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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?

Stadium Improvements in Women’s Athletic Programs

2013 May 14
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by Phil Miller

The AP is reporting that the University of Missouri is on its way to building a new softball stadium to house the university softball program.  While the SEC is well-known for its prowess in football, its softball prowess is nothing to sneeze at either.  Depending on what ranking you consider, 5-66 of the current top 10 programs are SEC programs.  If Missouri is to keep pace with these elite teams and remain a perennial top-10 team, it will need to make these kinds of investments.

However, the AP article reports that the current stadium is 31 years old.  That is true of the field, but the stands were installed back in 1998 when the university installed stands at its soccer facility.  The softball field and the soccer field border one another, and it made economic sense to build seating for both fields at the same time.  So while the playing grounds are three decades old, the whole feel of the ballpark is much more modern.

What’s a Name Worth?

2013 May 13
by Victor Matheson

Go to Amazon.com today and you can buy an official Nike “US Soccer” jersey on sale for $78.99. For a mere $35.00, the clothing manufacturer Xara sells a “USA Soccer” jersey that is not licensed by US Soccer but is instead, in their own words, “A Unique Soccer Experience Representing a Country.” Apparently that “US Soccer” trademark is worth about $45.00 per shirt to Nike and the US Soccer.

Total sales of officially licensed merchandise totaled $12.6 billion in 2010 in just MLB, NFL, and college sports alone, so apparel sales are clearly big business in spectator sports. It is in this backdrop that the peculiar case of the Washington Redskins vs. the Federal Trademark Trial and Appeal Board is of interest to economists.

Over the past two or three decades, under pressure from Native American tribes and other petitioners, dozens of colleges and high schools have changed their mascots from representations of Native Americans. While Miami University (Ohio) and Southern Nazarene University both dropped the name “Redskins” in the late 1990s, the NFL’s Redskins have resisted the calls to change their mascot. This may be changing.

The Federal Trademark Trial and Appeal Board, which adjudicates questions regarding trademarks, recently heard a case requesting that the board classify the word “Redskin” as a derogatory slur. If the board deems the term offensive, the team would no longer be subject to trademark protection essentially meaning that anyone could sell merchandise in the team’s colors and with the words “Washington Redskins”. Trademark protection is the barrier to entry that allows teams to charge monopoly prices for apparel (like we saw in the US Soccer example), and the loss of that trademark is likely to drive the premium that the team can charge for officially licensed apparel from the 100% or more mark-up that we typically observe in the market towards the perfectly competitive price – good for consumers, but bad for the Redskins.

While the team’s owner, Dan Synder, say he will “NEVER” (the caps at his insistence) change the Redskins’ name, we will see how long that lasts if the team can only sell “Redskins” jerseys for $45 when they could sell “Washington Red Storm” jerseys for $100.

Tebow’s Freeze Out

2013 May 9
by Brian Goff

Why is Tim Tebow out in the cold? Why are general managers and coaches willing to roll the dice with a QB who has never played an NFL down or a struggling QB versus one who holds a winning record and notched a stylish, memorable playoff victory over the vaunted Pittsburgh defense?

Part of Tebow’s fate falls to timing.   In past posts,  I’ve referenced economist Zvi Griliches iconic article “Hybrid Corn: An Exploration in the Economics of Technological Change”. He demonstrated the acreage planted with hybrid seed took over across states, slowly, at first few adopters, then gaining steam, and finally won over even the die-hards resulting in an “S-shaped” curve depicting the growth in its use. This picture describes the diffusion of most any “technological change” whether a new corn seed, a new tractor implement, black players on Major League teams, or the use of “run-option” quarterbacks in the NFL. In the early stages of use, it’s difficult to distinguish between crazy ideas and brilliant ideas. Almost any new idea will draw vocal detractors, sometimes among people of respect and insight. Numerous NFL insiders, including those as insightful as Bill Belichick and Steve Mariucci, have denigrated the idea of the “option” and QBs suited for it as an integral part of NFL offensive strategy. Even a year or two ago, and in spite of Tebow’s success in Denver, the critique appeared weighty — enough so that the Broncos sought out another QB (albeit, a Hall of Famer) and traded Tebow. With the Colin Kaepernick’s trip to the Super Bowl with the 49ers along with others such as Robert Griffin III, it’s looking less crazy and more brilliant, less temporary fad and more permanent strategy.

I don’t mean to imply that the run-option QBs will ever come to dominate completely. One key difference between sports and agriculture is that one particular technology doesn’t necessarily swamp all others. NFL rules favor passing. Successful teams for many years have employed skilled passers with ever-increasingly complex passing schemes. The trouble is that not everyone can draft Tom Brady or Peyton Manning. The ground in Iowa and the ground in Kentucky may both be receptive to hybrid corn seed, but the same passing scheme that works in New England or Denver isn’t going to work nearly as well in some other place because a key input, the QB, does not have the skills of Brady or Manning. Insightful coaches like Jim Harbaugh and Mike Shanahan decided better to adjust the system to the talent rather than hope that a struggling young QB like Blaine Gabbert (Jacksonville) evolves into a Brady or Manning.

Alright, so Tebow came on the scene just a bit too early, why aren’t teams like Jacksonville scrambling for him now? His less than consistent passing skills hurt him. He can thread the needle on one throw and look silly on the next. Ironically, the GM who turned him out in Denver, John Elway, displayed those same traits for the first half of his career. Nonetheless, Tebow’s passing isn’t as polished as Kaepernick or Griffin. On the flip side, he has shown that he can win games, even against good defenses. A major part of the success of Kaepernick and Griffin is what they do to defensive strategy. At the end of last season, Griffin played a very mediocre passing game against the Cowboys, but because of his running threat (even with a bad knee), his running threat opened the way for his running back, Alfred Morris to have a great night with the Redskins scoring 28 points. The interaction effects between running and passing abilities of QBs with the other offensive players influences both yards gained per passing play along with yards gained by other runners. Tebow’s enormous celebrity almost certainly works against him now. Any GM and coach who bring him on board invite a national media spotlight far beyond what a newly drafted QB will bring. Don’t be fooled — coaches and GMs, in spite of voicing indifference about media and fan attention, care about scrutiny. The care a lot — ok, maybe Bill Belichick doesn’t, but that’s why he is willing to make decisions other coaches will not on matters such as not punting on fourth down. The “Christian” element of Tebow’s celebrity also surfaces as a possible obstacle to him. While I don’t doubt that some coaches, players, and, particularly, media figures roll their eyes at him, there are many NFL players who openly, if with less attention, display their faith. My guess is that his unlucky timing, inconsistent passing, and undesired media attention resolve the conundrum much better.

Maintaining a Credible Threat

2013 May 1
by Victor Matheson

Great article today at Slate from Matt Yglesias about the Sacramento Kings proposed move to Seattle. It appears as if the NBA will try to force the current Kings’ ownership to take a lower bid from a Sacramento group that includes a new publicly financed stadium than a higher bid from a Seattle group that proposes to build a largely privately financed arena. As noted by Yglesias,  “The Seattle bid, in other words, would have set a good precedent for the future of American public policy. And the owners didn’t want that.” I’m not sure Yglesias is exactly right here. There are plenty of examples in the NBA of largely privately financed arenas including those in Chicago, New York City, Boston, Toronto, Philly, and Salt Lake City.

His point about using Seattle as a blackmail threat, however, is spot on. He states, “The owners want to be able to make this move over and over again. ‘Give us a new publicly financed stadium or we’ll move to Seattle’ is a threat that works as well in Portland or Milwaukee or Minneapolis or Salt Lake City or Memphis or New Orleans or Phoenix as it does in Sacramento.” Seattle is a much more credible threat for franchise relocation than Sacramento, so unless the Seattle bid is a whole lot better than the one in Sacramento, having an open city in Seattle is worth a whole lot more to the league than having an open city in Sacramento.

One can see the most obvious example of this in the NFL. While it may seem odd that the NFL doesn’t have a team in Los Angeles, the nation’s second largest media market, in fact, Los Angeles is a credible relocation threat for just about every team in the country. The open market in LA just got the normally quite parsimonious citizens of Minnesota to cough up about $500 million for a new Vikings stadium. The Indianapolis Colts and the New Orleans Saints almost certainly have LA to thanks for their new or upgraded stadiums as well. All in all, LA is probably worth more to the NFL without a team than with a team.

“42″ and the Intangible Impact of Sports

2013 April 22
by Brian Goff

Baseball is life, or so the saying goes. The release of “42” brings back to light a story that, among its many angles and nuances, turns that saying around — life is baseball. Sports not only mirrors life but also acts as a vehicle to influence and change it. Measured solely by revenues, sports rates a relatively minor player as industries go. Summed together, professional football, baseball, basketball, hockey and auto racing generate only about $30 billion per year. Even with the major football and basketball revenue producers among college teams lumped in, the total is well under $50 billion. That’s nowhere near the $100 billion-plus figures for the heavyweights among individual companies, much less entire industries. Yet, for enormous sales figures and cult-like following surrounding a company like Apple, its ongoing buzz does not come close to sports. Steve Job and Bill Gates have enjoyed about as much celebrity as any corporate figures, but the events involving Jackie Robinson, Branch Rickey, and the Brooklyn Dodgers took place over 75 years ago and continue to inspire. Babe Ruth’s exploits in Major League Baseball will soon be 100 years old, but his name is still widely known. After 100 years, I would expect very little public awareness of names like Jobs or Gates, unless it happens through the naming of some institution.

A reply might be, the Jackie Robinson episode lives on because it centers on an important period of American history — breaking down racial barriers. Yes, but among all the individual stories that paralleled that of Robinson, it’s his that emerged into and has survived in the common public consciousness. This kind of influence, however, goes beyond Robinson and race. Sports is one of the few areas where revenues so radically understate the social impact and awareness of the business. The very existence of substantial merchandising revenues for sports teams is a tell-tale indicator of this non-monetary interest. ExxonMobil may generate $400 billion in revenue but hardly anyone walks around wearing caps, jackets, and shirts displaying their attachment as fans do for the Yankees, the Cowboys, the Crimson Tide, or Dale Jr. In this respect, sports fits with movies, vacations, special romantic moments, and a few other activities where individuals relive, retell, and rehash memorable events over and over, making the initial “consumption value” very durable. The involvement of thousands of other people in the initial enjoyment offers a relatively unique opportunity for social networking that long preceded the advent of the internet.

It’s an interesting exercise to try to add up the non-revenue value of sports to fans. The amount of time alone, whether at reliving the game in the break room or at home, reading newspapers, blogs, or other sources is not trivial. Further, the time spent on fantasy sports ultimately derives its value from the sports themselves. With even modest estimates the number of people involved in these activities along with the time spent and at average wage rates, it’s easy to double the revenue value. Such estimates vastly understate the impact of sports as “42” once again demonstrates.

Organizational Architecture of College Sports Behind the Scandals

2013 April 10
by Brian Goff

Another college coach engages in reprehensible activities and the supervising athletic directors and university presidents do nothing until external investigations and public awareness force their hand.    While not involving incidents nearly as disturbing, the bumbling of the Rutgers situation echoes of many of the same issues as the Penn State scandal.  Some writers have pondered how Rutgers’ Athletic Director and President could have fallen down the same hole with the PSU scandal so fresh. 

The head scratching takes a very narrow view.  The problem is, fundamentally, not one of university officials who are unaware or without ethical standards (although one wonders at times).  Its endemic –  flowing out of the very fabric of college sports and the incentives supplied by its organizational architecture.  (See the McCormick-Tollison TSE post on Subversion of the Academy for similar views).

I’m not an academic who dislikes sports, who has a gripe because a coach makes more than I do, or who thinks the football program drains funds from my department.  The fundamental point is that big time college athletics, football and men’s basketball, are professional entertainment operations clumsily bundled with academic institutions and shrouded in archaic language and restrictions of amateurism.   College athletics started as truly amateur enterprises not very different from intramural athletics on campuses today.  By the 1950s, fan interest had already turned them into something very different.  Sixty years later, with billion dollar basketball tournament TV contracts and major football programs hauling in $50-$100 million revenues each year, and 100,000 seat stadiums filled to capacity, the difference between these activities and their professional sports counterparts is one of semantics and organizational structure  – not basic economics. 

With the sizable revenues at stake, dollars will try to work back into the hands of players whether by illicit cash payments or through “legal” in-kind inducements.  But that’s not my point here.  It also means that university officials whose positions and salaries correspond to governing academic institutions will also be tasked with overseeing operations that only nominally fall within the scope of their other duties.  It’s not the dog chasing its tail as some think about college academics and athletics, it’s a wholly different dog (or elephant) trying to fit into the same doghouse. 

Why is it that the top coaches for the best programs make salaries several times above their “supervisors”?  It’s not an outrage or evidence of athletics out of control.  Instead, it vividly illustrates that something is amiss.  It grows out of the imbalance of stuffing a distinct professional entertainment operation underneath the organizational umbrella of another, unrelated entity.  It’s a bit like cramming a Hollywood movie production within the organizational confines of a local car dealership and placing the general manager of the car dealership in charge of the film’s producer, director, and actors.   How well would that work? 

The Penn State and Rutgers cases are just the most egregious examples of the silliness that transpires when someone who is economically subordinate is put in the position as supervisor.   Bob Knight had a long history of (largely ignored) incidents at Indiana before his dismissal, again only after a video goes public.  In IU’s case and those like it, the running joke is that the AD calls up the coach and asks, “what punishment do you want?”  More recently, the Sports Illustrated story on now-fired Ben Howland, Not the UCLA Way, offers up similar themes.  Stories of these kinds, whether true or apocryphal, dot the landscape of college sports.  So, the next time a story breaks about a coach out of control whose behavior is smoothed over by university officials, or when a player has received payments, loans, or better grades, there is no riddle – the system is built that way. 

NCAA Seeding — A Rejoinder to Brian Goff

2013 April 3
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by Victor Matheson

In his latest post Brian Goff notes that top seeds in this year’s tournament had some trouble putting away their lower ranked opponents and that seed wasn’t a strong predictor of final win margin. While I must agree that I certainly didn’t have FGCU making it to the Sweet Sixteen or Wichita State in the Final Four, at least historically, the people at the NCAA who put together the brackets have done a remarkably good job seeding the teams. Obviously, there is always uncertainty of outcome in any sporting event – that’s quite a bit of the allure of spectator sports – but higher seeds tend to do better than lower ones and beat lower seeds by higher margins. Here’s the data since the men’s tournament went to a fully seeded 64-team tournament (minus the last couple of years I haven’t gotten around to updating yet.)

Seed

Men’s Tournament, 1985-2011

Win Margin

Win %

1

25.84

100.0

2

16.77

96.2

3

11.53

84.6

4

9.49

78.8

5

4.54

66.3

6

3.94

68.3

7

2.20

58.7

8

-0.16

48.1

The margin of victory uniformly falls with the seed and win percentage is fairly uniform as well with the exception of the 5 and 6 seed where there isn’t an observable difference. There is a slight anomaly in the 8 vs. 9 game with 9s winning more often, but call that one a coin flip. Overall, I would give a great deal of credit to the bracket makers for their overall success.

That being said, it is possible that these results are being driven by good seeding in earlier decades, and an examination of whether seeding accuracy or competitive balance has changed over time would be of interest.

NCAA Seeding — A Lot of Noise

2013 April 1
by Brian Goff

The 2013 NCAA tournament has afforded another experiment on whether the seeding process incorporates much more noise than signal.  For those following the tournament, it should come as no surprise that this year offers more confirmation of the suspect seeding process.

I collected scores and seed differences for all 48 games from the first two rounds.  Using a common statistical technique (regression analysis), I examined the relationship between seed differences and score differences.  Seed differences explain a paltry 6 percent of score differences.  When the 1-16 and 2-15 are dropped, this percentage falls to only 3 percent.  Even as a predictor of win-loss rather than score, seed differences fare poorly.  For many of the games, plucking scores from a lottery hopper would come close to providing as much information on outcomes.

Is seeding really intended to predict score differential?  Obviously, not directly.  However, seeding reflects a gauge of team’s in-season performance quality – wins and losses adjusted for quality of competition.  If this gauge has much meaning to it, better seeds indicating higher quality teams, differences between them should show up in scores.  Instead, games with large seed differences wind up close or in upsets and games with narrow seed differences result in some blowouts.

It’s not just the NCAA Selection Committee that struggled with finding meaningful differences between teams.  Vegas point spreads, direct estimates of score differences, predicted only about 17 percent of score differences.  That’s a stunningly low number given that these spreads incorporate information such as injuries and best guesses about team specific matchups.

The 1 and 2 seeds are still very likely to win their opening round games, but even these games have become much more contested.  Based on this year’s tourney, I might amend original suggestion to select seeds 1-4 with everyone else randomly selected to just selecting the 1 seeds and randomizing from there.  Yes, that would lead to some seemingly strong teams facing other strong teams in the first round, and weak versus weak, but, that’s already happening.  The setup just puts a different face on it.

What Are the Falcons Worth to Atlanta?

2013 March 18
by Skip Sauer

“WHEREAS, due to the continuing economic benefits to be derived from the New Stadium Project by the citizens of the City of Atlanta and the State of Georgia…”  Thus begins the latest diversion of revenue from a city’s coffers to a professional sports franchise.

Various reports indicate that the negotiations between Atlanta and the NFL’s Falcons over a new stadium are nearing a conclusion. A story in Friday’s Atlanta Journal and Constitution presents a number of basic facts.  The estimated construction cost is an eye-popping one billion dollars.  The public will contribute two hundred million dollars up front through a bond issue, with the Falcons responsible for the rest.  The deal appears to fit the contemporary norm for stadium building and funding.  As in Dallas and New York, a building costing a billion bucks will doubtless be a super spruced-up sports palace.  But along with the higher price tag, the public’s share of the costs is below the norm for the mid to late 20th century.  Raymond Keating’s 1999 survey of stadium costs (“Sports Pork“) estimated the public share of construction costs at about 75%, roughly three times the public share in the present case.  

Neil deMause presents a detailed breakdown of other elements in Atlanta’s “New Stadium Project Financing Proposal,” along with a valuable link to the 200 page proposal itself.  To the construction costs, add $24 million in land costs and $30 million in construction sales tax rebates.  This pushes the subsidized share of full construction costs to about 25%.  That’s not the end of public support however.  In addition, the Falcons will receive  revenues from the city’s 7% Hotel Motel Tax.  This tax, which would sunset under current law in 2020, is extended another 30 years to 2050.  (The extension of this distortionary tax is perhaps the most inefficient aspect of the agreement).  deMause reports that the Falcons’s share of this tax currently runs about $17 million.  These funds are designated for operation and maintenance of the stadium — costs that in the absence of public involvement would be charged to the Falcons (or the Atlanta Falcons Stadium Company, a separate legal entity).  

There are a number of offsets in the various flows of costs and revenue, but deMause’s back of the envelope estimate is that the total public subsidy in this deal is on the order of $554 million.  The costs are spread out through bond issuance, and flows from the Hotel Motel Tax which accrue in the year they are incurred.

This is a significant subsidy, one that the Falcons’ ownership will take happily to the bank.  But it’s standard operating procedure in the monopolized world of North American professional sport.  Monopoly control over the number of franchises creates potential competition from a host city without a team, and through that an exit threat for which citizens in towns with current teams must compensate.  As an economist, with my normative hat I decry the system which generates this diversion of funds between now and 2050 to a sports entity, rather than projects which would truly help develop Atlanta’s economy.

But given the rules of the game, the price tag doesn’t strike me as one that the citizens of Atlanta will get all worked up about.  The subsidy amounts to about $20 million per year — a significant but not massive fraction of ticket revenues.  With about 5 million people living in the Atlanta MSA, the per capita cost is about $4 per year.  I suspect that if the question were asked, “Falcons for $4″ versus “no Falcons”, the people would fork over the $4.  I’m not a fan of this process at all, but must say “well played, Arthur Blank.”