ARE PUBLIC POLICIES NEEDED TO LEVEL THE PLAYING FIELD BETWEEN CITIES AND TEAMS? MARK S. ROSENTRAUB* Indiana University ABSTRACT: The owners of professional sports franchises, once minor players in the manipulation of locational choices to receive subsidies, now routinely anticipate substantial incentive packages from the public sector. Teams demand and receive subsidies because many communities want teams and the leagues dictate the supply of franchises. Periodic disdain over these subsidies and resentment from communities that have lost teams has not produced public policies to balance the interests of team owners and cities. Ironically, the federal laws that have been passed have enhanced the economic power of the leagues. This article explores the impact of the cartel structure of professional team sports and a justification for changing the existing laws. Two different strategies are discussed designed to end the sports subsidy game and thwart the incentives that convince some teams to move from one area to another. The provision of subsidies to influence the location of capital has been a constant and frustrating component of local economic policy (Eisinger, 1988). Market forces, a preference for suburban lifestyles, national transportation and housing programs, and the imperatives of global competition have led many municipal leaders to conclude they must offer subsidies to attract capital. Kantor and David (1988) underscored some of these themes and concluded that economic competition and the structure of markets had created a highly dependent position for cities. Communities can always refuse to meet demands, and some cities have indeed abandoned bidding wars for firms when the costs became too high (Hudnut, 1993; Nunn & Schoedel, 1995). In most situations, however, corporations have successfully manipulated the dependent status of local communities to enhance profits and increase the political costs for officials who refuse to provide inducements (Hudnut, 1993; Nunn, Klacik, & Schoedel, 1996). The owners of professional sports franchises, once surprisingly minor players in the manipulation of locational choices to receive subsidies, now routinely anticipate substantial incentive packages from the public sector. For example, the Dallas Cowboys is among the most valuable sports franchises in America. Yet, in January 1999, team owner Jerry Jones made it clear he expected either his host city, Irving, or the state of Texas to provide a subsidy to help renovate the team s current stadium *Direct all correspondence to: Mark S. Rosentraub, School of Public and Environmental Affairs, Indiana University, Indianapolis, IN 46202. E-mail: MRosentr@IUPUI.Edu JOURNAL OF URBAN AFFAIRS, Volume 21, Number 4, pages 377 395. Copyright 1999 Urban Affairs Association All rights of reproduction in any form reserved. ISSN: 0735-2166.
378 6 JOURNAL OF URBAN AFFAIRS 6 Vol. 21/No. 4/1999 or build a new one (Street and Smith s Sports Business Journal, 1999a). Left unsaid was that the failure to provide a subsidy would lead to a move of the beloved Cowboys to a more supportive environment. In the past two years, the Yankees, another of professional sports most profitable teams, have echoed a similar refrain in their efforts to secure a new ballpark in the metropolitan New York City area. The modern practice of providing subsidies to attract teams may have begun in 1953. Baltimore, eager to be home to a Major League Baseball (MLB) team, promised a second deck on its Municipal Stadium and a generous lease to rescue the American League s Browns from their losing battle for profitability in St. Louis. The Browns accepted Baltimore s offer and became the Orioles in 1954 (Morgan, 1997). In 1956, Los Angeles provided land and other incentives to convince the Brooklyn Dodgers to overcome MLB s reluctance to place franchises in California. Incentives to influence the locational choices of team owners now range from tax abatements and expenditures for infrastructure to public guarantees to buy unsold tickets and luxury suites. The vast majority of teams now play in publicly funded ballparks, stadiums, and arenas and have leases that eliminate the need for teams to be responsible for all or a majority of a facility s capital and operating costs (Noll & Zimbalist, 1997). Periodic disdain over these subsidies and the resentment from communities that have lost teams have led to several unsuccessful efforts to develop public policies to balance the interests of team owners, cities, and fans. To date, however, no laws have been passed that effectively address the factors that influence the provision of subsidies: the leagues control over the supply and location of teams and the distribution of revenues and talent between large and small market teams. Ironically, the laws that have been passed have enhanced the economic power of the leagues by allowing mergers and the packaging of broadcast rights. The four major sports leagues, MLB, the National Football League (NFL), the National Basketball Association (NBA), and the National Hockey League (NHL), are able to decide how many teams will exist and where they will play. The leagues also decide how revenues and playing talent will be distributed and shared among teams playing in markets of very different sizes. The leagues unfettered control over the supply of franchises means communities without teams must induce a move or satisfy the conditions stipulated for an expansion team. Increasingly, this has meant that the public sector builds a subsidized playing facility and permits a team to retain the vast majority of the revenues collected at the new ballpark, stadium, or arena. Moreover, the differential in earning power between teams in market areas of varying sizes leads to pressures for larger subsidies from smaller communities. Team owners in these areas frequently demand subsidies to ensure that their gross revenue and profit levels match those secured by franchises in larger markets. The extra revenues available to teams in larger communities are a function of the ability of those owners to prohibit other franchises from entering their market. Any discussion of the need for new or different public policies to influence the supply of franchises or the distribution of revenues and talent must be framed by at least three sets of critical questions. First, what is the public interest in professional team sports that justifies the implementation of policies that would constrain the property rights of owners? If communities are free to provide subsidies, they are also free to decide against the provision of a locational inducement. In such an environment, the public interest may well be in permitting an expression of each community s interest in hosting a team through the level of subsidies a city or state is willing to provide. Government interventions that increase the supply of teams will change the value of all teams. Is such intervention warranted? Second, have the leagues made an effort to meet the demand for teams, or have they artificially restricted the supply of franchises? Even if the leagues are cartels that control the supply of franchises, are any communities that want teams without them? Third, do the leagues attempt to share revenues to ensure competitive balance and eliminate the pressure on smaller communities to provide subsidies? These questions are systematically addressed in the sections that follow, and they help to frame a discussion of the policies that could be used to reduce or eliminate the subsidies provided by communities.
6 Public Policies and the Playing Field Between Cities and Sports Teams 6 379 THE PUBLIC INTEREST IN PROFESSIONAL SPORTS TEAMS AND THE JUSTIFICATION FOR POLICY INTERVENTION While there might be a certain caché in expressing contempt for the popularity of sports and the value and importance placed on teams and games, the available evidence suggests that professional teams are both extremely popular and critically important cultural symbols. The popularity of sports can be readily demonstrated from a review of attendance statistics and media penetration. In 1998, for example, almost 15 million people attended NFL regular season games, and 70.5 million fans went to MLB games. More than one million tickets were also sold to MLB s playoff games, and several hundred thousand people attended NFL playoff games and the Super Bowl. NBA teams attracted more than 20 million fans to their games in the 1997/98 season, and NHL games attracted more than 17 million fans that same year (ESPN Information Please Sports Almanac, 1999; Street and Smith s Sports Business Journal, 1999b). These figures, of course, include multiple visits by the same fans. Some might argue that even if the 71 million tickets to MLB games represented visits by separate fans, then fewer than one-third of all adults in North America would have attended a baseball game. Is that level of popular interest deserving of government regulation and legislative oversight? The popularity of sports, however, far exceeds the number of fans at games. Many people enjoy games that are televised or broadcast. For example, the NFL s Super Bowl regularly attracts viewers in more than 40 million homes. Games involving NFL teams account for more than one-third of the 60 most watched television programs in history, and sporting events routinely rank as the most watched programs on cable networks (ESPN Information Please Sports Almanac, 1999). While there would seem to be little debate with the conclusion that sports is popular, does popularity imply an importance that requires the establishment of public policies? If substantial popularity was an insufficient justification for public policies regarding the supply and competitiveness of teams, there is an extensive body of scholarly work that could be used to underscore the social significance of team sports for societies. Anthony King, for example in summarizing the value of English football, noted, The significance of football lies primarily not in its financial value but rather in the fact that many individuals particularly males in English society have regarded it as critical to their lives (1998, p. 16). Sport and the rituals created by it become a service industry which sells (the) symbolic values that define a society (A. King, 1998, p. 28). Duke and Crolley (1996) underscored these themes for various nations in analyzing the defining elements of football (soccer) for the United Kingdom, Spain, Belgium, Italy, and Argentina. They also pointed to the work of Tomlinson (1994), who noted that nations attain their fullest expression in two ways war and sport (Duke & Crolley, 1996, p. 4). For many people, this relationship was underscored by Honduras war with El Salvador following the 1969 World Cup soccer matches. Such observations are not limited to European or Central and South American nations. Houlihan (1997) focused on the transnational importance of sports. Similarly, Pope (1997) traced the level of importance for sport in American society from 1876 through 1926. Edwards (1973), Shropshire (1996), and Danielson (1997) have discussed the critical role of team sports for present-day Americans and cities. While sport is an important element in a society, does it follow that the four major sports leagues should be subject to special public policies that address the availability and distribution of their assets? After all, a myriad of sports leagues exist at varying professional levels, and there are collegiate and high school teams. Have professional team sports, as the pinnacle of this sports pyramid, established some level of preeminence that warrants the intervention of public policy? The answer to this question is yes. Numerous courts, Congress, and various state legislatures and local governments have underscored the economic and intangible value of the four major professional sports leagues. Other data also attests to the critical value and importance that people place on the four major sports leagues (Swindell & Rosentraub, 1998). Community leaders and elected officials frequently point to the value and importance of a professional sports team. In 1966, for example, Louisiana Congressman Hale
380 6 JOURNAL OF URBAN AFFAIRS 6 Vol. 21/No. 4/1999 Boggs urged Congress to permit the merger of two competing professional football leagues. Noting that New Orleans would receive a new franchise if the merger were approved, Congressman Boggs declared, The New Orleans area is ready for a professional football team. It is what New Orleans and Louisiana wants. It is what the South wants. We have a growing industrial area, one of the fastest growing in the United States... Professional sports are an integral part of growth patterns. We have come of age and we deserve a team (U.S. House of Representatives, 1966, p. 102). Senator Thomas Eagleton led the drive to bring the NFL back to St. Louis after the Cardinals had moved to Arizona. When asked why he supported the provision of extraordinary subsidies to attract the NFL s Rams to St. Louis, he responded, Why do the deal for the Rams? Because some people around the nation think St. Louis s best days are behind us. We had to do something dramatic (Rosentraub, 1997, p. 286). When asked why a large public investment in a ballpark was important for Denver, Federico Pena, the mayor who brought MLB to Denver, was quite clear on the importance of the four major sports leagues. I think if you re going to compete in the global marketplace you ve got to step up to the plate, so to speak, in many areas, and one is you have to have all the major sports teams in your city (Whitford, 1993, p. 30). In 1997, the Indiana legislature declared it a matter of public purpose to preserve and insure the continued existence of the economic and intangible benefits of the Indiana Pacers (Indiana Code, 1999). To this end, the legislature supported a $109 million, tax-supported plan to build a new arena for the NBA s Pacers. The city of Indianapolis diverted tax dollars to the project and then passed a tax on rental cars to improve the finances of the NFL s Indianapolis Colts. To these state and local actions can be added Congressional acts protecting the sports leagues from anti-trust actions to permit them to operate their special business in the best interest of the country (U.S. House of Representatives, 1966). New Orleans and Louisiana, St. Louis and Missouri, Denver and Colorado, and Indianapolis and Indiana each have numerous civic assets and access to a myriad of sports teams. Yet, community leaders and legislative bodies recognized that hosting major league sports teams was critical to their community s future and identity. In this regard, the public policy importance of the four major sports is found in Congressional and state and local legislative actions. The justification for public policy to affect the supply and distribution of teams, as well as their potential to be competitive lies in the social importance placed on team sports and in their immense popularity. If the four major sports are cartels that ignore the public s interests, then public action to influence the supply and location of teams is warranted. CAN SPORTS CARTELS REPRESENT THE PUBLIC S INTEREST? The development of public policies to affect the business decisions of private sports organizations can only be justified if the leagues are indeed cartels using their status to thwart market forces and economically harm consumers or taxpayers. If the leagues are merely organizations that have successfully competed with other forms of recreation for consumers scarce dollars, then oversight of their rules for expansion and revenue sharing is an inappropriate intrusion of governmental authority. If the leagues are cartels that fail to respond to the demand for competitive teams, then corrective actions may be justified. Some have argued that the leagues are just one form of entertainment and that if any market irregularities exist, they involve the relationship between teams and their players. While a consumer can select among competing forms of entertainment for their recreational dollars, a football or baseball player can sell their services to only one league if no other exists. Further, if the existing leagues limit the ability of players to market their services to different teams through capitation methods (ceilings on salaries or team expenditures) or restrictions on free agency, then the power of the leagues relative to labor is magnified. This has been an issue at the heart of many of the labor disputes in professional sports. However, for the present discussion, the issue for cities that want to host teams
6 Public Policies and the Playing Field Between Cities and Sports Teams 6 381 capable of competing for championships is how league practices and policies have influenced the supply, distribution, and competitiveness of teams. Are the four major sports leagues cartels that maximize their economic position through unfair control over a scarce resource? This is the question that is central to those communities that want teams and the justification for any public policies that interfere with the leagues rights to control the supply of franchises. Leagues were initially created to ensure the existence of competitive teams for the staging of games, protect market areas and the economic stability of each franchise, and provide a season of games that led to a championship. At first it was believed that teams did not compete with each other in an economic sense (Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs, 1922). Within this perspective, teams were seen as partners in a joint economic enterprise created for the sole purpose of staging athletic competitions (Quirk & Fort, 1992). Events across the last few years have dispelled this notion. In an era when teams must compete with each other to attract and retain talent, a baseball team in Chicago is more than a source of competition for the staging of games. If a team in Chicago uses its resources to attract and retain the best players, this competition can have a damaging effect on teams in other cities without access to similar levels of revenues (Lombardo & Kaplan, 1999). When the New York Mets agreed to pay Mike Piazza a record $91 million for seven seasons, most experts concluded the contract had effectively forced smaller market teams to strain to attract and retain their free agent stars (B. King, 1998). As winning percentages are correlated with expenditures for players (Scully, 1995), if any one team raises salary levels, all of its athletic competitors are threatened. In this manner, a team s athletic competitors quickly become their economic competitors. The Implications or Outcomes From Self-Regulation: The Supply Of Teams There are clear incentives for all owners to restrict the supply of teams. As long as the number of teams is less than the number of cities that want one, owners can bargain for the best possible deals from different communities. While one would expect a cartel to restrict the supply of teams, has this actually taken place? The ability of any community to support a team is a function of the size and wealth of its population. Preferences for different sports also are quite important. In 1995, the New York Times performed an analysis of the number of baseball teams that could be supported in the United States. This examination focused on four criteria enumerated for each metropolitan area: the number of men between the ages of 18 and 54, per capita incomes, population growth, and the potential for the sale of luxury suites (the number of firms and wealthy households in an area). The Times found nine areas without MLB teams that could definitely support a team, five areas that could possibly support a team, and as many as five areas that could support at least one additional team. With 28 teams based in the United States, the analysis by the New York Times would suggest MLB should have at least 37 teams and possibly as many as 47 (Ahmad-Taylor, 1995). In 1997, the Cleveland Indians earned a pretax profit of almost $10 million with gross revenues of approximately $140 million. The Indians play in a metropolitan region of 3.9 million people (July 1996 population of Cleveland s media market). If four million is the population base needed for a very profitable and successful team, both the New York City and Los Angeles metropolitan regions could clearly support additional teams. It may not be possible to conclude that as many as four or five MLB teams could exist in these markets, but at least one additional team would be quite profitable. If one focused only on the increased population of the US, there would also appear to be too few teams. There are nine metropolitan areas with populations larger than the smallest area with a MLB baseball team. If one focused on the number of large corporations in an area as a measure of the financial viability of a region to support a franchise, additional teams should exist in the Northern Virginia and Austin/San Antonio areas, Portland, and in the San Bernadino area. The current US population and the distribution of large businesses are sufficiently robust to support 33 or 34 major league baseball teams. In the NFL, Buffalo is the smallest market with a NFL team, but 14 other
382 6 JOURNAL OF URBAN AFFAIRS 6 Vol. 21/No. 4/1999 metropolitan areas with larger populations are without teams. As many as 42 NFL teams could be supported if population and local wealth were the factors determining supply and demand. Using wealth and size of the population it would seem that too few teams exist. In a free market setting it is reasonable to expect that there would be more teams. The fact is that cartels have restricted the supply of teams. The Implications or Outcomes from Self-Regulation: The Distribution of Revenue The distribution of revenue is critical to the integrity of athletic competition in a league. If teams have very different levels of income, then high-income teams will have a greater potential to attract and retain the best players. If this occurs, a group of teams can dominate a league and effectively eliminate competition. Some argue that the supply of talented players is such that all teams can compete for the players needed to win. It is the contention here that there is a limited supply of the best players. In the absence of revenue or talent sharing programs, teams in larger markets will attract better players, forcing teams in smaller markets to demand subsidies to enhance their revenues to the point that they can maintain profit levels and pay for the best players. The four major sports leagues have had very different commitments to revenue sharing. The NFL shares the greatest proportion of total league revenues and the NHL shares the least. The NBA also has a very limited revenue sharing program, but salary caps for teams and for every player place some limits on what can be spent. Major League Baseball In 1996, prior to MLB s new revenue-sharing program, team s averaged $66 million in total revenues (see Table 1). Fifteen MLB teams, however, had revenues below this average, and seven had revenues that were at least 33% larger. The high-revenue teams played either in large market areas (New York, Boston, and Chicago) or in subsidized facilities (Texas, Cleveland). The 1997 MLB baseball season was played with a new revenue-sharing plan, but when the smoke had cleared in 1998 from this redistribution effort, as the season began not much had changed. In Sports Illustrated s annual baseball season preview issue, Tom Verducci noted: The five biggest spenders last year all made the post season leaving just three playoff spots for the remaining 23 teams. The three clubs who got those spots... were gone from the post season quicker than footprints in the sea at high tide. It may not seem that long ago that Oakland, Minnesota, and Kansas City were World Series teams, says Athletics president Sandy Alderson. But that s ancient history. The dynamics of the game are drastically different from what they were ten years ago even five years ago. The change is easily explained. It was the construction of stadiums with public money coupled with the drop in TV money after the last CBS contract. Almost overnight the poor (teams) got poorer and the rich (teams) got a lot richer. As the gap between the haves and have-nots widens, those clubs in between are the most foolhardy. They are the ones spending enough money to dream of a pennant but not enough to compete with the big-revenue clubs (1998, p. 68). The five teams that paid the luxury tax in 1997 the Yankees, Orioles, Indians, Braves, and Marlins paid a total of $12 million to offset the revenue differences in baseball. Such a small sum has no ability to change the economics of baseball. Ozanian s 1998 analysis of MLB found 3 teams with gross revenues in excess of $130 million while 11 franchises earned no more than half of this total. Five teams had gross revenues in excess of $100 million, while 14 MLB teams did not earn as much as $80 million (see Table 2).
TABLE 1 Team Revenues and Expenditures and Selected Community Characteristics: MLB Teams in 1996 (all figures in millions of dollars except population) Revenues Team Gate Media Facility Total Player Salaries Income 1996 Population (in millions) Public Investment New York Yankees 42.6 69.8 17.5 133.3 63.0 38.3 19.8 Note 1 Baltimore Orioles 51.0 30.6 21.4 105.3 55.8 19.0 7.8 $200 Million Colorado Rockies 46.0 22.8 23.9 95.6 41.6 23.0 3.8 $215 Million Cleveland Indians 48.0 21.6 22.9 95.4 51.4 15.6 5.9 Approximately $215 Million Los Angeles Dodgers 31.9 31.8 22.0 88.6 39.1 13.5 15.6 Note 2 Boston Red Sox 39.0 30.9 16.4 88.4 42.2 16.3 7.3 Private Facility Texas Rangers 35.5 24.3 25.5 87.7 42.8 18.9 5.1 $135 Million Atlanta Braves 40.1 30.3 6.3 79.1 55.4 0.4 4.4 Note 3 Chicago Cubs 28.3 29.3 16.9 76.6 32.2 18.3 8.8 Private Facility Chicago White Sox 22.2 24.3 20.9 70.3 47.5 5.2 8.8 $150 Million Toronto Blue Jays 36.3 28.4 3.1 70.2 30.7 14.5 4.3 $262 Million (Canadian) St. Louis Cardinals 27.3 25.7 14.9 69.8 42.6 3.2 3.0 Private Facility New York Mets 18.2 30.9 16.8 68.3 26.2 11.0 19.8 Notes 4,5 Houston Astros 21.8 22.3 14.4 62.4 28.4 11.5 4.6 $180 Million Seattle Mariners 31.0 17.2 7.5 57.6 44.3 1.7 4.0 $360 Million Florida Marlins 21.5 23.9 7.3 55.8 30.0 2.8 3.7 Note 5 San Diego Padres 21.7 16.5 12.1 52.8 33.3 2.5 2.7 $250 Million; $450 Million Private San Francisco Giants 14.3 25.5 9.6 51.8 37.8 6.0 6.5 Note 6 Philadelphia Phillies 18.7 21.4 8.0 50.0 31.9 6.5 7.7 Note 5 Oakland Athletics 12.5 25.2 9.8 49.4 21.4 11.3 6.5 $130 Million Cincinnati Reds 14.9 21.5 7.0 45.3 45.3 14.0 9.4 $250 Million Detroit Tigers 12.4 24.7 5.4 44.4 21.6 3.8 6.0 $240 Million Kansas City Royals 14.5 16.5 10.2 43.1 20.9 4.7 3.3 Note 7 Anaheim Angels 15.0 18.3 7.1 42.5 27.7 2.4 15.6 Note 8 Milwaukee Brewers 14.9 15.1 9.7 41.6 17.5 6.6 2.2 $232 Million Minnesota Twins 13.8 20.4 5.0 41.1 23.4 1.3 3.9 Note 5 Montreal Expos 14.8 19.4 4.8 40.9 17.7 6.2 3.3 Note 5 Pittsburgh Pirates 12.3 17.7 7.7 39.9 20.5 1.4 2.9 Note 5 Average revenues of MLB teams in 1996, $66 million; Average revenues of 1996 playoff teams, $89 million Average revenues of 6 teams with highest player payrolls, $88.1 Million; Population, in millions, refers to media markets. Notes: (1) Yankee Stadium was remodeled at the public s expense, but the team is now seeking new facility; (2) The Dodgers were given the land upon which their stadium was built. (3) Atlanta Braves paid approximately $50 million for the remodeled 1996 Olympic Stadium. (4) New York City built Shea Stadium in the 1960s; (5) Seeking new stadium or new stadium has been approved. (6) Building privately financed stadium. (7) Team is now community owned. (8) Private financing for remodeled public stadium. Sources: Financial World (Website), Alan Friedman and Paul J. Much, 1998. 6 Public Policies and the Playing Field Between Cities and Sports Teams 6 383
384 6 JOURNAL OF URBAN AFFAIRS 6 Vol. 21/No. 4/1999 TABLE 2 MLB Team Values, Revenues, and Operating Income in 1997 (all figures in millions of dollars) Team Market Value Revenues Operating Profit New York Yankees 362 144.7 21.4 Baltimore Orioles 323 134.5 18.7 Cleveland Indians 322 134.1 15.4 Colorado Rockies 303 116.6 38.3 Atlanta Braves 299 119.6 18.2 Texas Rangers 254 97.6 9.1 Seattle Mariners 251 89.8 11.4 Los Angeles Dodgers 236 94.3 0.9 Boston Red Sox 230 92.1 7.7 Chicago White Sox 214 82.3 4.2 Chicago Cubs 204 81.5 8.1 New York Mets 193 80.5 8.1 Houston Astros 190 68.0 2.3 San Francisco Giants 188 69.8 0.2 St. Louis Cardinals 174 82.9 2.4 San Diego Padres 161 57.6 6.7 Florida Marlins 159 88.2 5.5 Anaheim Angels 157 62.6 9.6 Toronto Blue Jays 141 67.1 20.5 Detroit Tigers 137 50.6 0.4 Cincinnati Reds 136 50.2 19.9 Pittsburgh Pirates 133 49.3 7.5 Philadelphia Phillies 131 57.1 2.5 Milwaukee Brewers 127 46.9 4.8 Oakland Athletics 118 56.4 7.5 Kansas City Royals 108 51.2 11.8 Minnesota Twins 94 46.8 16.5 Montreal Expos 87 43.6 3.7 Source: Michael K. Ozanian, Selective Accounting, Forbes, December 14, 1998, pp. 124 134. National Basketball Association In 1996, the 8 most successful teams had average revenues $8.9 million above the league average. For the 1997 98 season, 9 teams had player payrolls in excess of $35 million, while 17 teams spent less than $30 million. Differences of this magnitude, when a team may have as few as 12 players can have a substantial impact on winning percentages. NBA teams do not share any arena-related income, ticket revenues, or income generated through local media contracts. The league does share its national television contract, but that accounts for less than 30% of team revenues. By the end of the 1997/98 NBA season, the revenue disparities in this league had also created a world of haves and have-nots. Two teams had gross revenues that exceeded $100 million, while 8 earned less than $50 million. Seven teams had gross revenues in excess of $80 million, but 20 teams earned less than $60 million, creating a revenue mismatch that had effectively destroyed any competitive balance (see Tables 3 and 4). After the 1997/98 NBA season, team owners invoked a clause in the existing contract with the NBA Players Association that enabled them to terminate the agreement. The players share of league revenues had exceeded the agreed-to level. A lockout began that led to the cancellation of 31 games for each team. The NBA s new agreement placed a cap on team salaries by limiting the amount of money that could be paid to any one player. Players with 5 or fewer years of experience could not earn more than $9 million. Those with between 6 to 9 years of service could earn no more than $11 million, and the most any one player could earn with more than 9 years of service was $14 million. The union also accepted a total salary cap of $30 million per team for the 1999 season. For the
TABLE 3 Team Revenues and Expenditures and Selected Community Characteristics: NBA Teams, 1996 (all figures in millions of dollars except population) Revenues Team Gate Media Facility Total Player Salaries Income 1996 Population Public Investment New York Knicks 41.2 30.0 19.6 99.9 45.9 22.9 19.8 Private Facility Chicago Bulls 38.0 27.3 12.2 86.8 25.2 33.2 8.8 Reduced Taxes Portland Trailblazers 40.9 22.6 15.2 86.1 25.6 33.5 2.6 Infrastructure Los Angeles Lakers 31.0 36.5 6.8 81.3 34.9 19.9 15.6 None in New Arena Phoenix Suns 27.5 32.5 10.9 78.8 39.0 15.3 4.4 At Least $50 Million Detroit Pistons 24.4 33.1 24.5 77.3 25.6 25.7 6.0 Private Facility Boston Celtics 29.8 22.6 7.4 64.6 27.6 16.4 7.3 Private Facility Cleveland Cavaliers 25.7 19.5 13.4 64.5 29.6 11.9 5.9 At Least $100 Million Houston Rockets 27.9 25.0 4.4 62.8 27.4 13.4 4.6 New Facility Planned Orlando Magic 27.6 25.1 4.8 62.8 39.1 8.5 2.7 $98 Million Utah Jazz 27.2 15.6 11.5 61.4 24.0 14.8 2.2 Land Was Provided San Antonio Spurs 29.4 20.2 6.0 59.7 28.0 15.2 3.1 $186 Million/Note 1 Seattle Supersonics 26.6 19.5 3.9 55.7 27.7 12.0 4.0 Note 2 Charlotte Hornets 23.5 19.8 6.2 53.7 24.2 14.9 6.8 $52 Million/Note 1 New Jersey Nets 19.2 24.7 5.3 52.9 24.6 7.3 19.8 $85 Million/Note 1 Sacramento Kings 19.9 15.8 9.4 50.4 26.1 4.3 3.2 $70 Million Loan Toronto Raptors 23.7 17 4.5 49.4 18.1 14.4 4.3 Private Golden State Warriors 18.6 20.9 4.9 48.2 24.7 7.8 6.4 $28 Million Indiana Pacers 22.4 16.8 4.7 47.8 25.6 9.1 3.2 $107 Million Washington Wizards 17.5 16.2 7.0 45.9 23.8 4.6 7.8 $60 Million for Infrastructure Philadelphia 76ers 14.1 24.5 2.3 44.6 27.1 2.1 7.7 Infrastructure Only Miami Heat 17.2 18.8 4.4 44.3 23.5 4.8 3.7 $6.5 million/year; Note 4 Minnesota Timberwolves 13.6 19.9 6.8 44.0 23.9 6.7 3.9 At Least $50 Million Denver Nuggets 16.2 18.6 4.6 43.6 24.8 4.4 3.8 $20 Million Vancouver Grizzlies 17.8 14.5 3.8 42.3 19.4 5.4 1.8 Private Facility Dallas Mavericks 18.5 17.7 2.3 42.2 23.3 4.6 5.1 $125 Million Atlanta Hawks 12.3 17.7 5.8 41.3 24.1 2.8 4.4 $62.5 Million Milwaukee Bucks 14.2 15.6 2.8 36.4 24.9 3.5 2.2 $90 Million Los Angeles Clippers 10.1 19.1 2.5 35.5 22.6 1.4 15.6 $5 Million Notes: (1) Teams pay rent, which reduces a portion of the public subsidy. (2) Renovation cost of $110 million paid by city but supported by facility revenues. (3) The public sector investment is limited to infrastructure. (4) The new arena will be privately built, but the public sector is responsible for maintenance costs of $6.5 million per year. (5) City provided $4.5 million for infrastructure, $2.25 million in sales tax rebates, and $2.1 million in annual property tax reductions. Sources: Financial World (Website), Alan Friedman and Paul J. Much, 1998. 6 Public Policies and the Playing Field Between Cities and Sports Teams 6 385
386 6 JOURNAL OF URBAN AFFAIRS 6 Vol. 21/No. 4/1999 TABLE 4 NBA Team Values, Revenues, and Operating Income in 1997 (all figures in millions of dollars) Team Market Value Revenues Operating Profit Chicago Bulls 303 112.2 8.6 New York Knicks 296 109.7 18.3 Los Angeles Lakers 268 92.4 24.8 Portland Trail Blazers 245 94.1 34.2 Phoenix Suns 235 87.0 15.3 Washington Wizards 207 76.5 8.2 Detroit Pistons 206 85.9 30.0 Utah Jazz 200 80.1 20.7 Philadelphia 76ers 196 69.9 8.6 Boston Celtics 176 65.0 10.5 Seattle Supersonics 169 64.9 3.3 Houston Rockets 166 72.1 20.3 Cleveland Cavaliers 161 61.9 13.5 New Jersey Nets 157 65.5 8.4 Indiana Pacers 152 56.4 4.8 Miami Heat 145 50.0 7.5 Atlanta Hawks 140 46.6 9.1 Orlando Magic 134 63.7 1.9 Vancouver Grizzlies 133 51.1 1.3 Golden State Warriors 130 48.0 2.5 Charlotte Hornets 124 56.4 9.2 San Antonio Spurs 122 55.3 0.7 Toronto Raptors 121 44.9 1.6 Dallas Mavericks 119 41.2 6.8 Sacramento Kings 119 51.9 5.2 Minnesota Timberwolves 119 51.8 5.8 Denver Nuggets 110 37.8 6.8 Los Angeles Clippers 102 39.3 4.9 Milwaukee Bucks 94 42.7 3.2 Source: Michael K. Ozanian, Selective Accounting, Forbes, December 14, 1998, pp. 124 134. 1999/2000 season, the cap will expand to $34 million, but thereafter the cap will grow by approximately $1.5 million a year. With salaries capped, it was hoped that smaller market teams with new revenue-rich (and subsidized) arenas would be able to have competitive teams and to retain their stars. This potential certainly exists; however, the NBA s achievement of a plan to balance competition and protect smaller market teams did not involve a sharing of revenues. Rather, the cost of putting a competitive team on the court was controlled by limiting the money players could earn. No caps on profits were established. National Football League By virtue of sharing revenues from the national broadcast contracts and from the sale of tickets, the NFL redistributes more money than any other league. However, the revenues that are not shared have led to critical revenue differentials. In 1996, seventeen teams earned less than the league average of $77.7 million, and seven teams earned more than $80 million. The Cowboys benefited from being the team with the most in-stadium revenues and earned a total of $121 million in 1996. In 1997, the Cowboys, Redskins, and Dolphins had income after expenses that dwarfed the revenues of every other team in the league (see Tables 5 and 6). One other team that was quite successful financially, the St. Louis Rams, plays its home games in a new stadium that was built by the public sector without contributions from the team. Smaller market teams typically earned less revenue. For example, the
TABLE 5 Team Revenues and Expenditures and Selected Community Characteristics: NFL Teams, 1996 (all figures in millions of dollars except population) Revenues Gate Media Facility Total Player Salaries Income 1996 Population (in millions) Public Investment Dallas Cowboys 23.3 47.0 41.5 121.3 61.1 30.2 5.1 New Stadium Discussed Miami Dolphins 26.2 44.4 20.0 95.4 49.5 20.7 3.7 $12.5 Million San Francisco 49ers 25.9 46.7 9.3 85.9 58.8 3.6 6.5 $100 Million St. Louis Rams 24.6 44.7 12.0 85.8 51.9 16.4 3.0 $280 Million Kansas City Chiefs 23.9 44.1 10.0 82.0 50.1 10.9 3.3 $43 Million/Note 1 New York Giants 25.1 45.8 5.2 80.6 65.4 0.6 19.8 $78 Million/Note 1 Philadelphia Eagles 23.6 44.9 8.3 80.3 51.6 6.7 7.7 $50 Million/Note 1 Chicago Bears 22.2 48.0 5.7 79.5 55.8 2.9 8.8 New Stadium Requested Oakland Raiders 25.0 44.8 4.9 79.3 56.2 3.6 6.5 $197 Million/Note 1 Atlanta Falcons 23.8 44.9 6.5 79.2 54.3 5.4 4.4 $214 Million/Note 1 New England Patriots 20.8 46.4 7.0 79.1 57.0 0.1 7.3 $375 Million+ New Orleans Saints 20.2 42.9 9.3 79.0 58.6 4.7 2.5 $134 Million/Note 1 Buffalo Bills 24.2 44.1 5.9 77.7 60.7 2.5 2.6 $180 Million/Note 2 Baltimore Ravens 24.4 43.9 3.0 75.8 47.8 9.0 7.8 $220 Million San Diego Chargers 23.0 43.4 5.7 75.6 51.3 6.7 2.7 $105 Million/Note 1 New York Jets 20.4 45.2 5.2 75.4 62.2 8.0 19.8 $78 Million/Note 1 Carolina Panthers 32.5 19.4 16.2 75.1 49.9 1.7 6.8 $50 Million Green Bay Packers 19.3 43.2 7.8 74.9 46.5 7.2 5.1 $960,000 Minnesota Vikings 20.6 43.5 6.6 74.2 46.4 8.9 3.9 $55 Million/Note 3 Denver Broncos 22.9 46.7 0 73.4 56.4 0.7 3.8 $260 Million Pittsburgh Steelers 22.7 43.6 2.7 72.5 49.6 4.9 2.9 $35 Million/Note 1 Cincinnati Bengals 20.2 43.0 1.4 72.1 44.0 10.1 6.9 $400 Million/Note 1 Tampa Bay Buccaneers 17.5 43.6 6.9 72.1 47.5 8.9 3.5 $300 Million Seattle Seahawks 20.0 45.0 2.6 71.2 49.4 3.3 4.0 $325 Million Arizona Cardinals 19.1 43.9 4.5 71.1 52.1 0.8 4.4 New Stadium Requested Washington Redskins 20.2 45.7 1.2 70.7 41.1 7.5 7.8 $71 Million for Infrastructure Indianapolis Colts 20.2 42.8 3.2 69.7 52.4 3.0 3.2 Note 4 Detroit Lions 21.8 43.2 0.8 69.4 47.0 3.3 6.0 $240 Million Jacksonville Jaguars 30.8 20.0 11.6 67.3 53.1 4.8 1.4 $121 Million/Note 1 Tennessee Oilers 14.6 44.4 3.2 65.7 43.5 5.2 4.6 $292 Million Notes: (1) Team pays a small rent, which reduces the public subsidy. (2) Original stadium cost was $85 million; a state aid package passed in June 1998 provided $63 million for stadium improvements, $18 million in capital to help the team, and $2.9 million to cover the team s rental payments to Rich County. (3) Team is requesting a new stadium. (4) In 1997 the city of Indianapolis changed the lease to give more revenue to the Colts the public costs for the RCA Dome will be in excess of $80 million. Sources: Financial World(Website), Alan Friedman and Paul J. Much, 1998. 6 Public Policies and the Playing Field Between Cities and Sports Teams 6 387
388 6 JOURNAL OF URBAN AFFAIRS 6 Vol. 21/No. 4/1999 TABLE 6 NFL Team Values, Revenues, and Operating Income in 1997 (all figures in millions of dollars) Team Market Value Revenues Operating Profit Dallas Cowboys 413 118.0 41.3 Washington Redskins 403 115.1 31.7 Carolina Panthers 365 83.0 0.7 Tampa Bay Buccaneers 346 76.8 2.6 Miami Dolphins 340 103.1 31.6 Baltimore Ravens 329 73.2 1.0 Seattle Seahawks 324 77.1 10.9 Tennessee Oilers 322 71.5 0.4 St. Louis Rams 322 91.9 17.1 Denver Broncos 320 76.3 2.5 Detroit Lions 312 74.2 20.9 Cincinnati Bengals 311 69.2 1.7 Pittsburgh Steelers 300 75.1 1.6 Jacksonville Jaguars 294 66.8 14.1 New York Giants 288 82.3 0.4 New York Jets 259 76.2 2.1 Kansas City Chiefs 257 85.6 3.7 San Francisco 49ers 254 84.7 0.6 New England Patriots 252 84.0 8.1 Buffalo Bills 252 78.7 6.6 Philadelphia Eagles 249 83.0 13.0 San Diego Chargers 248 82.5 6.1 Green Bay Packers 244 78.8 1.2 New Orleans Saints 243 80.9 18.5 Chicago Bears 237 79.0 2.7 Oakland Raiders 235 78.3 2.5 Minnesota Vikings 233 77.7 6.7 Atlanta Falcons 233 77.6 0.8 Arizona Cardinals 231 76.9 8.5 Indianapolis Colts 227 70.9 0.4 Source: Michael K. Ozanian, Selective Accounting, Forbes, December 14, 1998, p. 132. Indianapolis Colts, the Arizona Cardinals, and the Seattle Seahawks each earned at least $6 million less than the league average and more than $10 million less than the teams with the largest revenue bases. The Seahawks will soon play in a new, publicly subsidized stadium, and the Colts received a revised lease that will enhance their revenues and that led to higher local taxes. The Cardinals have tried in vain to get governments in the Phoenix area to build a new stadium and have threatened to move if a new facility is not forthcoming. To help another small market team, the Buffalo Bills, taxpayers in New York provided more than $60 million for stadium renovations. National Hockey League Substantial revenue differentials exist in the NHL. In 1996, 6 teams earned more than $50 million, while 13 earned less than $40 million. Teams are dependent on their own local revenues, and those franchises with subsidized facilities have a potential to earn far more money than those teams that do not. In 1997, while 15 teams earned less than $50 million, 3 earned more than $70 million (see Tables 7 and 8). To summarize, in three of the four sports leagues, there are very large differences in the revenues earned by teams. These differences inevitably affect the distribution of playing talent. Teams in smaller market areas frequently demand subsidies to ensure that they earn sufficient revenues. In the NFL,
TABLE 7 Team Revenues and Expenditures and Selected Community Characteristics: NHL Teams, 1996 (all figures in millions of dollars except population) Revenues Team Gate Media Facility Total Player Salaries Income 1996 Population (in millions) Public Investment Chicago Blackhawks 38.7 6.0 24.5 73.1 23.8 26.9 8.8 Tax Reduction Only New York Rangers 36 8.3 20.7 70.4 34.1 10.2 19.8 Private Facility Detroit Red Wings 37.5 8.3 15.0 65.2 30.6 9.1 6.0 $57 Million/Note 1 Boston Bruins 35.9 11.8 12.8 64.9 22.2 17.8 7.3 Private Facility St. Louis Blues 38.1 5.2 8.6 54.8 28.5 6.3 3.0 $34.5 Million Philadelphia Flyers 34.1 7.9 8.7 53.6 22.4 9.7 7.7 Infrastructure Only Pittsburgh Penguins 35.6 7.0 4.6 48.6 24.2 10.1 2.9 $22 Million Toronto Maple Leafs 24.7 8.4 8.8 46.2 23.4 3.4 4.3 Private Facility New Jersey Devils 27.1 7.2 8.5 43.6 23.4 4.3 19.8 $85 Million/Note 1 Vancouver Canucks 26.3 7.3 4.8 42.7 26.5 0.3 1.8 Private Facility San Jose Sharks 25.5 4.2 10.5 42.4 18.9 8.1 6.5 $162.5 Million/Note 1 Los Angeles Kings 27.8 7.0 4.8 40.4 28.4 2.0 15.6 New Private Facility Montreal Canadiens 22.7 7.2 6.4 40.2 20.1 0.4 3.3 Private Facility Anaheim Mighty Ducks 22.6 5.5 9.0 39.5 15.8 6.9 15.6 Note 2 Calgary Flames 22.3 5.0 8.4 38.6 17.1 7.8 0.8 $176 Million/Notes 1,3 New York Islanders 19.8 10.9 5.0 37.1 18.0 3.9 19.8 $31 Million Colorado Avalanche 25.9 3.0 6.6 36.9 21.5 0.6 3.8 Note 4 Washington Capitals 22.1 4.7 7.3 36.5 18.5 0.5 7.8 $60 Million/Note 5 Dallas Stars 26.9 4.3 1.9 33.9 21.4 0.1 5.1 $125 Million Florida Panthers 23.2 5.4 2.7 32.6 17.8 0.9 3.7 $185 Million/Note 1 Ottawa Senators 17.7 5.5 6.4 31.9 13.8 0.1 1.0 $200 Million/Note 3 Buffalo Sabres 19.3 5.1 4.1 29.3 19.9 3.3 2.6 $122 Million/Note 6 Edmonton Oilers 13.7 5.0 6.1 27.6 11.7 0.1 0.9 $14 Million/Notes 3, 7 Tampa Bay Lightning 12.9 5.5 5.7 25.0 15.4 4.2 3.5 $139 Million Carolina Hurricane 16.6 4.1 2.2 23.8 22.4 9.2 2.4 $130 Million/Note 8 Phoenix Coyotes 11.9 4.6 3.3 20.6 22.8 11.7 4.4 New Facility Requested Notes: (1) Teams pay a small rent reducing the public subsidy. (2) Private sector assumed debt for facility. (3) Canadian dollars. (4) City provided $4.5 million for infrastructure, $2.25 million in sales tax rebates, and $2.1 million in annual property tax reductions. (5) The public sector investment is limited to infrastructure. (6) Ticket charge reduces public subsidy to approximately $32 million. (7) Team may move to U.S. city. (8) Team will share new facility with a university, team pays $20 million, and public sector pays $88 million. Sources: Financial World (Website), Alan Friedman and Paul J. Much, 1998. 6 Public Policies and the Playing Field Between Cities and Sports Teams 6 389
390 6 JOURNAL OF URBAN AFFAIRS 6 Vol. 21/No. 4/1999 TABLE 8 NHL Team Values, Revenues, and Operating Income in 1997 (all figures in millions of dollars) Team Market Value Revenues Operating Profit New York Rangers 195 69.6 3.9 Philadelphia Flyers 187 74.6 2.0 Boston Bruins 185 66.1 18.0 Detroit Red Wings 184 80.1 1.9 Washington Capitals 178 74.2 14.1 Chicago Blackhawks 170 63.1 13.6 Montreal Canadiens 167 61.8 8.3 St. Louis Blues 154 70.0 13.6 Colorado Avalanche 138 53.2 6.9 New Jersey Devils 125 54.4 4.4 Toronto Maple Leafs 119 47.5 6.8 Dallas Stars 118 45.6 2.6 New York Islanders 111 46.2 12.9 Mighty Ducks of Anaheim 109 49.6 6.3 San Jose Sharks 108 49.2 2.6 Florida Panthers 105 32.7 9.3 Los Angeles Kings 104 38.5 1.0 Tampa Bay Lightning 101 41.9 1.7 Vancouver Canucks 100 41.8 10.4 Ottawa Senators 94 42.8 1.2 Buffalo Sabres 91 41.5 1.3 Pittsburgh Penguins 89 52.6 8.7 Phoenix Coyotes 87 41.2 0.7 Carolina Hurricanes 80 25.1 13.4 Calgary Flames 78 38.9 0.6 Edmonton Oilers 67 33.6 2.3 Source: Michael K. Ozanian, Selective Accounting, Forbes, December 14, 1998, p. 134. where approximately 80% of league revenues are shared, the disparities are smaller. However, these differences are sufficiently large that smaller communities must provide subsidies or face the loss of their team (Rosentraub, 1999). The Implications or Outcomes from Self-Regulation Revenues and Winning Records As pointed out by Verducci (1998), the era of the small market baseball champion may well be a poignant part of baseball s lore. Of the final four teams that played for league pennants in 1998, only the San Diego Padres had a payroll below $60 million, while the league average was $41.1 million. In the NBA, since 1980, only four teams from market areas with fewer than 3 million people have made the NBA finals. The Portland Trail Blazers have appeared twice in the NBA finals (in a market area of 2.6 million people), the Orlando Magic (2.7 million residents in their market area) and the Utah Jazz (in a regional market of 2.2 million people) have each made one unsuccessful appearance in the finals. In 1999 the San Antonio Spurs won the NBA title, and they are lobbying for a new arena even though their current home, the Alamodome, opened in 1993. In comparison, between 1980 and 1997, the Los Angeles Lakers have been in the NBA finals nine times, the Boston Celtics and Chicago Bulls five times, the Houston Rockets four times, and the Detroit Pistons and Philadelphia 76ers three times each. None of these markets have fewer than 4.6 million residents. The NFL s champions, despite the impressive revenue-sharing program that exists, also have been from the league s largest cities. Prior to the victories by the Packers and Broncos in 1997, 1998, and
6 Public Policies and the Playing Field Between Cities and Sports Teams 6 391 1999, the last time a team from a region with fewer than three million residents won the Super Bowl was 1980 (Pittsburgh Steelers). After the Packers and Broncos won their titles, both teams needed to raise additional revenue. The Packers sold additional stock that has no real market value, and the Broncos renewed their demands for a publicly subsidized stadium. Under a threat that the Broncos would move if a new stadium was not built, voters agreed in November 1998 to subsidize a new facility for the team. While Scully and others have shown that there is a statistical association between revenues and winning, recent cases underscore that revenues create winners. For more than two decades, the Cleveland Indians languished at the bottom of the American League. The team s revenues have increased dramatically since heavily subsidized Jacobs Field opened. In 1990, the team earned $34.8 million; in 1997, the team s earnings had increased to $134.2 million for a real increase of 214%. In the same period, the team s payroll increased from $19.1 million to $66.9 million for a real increase of 250%. In 1990, player salaries accounted for 44.3% of total revenues; this figure increased to 49.3% in 1997. The team s increased expenditures for players and revenues have matched their increased winning percentages. From 1993 to 1994, the Indians increased player salaries by 30% and the team had a winning season in 1994 for the first time in more than a decade. Since increasing salaries, the team has never had a losing season. In 1997, the team won the American League pennant and in 1998 lost the American League pennant in the final rounds of the playoffs. Increased revenues and expenditures for players have changed Cleveland from a two-decade loser to an annual competitor for the American League pennant. The importance of revenues for a winning team does not imply that managerial talent does not matter. Some teams in large markets have consistently done poorly and also have failed to win division titles and championships, despite a willingness to spend dollars to attract the best playing talent. The Yankees had several poor seasons in the 1980s and early 1990s, as have the Mets, the Chicago White Sox, the Dallas Cowboys, and the Los Angeles Lakers. Philadelphia s teams each enjoy the ability to market their sport in a very large region, but they have consistently failed to offer fans a winning franchise. Despite these important examples of the role of management, in recent years when managerial issues have been addressed, the teams that consistently win have been those with access to either the largest markets, revenue sources that are not shared with other teams, or heavily subsidized facilities. PROFESSIONAL TEAM SPORTS AND PUBLIC POLICY There are too few teams relative to the demand for franchises, and the leagues have used their cartel status to both restrict the supply of teams and increase the pressure on communities to build subsidized facilities. Since 1985, more than $7 billion in public debt has been negotiated to build new facilities (Noll & Zimbalist, 1997). Across the next several years, it is anticipated that the total state and local debt for sports facilities will climb to $15 billion (Cagan & demause, 1998; Zimmerman, 1998). (Estimates of the public investments in the facilities used by each team are also provided in Tables 1, 3, 5, and 7.) In addition, on several occasions the leagues have asked Congress to pass laws to protect them from anti-trust actions, and on at least two occasions the requested laws were passed. Either different laws or, ironically, a policy of no government intervention, is needed to eliminate the dependent status of cities relative to their negotiations with professional sports teams. The need for either a different set of policies or laws or the implementation of a free market system is probably best underscored by the failure of leagues to meet their commitments to Congress. In 1966, Congress permitted the NFL to merge with the American Football League (founded in 1960). During hearings on the proposed merger, the NFL s representatives gave assurances that existing teams would remain in their current locations and new franchises would be created. The NFL did create one franchise, but additional expansions did not take place for several decades. In addition, within 15 years of the merger, franchise movement became a commonplace occurrence in the NFL (Rosentraub, 1999).