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A Critical Battle Over The Sports Economics Model

November 20, 2014

By Warren Meyer

A  critical battle is underway challenging the very heart of the professional sports economics model — and it is not the NFL labor negotiations.  The unlikely fight is between a struggling league (the NHL), a suburb with delusions of grandeur (Glendale, Arizona), and a small, regional think tank (the Goldwater Institute). At stake is an important source of value for nearly every professional sports team:  taxpayer subsidies.

While the NFL’s Superbowl is held in different cities each year, locations for the game used to have one thing in common:  They were warm weather tourist cities like New Orleans, Miami, or San Diego.  But recently we have seen the NFL award their big game to cities like Detroit, a record cold Dallas, Indianapolis, and New York.  It turns out the NFL has changed its decision-model for choosing Superbowl cites.  Rather than choose the city best able to attract fans, it now chooses the location best able to attract government subsidies.

Four of the seven Superbowls between 2008 and 2014 will be held in cities where taxpayers have built their football clubs brand new stadiums.  In each case, the NFL held out the promise of a future Superbowl — music to the ears of powerful hotel and retail interests — as a deal-closer on a contentious publicly funded stadium proposal.

Consider the Arizona Cardinals new football stadium in Glendale, for example.  In part due to the promise of a Superbowl bid, the local taxpayers paid $346 million of the total $455 million cost of the facility — a building that will be used just three hours a day on ten days a year for its primary purpose.  By contrast, in 2010 Forbes valued the Arizona Cardinals at $919 million, meaning well over a third of the franchise’s value accrues from the public subsidy of its retractable roof palace.  It can be argued that much of the increase in player salaries and team owner wealth in the NFL over the last twenty years has come at the expense of taxpayers.

If anything, this example from the NFL understates the importance of public funding of stadiums.  Why?  Because of all the major sports leagues, the NFL gets the lowest percentage of its total revenues from its stadiums.  Leagues like the NBA, and in particular the NHL, are far more dependent on stadium revenue for their well-being.

Let’s return to precocious Glendale.  In 2003, the city agreed to publicly fund $180 million of the $220 million cost of building a new arena for the Phoenix Coyotes hockey team.  Whereas Glendale’s subsidy of the Cardinals represented about a third of that franchise’s value, their $180 million subsidy of the Coyotes represents over 130{010c6536f15f83a69f09c4467fdfb4a5656804feab27fe0dec71ed1e80da306f} of the current $134 million value of the team.  Stuck in Arizona and losing as much as $40 million a year, the team is literally worthless without ongoing public subsidies.

Given the importance of public money to professional sports revenues, it should be no surprise that NHL commissioner Gary Bettman rushed to Phoenix this week to fly cover for yet another proposed taxpayer giveaway.  Because, incredibly, those crazy folks in the City of Glendale are attempting to subsidize the Phoenix Coyotes yet again.

Specifically, the city has proposed a new $100 million bond issue whose proceeds would be handed to private investor Matthew Hulsizer so he could buy the team.  Another $97 million would be paid to Hulsizer over five years in a sweetheart no-bid stadium management deal.  At the end of the day, between this deal and the original stadium giveaway, Glendale will have spent nearly $400 million of public money on a a team worth $134 million, a team that still has not presented any plan for becoming profitable.

Enter the Goldwater Institute, a local Libertarian-Conservative think tank.  Goldwater has a long track record in Arizona challenging certain public subsidies as violations of the Arizona Constitution’s “gift clause.”  This sensible Constitutional provision requires that neither the state nor any municipality in it may “give or loan its credit in the aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation.”

The issues in Glendale are fairly complex, and are made worse by the city’s lack of transparency in these dealings .  The city argues that it is not subsidizing the purchase of the team, but rather is merely buying the rights to charge for parking at the arena, a right others argue the city already owns  (if the city does not own the parking rights, it raises a separate issue that the city transferred these rights to the team sometime in the last 10 years, apparently with no scrutiny and no compensation).   One wonders why,  if the team really does own parking rights that are objectively worth $100 million, Hulsizer does not use them as collateral for private financing.

The Goldwater Institute’s fairly sensible questioning of the deal vis a vis the gift clause has ignited a firestorm.   We shouldn’t be surprised to see Mr. Hulsizer lashing out at Goldwater — after all, Goldwater is standing in the way of his feeding at the public trough to the tune of $200 million.  But the NHL, the City of Glendale, and our local paper the Arizona Republic (after all, the sports section drives a lot of revenue) have all piled on Goldwater.  Glendale has even threatened a lawsuit against Goldwater.

Most intelligent people understand that a lawsuit by a government body against a private group for its excercise of free speech will likely not go over well with the voters (or courts).  So Glendale has come up with a novel critique — repeated by Commissioner Bettman —  that by questioning the constitutionality of the deal, Goldwater has driven interest rates on their pending bond issue up by as much as 150 basis points.  Goldwater stands accused, in other words, of tampering with a public offering.

But this argument is a sham, and demonstrates just how desperate the NHL is to keep the public gravy train going, and how desperate Glendale is to paper over the terrible decision it made 8 years ago when it initially built the stadium.

There are many factors other than Goldwater influencing the price of Glendale’s proposed bond issue.  For example:

•The major bond ratings agencies recently put the city of Glendale on a credit watch list
•The bond issue depends on the success of the Coyotes franchise, which has lost money every year it has been in Arizona (including $40 million this last year) and for which no roadmap to profitability has ever been proposed.  Remember, the parking rights are worthless if the team fails or leaves town in the next 30 years.
•Sales tax revenues that are pledged to pay for the bonds (as a backup if parking revenues fall short or the team goes into bankruptcy again) are way down in both Arizona and Glendale.  Tax receipts in Glendale are already pledged to other bond issues, so in some sense this is a second mortgage.
•One of the consultants who prepared the parking revenue forecasts for the bond issue is being sued by purchasers of another municipal bond issue for inflating potential stadium revenues in a deal that was initially highly rated but now has fallen to junk status.
•A dearth of new municipal bond issues in the first quarter has made it difficult for market participants to forecast yields, particularly for longer duration bonds like these, so it is no surprise initial forecasts of the issue’s yield may have been wrong.
As Darcy Olsen of Goldwater has observed,  “Hulsizer could get a private loan to buy this team like most businesses do.  They finance their investments not on the backs of taxpayers but take the risk privately where it belongs.”  Of course, this would break the business model that has come to dominate professional sports.

The NFL labor negotiations going on this week are contentious, but are merely about how to split the pie between owners and players.  The fight here in Arizona is about whether the size of the pie they are splitting will continue to be enlarged at the expense of taxpayers.




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