5/09/2005

Demolishing Sports Welfare: Reason Online, 5/05

Two court cases could mean the end of publicly funded stadiums

By Daniel McGraw

When Dallas Cowboys owner Jerry Jones asked Arlington, Texas, voters to pay for a fancy new stadium last November, he did not call the classic plays from the sports welfare handbook. He could not say that America’s Team needed a state-of-the-art facility to compete, since Texas Stadium (in the Dallas-adjacent suburb of Irving) has more luxury suites than any other in the National Football League, and the Cowboys won three Super Bowls in the 1990s. He could not say he was financially strapped, since his franchise ranks sixth in the NFL in profits and second in revenue, according to Forbes magazine. Most important, he did not use the team owners’ favorite and most effective threat—to move to a new city—because the Cowboys have always had very strong local fan support; the Dallas–Fort Worth media market is the fifth-largest in the country, and Dallas Cowboys is a powerhouse global brand name.

But Jones had three key deadlines to beat. His lease in Irving was scheduled to run out in 2009, so a new stadium deal needed to be done quickly. Electorally speaking, there was no better time to pass a tax increase than during the high-profile presidential vote of 2004; special elections usually draw low turnouts, and the anti-tax older folks show up in droves. But perhaps the most important deadline of all loomed in 2005, when the window for public financing of sports stadiums in the United States may be slammed shut by two court decisions expected to be handed down during the year.

Kelo v. New London, which the Supreme Court is scheduled to rule on by summer, could decide once and for all when or even whether governments have the right to use eminent domain to acquire private property for the benefit of private businesses. Meanwhile, Hamilton County v. Cincinnati Bengals Inc., which is being heard in federal court in Cincinnati, is challenging football’s federal anti-trust exemption, forcing all NFL teams to open their closely guarded books, and arguing that the Bengals’ demand of build-it-or-we-can’t-compete is tantamount to fraud.

Jones’ P.R. people swear the lawsuits were not on his radar screen. But sports business specialists around the country say these two cases could bring the taxpayer-financed stadium-building boom of the last 15 years to a merciful halt. For whatever reason, the Cowboys’ flamboyant owner convinced the Arlington City Council in August 2004 to rush hikes in sales, rental car, and hotel taxes onto the November 2004 ballot. He then unleashed a mass media blitz starring old Cowboys heroes such as Roger Staubach and Troy Aikman, spending more than $5 million in all—an extremely high amount for a local election, even in the high-stakes stadium game.

The tax hikes passed 55 percent to 45 percent, and the Cowboys will move into a new retractable-roof stadium in 2009. But it could be the last deal of its kind. On the same day Jones received his gift, voters in Kansas City and St. Louis rejected similar measures to fund sports facilities. Since then, Washington, D.C., has agreed to build a new stadium for the relocated Expos baseball team (now the Nationals), but its city council insisted that it be financed with a significant amount of private money. Public sentiment may finally be turning.

From 1990 to 2003 there were 66 major construction and renovation projects for professional sports stadiums and arenas in the U.S., costing $17.3 billion, according to the League of Fans, a sports welfare watchdog group founded by Ralph Nader. Sixty percent of the funding, or an estimated $10.3 billion, came from the public purse. With the economy and stock market no longer booming, and with the public becoming more skeptical about the rosy economic claims of billionaire team owners, the era of easy money already was drawing to a close. Now the two court cases are poised to determine whether the fund-raising tactics of professional sports teams and their local boosters are even legal.

The Right to Take
Technically, the eminent domain case before the Supreme Court has nothing to do with sports. The high court is hearing a lawsuit involving a New London, Connecticut, real estate project, in which the city agreed to tear down a neighborhood so developers could build a condominium complex and office park. No claim of blight was involved. The city said the development was a “public use,” as required by the U.S. and Connecticut constitutions, because it would generate new tax revenue. Several property owners refused to sell. The Supreme Court will decide if they have to.

The Court has rarely visited the eminent domain issue. In 1954 the justices ruled that a neighborhood deemed “blighted” could be torn down and redeveloped if the local government had a better use for it. There have been several more decisions since then, but most have been very narrow in scope.

Meanwhile, the use of eminent domain has mushroomed. The Institute for Justice, the nonprofit law firm that is arguing the New London case before the Supreme Court, has documented more than 10,000 cases between 1998 and 2002 in which local governments have transferred or threatened to transfer property from one private party to another. Blight is no longer the issue; the question now is simply whether the deal helps the local economy in some way.

Sports owners have long used eminent domain as a way to acquire property cheaply. Sports economists estimate that half of the post-1990 stadium and arena construction has involved eminent domain—and even when it wasn’t invoked, it was understood that condemnation could be a last resort if the teams encountered stubborn landowners.

One of the most famous eminent domain cases involved the Cowboys’ future home of Arlington, where baseball’s Texas Rangers, at the time owned by George W. Bush, convinced local voters to approve a 1991 tax increase that helped build a new $191 million stadium. The city of Arlington used eminent domain to acquire the property from hundreds of private owners, claiming that the stadium was a “public use,” just like highways, schools, or government buildings. Several property owners were lowballed, and court decisions increased their take. (The city, not the team, was responsible for the larger payments. The compensation for one 13-acre plot was increased from $877,000 to $5 million, for example.)

The stadium clearly benefited the Rangers’ owners more than anyone else: Bush turned his initial $600,000 investment into $15 million when the team was sold in 1999. But it has produced little of the promised economic benefit to Arlington, and there has never been a real “public use” factor aside from baseball fans’ paying their money to see games.

Opponents of stadium deals argue that teams and local governments are getting around the public use issue by placing the stadium or arena in the ownership of a “public sports authority.” The property is then tax exempt, and the teams pay nominal rent that is often less than they would have owed in property taxes. The lease arrangements are often lopsided in favor of the teams; many, for instance, allow the franchises to move after a certain time if revenues do not hit projections. This threat to pull stakes and run gives teams strong leverage to renegotiate. If the sports facility were privately owned, there would be no lease to haggle over, and the team would be less willing (and able) to leave.

Without eminent domain, acquiring enough property for a stadium could become expensive. A handful of property owners could hold up an entire complicated deal. “If the court makes the ruling that this is not a valid use of eminent domain, there will be some problems,” says Scott Powe, a law professor at the University of Texas. “Huge problems. No doubt, there will be lots of litigating.”

In resolving the Connecticut case, the Supreme Court is expected to decide whether the promise of local economic benefits is enough to justify the use of eminent domain, and whether local governments have to prove such benefits are likely. If the Court requires such evidence, stadium boosters will be in serious trouble.

During the last 15 years, economists such as Stanford’s Roger Noll, Smith College’s Andrew Zimbalist, and Cleveland State University’s Mark Rosentraub repeatedly have shot down the claim that new stadiums benefit local economies. “There is no dispute in the economic community about who gets the primary benefit from the subsidy,” says Raymond J. Keating, chief economist for the Washington-based Small Business & Entrepreneurship Council and an expert on sports facility financing. “It is very clear a ruling against how eminent domain is now used will change some of the issues used by local government and teams in making their case for public financing of sports facilities.”

Rosentraub estimated Arlington would lose roughly $235 million over 30 years as a result of the new Cowboys stadium, a far cry from the city’s (and team’s) projected $7 billion gain over the same period. (The raised taxes for the stadium would actually take spending money out of the local economy.) Local businesses tend to be largely unaffected, Rosentraub has found, because teams attempt to control almost all of their fans’ entertainment spending, including shopping and dining. This leaves little room for the promised spillover growth around the stadium.

“The reason you build new facilities is to bring in that consumption,” Rosentraub says. “That’s why in the absence of a plan for an overall development of any district, the ‘Disneyfication’ aspect works against you. People drive to games, and those that don’t eat at the ballpark usually eat at their favorite restaurant—not necessarily in the city where the stadium is located—and have generally well-defined consumption patterns.”

Without a spillover effect on the neighborhood, owners and cities would have to scramble to justify using eminent domain. “They would have to prove a defined public use and benefits that go to the community,” Keating says. “Obviously the clear benefits go to the team owners and the players.”

Kelo v. New London could have a sweeping impact not just on sports but on how local governments arrange deals for shopping malls, big-box retail outlets, housing developments, and more. If the Supreme Court restricts the use of eminent domain, private developers and sports owners will have a much harder time acquiring land and negotiating sweetheart leases with quasi-public landlords. If the high court decides a flimsy promise of economic benefits is enough to justify condemnation, it may signal a new building boom. Or the whole question could be tabled until another, more definitive lawsuit comes along.


Monopoly Powers?
The Cincinnati Bengals case is simpler. Basically, the Hamilton County commissioners claim the team they built a stadium for — and the league that oversees the team — cheated them out of $600 million. One of the most controversial pieces of evidence is the Bengals’ win-loss record: The team said it needed more money to be more competitive, but the Bengals still stink.

The Bengals moved into their new publicly funded facility in 2000. Local voters had approved a half-cent county sales tax hike in 1996, and the stadium complex — one for the Bengals, one for baseball’s Reds — cost $750 million. There was a $210 million cost overrun, which the county was forced to pay.

The new address did not produce the promised improvement on the field. In the five seasons prior to moving in, the Bengals’ record was a lousy 29-51. For the first five seasons after, it was an even worse 28-52. The Hamilton County commissioners say the team told voters they would have to pay for a new stadium if they ever wanted a Super Bowl championship, an assertion the lawsuit claims violated anti-trust laws. Because the number of professional football teams is artificially limited, Hamilton County argues, the NFL and the Bengals improperly used monopoly powers by threatening to move to another city unless the stadium was built. Because the NFL has the most shared revenues of any professional sports league — and a hard salary cap that limits pay for players — every team is theoretically profitable and should be equally competitive.

The lawsuit is designed to drive the Bengals and the league back to the bargaining table. Like most stadium deals, the Bengals have a tiny annual lease payment (about $1 million), and they keep all revenues, even for nonfootball events. Because sales tax receipts have declined, the county’s bond repayment, initially scheduled to take 23 years, is now expected to take 35. According to sources close to the lawsuit, the county wants the Bengals to pay about $200 million to keep the bond payments more in line with the original plan.

“You can’t use your monopoly status purely for driving up your profits,” says Hamilton County Commissioner Todd Portune. “That was the business plan of the NFL, and they have used their monopoly status illegally, we believe. All the evidence we have since uncovered shows that false statements were made by both the team and the league. The team was financially stable. There was no real talk behind the scenes of moving the team to another city. But the Bengals and the NFL perpetuated these lies to take money from the taxpayers and…to make lots of money for a private business.”

That, Portune contends, was illegal. “Congress has laws in place that prevent the public from being taken advantage of by private businesses by using their monopoly powers,” he says. The Bengals, he concludes, should “come back to the bargaining table and remedy how disproportionate the benefits were to the team and the league, vs. the cost to the taxpayers.”

Neither the Bengals nor the NFL would comment on the case. But the suit is already having effects on teams. U.S. District Judge S. Arthur Spiegel has ordered the NFL and all its teams to show their financial books to Hamilton County’s lawyers. The NFL has long avoided opening up its books, and the possibility of having municipalities around the country be privy to the league’s real financial health would almost certainly make it harder to sell stadium deals in the future.

Still, the Hamilton County case is fraught with problems for the plaintiffs. The Bengals and the NFL can claim that since voters properly approved the bond, it is not open for renegotiation. The league also argues that teams with more revenues from luxury boxes can sign better players by having the funds for signing bonuses. And the NFL has always maintained that it is not 31 separate businesses but a single, 31-branch business — one that can’t be a monopoly because it competes for entertainment dollars in every market.

“With all these cases, it just depends on the decision,” says Jeffrey Kessler, a New York lawyer who specializes in antitrust cases. “If the decision is that the league violated laws, and the league is punished for it, it could have a huge impact. But I seriously doubt that a court ruling in a case like this would do things like open the door for unlimited franchises. However, a decision against the league and the teams might change how teams deal with cities and local government in setting up their stadium deals.”

The Turning Point?
The stadium deal for Jerry Jones and the Dallas Cowboys is weighted heavily on the side of the team. The Cowboys emphasized during the tax initiative campaign that they were putting up half the money for the stadium — $325 million — but that isn’t quite true. While the city will use the new taxes to retire its side of the debt, Jones will be able to slap his own 10 percent “tax” on tickets and a $3 tax on parking to retire his side. This will amount to about $10 million a year, or $300 million over 30 years.

But that’s hardly the limit to Jones’ new revenue streams. He’ll also get 95 percent of the corporate naming rights revenue for the new facility, which could be worth $250 million to $350 million. That’s extra money, since the team’s current home, Texas Stadium, has no corporate naming contract. Jones could also earn more than $100 million by selling personal seat licenses (priority rights for buying season tickets), and the NFL is giving the Cowboys a $100 million loan they don’t have to pay back.

So before he even sells a ticket or luxury box or hot dog or beer, Jones will be up about $800 million. Take away the $325 million, and he is still ahead $475 million. Since studies have shown NFL teams usually double their profits in new digs, Jones’ estimated annual take of $40 million could balloon into an additional $1.2 billion over the life of the 30-year deal.

The city of Arlington never asked to see the Cowboys’ books before deciding to put the issue before voters. As with the Texas Rangers stadium before it, eminent domain likely will be invoked to assemble land for the football stadium; the Arlington City Council already has threatened to use it if any property owners decide to hold out. The city has claimed the area where the stadium will be built is blighted and full of crime, neither of which is true; the local housing prices and crime rates are about average for the city.

Such spurious claims in the service of forcing small property owners to sell to larger ones have become all too common. If the Supreme Court requires the justifications to be even slightly more rigorous, and if Hamilton County succeeds merely in publicizing the NFL’s notoriously secret finances, then the balance of power will shift away from the teams. And if the judges take decisive action, 2005 could be the year the public stopped lining the pockets of billionaire owners and millionaire players by paying for the places where they earn their living.

Daniel McGraw is the author of First and Last Seasons: A Father, A Son, and Sunday Afternoon Football (Doubleday).


Reason Online, The Reason Foundation: www.reason.com