Stadium Economics

Just in time for another anniversary of the opening Oriole Park at Camden Yards (Originally opened April 6th, 1992), it’s worthwhile to review the economics of professional sports stadiums. Don’t worry, I won’t ignore those wonderful subsidies either.

Was the cost required to build Camden Yards worth the outcomes the City and State have realized? Discuss stadium economics on the BSL Forums.

In theory, a city should be willing to provide a funds equal to or less than the economic return of the project. That is, it makes sense to provide $1 million to a team to build a stadium if the existence of the stadium generates $1 million or more, all else being equal. Things like time are important variables in this calculation. If Baltimore gave the Orioles $1M in 2014 to build a new stadium and accrued $1M in return over the next 20 years, that’s not at all equal in value: a $1M investment in an interest-bearing asset or in tax abatement for another business may be worth far more than $1M in 20 years.

The biggest difficulty in measuring economic impact of a professional stadium is the potentially difficult-to-grasp concept of “but for.” The question economists ask when measuring economic impact of stadiums is “How much of the spending around the stadium would have occurred but for the existence of the stadium?” Put another way: in an alternate universe in which this stadium were never built, what expenditure would the surrounding area or complementary businesses have seen? And from there, the difference between actual spending levels and theoretical, but-for-the-stadium spending levels is the direct economic impact of the stadium.

Obviously, this is not an easy figure to determine. For one thing, it’s easy to report how much consumers spent at Camden Yards or around the area, but it’s nearly impossible to determine how much those same people would have spent in Baltimore without Camden Yards present. My personal assumption is that it would have been a similar level of expenditure, given that the Orioles were already in Baltimore at Memorial Stadium anyway. As far as state revenue goes, it’s even harder to tell how many people spending money in Baltimore are not only doing so because of Camden Yards but are spending money in Maryland because of Camden Yards. Families from Carroll County, for example, may have spent the same amount that they would spend on a night at the ballpark on a dinner out in a local restaurant, and that revenue would still cycle through the state all the same. There are also differences in the portion of money spent at Camden Yards that actually makes it back into the local economy and the portion of money spent at a restaurant in Carroll County that makes it back to the local economy.

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There’s a cool¹ concept in economics called rent-seeking. In this case, rent isn’t exactly like the rent many people play every month for their residence. Instead, rent-seeking is deliberately using resources to create an economic gain without reciprocating benefits back to society through wealth creation. Rent-seeking happens in professional sports all the time. Remember how the host city should be willing to offer a subsidy the size of the economic benefit generated for its residents to the professional sports team? Obviously, the goal of the city in this situation is the same as any other investor in another situation: maximize the return on investment. If the city is providing $10M and getting back $100M, it’s a great investment and worthwhile to pursue.

Unfortunately for cities, professional sports teams understand this concept well – perhaps all to well, and maybe even better than the city politicians that dole out subsidies. Knowing that their project will return $100M to the city, the professional team will likely not accept subsidies as low as a paltry $10M – they’ll demand $100M, or just enough less than that to make the city indifferent between spending and saving the money.

Now, a few things do come up in this process that make it even more difficult to see any economic value of stadium subsidies. Teams often promise many benefits that they simply cannot or are proven not to deliver. Oriole Park at Camden Yards, for instance, was promised to deliver jobs, revitalized neighborhoods, tax revenue, and an urban renaissance. Whether it has provided these things is, like all other “but for” questions, is hard to answer. What we do know is that there are fewer employers around the stadium than there were in 1998 and unemployment is rising in surrounding neighborhoods.³

The Maryland Stadium Authority receives approximately $8.7M from the Orioles every year in rent plus a majority of the 10% state admissions tax. The reporting on this number is unclear as to whether this is net or gross State revenue from Camden Yards (I believe it’s net). Bloomberg reports that Maryland will pay about $24M in 2014 for debt service. As the landlord, the Stadium Authority is responsible for maintenance, repair, and upgrades, and that eats a chunk of the money paid to the state by the team. I would imagine that the significant recent improvements to Camden Yards took up most, if not all, of the annual funds paid to the State.

The City of Baltimore receives a net of less than $40,000 every year after its $1M annual payment towards stadium debt. This average figure is driven, at least in part, by ticket sales. In lean years, Baltimore loses money on the existence of the Orioles. In recent years, between rising ticket prices and the team’s fantastic turnaround, the City has likely made more.

Also at issue is the subsidy itself; subsidies are in and of themselves, regardless of return on investment, a form of rent seeking. The $300 million that the City of Baltimore spent to build a stadium for a private entity could have been applied elsewhere that widespread benefit and wealth creation for its residents and left the Orioles to build the stadium themselves.

So while the City of Baltimore and the State of Maryland usually both net positive revenue annually from the existence of Camden Yards, the concept of opportunity cost is, as always, lurking. It’s nearly impossible to determine what sort of tax revenue the City and State would be receiving had the money used to build Camden Yards been put to other uses. Multiple studies show that new stadiums, whether constructed for relocated teams or for existing teams that want new digs, create no change to economic activity, and in some cases reduce economic activity. As such, it’s possible that Baltimore and Maryland spent close to $300 million to generate no additional economic impact on the area.

The true winners in the stadium subsidy game are, not surprisingly, the owners that end up making money off of generous leases to play in new stadiums that the people paying to attend and watch the games played there have actually paid for.

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So if we know all of this about stadiums, and if there’s significant pushback from fans, media, and economists alike, why are cities still giving huge (usually) subsidies to professional sports teams? There can be a lot of answers to that question, including the fact that economists are typically pretty bad at measuring utility, since, uh, it’s totally non-quantifiable and subjective and people are generally pretty bad understanding and applying regular opportunity cost, not to mention opportunity cost of an abstract, non-quantifiable concept like utility. But mostly, politics. It’s awesome to be The Mayor That Brought The Royals to Kansas City for the rest of your life, not to mention a pretty solid resume-builder for a run at statewide office. It also totally sucks to be The Mayor That Let The Los Angeles Raiders Leave Because He Was Too Cheap and Out of Touch With His Constituency.² Like, never-welcome-in-the-city-again sucks.

Baltimore politicians clearly felt pressure to give the Orioles a sweetheart deal on a new stadium after the Colts left for Indianapolis. Belgrad, Chairman of the Maryland Stadium Authority from 1986-1995, said, “As a result of there being a single stadium, we lost the Colts. It was the city’s inability to accommodate both teams.” While Roberty Irsay did look for outrageous stadium subsidies and complained about the team’s then-current digs, he actually got the deal he asked for from the Mayor of Baltimore. What was happening behind the scenes was an attempt by Baltimore to seize control of the Colts by eminent domain – a problem in many ways that relate more to property rights than sports, but also, according to Irsay was the direct cause of his midnight move.⁴

Recently, politicians across the country have started to push back on stadium subsidies with the support of their constituents. The Atlanta Braves have announced plans to move from Atlanta to Cobb County because they weren’t awarded the subsidies they requested. Admittedly, it is easier to deny subsidies when the relocation is to the surrounding county, effectively keeping the team in the same place. Had the Braves threatened to move to another city,⁵ it might be a different story.

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1. Relatively speaking, I guess.

2. And I get that these are not perfect 1:1 examples, but it would be awful for that to be your Twitter bio or Wiki headline, the 21st century version of tombstone inscription.

3. Employers in surrounding zip codes may be larger now than they were in 1998, taking up more of the area’s limited office space and therefore crowding out other potential tenants and lowering the absolute number of businesses. The unemployment rate may be rising recently as discouraged workers return to the labor force. There are a number of issues with Bloomberg ignoring the semantics of the figures they’re reporting.

4. The City “offered” Irsay $40M for the Colts, which not only seems incredibly low by today’s standards, but represents the Irsay family giving up an asset that was likely to appreciate exponentially. And wealth creation and preservation are the real goals of professional sports investment, just like any other investment! So if you’re going to complain about the Colts sometime in the future, remember that Baltimore did a pretty good job of making sure that leaving in the middle of the night was the owner’s only realistic option.

5. Moving from Atlanta to another city would be foolish anyway; as one of the 30 largest metropolitan areas in the country, it’s doubtful that the Braves would have found a home with a large enough population within their new broadcast territory to move to and maintain their revenue stream.