Building New Stadiums: Who Pays?

“Between 1995 and today, taxpayers have been forced to spend nearly $7 billion subsidizing NFL stadium construction and renovation projects. The subsidies amount to little more than crass corporate welfare. After all, the handouts for stadium construction and renovation projects amount to money being taken from struggling taxpayers by politicians, then funneled to the billionaire owners of the teams in order to reduce their overhead cost and increase their profits.” Taxpayers Protection Alliance [1]

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With the 2016 Summer Olympics coming up in Brazil, the age-old question of whether hosting the Olympics is worth the major public expense is once again being debated.[2] For a slightly different take, this week’s note looks at the financing of longer-term stadiums.

Public Funds for Private Teams?

In 2014, in the midst of an unprecedented bankruptcy proceeding, the city of Detroit finalized plans for the construction of a $627 million facility to house their Detroit Red Wings hockey team.[3] Public funding will be responsible for footing at least $250 million of that sizeable price tag.[4] Generally, proponents of using public money to fund sports stadiums argue that the new facilities revitalize local economies and generate new revenue streams. This was the rationale used in 2000 when the Detroit Tigers received $115 million in public funding to pay for their new stadium;[5] and the same rationale used in 2002 when the Detroit Lions used public funds to pay for 36% of their brand new, state of the art facility.[6] So, have these new stadiums delivered on their promise to revitalize Detroit’s economy? Look no further than the $18 billion bankruptcy proceeding, taking place only years later, which amounts to the “largest municipal bankruptcy filing in American history in terms of debt.”[7]

History

Despite what many taxpayers may believe, public financing for stadiums used by private teams has not always been the standard in America.[8] In fact, “with the exception of the Los Angeles Coliseum (1923), Chicago’s Soldier Field (1929) and Cleveland’s Municipal Stadium (1931), which were all built with the intention of luring the Olympic Games, all major league facilities were constructed exclusively with private funds until 1953.”[9] Fast-forward to the modern landscape, and the increasingly popular sports scene, and what you will find is owners and franchises defaulting to public assistance, even when private investment could potentially cover all costs. “Over the past 20 years, 101 new sports facilities have opened in the United States—a 90-percent replacement rate—and almost all of them have received direct public funding.”[10]

Is this Practice Regulated?

In the past, both American and international governments have attempted to put restrictions in place that limit a sports team’s ability to receive public funding for new stadiums. The problem has not necessarily been a lack of effort, but a lack of effectiveness.

The United States

With the 1986 Tax Reform Act, federal lawmakers thought they found a way to eliminate public subsidies by “forcing team owners to finance stadiums with taxable, rather than tax-free, dollars.”[11] The legislation stopped team owners from tapping public bond markets, and it was thought that this would lead to stadiums being built with taxable money. Instead, this attempt to protect taxpayers ended up backfiring, leading to the public getting even worse deals on stadiums in order to skirt the law. The Tax Reform Act of 1986 aimed to remove sports facilities from the types of projects that could qualify for certain subsidies, but instead, “[c]ities and states borrowed more money backed by tax revenue, not less, to make sure that no more than 10 percent of a stadium’s debt payments came from a private business,” per the requirement that bonds would become taxable if “more than 10 percent of the debt for a facility built mainly for nongovernment use was to be repaid with revenue from a private business.”[12]

Then, an attempt to rectify this mistake came in 1999 from Senator Arlen Specter with the Stadium Financing and Franchise Relocation Act. It aimed to take advantage of the Sports Broadcasting Act of 1961, “which allowed a sports league to sell their television rights as a whole and not violate anti-trust laws.”[13] In order to remedy the problem of franchise relocation, partially caused by the 1986 Tax Reform Act, Senator Specter attempted to make the Sports Broadcasting Act exemption conditional “on an agreement that [sports leagues] would place 10% of television revenue in a trust fund for stadium construction. Further, once a stadium was to be built, the trust fund would be responsible for no more than 50% of the total cost of any individual stadium.”[14] Senator Specter’s main argument revolved around the fact that the main reason taxpayers were being convinced to pay for new stadiums was the threat of relocation. Ultimately, the measure failed.

The European Union

The European Union has also put regulations in place in an attempt to limit public funding of private businesses such as sports team’s stadiums, and although it could be argued that it has been more successful than American attempts, it has still not come close to solving the problem.[15] Article 107 in the Treaty on the Functioning of the European Union (TEFU) regulates any aid granted through state resources and holds that any such aid “which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.”[16] Article 107(3)(c) notes that “aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest” may be considered compatible with the internal market, and it is this provision that has been used by team owners in Europe to legally justify the use of public funds for stadiums.[17] The European Commission has thus established the following guidelines for public funding of sports stadiums:

Public funding is justified when

1.  There is a need for additional capacity for sports or cultural events or new arenas are complementary to existing facilities.

2.  There is no practical alternative to the construction of a new arena for the purpose of increasing the number of events (sports and cultural) that can take place in an area or for the purpose of increasing the number of spectators.

3.  Public co-financing is limited to the strictly necessary for the project to be realised.

4.  Arenas and stadiums are multifunctional and open to any user on non-discriminatory terms.

5.  The effect on trade and competition is limited by keeping the projects to an appropriate size for the area or they are located far from international borders.[18]

Despite this seemingly strict language, “[i]t has become apparent . . . that the Commission considers the state funding of sports infrastructures is essentially an admissible state policy objective, which does not necessarily lead to the favoring of certain undertakings and, thus, to the existence of state aid in the sense of the EC State Aid Law.”[19] This suggests that European communities are falling for the same tricks pulled in America by owners and politicians that claim that these stadiums benefit the public by increasing local spending and creating new revenue streams. The European Commission has accepted the notion that “the construction of the site for public events, which is suitable for different kinds of activities and, in addition, benefits the general public, can be seen as equivalent to the financing of an infrastructure and, therefore, does not fall within Article 87, Section 1 of the EC Treaty.”[20]

Conclusion

Ultimately, while it may not seem like there is a workable regulatory solution, the next decade will be a pivotal time for large stadium financing. As the public becomes more aware of the issue, and the cost of stadiums continues to climb, it may be up to the general public, not regulators, to start the movement toward more private financing.

[1] Taxpayers Protection Alliance, Sacking Taxpayers: How NFL Stadium Subsidies Waste Money and Fall Short on Their Promises of Economic Development 3 (Sept. 2015).

[2] See, e.g., Binyamin Appelbaum, Does Hosting the Olympics Actually Pay Off?, The New York Times Magazine (Aug. 5, 2014), http://www.nytimes.com/2014/08/10/magazine/does-hosting-the-olympics-actually-pay-off.html?_r=0.

[3] Louis Aguilar, Red Wings arena cost at $627M, could go higher, Detroit News, (Nov. 5, 2015), available at http://www.detroitnews.com/story/business/2015/11/04/report-cost-new-red-wings-arena-rises/75146516/.

[4] Id.

[5] Louis Aguilar, New Detroit hockey arena likely faces funding hurdles, Detroit News, (Oct. 22, 2011), available at http://www.andersoneconomicgroup.com/Portals/0/upload/DetNews%20hockey%20102211.pdf.

[6] Marquette University, 7 Sports Facility Rep. 3, available at https://law.marquette.edu/assets/sports-law/pdf/sports-facility-reports/sfr-v07-nfl.pdf.

[7] Monica Davey, Billions in Debt, Detroit Tumbles Into Insolvency, N.Y. Times, (July 18, 2013), available at http://www.nytimes.com/2013/07/19/us/detroit-files-for-bankruptcy.html?pagewanted=all&_r=1&.

[8] Andrew Zimbalist & John Siegfried, The Economics of Sports Facilities and Their Communities, 14 J. of Econ. Persp. 3, 96 (2000).

[9] Id.

[10] Aaron Gordon, America Has a Stadium Problem, Pac. Standard, (July 17, 2013), available at http://www.psmag.com/navigation/business-economics/america-has-a-stadium-problem-62665/.

[11] Leslie Wayne, Picking Up the Tab for Fields of Dreams; Taxpayers Build Stadiums; Owners Cash in (July 27, 1996), http://www.nytimes.com/1996/07/27/business/picking-up-the-tab-for-fields-of-dreams-taxpayers-build-stadiums-owners-cash-in.html?pagewanted=all.

[12] Aaron Kuriloff & Darrell Preston, In Stadium Building Spree, U.S. Taxpayers Lose $4 Billion, Bloomber (Sept. 5, 2012), http://www.bloomberg.com/news/articles/2012-09-05/in-stadium-building-spree-u-s-taxpayers-lose-4-billion.

[13] Zachary Phelps, Stadium Construction for Professional Sports: Reversing the Inequities Through Tax Incentives, 18 J. Civ. Rts. & Econ. Dev. 981, 1000 (2004).

[14] Id.

[15] Phedon Nicolaides, Public Funding of Stadiums and Arenas, State Aid Uncovered, Lexxion, (June 12, 2013), http://www.lexxion.eu/training/stateaidblog/2013/06/12/39-public-funding-of-stadiums-and-arenas.

[16] Id.

[17] Id.

[18] Id.

[19] Michael Siebold & Angela Klingmuller, Sports Facility Financing and Development Trends in Europe and Germany, 15 Marq. Sports L. Rev. 75, 87 (2004).

[20] Id.