Skip to content

Economic power and sports success

2013 July 29
by Victor Matheson

Yesterday the US Men’s national team wound up a successful Gold Cup, the biannual North American soccer championship, by beating Panama 1-0 in the title match. The US win was an all-time record 11th in row for the Americans who dominated the tournament from start to finish. While the US does not have a particularly strong soccer tradition, winning the title came as no surprise. Since the tournament began in 1991, the US has a 48-6-7 record in the tournament, has won the championship 5 times, and has another 4 second place and 2 third place finishes to its name. There is one simple reason for the Americans’ success: economics.

There is a fairly lengthy scholarly literature on the relationship between sports success and economics. Whether one looks at medal count in the Olympics or FIFA rankings for either men’s or women’s soccer, there is a strong correlation between population, GDP, and GDP per capita and sports success. A large population gives a country a large pool of potential athletes from which to draw, and a high GDP or GDP/person gives the country the resources required to adequately train its athletes.

Thus, it should actually come as no surprise that the US is the dominant soccer-playing country in its region. It has a GDP five times larger than the rest of North America combined and a population that also exceeds the rest of the continent. Aside from the US, only Mexico, a six-time winner of the Gold Cup, is consistently a real challenger for regional supremacy, and again it is all about economics. Excluding the US and Canada, Mexico’s population is larger than the rest of the continent combined and its economy is roughly three times bigger. Indeed, Canada, with the region’s second largest economy and third largest population, is currently the real underachiever.

So, kudos to the Americans for their on-going win streak and latest championship, but let’s keep things in economic perspective. Aside from a nice win against economic and soccer power Germany to begin the streak, the American’s last 10 wins have come against countries with a combined GDP of roughly the same size as Boston’s.

Why MLBPA Slow to Protect Non-Users?

2013 July 26
by Brian Goff

Milwaukee Brewer Ryan Braun surpised the baseball world this week by admitting his use of steroids and accepting a suspension.  Of course, after failing a drug test and avoiding suspension on a technicality, he only admitted the obvious and after months of denial.  I suppose there is some honor in that.

My question for players is why hasn’t the MLB Player’s Association emerged as a stronger voice against PED use?  Yes, there should be due process protections for suspected players, but the MLBPA has never stepped out front on this issue.  And, yes, there are now indications that times may be changing as I note below.  For a long time, however, the pressure has run the opposite direction — protect the users, silence the critics.  That’s certainly the case a few years back when Mets player representative, Tom Glavine, told fellow Met Turk Wendell to shut up about PED use.

The campaign to reduce or eliminate steroid use in baseball usually comes across as either a push by outsiders (media, drug testers, former players…) or by league management.  Yet, the strongest case is internal — clean players against those who are users.  Roy Oswalt stated the case with force in this 2009 article:

“It does bother me,” Oswalt said. “Especially for the guys that went out there and did it on talent. We’re always going to have a cloud on us, and that’s not fair at all. “The ones that have come out and admitted it, and are proven guilty, [their numbers] should not count. I’ve been cheated out of the game,” Oswalt continued. “This is my ninth year, and I’ve done nothing to enhance my performance, other than work my butt off to get guys out. These guys [who took PEDs] have all the talent in the world. All-Star talent. And they put times two on it. “I’m going out there with the ability God gave me. They have that ability, too, and they’re putting something on top of it.”

Such strong statements by players are rarely heard and certainly not taken up as a banner by the Player’s Association.  Roy Oswalt is not the voice of the MLPA.  The internal politics of the MLBPA that continues to drag its feet intrigues me.  What drives this deference to users?  Why isn’t the MLBPA out front on the matter?  Why isn’t it pushing for longer suspensions and more frequent testing?  Why are players still snared by backdoor investigations of labs rather than up front testing?  The political possibilities include:

1. A majority of players are users and dominate the MLBPA’s voice through sheer numbers.  That would not have been hard to believe in the 1990s or early 2000s, if the now believable statements by players like Jose Canseco or Ken Caminiti were, indeed, accurate.  While, clearly, many players are still using, one would think that the percentage has dropped, even with MLB’s rather weak testing and penalties.

2. Star players are at risk who have greater than average influence on the association’s leadership.  Whether Ryan Braun, or players on the list associated with the Florida lab such as Alex Rodriguez, these are high profile players.  Their status makes player reps and union leadership reluctant to be aggressive.

3. The institutional culture of the MLBPA enforces a fraternal conspiracy of silence.  Members of close-knit organizations or insiders frequently adopt standards that strongly discourage negative revelations, even when it works to the detriment of the group, and, in retrospect, even seems stupid down the line.  Anyone who steps out of line becomes a disloyal “narc.”  This kind of thing is seen among police, military units, and even in the Penn State case.  Glavine’s assault on Wendell fits this to a tee.

Whichever of these or some combination of them have held sway, a couple of pieces by ESPN’s Buster Olney signal that the non-user players are becoming more vocal against the users.

“Who Scores Games by Hand Anymore?”

2013 July 14
by Phil Miller

The NYTimes has an article about keeping score at baseball games.

But today’s fans go to ballparks that feature upscale restaurants, play areas for children and other attractions besides the game. Digital apps aside, there are also e-mails and social media sites to check, photos and videos to shoot, phone calls to make.

I didn’t become a baseball fan until after I graduated high school and I didn’t go to my first baseball game until I was 21 years old.  A friend and I drove from my hometown of Sioux City, Ia to Kansas City to watch the Royals play the A’s and Jose Canseco.  I was too excited to see my first game to even think about keeping a record of the game and, admittedly, didn’t realize there was such a thing as formally keeping score.  So I was well into my adult years before I learned to keep score.

The first time I remember keeping score was at an Omaha Royals game, probably in 1989.  I bought a program and found a scorecard inside, got a pencil, read the program’s instructions on how to keep score, and, well, kept score.  It wasn’t a hard thing to do.

I usually don’t keep score when I go to games these days and I can’t tell you the last time I kept score at a professional game.  If I’m at a game, I’m likely there with my family and I’d rather talk to them and take in the atmosphere of the game.   Oh, and I must use my smartphone.

The last time I kept score was a couple of weeks ago at my 11 year-old’s baseball game.  If you’ve ever seen 11 year-old baseball, there are a few hits.  But there are lots of BB’s, K’s, HBP’s, WP’s, PB’s.  Oh, and there are lots of E-x’s where x = (1,2,…,9).  So they kept me busy.

And off my smartphone.

‘Old Urn’ Itself Could Alter Aussie Ashes Tactics

2013 July 10
by Liam Lenten

The oldest prize in Test cricket is once again up for grabs. Commencing earlier today, Australia is taking on England away from its own backyard in an attempt to regain the Ashes. Michael Clarke’s men have shown transparently that this one is the series they have the greatest desire to win, despite the old urn’s grossly underwhelming aesthetic stature.

Following its creation as the spoils of victory in series between these combatants in 1882 (though curiously never designated as such formally), its place in the sport as a bilateral trophy (one that can be won only by either of two teams) was unique for almost 80 years.

This changed only during the remarkable 1960/61 West Indies tour in Australia, which was capped with the minting of the Frank Worrell Trophy, to be contested thereafter between those teams. There has more recently been a real proliferation of these trophies, especially since the mid-1990s.

Currently, with 10 Test playing nations involved in World cricket, there are consequently 45 bilateral sets of opponents, and a total of 11 different bilateral trophies (effective since 2008) are now actively played for periodically, with Australia being the ‘worst offenders’, playing for 6 such trophies out of its 9 Test rivals.

Cricket fans – please feel free to disagree, but one’s personal view is that with the Ashes an obvious exception (given its history), many of these other bilateral trophies are surplus to one’s interest above and beyond the simple significance of the Test series and its ultimate result, and often play a role of little more than a shameless gimmick, and a diminution of the actual cricket.

Nonetheless, in any individual Test series, the simple tactical objective is generally to win the series, and if that becomes mathematically impossible or even improbable, a series draw is still better than a loss.

A complicating factor in cricket, however, is that there is no universal consensus – the ICC ranking system aside – on the value of a draw relative to a loss, unlike other sports where league points make this explicit (one-half in many sports, one-third in modern soccer). The existence of a trophy, assuming that ‘holding’ it really matters to players and fans, muddies the tactical waters, as the holder has to be beaten for the ‘silverware’ to change hands.

There is relevance in this setting of interest to microeconomists through incentives and strategy. Sporting contests have much potential to tell us economists more than a thing or two about the way firms behave in duopolistic industries where the competitors are not equally resourced.

Assuming there is some value to holding the trophy, potential follows for this value to skew attacking and defensive tactical decisions of both captains, comparative to the identical series scenario where there is no trophy on the line.

This upcoming series can be used to illustrate a textbook case of how a bilateral trophy being at stake may just alter team behaviour at the margin. However unlikely you think it, suppose the series is level at 1-1 after four Tests, and that late on day five of the fifth test, the final and deciding game is on a knife’s edge (and that a draw is still a comparable possibility).

Since 1-1 is not good enough for Australia to return home with the prize (England currently holds the Ashes), it is easy to envisage how Michael Clarke would throw caution to the wind to give his XI every possible chance of winning the decider, not to mention what Alistair Cook’s ‘game theoretic’ tactical response might be.

In the counterfactual that there exist no Ashes for him to regain, rather it’s purely the series outcome that matters, one might imagine how he may turn defensive to suffice for a draw and (arguably) claim a moral victory in levelling an away series against a significantly more favoured team. The inclination for him to do this might be accentuated if his captaincy and/or personal form were under scrutiny during the series, with equal honours perversely providing him some measure of vindication.

Even if you summarily reject any possibility that Clarke would ever sway toward that tactical inclination, you might be willing to accept how Zimbabwean skipper Brendan Taylor would analogously almost certainly opt for any stalemate within reach at the death of an away series to their neighbours – the World top-ranked South Africans.

At any rate, I suspect that fans of Australian cricket will have a wide range of views about how they will feel about a drawn series. Many will consider it equivalent to a series loss, since the Ashes are not regained either way. Others like me, with the recent 4-0 whitewash in India still fresh in the mind, will still take some matter of pride in averting a third successive series loss against the old enemy.

MLB Closers — Role Players with Rock Star Reputations

2013 July 9
by Brian Goff

In 1988 for the Oakland Athletics, Tony LaRussa initiated his strategy of using Dennis Eckersley as a 9th inning, only-when-leading relief pitcher – a “closer.” The move helped the A’s and resurrected Eckersley from an over-the-hill starter to Cy Young and MVP winner. The success of the Athletics and Eckersley popularized the practice with it eventually attaining universal adoption across MLB. Specific elements of the Eckersley case made the strategy make sense. He was an aging starter with a lot of inning mileage in his arm. Restricting his innings and making them very predictable so as to ease warming up improved his performance and extended his career while helping the team.  Beyond his case, however, was the the universal adoption of the practice evidence of it’s wisdom or a case of mindless managerial imitation?

Among all closers over the past 25 years, the Yankees’ Mariano Rivera leads the pack as the most celebrated. Yet, one can make a strong case that he has been underutilized. Arguably, Rivera’s most impactful year was 1996, which preceded his use as the 9th inning closer. At that time, John Wetteland filled the Eckersley-esque role. By simple metrics, Wetteland performed very well, leading the league with 43 saves. Rivera’s numbers, however, both conventional and more sophisticated ones, bettered Wetteland while Rivera pitched nearly 70 percent more innings.

Glaring holes crop up in the universal adoption of the closer strategy. Foremost, as in Rivera’s case, it underutilizes great talent. The rationale might be summarized as “this guy is really effective, so let’s pitch him a lot less and only when we are ahead in the 9th inning.” Where else would that kind of thinking fly? LeBron James is killing the other team, so let’s save him until late in the 4th quarter to help preserve leads? Not only have closers become a universally accepted norm in MLB, but the successful ones command very high salaries. Rivera’s salary has rivaled that of the best starting pitchers even though he pitches 3 to 4 times fewer innings. Would a team pay huge bucks for a pinch hitter, even a great one by historical standards? (The fact that by some sabermetric measures, a reliever like Rivera can influence wins by half as much or more than a starting pitcher like Justin Verlander or Roy Halladay only calls into question those metrics. )

No doubt, certain pitchers, even though very effective, may be better suited to shorter relief appearances because of limited variety of pitches, pitching mechanics, or other issues as with Dennis Eckersley. Maybe Mariano Rivera and many other marquee closers fit this bill. Nonetheless, the nearly exclusive use in the 9th with leads defies easy explanation. Why not use the best relief pitcher in the most dangerous, pressure-filled situations? This is how the best relievers prior to the Eckersley era had been employed whether Bruce Sutter, Goose Gossage or others. Predictability of use, and therefore, ease of mental and physical preparation is sometimes offered as a reason, but use in tight games in pressure-filled situations is fairly predictable too.

The highly structured, ahead- in-the-9th inning (once in a while tied) is even harder to understand for teams struggling to win games. Perversely, it limits the best relief pitchers on the staff to situations that arise infrequently, or, else, puts them in “get-some-work-in” situations that matter very little. With the Yankees regular season success over his career, Rivera enjoyed many opportunities that fit the closer structure. However, in playoff series where the Yankees have struggled for leads, Rivera barely appeared. For instance, in the 2011 AL Championship Series, he pitched only one meaningful inning over 6 games (along with 2 others in blowouts just to “get work.”). Imagine any other player or any other sport where you pay a health guy $15 million just to sit on the bench in key situations.


The Sports World is Seriously Ill

2013 June 12
by Skip Sauer

Last night I saw Costa Rica’s Bryan Ruiz pelted with water bottles and who knows what else when attempting to take a corner kick at the Azteca in Mexico City.  I thought for a moment that CONCACAF should impose a ban on future games being played there, before wondering what the consequences of such action might be.  Taking action could be futile or ill-advised, and might make things worse.

Here’s an apparent example of futility.  Two years ago the fans of Olympiakos — a perrenial power in Greece and the 2013 UEFA Champions — threw objects at the players of their arch rivals Panathinaikos in the fifth and final game of the Greek Basketball League playoffs.  As a conseqeunce, Olympiakos was dealt a penalty, being forced to play six home games “behind closed doors in the following season.”

Last night they did it again, throwing flares on the court, and refusing pleas for order.  Their team was losing 76-72 with 1:30 to play in game three of the five-game finals and their team down 2-0.  Deja vu.  The game was abandoned and Panathinaikos was awarded the Greek title (here’s an account from  What will it be for Olympiakos next year?  A 12 game ban?  Will the fans care?

Here’s another inexcusable insult, and an example, as in the Azteca last night, of caution and discretion in taking action.  Tonight it went public that Howard’s Rock, the centerpiece of the gametime ritual of the Clemson Tiger football team, was recently vandalized.  That is very sad news (here are pictures of the rock before and after), and as I am a Clemson partisan, it’s also infuriating.  Perhaps my feeling of fury is why news of the defacing is only surfacing two weeks after the event.  Regardless of who did the deed, until proven otherwise most Clemson fans will think that a fan of their arch rivals, the South Carolina Gamecocks, was responsible.  And South Carolina’s baseball stadium is where the Clemson team was playing in an NCAA regional on June 1, where tempers could have hit the boiling point.  Update:  this was probably not the reason for the slow release of information.  According to this story, Howard’s Rock was intact on June 2, and the incident was not reported to police until June 3, after the Tigers had been sent packing from the South Carolina regional by Liberty.

Caution and discretion, and leniency, may have helped bring us to this ugly place, however.  And that “caution and discretion” may be the prudent course of action in these cases is worrying indeed.

Just over two years ago, Alabama “fan” Harvey Updyke poisoned the oak trees at Toomer’s Corner — the focal point of Auburn football’s post-game celebrations.  The oaks were cut down six weeks ago.  Updyke was released from prison last Friday, perhaps too soon.

The sports world is seriously ill, and I have no idea how to cure it.

MLB’s Best and Worst Managers and GMs

2013 June 11
by Brian Goff

Over the past 40 years, who are the best MLB managers and general managers?   I recently explored this question in an academic piece published in Managerial and Decision Economics.  Of course, one could just take winning percentage or championships won, but where managers have taken over successful teams, continuing that success is not as impressive as turning a team around.  In addition,  some franchises, such as the Yankees, are located in large metropolitan areas and given league revenue sharing practices, can turn this population base into a big financial advantage.  Finally, managerial relationships are hierarchical — the owner answers for everybody, the general managers, typically, makes roster decisions with managers making on-the-field decisions.  The methods that I employed took account of all of these issues using data from 1970-2011.

Interestingly, in comparing managers with GMs, the latter didn’t matter much prior to the 1990s.  Or, at least, very little difference existed between GMs so that one was just as valuable as another.  In the 1990s onward in the “Moneyball” era with much more attention paid to predictive characteristics of performance by some GMs rather than simply how players look in their uniform or the most obvious physical attributes, the general manager role exceeded that of managers in terms of explaining winning and losing.

      Top 10 Managers:

  1. Bobby Cox (Toronto, Atlanta)
  2. Danny Murtaugh (Pittsburgh)
  3. Walter Alston (Los Angeles)
  4. Earl Weaver (Baltimore)
  5. Danny Ozark (Philadelphia, San Francisco)
  6. Tony LaRussa (Chicago AL, Oakland, St. Louis)
  7. Davey Johnson (Cincinnati, Baltimore, New York NL, Los Angeles, Nationals)
  8. Sparky Anderson (Cincinnati, Detroit)
  9. Joe Torre (Atlanta, New York AL, Los Angeles)
  10. Jerry Manual (Chicago AL, New York NL)

Honorable Mention: Ron Gardenhire, Dick Williams, Terry Francona, Dusty Baker

With the recent retirement of Tony LaRussa, none of the Top 10 are still active.  Among the active managers, Gardenhire, Fancona, and Baker head the list.        


      Top 10 General Managers 

  1. Brian Cashman (New York AL)
  2. Bob Howsam (Cincinnati)
  3. John Schuerholz (Atlanta)
  4. Theo Epstein (Boston)
  5. Joe Burke (Kansas City)
  6. Joe Brown (Pittsburgh)
  7. Paul Owens (Philadelphia)
  8. Walt Jocketty (St. Louis)
  9. Al Campanis (Los Angeles)
  10. Haywood Sullivan (Boston)

Honorable Mention: Dan Duquette, Ron Schueler, Joe Gariagiola, Pat Gillick

A natural reaction to this list might be “Cashman has all the money to spend — no wonder he’s on top.  However, his individual contribution and ranking already takes account of the size of the Yankees’ market as well as taking over a team already enjoying a degree of success.  On the other hand, given that Theo Epstein is still active and his new team, the Cubs, are not faring so well, at least so far, his ranking would likely fall with expanded data.

There are some caveats, naturally:  individuals whose careers overlap 1970 do not have their whole performance taken into account.  At the time of compiling the data, I didn’t have GM data farther back.  Even with such data, the comparability of the league over time diminishes.

Here is a link to a draft version of the article on which these results are based.

Correction:  A commenter raised a question about Billy Beane, the Oakland GM of Moneyball fame.  I rechecked my results.  He should have been listed 7th among GMs.  An oversight on my part.

Sir Alex & His Peers

2013 May 29
by Brian Goff

Most U.S. sports fans don’t know who Sir Alex Ferguson is much less his accomplishments as manager of the most highly valued sports franchise in the world,  Manchester United. In his 27 years, the “Red Devils” have won 13 Premier League titles, 2 European Champions League trophies, and assorted English tournaments.  He stands along the most successful and recognizable managers such as Vince Lombardi, Don Shula, or Tom Landry (NFL),  John Wooden or Mike Krzyzewski (NCAA), Casey Stengel, Joe Torre, or Tony LaRussa (MLB), Red Auerbach (NBA), or Scottie Bowman (NHL).  In terms of league titles, Sir Alex exceeds them all.  Of course, their degree of revenue-sharing differs widely across leagues so that such comparisons are relatively crude.

What makes these managers successful for so long?  The individuals listed above achieved success over decades with different personnel.  Even the ones with financial advantages, like Ferguson, far exceeded the success of their closest peers, predecessors, or successors who held similar advantages.  One could read the books by these coaches and coauthors, but the success question  is much more difficult to answer than many might think.  The “how I did it” books resemble the variety of golf swings among great golfers – many unique and noisy elements are folded into the critical and common elements. Furthermore, a new idea, a key player or two, or just lightning in a bottle can make a manager successful for a short time.  In my book, From the Ballfield to the Boardroom, I explored these common elements in more detail.  What stands out includes

Eye for Talent and Its Application: These managers could spot players with skills useful for their teams.  This includes star players along with role players.  Imitators of Vince Lombardi under-valued this contributor to his success and over-valued his verbal abuse.  The skill goes beyond merely recognizing skill players, however, and involves making the best use of them.  Earl Weaver, the longtime Baltimore Orioles manager, liked to say, “I focus on what players can do, rather than criticizing them for what they can’t.”  Of course, part of the job involves seeing where a player has outlived his role.  Alex Ferguson cut loose the very popular David Beckham.

Motivators:  Among long-lived managers, personalities differ a great deal, often, too much is made and too much imitation of glaring, distasteful aspects.  John Wooden, Scottie Bowman, and Sir Alex dealt with players in very different ways.  For whatever reason, players responded to their instruction.  Wooden liked to say, “it’s not what I know, it’s what they do.” Player-management struggles were not part of the equation. Players got with the program or moved to the bench or off the team.  Randy Moss stopped his antics when he signed up with Bill Belichick, and when he started them up again, he found the door quickly.

Inflexibly Flexible:  Most of these managers present a paradox.  There is no doubt who was in charge.  No internal struggles for control, or short-lived ones.  They all held firm ideas about what they wanted to do.  However, over the course of their careers, they bent with trends.  Interestingly, few of them were really noted as innovators.  Innovators sometimes make big splashes, but long run success is more than just a good idea or two.  On the flip side, they adapted to changes in the game.  They didn’t hold on to the past. Various ones adopted a slogan such as “when I’m through changing, I’m through.”  In fact, whenever the adaptation slowed down, the success did also, as one could observe with Bob Knight or Tom Landry.

The Hidden, Unexpected Public Costs of a Stadium

2013 May 21
by Phil Miller

The state of Minnesota has found that it’s expected revenue stream from new e-gambling games will not be sufficient to fund a new Vikings stadium.   The practical problem for the state government to solve is how to get people interested in e-gambling.  The answer is: with a tour of state officials and other vested interests (HT Neil DeMause).

To drum up interest in the electronic games, Allied Charities will launch its tour June 10. Leaders from the Minnesota Gambling Control Board, the Minnesota Department of Revenue and the Minnesota Licensed Beverage Association will be available to answer questions. E-games manufacturers and vendors will also be available, Lund said.

The idea is to let charities get a firsthand look at the products now available, answer questions about installation, customer response, tax ramifications and more, he said.

Roughly 1,200 charities are licensed to sell the e-games in 2,800 bars and restaurants and fraternal halls across the state.

Since the games were launched last September, about 200 sites have made e-bingo and e-pulltabs available to customers.

…“Our hope [for the tour] is we increase money for our [charity] missions by selling more games, which in turn provides more tax revenue for the state, and ultimately we hope enough revenue to pay for the stadium,” Lund said.

Taxpayers were told that the new stadium would not be funded from the general fund, so the state created a new product to tax to fund the stadium.  But why couldn’t e-gambling revenues be put into the general fund?  Not putting them in the general fund is an opportunity cost to the state.

The money spent on e-gambling also doesn’t come out of thin air.  It probably would have been spent elsewhere in the state, probably on something taxable.   Here we have another opportunity cost to the state.

Also, the state officials presumably would have had better things to do with their time rather than touring the state, so time spent trying to drum up interest in e-gambling gives us another opportunity cost to the state.

To paraphrase, there ain’t no such thing as a free stadium.  Anybody who tells you otherwise is pulling your e-tabs legs.


Edmonton Arena Deal Finalized

2013 May 16
by Brad Humphreys

The Edmonton City Council passed a bill yesterday authorizing a package amounting to $480 million in funding for construction of a new arena in downtown Edmonton.  This appears to end more than 5 years of bickering over the financing of this proposed new arena.  This $480 million dollars in financing is assumed to cover the entire construction costs of the facility, excluding land and other related infrastructure like roads, sewerage, and utilities.   The details of the financing are almost too complicated to cover in a blog post, as the financing mix consists of a mish-mash of local, provincial, and private funds from ticket taxes, property taxes, capital improvements funds, and maybe even loose change from the couches in city hall.

Since at least March 2008, the maintained assumption was that this new arena can be built for $450 million.  That cost estimate was in a document, “City Shaping,” produced by the Leadership Committee for a New Sports/Entertainment Facility for Edmonton in early 2008.  “City Shaping” contained no supporting details for this facility cost estimate.  I have seen a heavily redacted version of a 2007 feasibility report by HOK on the proposed new Edmonton arena, but it also contains no useful details about the expected cost of the facility.  I do not know anyone who has seen the supporting documents for the 2008 $450 million facility construction cost estimate.  Like every other sports facility construction subsidy debate I have observed over the last 15 years, the first cost estimate that appears in the media becomes the focus of the debate.  That first estimate assumes a mythical stature.  In the case of Edmonton, the mythical $450 million cost estimate has been the focus of a five year debate on the financing of the proposed new arena.  A few months ago, the estimate was increased to $480 million, in recognition that things could have gotten more expensive over the last 5 years.

I have a couple of thoughts on this agreement as I prepare for a round of radio and TV spots today and tomorrow here in Edmonton.  First, now that the city has come up with $480 million in funding, what are the chances that the structure can be built for $480 million?  In my opinion, it is extremely unlikely that $480 million will be the final cost of the structure.  The final cost will almost certainly be more. The original $450 million estimate is now more than 5 years old.  Arena construction costs are primarily things like steel and concrete, and lots of labor costs.  Raw materials prices are notoriously volatile, but I looked around the Stat Can web site for some information on construction cost changes. Since 2007/2008, the cost of inputs from steel foundries increased about 17%, concrete has increased about 13%, and union construction labor costs in Edmonton increased 15%.  So it seems reasonable to assume that building a $450 million structure spec’ed out in 2008 would cost about 15% more in 2013; $450×1.15 = $517.5 million.  That means the current financing package is still short $37.5 million, assuming that the original 2008 estimate of the structure cost was accurate.

But the 2008 structure cost estimate came from the team, and previous literature indicates that the initial cost estimates that come to the surface in these situations is a low-ball estimate.  Since the team owner is extracting a subsidy from the government, the standard negotiating tactic is to throw out a low-ball first offer, get the local government to agree to that figure, and let the public officials deal with the inevitable cost over-runs.  Here is a link to a recent Bloomberg article summarizing the results in Judith Grant Long’s excellent book, Public/Private Partnerships for Major League Sports Facilities.  She concludes that the final cost of a new sports facility is about 25% more than the initial cost estimate.  If the final cost of the new Edmonton arena is 25% more than the 2008 cost estimate, then Edmonton is still more than $80 million short in financing for the facility.

I have spoken with a number of public officials in Edmonton over the last 6 years about the proposed new arena.  Every time I raised the issue of cost over-runs, the response was always “we will let a contract for $450 million that explicitly states all cost over-runs beyond the contract price will be paid by the builder, not the city.”  My response was always: good luck getting a general contractor to agree to those terms.  We will soon see how easy it is for the city to strike such a deal with a general contractor.  After that, we will see who pays for the cost over-runs.

I also have some questions about the Community Revitalization Levy (CRL) that represents an important portion of the funds for the new arena.  A CRL is the Canadian equivalent of a TIF District.  It generates revenues from the increased property taxes that can be attributed to the new arena.  Property tax revenues increase because the property values surrounding the new arena increase.  According to the Edmonton Journal article linked to above, part of the final financing deal was that an additional”$15 million will be paid by the city through an increase to the community revitalization levy.”  The CRL has been a part of the arena financing deal for years.  Yesterday the city Council managed to find an additional $15 million in revenues from the CRL. I don’t understand how a CRL can be a variable source of public financing.  CRLs generate incremental tax revenues because of increases in property values.  The government cannot control property price increases.  They can control the property tax rate and the assessed value of the property.  But if they could have raised an additional $15 million from the CRL when it was proposed as part of the financing package years ago, why wasn’t the CRL contribution higher back then?