May 31, 2015

Subsidized Stadium Grass Is Always Greener

Christopher Koopman

Director, Technology Policy Program
Summary

In his latest budget proposal, President Obama calls for the removal of federal tax exemptions for municipal bonds issued to fund new sports stadiums. Perhaps not coincidentally, the National Football League is in the middle of what has become an annual event — teams jockeying for the right to move to Los Angeles.

In his latest budget proposal, President Obama calls for the removal of federal tax exemptions for municipal bonds issued to fund new sports stadiums. Perhaps not coincidentally, the National Football League is in the middle of what has become an annual event — teams jockeying for the right to move to Los Angeles.

In fact, L.A. might be the NFL's most important city, despite not having a franchise for two decades. This is no accident. Leaving America's second-largest media market without a team pays dividends for owners looking to fund new stadiums. In the 20 years since the L.A. Rams and Raiders moved to St. Louis and Oakland, respectively, the threat of relocating a team back to the City of Angels has been used time and again to extract stadium deals from home markets.

Take, for example, the recent interest in a return to L.A. by Rams owner Stan Kroenke, one of at least three NFL owners exploring a move. After years of reluctance by Missouri policymakers to overhaul the Edward Jones Dome (built in 1995 to lure the Rams away from L.A.), Kroenke announced plans to build a new stadium in California. Within a week, the governor of Missouri announced that "St. Louis is an NFL city and I am committed to keeping it that way." By the end of the month Missouri proposed building a publicly funded $985 million open-air stadium.

The L.A. threat got Kroenke in a matter of weeks what years of negotiation couldn't. The same story is playing out with the San Diego Chargers and Oakland Raiders, who proposed a joint L.A. stadium as each negotiates with their current cities.

More than a dozen teams have done the same thing, and none have actually moved since 1998.Threatening to leave for L.A. worked for the Minnesota Vikings before they got their $1 billion, taxpayer-funded stadium. Cincinnati Bengals owner Mike Brownused relocation threats severaltimes before he ultimately hooked taxpayers for a stadium lease and some projects that hadn't even been invented yet, including "ticketless entry systems," "stadium self-cleaning machines," and "holographic replay machines."

This tactic isn't unique to stadiums. Recently, electric-car manufacturer Tesla set off a bidding war when it sought a location for its "Gigafactory." The company selected four states as potential sites, and went so far as to announce that it would break ground in multiple locations, but would only complete the project in one. As the drama played out, one observer noted that it was difficult tell the difference between a search and a shakedown. Eventually, Tesla got a $1.4 billion deal from Nevada.

This shouldn't come as a surprise. As economists Christopher Coyne and Lotta Moberg recently explained, businesses have a strong incentive to put policymakers on notice that they face competition from other cities or states. And politicians are always eager to associate themselves with anything popular, like a hometown team.

Not everyone connected with the NFL sees this as a good thing. Former NFL commissioner Pete Rozelle decried the stadium shopping of the 1990s as "the biggest problem the league has ever faced." However, the potential antitrust liability the NFL faces when it tries to block a team from moving leaves it with little power. When the Raiders wanted to leave L.A. in 1989, they sued the NFL, and the Rams threatened to sue when they left for St. Louis in 1995.

Expensive stadium deals are often sold to taxpayers as a moneymaker. But there is a consensus among economists that this simply isn't true. In Cincinnati, Moody's recently downgraded the city's bond rating because it lacks "a long-term strategic plan for the growing obligations of the stadium."

The likelihood that even the president can change this dynamic is low. Franchise owners are extremely influential, with some operating their own stadium-focused PACs and others growing into major political players in their respective states.

And we may not see a team in L.A. as soon as we think. The NFL made it clear that a final decision is likely years away. Teams are expected to evaluate every option, "leave no stone unturned," and give their cities a chance to pitch their own proposals.

One thing is for sure: While L.A. would love its own NFL franchise, the City of Angels plays a devilish role for teams that think the subsidized grass is always greener in a shiny new stadium.