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Contents
Executive Summary................................................................................................................................................. 3 NBA Franchises Supply & Demand Fundamentals ............................................................................................... 4 Promoting Sports Investment through Economic Impact Analysis ........................................................................ 8 The Multiplier Concept ....................................................................................................................................... 9 Sources of Exaggeration in Economic Impact Analysis ....................................................................................... 9 Substitute spending......................................................................................................................................... 9 Leakage of NBA Wages ................................................................................................................................. 10 Survey of Economists ............................................................................................................................................ 12 Review of the Literature on Subsidization of Professional Sports Teams ............................................................ 13 Conclusions of the Literature Review ............................................................................................................... 14 Economic Impact of an NBA Team on Louisville ................................................................................................... 15 Measuring Job Creation Benefits ...................................................................................................................... 16 Valuing Benefits from Net Job Creation............................................................................................................ 17 Measuring Tax Benefits..................................................................................................................................... 18 Comparison of Jobs & Tax Revenue Benefits with Public Outlays .................................................................... 21 Conclusions ....................................................................................................................................................... 22
Executive Summary
The NBA maintains a virtual monopoly over professional basketball, limiting the total number of teams to 30 -far fewer than the number of cities that want to host them. This makes for fierce competition among cities for a very limited number of footloose NBA franchises. The result is public subsidy packages to entice teams that can range up in the hundreds of millions. Extending large public subsidies to teams is usually justified by Economic Impact Analysis. Studies commissioned by supporters of public investment in major league franchises exaggerate the economic and fiscal benefits that they bring to local economies, claiming that they add up to hundreds of millions of dollars. There are two inherent flaws in the conventional economic impact analysis supported by sports promoters. (1) They fail to account for local substitute spending and (2) They do not recognize the degree to which the high salaries of NBA players leak out of the local economy. Promotional economic impact analysis assumes that all money spent by local fans is new money into the economy. In fact, budgets for entertainment and recreation are the same in cities with and without major league sports teams. Entertainment spending is not affected by the presence or absence of a major league team. Money spent on professional sports is money that is diverted from other forms of entertainment including movies, concerts, amateur and college sports, restaurants, theaters, and clubs. Only money brought into the area by tourists can be considered to the new money in the economy. Research has shown that just 29% of NBA players reside in their home MSA, meaning that 71% of the wages paid to players leak out of the hometown area in the first round of spending, due to tax, saving, and lifestyle factors. We estimate that, for every dollar paid to NBA players, just 10 cents stays in the local economy. We have conducted an exhaustive review of the literature published in economic journals cover the past 25 years. The results in this literature are strikingly consistent. Economists have found no evidence that professional sports teams have a measurable economic impact on the cities that host them. Sports economists concur that pro sports are not the cause of economic development; they, rather, the effect if it. We have used a model designed by the Federal Reserve Bank to project the potential economic impact of an NBA Franchise on Louisville. This model adjusts for substitute spending and for wage leakage. The model projects that benefits from new jobs and local taxes are projected at $2.4 million a year. Given the average tenure of an NBA team, this stream of benefits would have a net present value of just under $19 million. This is insufficient to support the costs of attracting an NBA team, which, based on experience in other cities, can easy run up into the hundreds of millions. Even when a city has a new facility like the Yum Center available, costs to adapt it to the ideal mix of uses to suit the NBAs current business model can be well over $100 million. Due to changing business models and technologies, cities are required to undertake expensive facility renovation at regular intervals. As well as stiff front-end charges, Louisville would need to commit to multi-million dollar renovation programs for Yum Center going forward to keep an NBA franchise in town.
Coates & Humphries, Do Economist Reach a Conclusion on Subsidies for Sports Franchises? North American Association of Sports Economists, August 2008. Cambridge Economic Research
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Pittsburgh 2.4 1.8 Vancouver 2.2 Cincinnati 2.1 Kansas City 2.0 Virginia Beach 1.7 El Paso 1.7 Austin, 1.7 Louisville 1.3 Sources: Rascher & Rascher, NBA Expansion Viability Study; Sacramento Kings Relocation: 10 Cities; Cambridge Economic Research. Since 1990, 27 of the 30 cities that host NBA teams have built new arenas at a total cost of $5.1 billion. Even when a city has a facility constructed, costs of bringing a franchise team there can be staggering. Although St. Louis had spent $280 million building a new football stadium after it lost the NFL Cardinals to Phoenix, it cost the City over $100 million in lease break fees, relocation fees, lease rights, costs to build a new practice facility, and stadium upgrades to attract the Rams NFL team to the city (Table 2). Missouri Senator Tom Eagleton reflected the general sentiment when he said; Why do the deal for the Rams? Because some people around the nation think St. Louiss best days are behind us. We needed to do something dramatic.
Table 2
Relocation Fee, Moving Expenses Practice facility Lease Rights Stadium Improvements Total Costs
Note: 1995 prices adjusted for inflation using CPI
39 20 23 12 15 $109 Million
Table 3 looks at the average stay in hometown cities for footloose NBA franchises. These teams are rumored to be considering moving to new venues. It shows that the average stay in one city for these teams is 11 years.
Table 3
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Avg. Length of Stay in Home City Source: Mark S Rosentraub, Major League Losers, 1997
The significant investment by local governments suggests that the economic returns of professional sports must
Cambridge Economic Research
Without a doubt, professional sports teams are big business. But just how big is big? One way to put this into
Cambridge Economic Research
Santo, Charles and Gerald Mildner, Sport and Public Policy, Human Kinetics, 2010.
Younger Associates, Economic Impact of the Memphis Grizzlies, 2010
NBA Attendance
Percent from Outside of Metro Areas
Source Santo & Mildner Siegfried & Zimbalist TAMS 2006 Report Synthesis Date 2010 2002 2012 Percent Visitors 5% to 30% 5% to 20% 10% 15%
Table 4-A shows our projections of visiting fans from outside of the metro area that an NBA team would attract to Louisville, which we estimate at just over 100,000 a year.
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Baade, Robert A. and Allen R. Sanderson, Employment Effect of Teams and Sports Facilities, in Noll and Zimbalist, eds., Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums, The Brookings Institution, Washington, D.C., 1997, pp. 92-118. 5 Coates & Humphries, Do Economist Reach a Conclusion on Subsidies for Sports Franchises? North American Association of Sports Economists, August 2008.
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Table 4-A
Leakage of NBA Wages Approximately 53% to 75% % of total NBA revenues go to the players as salaries and benefits. For example, $70 million of the Memphis Grizzlies $98 million annual operating budget goes to salaries of player, high paid executives, and team owners. The top NBA players draw salaries of $13 million to $27 million a year, with the average being $5.1 million. Studies commissioned by pro sports boosters assume that 100% of these salaries go into the local economy. The wages of very high income individuals (the top 1%) have less local economic impact than those of average citizen. This is because very high income households have high marginal tax and savings rates. They make large federal tax payments and save a high proportion of their incomes, which leaks out of the local area and into the global financial markets. Neither federal taxes nor savings gets recirculated in the local economy. Most very high income earners spend more time travelling than the typical worker and many have multiple residences. They are therefore more likely to spend money out of town than is normal. Because a large share of the consumption expenditures of these individuals is on goods produced or sold outside the local economy, the standard economic expansion multiplier overstates the first-round effects of payroll and team profits on the local economy. In order to shed light on the proportion of NBA players salaries that leak out of their host economies, Siegfried and Zimbalist obtained home address data for all NBA players. Based on these data, they found that only 29% of NBA players lived in the hometown of each U.S. team. For all workers in those same cities, 93% lived in the local area. The difference between basketball players and other workers has important implications for the economic impact of local expenditures as over 70% of salaries leak out of the local economy as soon as they are paid and thus have much less economic impact than wages paid to other workers.
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Survey of Economists
George Bernard Shaw, the Irish playwright and co-founder of London School of Economics, famously jested that if all of the economists in the world were laid end-to-end, they would not reach a conclusion. In a 2005 survey of a random sample of American Economic Association members, Robert Whaples(2006) asked economist if they agreed or disagreed with the following statement: Local and state governments in the U.S. should eliminate subsidies to professional sports franchises. Possible responses were Strongly Disagree, Disagree, Neutral, Agree, and Strongly Agree. Figure 5 shows that 85% of Economists agree that professional sports team should not be subsidized. Of these, twothirds of economists strongly agree. Only 5% of economists disagreed that sports subsidies should be stopped. 6 This question was one of about 20 policy issues included in the survey. It received the highest degree of consensus among economist of all of the 21 policy issues.
Figure 5
Whaples, R., Do Economist Agree on Anything? Yes! The Economists Voice, (3)(9) 2006.
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Economic impact studies conducted over the past 25 years conducted by sports economists concur that pro sports are not the cause of economic development; they are the effect of a healthy local economy. Professional sports teams are not drivers of economic development. They are the result of a strong economy and a robust and diverse tax base that can provide generous subsidies to pro sports teams. They are not economic catalysts; they are economic complements.
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US Census Bureau, 2010 MSA Business Patterns for Louisville/Jefferson County, KY-IN MSA. Lertwachara &. Cochran, 2007
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Net jobs created by pro sports teams, both direct and indirect Increased City income taxes on astronomical team salaries Growth in the Citys 7.5% hotel tax receipts.
The model also counts sales taxes. In Kentucky, however, sales taxes accrue to the State rather than to local jurisdictions, so they are not included in our projections for the Metropolitan Statistical Area (MSA).
Baade, Robert A. and Allen R. Sanderson, Employment Effect of Teams and Sports Facilities, in Noll and Zimbalist, eds., Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums, The Brookings Institution, Washington, D.C., 1997, pp. 92-118 Cambridge Economic Research
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*Uses mid-points of the ranges to estimate net benefits for Louisville. Sources: Rappaport & Wilkerson, Economic Review, Federal Reserve Bank, First Quarter 2001
Attendance at home games has been estimated by multiplying the number of home games by projected attendance. Average attendance has been projected based on Memphis Grizzlies 2012 average home game attendance of 15,700. Based on data provided in Table 4 of this report, we have estimated that 15% of the NBA audience will be from outside of the MSA. Attendance at the games by visitors from outside of the Louisville metro area is projected at 103,620. Hotel tax revenues generated by these visitors and by visiting teams. The latter are projected is estimated in Table 9. The city gets 7.5% of the 15% hotel tax in Louisville. It is estimated that 50% of visitors from outside of the MSA will spend a hotel night in the City; others will be day trippers from the bi-state Kentucky-Indiana region or will stay with friends or relatives while visiting. Hotel taxes from visiting teams are projected by assuming that team members will spend 2 nights in Louisville during each of the 44 home games per season that would be held there. Based on these estimates, we project total hotel taxes from a potential NBA team in Louisville at $420,000.
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Table 9
* Assumes 50% day trips from within the bi-state region & 15% homestays. ** Louisville CVB *** The City of Louisville gets 7.5% of the 15% hotel tax. Source: Cambridge Economic Research.
Due to the high wages commanded by major league ball players, the major benefit of an NBA team to the City and its residents would be the income tax that would accrue to the City on the wages paid to NBA Players. Louisvilles earnings tax ranges from 1.45% for non-resident workers up to 2.2% for residents. We have assumed that 29% of team will reside in the Louisville MSA and that 71% will live outside of the MSA. Of the players that live in the MSA, it is assumed that 50% live in the City and 50% live the suburbs of Louisville MSA, based on the proportion of the population in each place. The total annual taxes on Team Salaries are estimated at $1.27 million (Table 10).
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Table 10
$ $ $ $
$ $ $
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(1) Based on a 2002 survey by Siegfried & Zimbalist that showed that 71% of NBA players lived outside of their hometown. Assumes that 71% of the team lives outside of the Louisville MSA (Siegfried & Zimbalist, 2001). Of the 29% that live within the MSA, it is assumed that 50% live in the city and 50% live in the suburbs. (2) See Table 4. (3) Average wage for jobs in Amusement & Recreation, Hotel & Restaurant, & Service Industries In Louisville MSA, US Census Bureau, 2010 MSA Business Patterns (4) Assumes that 50% of workers live in the city and 50% live in the suburbs. Sources: Rappaport & Wilkerson, Economic Review, Federal Reserve Bank, First Quarter 2000 & Cambridge Economic Research
The 500 net new jobs that will be created (see Table 7) will also yield additional city income tax benefits. We have used the average wage for relevant service industries in the L ouisville MSA ($18,500) in order to project wages and taxes from these spinoff jobs. They are expected to produce $169,000 in income taxes. The combined income tax benefits from team wages and wages from spinoff jobs is estimated at $1.4 Million a year.
$ $ $ $
Sources: Tables 7,8, & 9; Rappaport & Wilkerson, Economic Review, Federal Reserve Bank, First Quarter 2001.
How do our projections of $2.4 million annual benefits from an NBA franchise in Louisville compare with potential costs? Table 3 of this report shows that, for the teams that are currently rumored to be considering
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Younger Associates, Economic Impact of the Memphis Grizzlies, September 2010. Rappaport & Wilkerson, 2001. Projections adjusted to current dollars using CPI.
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Conclusions
The projected annual stream of $2.4 million in economic and fiscal benefits to Louisville has a net present value of just $18.6 million over the 11- year life expectancy for an NBA franchise team. It is unlikely that this could begin to cover the public costs of attracting an NBA franchise which could easily run up into the hundreds of millions. In addition, facility adaptation and maintenance costs going forward would be an onerous burden on taxpayers in a city of Louisville scale and tax base.
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Amway Center is Orlando has 185 luxury suites and Barclay Center in Brooklyn has 100 suites.
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Galacia, Thomas. Sacramento Kings Relocation: 10 Cities Better for the NBA Than Virginia Beach, Bleacher Report, Aug. 23,2012.
Lavoie, M., and G. Rodriguez. 2005. The Economic Impact of Professional Teams on Monthly Hotel Occupancy Rates of Canadian Cities: A Box-Jenkins Approach. Journal of Sports Economics, 6(3): 31424. Leeds, M. A. 2007. Do Good Olympics Make Good Neighbors? Contemporary Economic Policy. 26(3): 460-467.
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Authors Bio
Margaret Collins, AICP Director Cambridge Economic Research 71 Putnam Ave. Cambridge, MA 02139 Email: econresearch@comcast.net Margaret Collins, Director of Cambridge Economic Research, is certified urban planner with over 20 years of experience in analysis of public policy for economic development. She is an expert in economic and fiscal impact analysis of policy initiatives to catalyze tourism, including professional sports franchises and convention and cultural facilities. She has advised cities, non-profits, research foundations, and economic development agencies throughout the world on the economic and tax costs and benefits of public investments in tourist-serving buildings and infrastructure. In projecting economic impacts, he firm uses a full range of state-of-the-art models and methods including: REMI; IMPLAN; case studies; costbenefit modeling; multiple regression analysis; and demographic and economic forecasting. Prior to establishing Cambridge Economic Research, Ms. Collins was Director of Land Use with Economic Development Research Group. Previously, she was Director of the Scotland office of Roger Tym & Partners where she worked with international urban renewal agencies and developers on a range of tourism, economic, and real estate development projects. She has a MA in Urban Planning from Washington University and a BA in History and Political Science from Webster University and is a former Chairman of the American Planning Association. She has published a book and several articles on the economic impacts of convention centers and professional sport stadiums. She speaks regularly on these topics.
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