Why funding new sports stadiums can be a losing bet

When people hear of plans to bring a new stadium or arena to their city, they typically envision the stands packed with loyal sports fans, restaurants filled with eager diners from out of town and local hotels bustling with travellers there to see the big game.

That's what the cities of Edmonton and Markham, Ont., are counting on — both have just green-lighted public funding towards multimillion-dollar arena projects, in the hopes of creating new jobs and drawing in extra visitors.

Edmonton has approved a deal with the owner of the Oilers for the proposed $480-million downtown arena, while many in Markham, Ont., located just north of Toronto, are hoping their planned 20,000-seat rink will be bait for a new NHL franchise.

Both cities will likely be disappointed with the economic outcome, if past research is any indication.

'Most of the independent research can't find any economic impact associated with either new arenas, new stadiums, or new franchises or large events.' — Victor Matheson, professor of economics at College of the Holy Cross

The vast majority of studies done on the financial benefits of new sporting facilities by researchers not connected to any sport, league, or team have not found any economic boost for cities, experts say.

"Most of the independent research can't find any economic impact associated with either new arenas, new stadiums, or new franchises or large events," said Victor Matheson, a professor of economics at the College of the Holy Cross in Worcester, Ma., who has been researching the economics of sport for more than a decade.

"So, building a new arena doesn't seem to have any effect on a city's employment, per capita income, hotel occupancy rates, [or] taxable sales."

Economic benefits greatly exaggerated

And for those cities that do see a business bump from hosting sporting events, it's a fraction of what is touted, he added.

Matheson cited a study he conducted in the U.S. that examined cities that hosted the Super Bowl between 1970 and the mid-2000s. His analysis found that the mega-sporting event was associated with an increase in income in each city of roughly $30 million to $90 million US.

"That's positive, but that's also between one-quarter and one-tenth of what the [National Football] League says," Matheson said.

Very little Canadian sports economic research has been conducted, Matheson said, in part because many researchers in this field are south of the border, and because of the ease of access to data there.

But one 2005 study, conducted by University of Ottawa researchers, looked at the economic impact of professional sports teams on hotel occupancy rates between 1990 and 1999 in eight Canadian cities, including Toronto, Edmonton and Montreal.

The research, published in the Journal of Sports Economics, found that in 11 out of 17 cases, when a city with a major league franchise goes through a period without a team — due to a league lockout, for example, or when a team such as the Winnipeg Jets leaves — it "had no statistically significant impact" on the hotel occupancy rates in that city.

80% of ticket sales come from within the community

One of the issues is that consumers have a relatively fixed budget for their leisure activities. So, money spent on a hockey game could be cash that would have been used to, say, pay for a round of golf or to watch a basketball game.

"While local businesses may see an increase in sales around the stadium, it's sales and money that would have been spent in other parts of the community, for the most part," said Richard Powers, a lecturer at the Rotman School of Management at the University of Toronto. "So they're just redirecting it into a certain area."

As for attracting outside interest, studies show that just 20 per cent of the sporting event tickets are bought by people who live elsewhere, added Powers. 

'It's sales and money that would have been spent in other parts of the community... they're just redirecting it.' — Richard C. Powers, Rotman School of Management at University of Toronto

With little economic benefit, the hefty amount of money coming out of city coffers to fund these shiny new facilities is "hard to justify if other infrastructure projects are being put on hold," he added.

Most stadium and arena projects have been financed with public money, which often leave taxpayers in the city or municipality on the hook for several years.

One example is the 1976 Summer Games in Montreal. It took three decades for Quebec taxpayers to pay off the $1.5 billion Cdn debt from that venture. The astronomical cost — funded with 30-year bonds — included building Olympic Stadium, the Olympic village, a post-modern apartment building complex, the Velodrome and other facilities.

The 58,500-seat Olympic Stadium eventually became the home of the Montreal Expos, until the Major League Baseball team was sold to Washington, D.C., in 2004. The facility's lingering debt earned it the nickname the "Big Owe."

"We had Montreal citizens paying off the last of those bonds, paying off the 'Big Owe' after the Montreal Expos had already left town," said Matheson.

Projects often go over initial budget estimate

In Markham, a city of about 300,000 people, the proposed arena is estimated to cost $325 million. Half of the money will come from private sources, namely the Remington Group, and the other half will be generated through a levy on newly built homes, townhouses and condominiums.

In Edmonton, the proposed arena will cost roughly $480 million — $143 million put up by Edmonton Oilers owner Daryl Katz, $219 million coming from the city and $114 million coming from other levels of government. A ticket surcharge is expected to raise another $125 million.

The initial budgets for both of these arenas are likely conservative estimates, said Powers.

"They have a price tag right now, but again, if you were going to sell something, you're going to put it as low as you can... And we know what happens in these projects. They are notorious for cost overruns."

In some cases, going over budget is legitimate, he said. The projects take several years to build, and over that time, economic conditions, the cost of labour and the value can change. But, either way, it is often the municipality left with the bill when the project goes over budget, Powers said.

Hidden costs

Beyond the outlay of funds to build the stadium, there are costs related to subsidies and concessions given to the team owner, says Matheson.

For example, it is common for franchise owners to negotiate a deal with a city to not pay property tax on the land or facility, he said.  

"Had that land instead been given to a shopping mall developer, that would have obviously generated property taxes and other types of sales and use taxes. That is now forgone."

'What other infrastructure projects that would be benefiting the community are being cancelled or put on hold?' — Richard C. Powers, Rotman School of Management at the University of Toronto

There is also the loss in taking public money away from other projects that would also benefit the community.

"Where are you diverting cash from? What other infrastructure projects that would be benefiting the community are being cancelled or put on hold?" Powers said.

There are indirect benefits, however, of a new sports facility to the surrounding community that can't be quantified.

Having a local team to cheer on, and new amenities, can help boost the well-being and sense of civic pride among local residents.

"There are positives to it," said Powers. "You know there's community pride, there's certainly a rallying point around a team. But are the costs worth it?... Ask people what they would rather do: have a stadium or a rapid transit system? I think you'll find that most people would go for the rapid transit system."

Cautionary tales

That being said, there are examples of sporting projects that did continue generating revenue, such as the facilities built as part of the Calgary 1988 Olympics, he added.

But the bulk have produced little economic benefit, or are major losses. One recent cautionary tale is the new Marlins Park baseball stadium in Miami.

Miami-Dade County taxpayers paid for most of the $634 million US required to build it. However, to start construction, the city took out a loan, and the city will end up repaying roughly $2.4 billion US over 40 years, according to the South Florida Sun-Sentinel.

Even so, cities are still clamouring to build their own mega-sporting projects.

One reason is that sporting leagues have been "pretty smart about playing cities off of each other," said Matheson.

Teams can threaten to move their franchises unless they get a new facility, for example.

"All of these leagues are pretty good at keeping up a monopoly, and limiting the number of franchises, which makes franchise relocation a real, credible threat," he said.

Also, team owners or promoters have vested interests, he added.

"Just because an arena or stadium isn't good for a city as a whole doesn't mean it's not great for a franchise owner," he said. "And the franchise owner has a real incentive to try to lobby hard for that."

Another reason could be that the perceived economic boost — a flurry of ticket sales and a bump in spending near the arena — comes long before the debt problems are apparent, said Mike Moffat, an assistant professor at the Richard Ivey School of Business at the University of Western Ontario.

"It is a little bit puzzling," he said. "I think part of the problem is that the big problems tend to come 15, 20, 25 years down the line, at which point the mayor has retired. But the benefits come up front."