Demolishing Sports Welfare

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.