An ill-advised financial arrangement is causing Maryland taxpayers to lose money on sports stadium financing deals that were supposed to save them money.
Under the pretext of economic development, while planning for the construction of a new stadium for the Baltimore Ravens of the National Football League in the late 1990s, the Maryland Stadium Authority entered into what are known as swap deals, complex business arrangements that enabled them to hedge against interest rate rises. The Federal Reserve significantly lowered interest rates in the years since, however, and the swaps are now costing taxpayers money.
Marta Mossburg, a senior fellow at the Maryland Public Policy Institute, noted a public debt analysis revealed the MSA received $19 million in cash up front as part of the deal. The incentive likely caused the fixed interest rate paid by the MSA to be 1 percent higher than it might have been had the MSA not received money up front.
Millions of $$$ Lost
The MSA received a total of $21 million in subsidies, according to its 2009 Annual Report. Yet in 2009 the agency still had an operating loss of $10.5 million.
Most economists who have studied sports facilities subsidies agree subsidizing stadiums is bad public policy because it burdens taxpayers while creating minimal economic benefits.
“I don’t think you can get much difference of opinion among economists or sports economists around the country: The sports stadiums tend to be drains on local economies,” said Allen Sanderson, professor of economics at the University of Chicago.
In addition to having an operating loss of more than $10 million last year, the MSA did not adequately pursue $812,000 in back rent owed by the Baltimore Orioles of Major League Baseball, according to a May 2010 audit from the Maryland Department of Legislative Services. The MSA also wrote off $158,000 in debt without proper approval, and an additional $124,000 from delinquent accounts was not collected, according to the Legislative Services audit.
Hundreds of thousands of dollars more also have been lost to taxpayers. In 2008 the Maryland Board of Public Works voted 2-1 to forgive $444,274 in outstanding rent owed to the MSA from the Sports Legend Museum, the audit noted. The museum’s monthly rent also was slashed from $32,208 to $10,300.
The MSA has since resolved the back rent owed by the Orioles. However, “The bigger issue is why the MSA should exist at all, given the agency’s poor stewardship of scarce resources,” wrote Mossburg in a column for the Baltimore Sun.
More Subsidies, Higher Costs
Stadium costs have been sharply on the rise nationwide since 1990. Although factors such as construction and insurance costs are involved, a 2007 study by Andrew Moylan of the National Taxpayers Union Foundation concluded these factors have “little merit” on what is driving stadium costs up.
Moylan noted iron and steel prices fell between 1995 and 2002, “a period when stadium costs escalated significantly.” The September 11, 2001 terrorist attacks caused insurance costs to rise, but Moylan noted, “the inflation-adjusted increase in stadium costs from 1990-2001—before the September 11 attacks—still would be a whopping 46 percent.”
He concludes the likely reason for increased stadium costs is simply fancier stadiums resulting from the huge taxpayer subsidies that go into them. The greater the subsidies, the more expensive the stadium designs become.
Other Risk Factors
The University of Chicago’s Sanderson also points to other risk factors in public investment in sports stadiums. Operating expenses are often high, he notes. One reason is there are few alternative uses for the facilities, especially outdoor football stadiums. It can be difficult to make a profit when the venue isn’t open on a regular basis.
“Teams would prefer not to own the stadiums for that very reason, because they’re [financial] drains,” Sanderson said.
In the case of the Baltimore Orioles, the baseball team pays rent based on how much revenue the team produces each year, so there is not a sure revenue stream.
Also, Sanderson notes, teams that are not tied down to a stadium are free to negotiate for more money.
Price for Departure
“Team owners now effectively hold cities and states under siege by threatening to move their teams, creating bidding wars to get as much government money as possible,” said John Nothdurft, budget and tax legislative specialist at The Heartland Institute.
Sanderson agrees, explaining that a pro sports team that decided to leave a city would impose costs on that city that another entity, such as a department store, would not inflict. Another problem he notes is that teams that rent stadiums have leverage over what activities take place in them even though they don’t own them, because the leagues control where teams can move.
“If a football team were to walk, or an NBA team or NHL team, the city would get saddled with basically a white elephant facility that they really don’t have an alternative use for, because that league—whether it’s the NFL or Major League Baseball or whatever the pro league is—can prevent another team from coming in,” Sanderson said.
Alyssa Carducci ([email protected]) writes from Chicago.