The use of tax-exempt municipal debt for the construction of sporting facilities has been a very common practice amongst many government entities. The commonly held belief amongst many politicians (who often decide on the governmental subsidies for these infrastructures) and their constituents is that big sporting infrastructure construction has a substantial positive impact on local economies.
However, there have been many counter-arguments stating the opposite and arguing against the governmental subsidies to construct sporting venues. In the Tax Reform Act of 1986, there were propositions introduced to limit the use of public funding for sporting stadiums, because unlike other publicly funded infrastructures (roads, water and wastewater infrastructures, bridges, and so on,) sporting facilities provide benefit to a small number of people. Even under President Obama’s administration, there were proposals that were brought forward on the use of tax-exempt bonds for stadium construction – eventually they were rejected by the Congress.
In this article, we’ll take a closer look at the governmental subsidies for the construction of sports stadiums, their net impact on local economies and whether this type of municipal debt is worth holding or adding on to your investment portfolio.
History of Government Subsidies for Sporting Stadiums
The federal tax expenditures to support the construction of a sporting infrastructure has been going on for many decades. This expenditure entails allowing the use of tax-exempt municipal debt to finance these capital structures. Even though the justifications for the use of public funds and federal tax expenditures for these type of capital projects is quite weak there has been over $2.7 billion of municipal debt issued for the construction or renovation of a professional sports stadium since 2010.
Revenue loss for the federal government: Because the municipal debt issued for the construction of these capital facilities is tax-exempt debt, it creates a substantial tax-revenue loss. As an example: Suppose that a borrower issues $1000 in bonds at the interest rate of 11.25% to the investor who faces an income tax rate of 25%. Since the interest rate on the taxable bond is 15%, the borrower saves $37.50 from the tax exemption and the federal government loses $37.50 in tax revenue. But now assume the borrower issues $1000 in bonds at the interest of 11.25% to the investor, who faces an income tax rate of 35%. The borrower still saves $37.50 from the tax exemption, but the federal government loses $52.50 in tax revenues.
The table below shows the revenues lost since 2010 on the construction of major professional sports stadiums.
|Stadium||Team||Year of bond issuance||Year of completion||Total cost of the stadium (Millions)||Tax-exempt Municipal Bonds Issued (Millions)||Undiscounted Revenue loss (Millions)|
|Orlando Magic (NBA)||2008||2010||$ 521||$ 342||$ 134|
|Brooklyn Nets (NBA)||2009||2012||$ 1,031||$ 564||$ 239|
Consol Energy Center
|Pittsburgh Penguins (NHL||2007||2010||$ 348||$ 288||$ 90|
|San Francisco 49ers (NFL)||N.A.||2014||$ 1,310||N.A||N.A.|
Little Caesars Arena
|Detroit Red Wings (NHL)||2014||2017||$ 450||$ 250||$ 71|
|Miami Marlins (MLB)||2009, 2010||2012||$ 654||$ 494||$ 193|
|New York Jets/Giants (NFL)||N.A.||2010||$ 1,737||N.A||N.A.|
|Minnesota Twins (MLB)||2007, 2008||2010||$ 591||$ 382||$ 125|
US Bank Stadium
|Minnesota Vikings (NFL)||2014||2016||$ 1,079||$ 392||$ 88|
Source: Electronic Municipal Market Access
Construction of Stadiums and Their Net Impact on Local Economies
The most common argument that’s often used to justify the construction of a sports facility and further subsidizing it with public funds is that building a facility will expand the local economy, generate more revenues, increase consumer spending, bring more jobs (both construction and operational jobs) and, furthermore, it’s assumed that wages created by these jobs will be re-spent into the local economy. From the local government perspective, building a new sporting facility will not only revitalize the surrounding areas but potentially promote tourism for the city. This assumption also entails the potential construction of more commercial and residential properties, thus creating new revenue streams for the municipality.
However, these assumptions may not be entirely accurate or hold much weight. Below are the key reasons that refute the above assumptions.
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- Opportunity Cost: When a municipality dedicates public funds to support professional sports — or any other private investment — it loses the ability to spend those same funds to provide the public goods that are the core roles of local government. The subsidy provided to a sports facility can potentially fund public education for years to come or potentially construct highways in the respective state.
- Net impact on local economy: Often studies suggest that the money set aside for entertainment by an individual isn’t going to see much of an increase simply because there is a new entertainment option (e.g. new sports arena). The existing entertainment budget will simply shift to the newer option from the old entertainment options (local businesses, recreational activities, restaurants etc). This refutes the argument that newly constructed sports arenas will only bring more business and potentially create jobs; it will also severely impact the old business and their revenue streams. Historically, the cities that have built these sporting facilities show that sporting event revenues typically constitute a small share of a city’s economic output and these events do not employ a substantial number of people. This tells us that the overall positive impact of constructing a new sporting venue is very small to the local economy.
- Political interests over rational decision making: Especially in local governments, City officials and political leaders may see “construction of a big sports facility” as an avenue to show their efforts in local economic development and garner some goodwill from their constituents. Furthermore, these officials or politicians don’t bear the risk of “bad investment”; or in other words, if a private investor was to build a sports facility, he or she will thoroughly analyze all the risks associated with his or her investment. In addition, he or she will bear all the investment risk if that sports facility isn’t generating enough revenue to sustain its operations. This detriment doesn’t entirely apply to public officials who are making the decision of subsidizing (with public funds) these sports arenas.
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The Bottom Line
In conclusion, the government subsidizes the construction of sporting facilities and then justifies it with: it’s good for the growth of local economies, it will create jobs and increase consumer spending, but this is not entirely accurate. The sole winners from these constructions are various sporting team owners and the construction firms that will reap the benefits from these huge construction contracts. In addition, this will also give bragging rights to those politicians who can say that they’ve done some work with taxpayers’ money.
Municipal debt Investors looking to capitalize on the construction of sports stadiums must carefully analyze the revenue streams backing that debt and the potential worst-case scenarios. As mentioned, sporting venues are very unlikely to bring a positive net impact to the overall growth of local economies.
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