Field of Schemes

by Neil deMause

  Tax-exempt bonds have been around ever since the introduction of the federal income tax in 1913. For decades, cities and states levied these bonds, which can be sold at a much lower interest rate because they are tax-free, generally for roads or other public works. But beginning in the 1950s, cities started using tax-exempt bonds for economic-development projects by private industry. By the early ’80s, so-called private activity bonds were everywhere—amounting to nearly 80 percent of all government bonds issued, and soaking up so much capital that there was little left over for genuine public-interest projects. So Congress made a point of eliminating this subsidy as part of the 1986 Tax Reform Act, making private-activity bonds subject to the usual taxes. And in what was intended as a death blow to public-stadium deals, lawmakers specifically declared sports-construction projects to be private activity and thus taxable.

  They left two loopholes, however. First, since no elected official wanted to be accused of sabotaging his or her own city’s bid for a sports team, the tax-reform bill contained a grandfather clause exempting all stadium and arena projects then under way, as well as twenty-six other projects that were merely under consideration. This clause would go on to create billions more in federal subsidies.

  The other loophole, though unintended by its congressional drafters, ultimately proved far more lucrative to team owners. The Tax Reform Act had redrawn the definition of private-activity bonds to be exceedingly strict: If more than 10 percent of the facility’s use was to be by a private entity, and more than 10 percent of the bonds would be paid off by revenue from the private project, the bonds were considered taxable. But what if the stadium lease were drawn so that total government revenues—whether from lease payments, ticket surcharges, parking fees, or whatever—were held below that 10 percent threshold? The local government issuing the bonds would take a bath on them, for sure. But if a city’s political leaders were willing to go along, teams could still have the use of tax-exempt bonds—and a guaranteed 90 percent of the resulting revenues to boot.

  The difference between taxable and nontaxable bonds may sound small, but it adds up quickly. Because interest rates on tax-free bonds are significantly lower than on taxed bonds, and because interest payments wind up constituting the lion’s share of the cost of a bond-financed project, stadiums can be built far more cheaply—albeit because the federal government forgoes its tax revenue on the bonds. The lifetime federal-tax subsidy on a stadium financed with tax-exempt bonds can be as high as one third of the total cost.

  New York senator Daniel Patrick Moynihan, who had helped craft the 1986 law, was appalled at how his envisioned tightening of the tax laws had been turned into the biggest loophole yet, in effect forcing cities to fund only facilities that were guaranteed money losers. “In other words,” Moynihan would later explaing before Congress, “non-stadium governmental revenues (i.e., tax revenues, lottery proceeds, and the like) must be used to repay the bulk of the debt, freeing team owners to pocket stadium revenues. Who would have thought that local officials, in order to keep or get a team, would capitulate to team owners—granting concessionary stadium leases and committing limited government revenues to repay stadium debt, thereby hindering their own ability to provide schools, roads, and other public investments?”

  But that’s exactly what cities did, in droves. Stadium rents, which had previously been used to defray at least part of the cost of a publicly built stadium, plummeted, as municipalities struggled to keep revenues below the 10 percent threshold. This, explains Maryland Stadium Authority deputy director Ed Klein, was the origin of the lease discrepancy that would cause friction between the Orioles and Ravens: While the Camden Yards baseball park (built under the 1986 loophole) could safely charge rent to the baseball team, the new Ravens football stadium could not do so without running afoul of the new limit. Instead, the Ravens were granted free rent, which immediately sent the Orioles clamoring for a free-rent deal to match. “The Tax Reform Act of 1986 was in theory supposed to put an end to these [stadium deals],” observes Roger Noll, “but all that it did was reduce the rents to zero.”

  Congress had created a monster. The law that was supposed to put a stop to stadium giveaways had instead caused them to metastasize. Moynihan would later try to close the loopholes he had created, but was unable to convince his congressional colleagues to pass a bill eliminating tax-exempt bonds once and for all.2

  What’s in a Name?

  As if direct subsidies and tax loopholes weren’t enough, there’s yet another way for sports owners to make money at public expense. This is the diversion of revenue streams (in sports-business parlance, every source of cash, from tickets to popcorn to advertising signage, is considered a “revenue stream” in the team’s ledgers) that would otherwise benefit the building’s owners—the local government—into the owners’ corporate coffers. The newest cash cow on the block is naming rights—for a fee of up to $60 million, corporations can affix their name to a stadium, guaranteeing unlimited exposure during every sports telecast or news recap.3 And though the stadium itself may be owned by the public, the fee invariably goes straight into the team owner’s pocket.

  There’s hardly a new stadium being built that doesn’t bear a corporate moniker, from Pacific Bell Park (San Francisco) to Miller Park (Milwaukee) to Bank One Ballpark (Phoenix). Even older facilities can be renamed for a fee—San Diego’s Jack Murphy Stadium, named for a renowned local sportswriter, became Qualcomm Stadium at Jack Murphy Sports Complex after a computer company kicked in $18 million; and Cincinnati’s Riverfront Stadium will end its days promoting the local power company as Cinergy Field. With old stadiums, though, there’s always the danger of the new name not taking (Candlestick Park’s transformation into 3Com Park, for a local computer company, was short-lived, as public disdain for the new name led to the official adoption of “3Com Park at Candlestick Point” as the park’s name), and besides, who wants to advertise on an aging billboard when a brand-new one can be had the next town over?

  With the exception of Pacific Bell Park, privately built by the Giants, all these stadiums are publicly owned. Yet, naming fees nearly always go to pay the teams’ share of construction costs and are not counted as public subsidies.

  Ballparks Go Condo

  Owners have likewise captured the bulk of revenues from the other great innovation in sports money making: personal seat licenses. Since the dawn of professional sports, team owners have juggled ticket prices up and down, trying to balance their desire for increased profits with their fear of alienating fans. Occasionally, there would be attempts at ticket surcharges and other hidden fees, but these extra charges seldom amounted to more than another dollar or two—until, that is, the invention of personal seat licenses (PSLs). These devices burst onto the sports scene in the early ’90s as a new way of raising funds directly from the fans themselves and, in so doing, substantially raised the ante on what level of outside funding teams could demand.

  The first proto-PSLs appeared in Texas Stadium, the football stadium built by Dallas Cowboys owner Tex Schramm for his team in 1968; Schramm offered forty-year “seat options,” allowing fans to buy—and sell—their season-ticket rights. PSLs then disappeared for nearly twenty years before their rediscovery by Max Muhleman, a sportswriter-turned-marketer who, in 1987, stumbled upon the idea while searching for a way to raise money for a new arena that the Charlotte Hornets basketball team was hoping to finance without public funding. His solution: Sell “charter seat rights” to fans, guaranteeing them a shot at scarce season tickets in exchange for a nonrefundable fee.

  “We thought as an incentive to season ticket holders who were being asked to put up forfeitable deposits that they be given what we thought every fan would always like to have—and that was essential ownership of their seats,” Muhleman explained in a 1996 newspaper interview. “Instead of the team dictating who could have your seat if you moved out of town or whatever—in some cities you couldn’t give the seat to your buddy and in some cases couldn’t
transfer your tickets to a family member if there was a waiting list—we thought it would be nice to designate these as seat rights that could be held by the original ticket buyer.”

  Six years later, North Carolina businessman Jerry Richardson was looking for an edge in his competition for an NFL expansion franchise. The going was rough: Other cities, like St. Louis and Baltimore, had new stadiums on the drawing boards, but Richardson had been unable to convince Charlotte to build one for him. Muhleman proposed raising $100 million for a stadium via his charter seat license gimmick.

  The licenses, by now renamed “permanent seat licenses,” sold out the day they went on sale. This time, the close-knit cabal of sports owners sat up and took notice. Richardson, much like Bill Veeck four decades before him, had abruptly discovered a whole new revenue stream for sports teams—all you needed was a new stadium and a few thousand fans desperate enough to get their hands on tickets to invest $1,500 or more in a PSL.

  PSLs are an especially devious money-making tactic because of their hybrid nature. Not quite a ticket surcharge, not quite an investment, they can be used to lure fans into paying far more for sporting events than they otherwise would. If fans decide to give up their season tickets, they are told, they can sell their PSLs to another buyer and be out only the cost of the tickets they’ve already used. If they’re lucky—if the team is doing well, say, and demand for tickets is high—they may even reap a profit. “It has been unfairly reported that a seat license is a surcharge on top of your season ticket, or simply a charge that you have to pay before you have a right to buy a season ticket,” said Muhleman in 1996. “In fact, what you are buying is control that ordinarily rests entirely with the clubs.”

  It’s the kind of win-win scenario that sounds more fitting for a pyramid scam than for a multimillion-dollar investment—and for good reason. PSLs are an investment, but one whose value depends entirely on the willingness of someone else to buy that “control” from you. For ten-, twenty-, or thirty-year “personal seat licenses,” there is at least an expiration date built in; buyers know that the licenses will be worth little toward the end of their useful life—who wants rights to a season ticket for only a year or two? But even for so-called permanent seat licenses, such as those sold for the San Francisco Giants’ new ballpark, the permanence lasts only as long as the team stays put. With teams now staying in a facility for a decade or two at most, a thirty-year PSL could end up being no more real an investment than a Ponzi scheme, with PSL owners at the time the team moves left holding the bag.

  The profits from PSLs, meanwhile, almost always go directly to the teams, regardless of whether it’s the team or local government that owns the seats themselves. In one of the few exceptions, the Oakland Coliseum provides an indication of some of the pitfalls of relying on fans’ speculation on seat rights to raise capital for a stadium.

  The Oakland Raiders had led the wave of NFL franchise relocations in the ’80s, leaving behind a rabid following in Oakland for the larger market of Los Angeles in 1982. But by decade’s end, owner Al Davis was already itching for a better deal. After hearing pitches from such unlikely suitors as tiny Irwindale, California, Davis focused his attentions on none other than Oakland, which had never given up hope of luring the Raiders back to their original home.

  Davis’s price was steep. In exchange for the Raiders’ return, he would demand that twenty-two thousand new seats be added to the Oakland–Alameda Coliseum at public expense—along with two forty-thousand-square-foot clubs and 125 new luxury suites. (The resulting wall of seats would tower precariously above the rest of the bowl-shaped stadium, peering out at passing motorists like a transplanted slice of some other building entirely.) Since the city of Oakland was in no position to raise the necessary $100 million on its own, city officials turned to PSLs as their savior. Upon the Raiders’ return, the city announced, anyone wishing to buy season tickets would first be required to pay a fee of up to $16,000 for a ten-year personal seat license.

  But by opening day of the 1996 season, during which the Raiders would make their triumphant return by losing 9 out of 16 games, the Oakland Football Marketing Association, the nonprofit organization set up jointly by the Raiders and the city to push PSL sales, had sold just thirty-five thousand of the forty-five thousand licenses, leaving the city $35 million in the hole for the already-completed construction. The marketing association, desperate to fill the newly expanded stadium, began selling tickets without requiring a PSL purchase first—and soon enough faced the added obstacle of a lawsuit, filed by a fan who had purchased a PSL back when they were being sold as the only way to get a Raiders season ticket, and who now charged the city with fraud.

  Despite the controversy, personal seat licenses—variously called permanent, preferred, premium, or charter seat licenses—continue to flourish, especially in football, where high ticket prices are already common and a short season keeps ticket demand high. In each case the main beneficiary is almost always the team; even when PSLs are used to defray the cost of building a stadium, they are generally considered part of the team’s contribution toward the project.

  “Private” Stadiums, Public Cost

  Naming rights and PSLs are only the beginning of indirect subsidies to sports teams, which are as varied as the stadiums and arenas that they help finance. Pacific Bell Park, in addition to its naming-rights deal, is an example of yet another hidden subsidy. Though construction of the ballpark was privately financed (by PSLs, naming fees, and the private sale of taxable bonds), the cost of clearing the land for the facility will be paid for by the city of San Francisco—an additional $1.2 million a year. Other stadiums, such as the Washington Redskins’ new privately built football emporium in southern Maryland, have likewise taken what’s been dubbed the “off-ramp” approach to subsidies, raking in hundreds of millions of dollars in government expenditures for new highways, roads, and parking lots around the new facility. And there’s always the opportunity for additional subsidy via tax breaks: When the owners of the New York Knicks and Rangers threatened to leave town in 1982, the city agreed to exempt whatever corporation controlled the team from all local property taxes so long as the teams stayed put—a clause that has cost the city millions of dollars in tax revenues as the land’s value has soared.

  As public opposition to sports giveaways grows, teams and municipal governments are growing more and more adept at playing hide-the-subsidy. Arenas are especially susceptible to this trend. A well-utilized arena can be full 365 days a year with hockey, basketball, and concerts, whereas a baseball stadium sees only eighty-one home games, and a football field is used on only eight to twelve Sundays. Because of this capacity for year-round income, as well as their smaller size, arenas are more likely to be financed with private money—ten of the thirteen sports facilities built privately starting in 1987 were arenas. But scratch the surface of even these deals and you’ll find public involvement: The “privately built” Fleet Center in Boston sits atop a $100 million city-funded parking garage; Philadelphia’s $217 million CoreStates Center (built next door to the twenty-nine-year-old Spectrum in 1996) included $32 million in state funds. Overall, about 40 percent of new-arena construction winds up being financed by the public.4

  Lastly, there are always ticket guarantees, whereby localities promise to reimburse teams for unsold seats. When the San Diego Chargers football team intimated in 1996 that it was thinking of relocating when its lease expired in 2003, the city agreed to spend $76 million on renovating city-owned Jack Murphy (now Qualcomm) Stadium and adding ten thousand seats. City officials also guaranteed that, for the next ten years, at least sixty thousand tickets would be sold for each game, with the city making up any shortfall.

  It was only after the deal was signed that critics pointed out an odd consequence of this ticket guarantee. Because the Chargers’ renegotiated lease called for the team to pay 10 percent of ticket revenues to the city as rent, owner Alex Spanos would stand to earn 90 percent of the face value of all tickets
sold, 40 percent of which he would have to give to the league as revenue sharing. For unsold tickets, however, the city had agreed to pay the team 100 percent of the ticket price—meaning the Chargers would make more money not selling tickets than selling them. Since the team’s lease did not limit what Spanos could charge for these tickets, the team’s owner had a potentially limitless pipeline to the city treasury.

  When local libertarian activist Richard Rider realized what the city had agreed to, he was aghast. “It became apparent when this came up that the city council, and we think even the city manager who negotiated the deal, didn’t know what they’d done,” he says. “They get their ten-year guarantee, without any control over the prices. And we’re building ten thousand seats that basically nobody wants. The real reason for doing the stadium remodeling is to come up with skyboxes. But the ten thousand extra seats are seats nobody will use.”

  Ryder predicts that the total city subsidy could easily wipe out the Chargers’ $5.5 million in yearly rent, leaving the city paying the team to play before a near-empty house.5 “A good parallel to think of is the airline industry,” Ryder continues. “One thing an airline doesn’t want to fly is an empty seat. You want to sell out your industry. So they do whatever they have to do—they cut all kinds of deals; they’re constantly juggling their prices trying to sell them. Well, we just told the Chargers that it’s actually not important for you. In fact, it’s less than not important—it gets better.”

  Anatomy of a Swindle

  If the benefits of a major-league sports team are insufficient to repay a city for constructing a new stadium, as Robert Baade and his fellow researchers argue, they’re nowhere near enough to compensate for all the various subsidies that a new stadium can earn its sports tenants as well. Take a sample stadium—say, the TWA Dome in St. Louis. Built in the early 1990s to lure an NFL expansion franchise to town (thus filling the football vacuum left when the Cardinals were lured away to Phoenix in 1988), the new dome was bypassed in favor of sites in Charlotte and Jacksonville, leaving the city desperate to lure an existing franchise to relocate. In 1996 they found one—the Los Angeles Rams—but at an astronomical cost to taxpayers.