tim ferguson, the former editor of Forbes’s Asia edition, writes about business, economics and society.
Published May 21, 2020
For years, economists have cautioned — well, scolded — that the common practice of financing sports venues with taxpayer-backed bonds was buying trouble. They pointed out the almost obvious: Stadium and arena funding was a risky public investment with lots of downside and little chance for gain beyond the bank accounts of team owners and bragging rights for local fans.
Now the Covid-19 pandemic has made those abstract warnings very tangible, indeed, for the dozens of localities that are on the hook for construction bonds. Social-distancing edicts are likely to have wiped out most of the 2020 seasons, virtually eliminating ticket revenue as well as any percentage cuts that public authorities get from stadium parking and $7 curly fries.
These curbs, of course, cancel not only sports events but also other venue-filling attractions such as rock concerts. Moreover, the fallback-financing for these facilities is often local hospitality taxes — taxes on rental cars and hotels — that aren’t apt to recover anytime soon. Thus the price of bowing to sports team owners who threatened to move to Tacoma or Tucson or Tijuana unless they could build luxury boxes and mega-videoboards on the public’s nickel is an even larger state and local debt crisis looming in the post-pandemic world.
They Told You So
Despite the warnings from economists and planners, sports-based edifices have continued to rise in recent years. Atlanta opened both baseball and football parks in 2017 at a cost exceeding $2 billion. Arlington, Texas (halfway between Ft. Worth and Dallas), would have seen its Rangers baseball team in new digs this spring if something viral had not happened on the way to the forum. Las Vegas has a $1.4 billion palace due for the football Raiders this fall (if there is a season). A $4 billion home for two other football teams is being privately built in Inglewood near LAX, though with lots of publicly funded infrastructure and tax breaks to make the medicine go down easy. (The basketball Clippers are eyeing a new arena on the same site.) And lest we forget, Major League Soccer, fast expanding in North America, is making the rounds with begging bowl in hand (feet?).
As of this writing (mid-May) the chickens are just beginning to roost. Standard & Poor’s has revised its rating to negative on notes issued by the Washington (DC) Convention & Sports Authority; Houston got the bad news from Moody’s at about the same time. Even Yankee Stadium, home to the second most valuable franchise in sports, has been put on credit watch.
Mark Rosentraub, professor of sports management at the University of Michigan, points to Las Vegas as the latest soft spot, given its reliance on hotel taxes to fund sports infrastructure. Nor are Indianapolis’s broader visitor levies sure to cover the debt on the small city’s lavish stadium. But Rosentraub says that other financing deals based on anticipated higher taxes on nearby business properties could also be undercut in a long recession.
Over the years, some policymakers have tried to play defense against this bigger-court press. President Obama’s 2016 budget proposed getting rid of the federal tax exemption for stadium bonds that had cost the U.S. Treasury billions in lost revenue. But that went nowhere — taxpayers’ liabilities, after all, are diffuse and far away. The high-paying construction jobs and juicy profits to be had building stadiums, not to mention the prospect of locals being able to root, root, root for the home team in 21st-century comfort, generally win the day.
The price of bowing to sports team owners who threatened to move to Tacoma or Tucson or Tijuana unless they could build luxury boxes and mega-videoboards on the public’s nickel is an even larger state and local debt crisis looming in the post-pandemic world.
How long the big venues will lie unused while the ravages of Covid-19 are tamed is anyone’s guess. But it stands to reason (not always the best yardstick, alas) that with their fixed, close-seating arrangements and crowd-funneling points of entry, the stadiums and arenas will be among the last operations to resume full-on operations. In the meantime, they are white elephants in need of care and feeding.
It’s true that several big venues have been employed for virus testing and other emergency operations. However, it is awkward to retrofit them for mass shelter or quarantine — the experience at the New Orleans Superdome after Hurricane Katrina was not auspicious. All the while, the venues require upkeep, especially those with natural turf to maintain.
Of extra concern: Organized sports that demand large infrastructure are often anchors to local economies that are neither wealthy nor diversified. The saddest fate may await baseball’s minor leagues, where modest-sized towns have upped the seating ante to remain competitive.
The biggest money in spectator sports comes from broadcast rights. And conceivably, some sports could return with minimal in-person attendance. Indeed, the NCAA briefly pondered March Madness without a live audience, and professional wresting is actually trying it. That may be of some comfort to fans and franchise owners. But it won’t generate the revenue contractually dedicated to service infrastructure debt.
Is there life for mega-sport construction after Covid-19? Civic boosters with the never-say-never spirit have come up with new schemes to support construction that aren’t as subject to epidemiological disaster (or, for that matter, economic recession). Minnesota has found a vice with socially redeeming aspects in its “pulltabs” lottery to finance the $1.1 billion U.S. Bank football stadium. Conducted with charities, which get to keep a cut, the sweepstake has been such a hit that legislators have debated what to do with the surplus. (Speaking of corporate naming rights, don’t get your hopes up. Their coin goes straight into team owners’ pockets.)
Perhaps the best one can say about the looming stadium debt gap is that it is likely to be a blip in a sea of other local government debt woes. Rosentraub sees a massive workout looming in municipal finance in which sports venues will be an afterthought. Settlements will ensue (eventually), making the bankruptcy bar and the investment bankers who double as workout specialists in hard times very happy.
Along the way, covenants may be triggered and lawsuits filed, yet nothing will look different when the fans ultimately return. Unless, in a post-pandemic world when priorities and risks are reassessed, we decide contesting of sports infrastructure finance to be too important to leave to economists. The political left, long skeptical of insider ball played by team owners and worried about municipal employee pensions in an era of budget deficits, need to gear up for the fight.
There’s a federal angle to all of this. The tax-exempt status of the interest paid on much sports-authority bonding has always been subject to question. On top of that, there’s the extent of any Washington bailout of municipalities in stimuli to come. Will the checks cover not only bread (and sanitation workers’ salaries) but circuses? Or is this the beginning of an era when the public good is no longer measured by yards gained and runs batted in?