money will pay for schools if it is not spent on a football stadium. This would come to more than the $24 million allocated on February 21. Of course, if suitable legislation were adopted, lottery funds could also be deposited in the state’s general fund, where they could be used to build more prisons (thereby reducing the state’s egregious crime rate),10 or perhaps to lower the state’s stifling tax burden (one of the highest in the nation, as described elsewhere in this publication).11

There is, furthermore, scant evidence that the lottery will be able to produce the $32 million a year necessary to make the governor’s numbers hang together. Though state Attorney General J. Joseph Curran, Jr. has concluded that the lottery may be expanded if necessary to increase state revenue upon the backs of gamblers,12 it remains the case that in its best ever year, the lottery only netted $26.74 million. As shown in figure 1, generally the lottery only takes in about $20 million.13

Almost by definition, state involvement in stadium construction drives up costs. Comparing construction costs of publicly owned stadiums with those of private facilities, economist Dean Baim concluded in 1985 that the public structures are built less efficiently. Updating his research in 1994, Baim found that construction costs tended to be chronically underestimated at public facilities. Even excluding the Louisiana Superdome (which eventually came in at 367 percent above projections), the average public stadium construction venture overruns cost estimates by 67 percent.14 In fact, the 1994 study determined that the great majority of municipal stadium investments have a negative accumulated net present value when built.

Look at the small print of deals worked out with relocating owners: Political payoffs are sometimes as evident as economic ones. A glance at the Washington Redskins’ agreement to move to Landover, Maryland provides some interesting snippets. For instance, in return for $73 million of Marylanders’ money for infrastructure development, the deal ensures that those patiently waiting on the Redskins’ legendary 30,000-person waiting list for season tickets will be trumped in favor of several thousand residents of Prince George’s County (Governor Glendening’s home county). The team will each year hire two – two, mind you, a serious dent in unemployment – Bowie State University students for part-time and summer jobs.15 Finally, the team will donate $4.5 million to various charitable works in that county. At press time, Prince George’s County Executive Wayne K. Curry was still showing no inclination to contribute county funds. In Baltimore, the Modell deal provides that the city will receive 20 percent of the stadium’s tax receipts (having put up none of the costs), while its businesses draw off entertainment money that might otherwise largely have been spent in other counties (assuming Baade’s model to be correct).

It will not have gone unnoticed by observant readers that Baltimore City and Prince George’s County are two of only three jurisdictions won by Glendening in his 1994 gubernatorial bid. Less charitable readers may well come to the conclusion that there is a lot of pork being redistributed here, and at a significant public cost.

Notwithstanding all of the above, it is clear that a new football team in Baltimore – or anywhere else – will have some positive external effects. Some local businesses will have higher incomes (while others will be hurt) because of the presence of the as-yet-unnamed team. But it is important to see that such positive externalities, even if they were to outweigh losses imposed on others, would really be no different than the benefits a community gets from any productive business. To assert that the existence of a positive impact makes the Baltimore team a “public good” worthy of state subsidy is to imply that state government should manipulate all economic development.16 Surely this ideology came crashing down with the Berlin Wall.

The former director of the U.S. Office of Management and Budget, David Stockman, used to say that “pork travels in herds.”17 There is a good case to be made that economic development

Posted in: Corporate Welfare, News Series