A Case Study on Stadium Subsidies: Prince William County and the Potomac Nationals

A note to the reader: This is an early draft of a forthcoming policy paper.
We appreciate comments/feedback to further refine the finished product.

Introduction

Prince William County, Virginia, is one of several municipalities currently considering whether to subsidize the construction of a minor league baseball stadium. Debates over the wisdom of using public funds to support professional sports have been occurring more often as local leaders and residents wrestle with the prospect of losing their home town team to other communities and team owners more aggressively advocate for more modern — and even luxurious — stadiums.

Academic Research Finds No Reason to Subsidize Professional Sports

A large body of academic research has found that despite optimistic projections of the economic impact of stadium subsidies, subsequent analysis indicates that they have little to no effect on the local economy and the economic well-being of nearby residents. The 1997 Brookings Institution book “Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums” concluded that:

“A new sports facility has an extremely small (perhaps even negative) effect on overall economic activity and employment. No recent facility appears to have earned anything approaching a reasonable return on investment. No recent facility has been self-financing in terms of its impact on net tax revenues.”

Following this, Dennis Coates reviewed the body of sports economics research in 2007, finding “the broad conclusion of this literature is that stadiums and franchises are ineffective means to creating local economic development, whether that is measured as income or job growth.”

Sports economists Robert Baade and Victor Matheson published a paper in 2011 which studied the evolution of sports facilities over the past two centuries and the potential for stadium construction to drive local economic development. They note that consistently flawed economic impact reporting has created false expectations and low returns are actually the norm for publicly-funded stadium construction. Their conclusion is that there are “little or no economic benefits from spectator sports.”

In addition, a 2015 Mercatus Center study by Coates, using data from 1969 to 2011, found little evidence of increased economic activity following the arrival of a sports franchise. By comparing similarly-sized cities, he discovered that those with professional teams fared no better than those without.

Lastly, a 2017 poll of top economic policy experts published by the University of Chicago Booth School of Business addressed the question of whether subsidies to build stadiums for professional sports teams would likely cost taxpayers more than any local economic benefits would be worth. 57% agreed that the costs were larger than the benefits, while only 2% disagreed.

Public Funding Tradeoffs

When a municipality dedicates public funds to support professional sports — or any other private investment — it loses the ability to spend those same funds to provide the public goods which are the core role of local government. For example, the $750 million subsidy that Nevada will provide to the Raiders football franchise for construction of their new stadium could instead have provided a year’s worth of education to nearly 100,000 public school students or built hundreds of miles of highways. In fact, because Nevada only has 5,692 miles of state-controlled highway, the Raiders’ subsidy could have funded all state highway rehabilitation costs in the state for 6.5 years. Alternately, such funds could go to civic parks or be dedicated to public safety, like police and emergency medical services.

The decrease in public goods or services offered by the municipality not only hurts local residents — it also hurts the general competitiveness of the region compared to other cities which have more prudently spent public funds. This adds insult to injury for other local businesses, whose taxes often pay some of value of subsidy and who now also experience a reduction in potential customers because the city is a less attractive option for new residents to move to or to do business in.

Potential Consequences of Using Public Debt to Finance Stadiums

An increasingly popular means of providing public support for stadium construction is to use future taxpayer revenue as collateral for municipal bond, which in theory is to be paid back via other tax revenue and/or team earnings. This approach consumes a portion of a municipality’s available credit, meaning that there is less funding available for true public goods and essential government services. The increased debt burden also makes the municipality appear more risky to future bond buyers, which might drive up future interest rates.

Pearl, Mississippi found this out the hard way after the town built a stadium for the Mississippi Braves, a Class AA minor league baseball team who relocated from Greenville, Carolina in 2005. The tax revenue streams intended to service the construction bond debt proved inadequate and the city has been paying more than $900,000 annually — over 5% of its general fund spending — to cover the shortfall. In December 2015, Moody’s Investors Service cut Pearl’s debt rating to junk status because of the ongoing stadium liabilities.

Deadlines, Threats, and The Field of Schemes

A false crisis appears to be a common tactic that sports team owners use in arguing for public funding for new stadiums. In their book on stadium deals, Field of Schemes, Neil deMause and Joanna Cagan identify a consistent trend in how sports teams use threats of the team leaving town to spur policymakers and voters to subsidize new stadiums, though often the team’s initial deadlines proved toothless. DeMause and Cagan discovered a recurring pattern followed by team owners to secure taxpayer dollars:

1. Claim the old facility is obsolete, sometimes going so far as to neglect maintenance to support this claim
2. Threaten to move
3. Claim that without a state-of-the-art stadium, the team will not be competitive in its league
4. Publish generous, and often unrealistic, economic analysis reports
5. Create a false crisis using an arbitrary deadline on the deal
6. Adjust the goal mid-project, resulting in budget overruns

In the Potomac Nationals’ case, the team owners have repeatedly claimed that Minor League Baseball (MiLB) has officially stated in a letter that the team’s facilities no longer meet Carolina League standards and must be upgraded by the start of the 2020 season, otherwise MiLB will assume control of the team and pass it along to new owners who will take the necessary steps to improve the stadium, including potentially moving the team. However, several elements of this situation seem odd:

1. No official letter stating MiLB’s conditions has ever been provided to the public, although such a letter has been referred to on numerous occasions by the team owners.
2. There has been no official deadline confirmed by the league (previous deadlines named by team owners have been 2014, 2016, and 2018).
3. There are no official “Carolina League facility standards” publicly posted.

MiLB does have minimum sports facility standards adopted in 1992 (known as “Major League Rule 58”), but Pfitzner Stadium meets these standards as an existing facility (the rules hold existing facilities to a lower standard than newly-built stadiums). In fact, in 2015 Prince William County provided $230,000 for renovation of the visiting team’s clubhouse to meet the 1992 standards.

Why Would Minor League Baseball Penalize One of Its Best Teams?

Though the MiLB may claim the Potomac Nationals’ stadium fails to meet league standards, the facility seems to have in no way harmed their performance. The franchise has won three Carolina League championships over the past nine years and the team’s major league affiliate, Washington Nationals, extended its contract with the team through 2018. Furthermore, attendance at Pfitzer Stadium has generally increased over time and the Potomac Nationals home games actually rank near the top in attendance in Class A Advanced Minor League Baseball.

Using publicly available attendance data from MiLB.com from 2005 through 2016, we find that the Potomac Nationals performed reasonably well with respect to ticket sales compared to their competitors in the Carolina League. Since 2012 the team has been in the middle of the pack in per-game attendance:

In fact, when attendance is measured with respect to 2005 levels, a long-run growth trend is apparent. Out of the eight teams in the league, only the Potomac Nationals and the Winston-Salem Dash have grown their per-game attendance by at least 50% relative to 2005. In fact, during the 2016 season four of the eight teams in the Carolina League saw their attendance dip below 2005 levels.

The story of the Potomac Nationals attendance is actually even better than this, however, because the Carolina League has the strongest attendance numbers in all of Class A Advanced Minor League Baseball. In fact, over the past three years the Potomac Nationals have had higher attendance numbers than 25 of the 30 teams in the entire division.

Furthermore, the Potomac Nationals’ attendance shows exceptionally strong growth even when compared to the entire Class A Advanced division. 2016 attendance per game was 50% higher than 2005 attendance per game, and only three teams in the entire Class A Advanced division have experienced more growth over the same period.

Would a New Stadium Increase Attendance?

Team owners often make the argument that attendance would increase if they played in better and more luxurious facilities. The obvious logic behind this statement is that if you make the fan experience better, more people will come to the games. However, of the seven Class A Advanced teams that began playing in new or renovated stadiums between 2005 and 2016, only three saw substantial increases in per-game attendance. Another three teams saw minor increases in attendance — less than 300 additional tickets per game sold in the season after the new stadium opened (the seventh team was an expansion franchise and had no prior data for comparison). This data suggests that opening a new stadium might not be the home run that baseball advocates argue it is.

The average per-game attendance for these teams is graphed below against the per-game attendance for the Potomac Nationals. Average attendance and attendance growth at Potomac Nationals compares favorably even against teams playing in new or renovated stadiums. This is not to say that the Potomac Nationals would not see an increase in attendance if they played in a stadium with all the modern bells and whistles, but serves as additional evidence of how well the Potomac Nationals have done without the having the benefit of a new stadium.

How Government Favoritism Occurs

The late James Buchanan — professor of economics at George Mason University and winner of the 1986 Nobel prize in economics — founded the economic school of thought known as “Public Choice”. He described it as “politics without romance” because it is based on the idea that everyone, whether they are shoppers considering a purchase or policymakers crafting policy, respond to similarly to the incentives they face and seek to create outcomes in their own best interest. In this, Buchanan essentially echoes what James Madison wrote in Federalist № 51:

“If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself.”

Similarly, in Federalist № 10 Madison wrote that “faction” — the tendency of people with the same desires to work together in accomplishing those goals — was an inherent aspect of human nature. Because of this, the attempt by factions to use government authority as a mechanism to achieve their goals — what we refer to today as “special interest groups” — would be an ever-present problem and that the only relief would be to create systems that mitigate the effect that special interest groups have on government policy.

Unfortunately, the long history of publicly-subsidized sports stadiums clearly indicates that we lack effective systems of rules to restrain the use of government authority and protect it from being used to serve private interests. The popularity of local sports teams often shields policymakers from the backlash of providing obvious government favoritism to team owners and also encourages them to appease voters by supporting the sports team. However, not all voters are in favor of such subsidies or value the presence of a local sports team. This means that some people are unwillingly paying for other people’s entertainment and boosting the profits of a private company in the process.

Economist Mancur Olson called this situation “concentrated benefits and dispersed costs” — the use of government authority to grant handouts to a few at the expense of the many. Since the per-person cost of subsidies is relatively low (by being spread over a large number of people) there is little motivation to fight hard to oppose the imposed cost. However, because the benefits are concentrated in a small group of recipients, that group has a strong incentive to pursue the benefits and are better able to politically coordinate their efforts to capture them.

Institutions to Resist Government Favoritism

The key insight to take from Madison, Buchanan, and Olson’s writings is not that government favoritism is evil, but rather that it is natural. The problem facing citizens and policymakers is how to structure government authority so that special interests have no reason to seek government handouts because there is no ability for government to grant them.

There are many different ideas of how to create favoritism-resistant institutions and their study is an open research question we are currently pursuing. The structure of the federal government, with its separation of powers between the legislative, executive, and judicial branches, is a well-known example of creating inherent structural limitations on the use of government power in order to inhibit special interest groups from gaining undue influence.

One structural limitation that has been used in recent years is prohibitions by state governments on the authority of municipal governments to enact regulations affecting labor markets and transportation services. If state legislatures passed similar laws prohibiting local governments from offering any sort of public funding to professional sports teams, this would negate the problem facing local policymakers. Such a restriction would remove the ability of team owners to threaten to move the team in order to blackmail local leaders for stadium subsidies. Of course, this then would simply shift the argument for such subsidies up to the state level, but the greater competition between special interest groups at the state level and the lack of statewide benefits from the subsidy might lead to less granting of public funds.

Another way for local policymakers to sidestep the special interest pressure to offer stadium subsidies would be to require all such public funding to be approved by a public referendum. In this situation, team owners would have to make the case for subsidizing their business to the entire body of voters, rather than relying on influencing individual policymakers. This may or may not be higher hurdle to the granting of public funds, but such a structure does offer policymakers a refuge from special interest influence — allowing them to focus more on crafting policy that works for all citizens — and it closes one channel through which government favoritism can be created. It also ensures that if stadium subsidies are indeed approved, that a majority of the voting public believed the costs to be worthwhile.

Conclusion

Policymakers in Prince William County should ask themselves what the best way forward is to avoid the potential misuse of government authority and misspending of public funds. Buchanan would remind them that that they themselves are not immune to the pressures and incentives created by special interest groups. Olson would remind them that the current structures of government authority enable a privileged few to leverage their influence to gain benefits at the expense of the larger population. And Madison would argue in favor of a solution which minimizes the understandable but ever-present problem of faction.

About the Authors

Michael D. Farren is a Research Fellow in the Study of American Capitalismat the Mercatus Center at George Mason University. He plays sports with great enthusiasm and a painful lack of motor skills.

Anne Philpot is a Research Assistant in the Study of American Capitalism at the Mercatus Center at George Mason University. Her motor skills are just fine.