As you settle in to digest your Thanksgiving turkey and stuffing, it’s a perfect time to consider a couple of thought-provoking issues that have been making waves in the world of sports economics. From questionable buyout clauses in college football coaching contracts to the often-overstated economic impact of sports stadiums on local development, these topics offer plenty of food for thought—especially for those interested in the financial intricacies behind the games we love.
In this article, we’ll explore two key issues. First, we’ll examine the moral hazard posed by buyout clauses in college football coaching contracts, where athletic departments frequently turn to deep-pocketed donors to cover the costs of firing underperforming coaches. Then, we’ll dive into the supposed economic impact of sports arenas on local neighborhoods, focusing on how reality often falls short of the promises made when these arenas are built. We’ll specifically look at M&T Bank Stadium in Baltimore and the AT&T Center in San Antonio as case studies.
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Buyout Clauses: A Financial Catch-22 for Athletic Departments
The first topic is a peculiar financial conundrum within the world of college football. It’s not uncommon to hear about universities firing head coaches who fail to meet expectations, even when these coaches have years left on their contracts. The catch? Athletic departments (ADs) often can’t afford to pay the hefty buyout clauses written into these contracts. Instead, they rely on wealthy donors to foot the bill.
The Problem: Buyout Clauses as a Moral Hazard
An interesting article from the Houston Chronicle sheds light on this phenomenon, highlighting how buyout clauses can create a moral hazard—a situation where one party takes risks because they know another party will bear the financial consequences. In this case, athletic directors write lucrative contracts for coaches, complete with substantial buyout clauses, knowing full well that their university may not have the funds to pay if things go south. However, they also know that if the coach fails, there are wealthy alumni and boosters who will likely cover the buyout costs out of their own pockets.
This practice becomes problematic because it encourages risky or irresponsible behavior. Athletic directors are incentivized to offer overly generous contracts to attract high-profile coaches, banking on the fact that deep-pocketed donors will swoop in to bail them out if the coach underperforms. The result? Coaches who fail to meet expectations are handsomely rewarded on their way out, leaving universities and athletic departments struggling to justify the expense.
Donors: The Safety Net for ADs
In most cases, these deep-pocketed donors are more than happy to cover the cost of a coach’s buyout, especially if they feel the need to bring in new leadership to salvage a struggling football program. After all, for many of these boosters, football success is not just a point of pride but also a key part of their university’s reputation and national standing. However, this reliance on donors introduces a troubling question: Should athletic departments write contracts that they can’t afford to honor on their own?
The logic of these buyout clauses creates a vicious cycle. ADs offer huge contracts to coaches in the hope of landing the next big thing, knowing that if the gamble doesn’t pay off, someone else will cover the cost. Meanwhile, donors—who care deeply about the success of the program—are willing to open their wallets, but this willingness only reinforces the cycle of risky decision-making.
One classic example of this phenomenon is the case of Coach Wunderkind, a fictional yet all-too-real archetype. Let’s say Coach Wunderkind is hired with a huge buyout clause, but after several disappointing seasons—failing to beat powerhouse rivals like Texas and Oklahoma—the boosters decide it’s time for a change. The university’s athletic department, strapped for cash, turns to its donors, who gladly pay the coach to leave, despite having little to show for their investment.
The Solution: Rationalizing Contracts
While it may seem like the obvious solution is for ADs to stop including such generous buyout clauses in coaching contracts, the reality is more complicated. College football is big business, and the pressure to attract top coaching talent is intense. For many programs, the potential upside of hiring a successful coach outweighs the financial risks associated with a large buyout clause.
However, the financial structure of these contracts could benefit from greater oversight and accountability. Universities should ensure that athletic departments are more conservative in the way they structure contracts, perhaps instituting clauses that tie buyout amounts to performance metrics or fundraising achievements. Until then, the moral hazard of buyout clauses will likely persist.
The Stadium Illusion: Economic Development Around Sports Arenas
Shifting gears, let’s move from the financial entanglements of college football to the often-misleading promises of economic development around sports stadiums. It’s common for cities to justify public financing for stadiums by claiming that these venues will spur significant economic growth in the surrounding neighborhoods. Yet, time and again, these promises prove hollow.
Two recent examples, discussed in articles from The Baltimore Sun and the San Antonio Express-News, highlight this disconnect between promise and reality. The focus here is on the neighborhoods around M&T Bank Stadium in Baltimore and the AT&T Center in San Antonio—home to the NFL’s Baltimore Ravens and the NBA’s San Antonio Spurs, respectively.
M&T Bank Stadium: A Lack of Development
In Baltimore, M&T Bank Stadium is a prime example of how sports arenas often fail to deliver the economic boom their proponents promise. Built with the hope of revitalizing the area, the stadium was supposed to bring new businesses, restaurants, and jobs to the surrounding neighborhood. Instead, what has emerged is a landscape mostly devoid of meaningful economic activity.
Dennis Coates, a prominent economist, discussed this issue in an article examining the stadium’s long-term impact on local development. Despite the influx of fans on game days, the area surrounding M&T Bank Stadium has not seen the promised revitalization. Few businesses have popped up to complement the stadium, and much of the surrounding area remains industrial, underdeveloped, or plagued by economic stagnation.
For all the money invested in the stadium, its impact on economic development has been underwhelming at best.
AT&T Center: Unrealized Economic Potential
A similar story is playing out in San Antonio, where the neighborhood surrounding the AT&T Center has failed to capitalize on its proximity to the Spurs’ home court. When the arena was built, city officials and developers promised that it would spur economic development and revitalize the area. Yet, years later, the businesses in the vicinity tell a different story.
The San Antonio Express-News ran an article that paints a stark picture of the area around the AT&T Center. The nearest establishments include a tattoo parlor, a funeral home, an auto repair shop, and a vacant liquor store. To the east, a Coca-Cola bottling plant still operates, while a golf course and industrial zones dominate the landscape. Few, if any, businesses seem to have benefited from the arena’s presence, despite the influx of Spurs fans on game days.
The irony in San Antonio is that the Spurs are already calling the AT&T Center obsolete—just five years after it underwent significant renovations. The franchise is now pushing for a new, publicly financed arena, even though the current venue hasn’t lived up to its promises in terms of spurring local economic growth. Once again, the idea of stadium-driven economic development seems more like a mirage than a reality.
The Myth of Stadium-Driven Growth
Both the M&T Bank Stadium and AT&T Center examples illustrate a broader point: the belief that sports stadiums act as economic engines for their surrounding neighborhoods is often overblown. While stadiums can bring temporary boosts to local economies on game days—thanks to spending on tickets, food, and merchandise—the long-term, sustained growth that cities hope for frequently fails to materialize.
Why? Stadiums are not the consistent drivers of foot traffic and economic activity that other forms of development might be. Outside of game days, these venues are often underused, contributing little to the local economy. Moreover, many fans simply travel to the stadium for the game and then leave, spending minimal time or money in the surrounding neighborhood.
Public Financing: A Controversial Investment
The issue of public financing for stadiums adds another layer to this conversation. Local governments often justify using taxpayer money to build or renovate stadiums by claiming that the economic benefits will offset the initial investment. However, as seen in Baltimore and San Antonio, these benefits are often illusory. Public funds are funneled into stadium projects that primarily benefit team owners and franchises, while the surrounding communities see little improvement in terms of jobs, businesses, or infrastructure.
Conclusion: Rethinking Sports Economics
As we digest these two items—buyout clauses in college football contracts and the questionable economic impact of sports arenas—it’s clear that the intersection of sports and economics is fraught with complexity. Whether it’s the moral hazard created by donor-funded buyouts or the inflated promises of stadium-driven growth, these issues highlight the need for greater transparency, accountability, and realism when it comes to sports financing.
In the case of college football buyouts, universities should reevaluate the contracts they offer coaches, ensuring that they are financially responsible and not reliant on the generosity of wealthy donors. And when it comes to building or renovating sports stadiums, city officials and taxpayers alike should approach such projects with a healthy dose of skepticism, understanding that the promised economic benefits often fail to materialize.
In both cases, careful planning and a more grounded approach to sports economics could help mitigate some of these issues and create a more sustainable financial model for the future of sports.
- An interesting article from the Houston Chronicle on the moral hazard involved in buyout clauses for college football head coaches. It seems that most athletic departments can’t come up with enough money to buy losing coaches out of their long-term contracts. Instead, ADs turn to deep pockets donors who pony up the cash for the buyout. ADs shouldn’t write buyout clauses into contracts that they can’t pay. But it appears that rational ADs know that their donors will gladly pay the buyout out of their own pockets if it turns out that Coach Wunderkind can’t beat Texas and Oklahoma.
- Dennis Coates discussed an article about the lack of economic development around M & T Bank Stadium in Baltimore a few weeks ago. Looking for homes in San Antonio? A recent article in the San Antonio Express-News about the neighborhood surrounding the AT&T Center, home of the San Antonio Spurs, makes a similar point. Like the Baltimore article, the picture here says it all. But this quote about the bonanza of economic development around the arena is also telling
“The nearest buildings were Leon’s tattoo parlor, a tiny funeral home, an auto repair shop, a vacant liquor store and a quiet, aging neighborhood.
Beyond the tracks on Houston Street, a Coca-Cola bottling plant operates south of the arena. Directly to the east, golfers hit the links at the city-owned Willow Springs Golf Course. A Ryder truck rental office and similar companies do business in an industrial zone north of the arena.
Few, if any, businesses appear to complement a state-of-the-art sports arena.”
The crazy thing about the AT&T Center is that the Spurs are claiming it is obsolete just five years after a significant renovation, and are demanding a new, publicly financed arena to replace it.
