Sunday, May 16, 2010

Subsidizing Pro Sports In Indy

For those of you that don’t follow sports and/or politics in Indianapolis, let me bring you up to speed. The Pacers wish to renegotiate their contract of the Conseco Fieldhouse and want to have the city pay for all of the operating costs … to the tune of $15 million per year. The Pacers, who have lost $200 million since being purchased by Herb Simon (local Billionaire) 20 years ago. Meanwhile, Indianapolis is grappling with closing six public libraries because there isn’t money to pay for them.

I think it is time that the citizens of Indianapolis take a stand against the Pacers and subsidizing professional sports in general. In a recent report commissioned by the Capital Improvement Board (the folks that run the Conseco Fieldhouse), the authors extolled the virtues of professional sports, citing the millions upon millions of dollars of economic activity that would be lost if our Pacers would leave. They also discuss intrinsic values including the joy that a franchise brings. I would like to debunk both.

Should franchises continue to enjoy these generous subsidies from taxpayers? The answer is no. John Sigfried and Andrew Zimbalist, both economics professors, have written widely on the subject. According to their research: "Few fields of empirical economic offer virtual unanimity of findings yet independent work of the economic impact on stadiums and arenas has uniformly found that there is no statistically significant positive correlation between sports facility construction and economic development."

But what about the $55 million that the Hunden report discussed? How will Indianapolis deal with the shortfall in economic activity? Will there even be a shortfall?

Almost all Hoosiers have a fixed leisure budget. They will spend this money at Pacers games or at Colts games or at a restaurant, movie theater or bowling alley. Should the Pacers leave, these recreation-seeking residents will find a way to entertain themselves while still spending money. So, in effect, the Pacers leaving would have no impact on the city. In fact, some economists argue that the Pacers (along with the Colts) are pulling money out of Marion County. Let me explain.

If I spend money at a downtown restaurant, that money has a better chance of staying in the local economy when the waitresses, cooks and restaurant owners spend that money locally. On the contrary, much of the revenue generated by the Pacers goes to pay players. How many players do you think live in Marion County? My guess is not many. That, coupled with many of these players falling in the top marginal income tax bracket, close to half of money is sent to the federal and state coffers, with the balance being spent outside Indianapolis.

Hunden tries to argue the intangible benefits of pro sports and being a ‘big league’ city. Did Oklahoma City suddenly become a big deal because of the Thunder? Do you look down your nose at Seattle since they lost the Supersonics? My guess is that your opinion of these cities has not changed based whether or not they have an NBA franchise. The immeasurables include the joy that he team brings. In economics terms, this is referred to as ‘consumer surplus’, or the difference between what fans are willing to pay to see a sporting event live or watch it on TV and what they actually pay. For casual fans this is minimal. But for the die-hard Pacers fans, it can be a lot. The problem is that these fans tend to be higher income and, when we subsidize the Conseco Field House, we are transferring money from the population as a whole to this subset of fans. The money used to pay for these facilities, like sales taxes, hit the lower income brackets harder as they are highly regressive.

Professor Robert Whaples, who teaches economics at Wake Forest University, surveyed economists whether local governments should subsidize stadiums and arenas. A full 85percent said no, while just five percent said yes.

The city would be best served discarding the Hunden report and commissioning an independent study that estimates the true impact while studying what cities have done in parts of the country that have lost NBA franchises. It is time to put tax payers first.

1 comment:

Carlton Bale said...

I agree completely. Unfortunately for fans, there are many more cities than teams and if one city doesn't pay, another will. The NBA is a coalition of teams with a fair amount of price control and this has driven up the salaries of the players to astronomical levels by subsidizing all other expenses. There needs to be a coalition of host cities to limit payment of public funds to teams; this would exert even pressure on teams and drive these (indirectly) publicly-funded salaries back down.

There is no justification for paying players as much as teams currently do, other than "other teams do it, and so must we." NBA players wouldn't quit playing basketball if their salaries were reduced -- all they want to do is play basketball. If private funds support their salaries, fine. But if it's public funds, it's time for a downward pay equity adjustment; the athletes can still earn an enviable living from endorsements. If lower salaries make some small-market teams uncompetitive, then it's the league's responsibility to address, not the tax payers.