No, plummeting tax revenues don’t pose a special threat to stadium projects, here’s why

Last week I wrote a brief aside about how teams and/or cities losing revenue they were counting on using to pay off stadiums and arenas isn’t especially bad — except inasmuch as losing revenue is always bad — but I’ve since gotten enough frantic emails about this Business Journals article from Thursday about how the pandemic economic crash will make it impossible for cities and states to pay off stadium and convention centers that this subject clearly requires a deeper exploration. So, let’s spend some quality time looking at how sports stadium debt works, and why so many people, even business journalists, too often misunderstand it.

Anytime anyone wants to buy anything — a house, a car, a $1.2 billion stadium just so you can have air-conditioning — there are two ways to pay for it: with cash, or by borrowing the money and paying it off later. Local governments almost always choose the latter, raising the money by selling bonds, which are essentially a way of taking out a loan from lots of individual bondholders instead of from a bank. They can then pay off the annual bond costs either by dipping into their general funds or by dedicating a certain chunk of future tax revenues to paying off the debt: rental car taxes or hotel taxes or sales taxes or whatever, something they often prefer because then they can claim this is new money that is only there because of the team, even though that’s almost never true.

The important thing to keep in mind here is the difference between funding (who’s on the hook for paying for something) and financing (how they’re paying for it). If you take out a mortgage or put an expense on your credit card because you don’t have enough cash in the bank to pay for it all at once, that’s financing — you’re still paying for it, you’re just also paying the bank and/or Visa to borrow the money from them temporarily. But financing decisions are separate from funding decisions: If you need a new refrigerator and an equally-priced new washing machine at the same time and don’t have enough cash for both, it doesn’t really matter which one you choose to put on your credit card; either way, you end up with the same debt, and the same appliances.

Also, all of these expenses are what economists call sunk costs: Once you’ve bought a refrigerator, or a sports stadium, that money is gone and nothing you do (or the economy does) will bring it back. So if you buy a snazzy new appliance and then lose your job, that sucks, and maybe is a sign you should have been saving that money for a rainy day just in case, but really the problem is that you’ve lost your job and now can’t pay off your Visa bill, not which particular item caused that Visa bill to get so high.

Now that we’ve established some ground rules, let’s take a look at some bits from that Business Journal article:

A Business Journal analysis identified dozens of examples of stadiums, convention centers, public infrastructure projects and cultural sites in store for precipitous declines in funding as the nation weathers the financial storm. For many cities and states, the loss of hotel-related taxes alone will blow million-dollar-plus holes in their budgets every week the pullback persists…

In Mecklenburg County, North Carolina, hotel-occupancy taxes accounted for about $1 million in revenue per week for a host of uses, namely financial support for the NASCAR Hall of Fame and Charlotte Convention Center, both in the city of Charlotte. Houston pays debt service on $75 million in convention center bonds with its hotel-tax revenue, which totaled about $90 million last year when room occupancy rates were around 65% citywide.
Nevada is home to perhaps the biggest challenge of all, as approximately $750 million in financing to build the future home of the National Football League’s Las Vegas Raiders is tied to local hotel-tax revenue. The public fund dedicated to the 65,000-seat stadium’s financing generated between $4 million and $5 million a month prior to the Covid-19 outbreak.

Okay, yeah, losing millions of dollars a year in tax revenue is a terrible thing for local governments — but it would be just as bad if that money were being counted on to pay for firefighters or schoolteachers or what have you. Maybe spending hundreds of millions of dollars on a shiny new stadium looks especially bad when tax revenue dries up — just like that fridge with the built-in icemaker looks like a dumb decision when you wish you still had the money in the bank to buy food to put in a fridge — but which money you’ve chosen to assign to pay off which debt is ultimately just bookkeeping. And that money would have been gone either way: It’s not like Nevada couldn’t have used more money for more schoolteachers before this current mess started.

(The confusion of funding and financing, incidentally, is the same kind of fallacy that causes too many journalists to write articles bemoaning how cities are still paying off debt on stadiums that have already been torn down. It may be especially galling to still be making credit card payments on an appliance that’s already broken down and sitting waiting for the garbage truck to haul it off, but it wouldn’t have been any better for your personal finances if you’d spent the same amount of money but paid it off faster.)

So what happens to sports venues and convention centers now, with their bond payments still due and far less money coming in? Nothing to the buildings themselves, obviously: They, and their construction bill payments, were all completed years ago. As for the local governments suddenly facing huge shortfalls in tax revenues, they have a choice: They can default on their debts, which never happens, because they’re too afraid of scragging their credit ratings; find money elsewhere, say by selling off a hospital or two; or refinance their debts, which effectively means taking out new loans (or selling new bonds) to pay off the old ones, pushing debt payments further into the future, when hopefully the economy will have recovered enough that slicing off a slab of tax revenues to pay for decades-old expenses doesn’t feel so onerous.

This is all terrible! Cities and states are going to need those revenues and public hospitals and credit ratings in the future, and we could be looking at years if not decades of bare-bones budgets to get out of this hole. But it would be the same if local governments had spent all this money on fixing potholes instead of building stadiums — except of course that they’d now have smooth roads to show for it, instead of just a different hunk of steel and concrete on the skyline in place of the old one.

And in the end, the scale of this crisis is so huge — an estimated half a trillion dollars in state budget losses this year alone, with tens of billions more for cities — that even a few billion-dollar stadium debts are really just a drop in the bucket. Even the Business Journal acknowledges this, late in the article:

“There just has got to be big federal block grants to save the states. If that doesn’t happen, you’re going to have 50 catastrophes plus the District of Columbia,” said Greg Sullivan, research director at Pioneer Institute, a Boston-based public-policy think tank.

Ah, but then aren’t you just transferring the debt problem from cities and states to the federal government? Yes, but there are reasons why the feds can take on debt in ways that cities and states can’t, and reasons why it may often make economic sense for it to do so during tough times; I’ve saddled you with enough economics for one day, but here’s a good explanation of the argument from Paul Krugman if you’re really interested. For now, just reassure yourself that local governments aren’t screwed because they have to figure out how to pay for stadiums per se; they’re screwed because a sudden economic crash has destroyed their budgets. Sports venue spending didn’t help with that, but it would have been money down a hole either way — it’s just easier to notice your dumb spending decisions when your bank account runs dry.


17 comments on “No, plummeting tax revenues don’t pose a special threat to stadium projects, here’s why

  1. Isn’t a centrally planned and funded economy precisely what we used to make fun of the Soviet Union for doing?

    Is it really any different when, instead of the party apparatchiks pocketing any surplus (real or perceived) for their own ends, allegedly private interests still pay themselves exorbitant fees and bonuses off the back of the taxpayer, all the while storing that money in offshore tax havens so they don’t have to pay any of it back?

    It seems some pigs really are more equal than others.

    PS: I like the new article category…

  2. Neil: I strongly suspect that you may be able to take a pause from your column. Why? Because I suspect that the economics both from municipalities and professional and college teams will not allow many ( if any) stadium construction projects to go forward. The projects that started: Rams, Chargers, Raiders, and Islanders will be finished. But teams like the Angels, A’s and Carolina Panthers will have to wait, until economic conditions allow their projects to go forward.

    • I actually almost addressed this in this post, but I figured I’d yammered on for long enough. But now that you mention it: I strongly suspect that this is not the case, given past historical precedent. While the 2020 Coronavirus Depression will no doubt look a lot different from the 2008 Great Recession, it’s still significant that that previous one didn’t put much of a crimp in team owners’ subsidy demands — they just switched gears from “now’s a good time to spend on new sports venues because times are flush” to “now’s a good time to spend on new sports venues because you need jobs however you can get them.” Both are equally spurious arguments, for all the reasons I note above.

      I do expect that we’ll see fewer stadiums and arena deals pitched the next few months, if only because everyone is going to be busy with other things. But given that the federal government is issuing trillion-dollar “stimulus” packages every couple of weeks with very little oversight as to how that money will be spent, I think the kind of profiteering we’re used to discussing on this site is just going to change slightly, not vanish entirely.

  3. I may be ignorant here but in many cases (e.g. Las Vegas) aren’t these stadiums funded by special taxing authorities not general funds? In some cases the jurisdiction doesn’t neatly correspond to municipal boundaries and budgets.

    Now there are plenty of other such bodies ranging from school districts to Port Authorities but they are generally limited in the kind of revenue streams they can tap and they have their own bonds independent or cities and states. Just as in most (all?) states when your local school district is short on cash they can’t implement an income tax and if the Port Authority of NY and NJ is running a shortfall they can’t just hit up De Blasio for some cash, there are some unique constraints on what these bodies can do in some (not all) cases.

    • The revenue streams may not correspond to the usual geographic boundaries, but there’s still somebody on the hook for the bonds, whether it’s a city or county or state.

      The Port Authority, to take your example, is a joint authority of the states of New York or New Jersey. I suppose the two states could at some point decide, “Screw it, that’s not our debt” and just let the authority go under, but that would be completely unprecedented. Far more likely is that states/counties/cities will find a way to funnel more money to the sports authorities, in order to avoid default.

      • Sure but this misses the politics. When these were sold the message was “out of town visitors will pay for the stadium.” Because it is a separate entity now state and local governments have to deal with the story “We need to raise taxes / cut schools / whatever to bail out the stadium authority.” That’s a political loser. So they will grandstand and finger point and settle political grudges. Ultimately they will probably refinance to get around the hard decisions but the uncertainty around both future hotel tax revenues and if other parts of government might let the stadium authority fail will add uncertainty which will mean higher interest rates.

        Yes, ultimately money will probably get moved but if the Federal, State and City government could not avoid just screaming at one another in NYC around a pandemic, I would wouldn’t underestimate the impact of CYA as a force of nature. Different agencies and jurisdictions make the refrigerator analogy less clean.

  4. Neil, you’re of course correct in differentiating between funding decisions and financing mechanisms. But most — if not all — of the arguments teams make in favor of funding these stadiums depend on the financing mechanisms either not imposing costs on local residents (hotel & rental car taxes) or on “paying for themselves” via increased local economic activity. The implicit promise is that this private benefit won’t come at a true public cost, insofar as “public” means “local tax-paying voters.” When that bargain fails during a recession, I think it is substantively different from a road bond stressing a local budget because nobody promised the taxpayers that the road could be built at no net cost to them.

    There’s academic research finding that economic development subsidies and incentives in general are correlated with lower spending on basic public services by local governments. I presume, given the economics of stadiums, that this is specifically true for stadium subsidies & incentives as well. If government debt incurred to finance deals benefiting private, for-profit entities is limiting the provision of public services, then that’s different from government debt incurred to finance one form of public service limiting its ability to pay for other such functions.

    • Oh, incurring government debt to give enormous play toys to private sports owners is of course a terrible idea. But it’s a terrible idea even when you have tax revenues available to pay off the debt, because that’s always money that could be used for something else (even if it’s just lowering taxes).

      As for “that bargain” failing during a recession, it’s never actually true that hotel and rental car taxes pay for themselves as a result of building a new stadium. So it’s more an issue of this pretense being harder to maintain during an economic crash — but the crash isn’t what makes it a bad idea, it just pulls away the curtain to make it more obvious.

  5. Neil – what are your thoughts on what Stu is going to do with his plans to play in Tampa Bay and Montreal with his split season shenanigans? Would Tampa, St. Pete or Montreal even dream of giving them significant funds to get two new stadiums built? I see this COVID-19 turning back the clock for years and likely the death penalty for Tampa Bay baseball.

    • I know the Commissioner has opposed expansion until the situation with the A’s and Rays is resolved, but Coronavirus changed things. That is especially true bif there is no 2020 Season). Why ? MLB owners can use the Expansion money to make up for their losses. Montreal being an obvious possibility. If that happens then there goes the Split schedule idea ( Tampa Bay and Montreal) down the drain, and the Rays become “Dead Man Walking.”’

      • Speaking of leagues using expansion fees to pay the bills… ProPublica recently had an amazing story about how 33,000 people attended a Seattle Sounders game in March after officials knew coronavirus was a major threat. Too many people would be outraged if the game was canceled at the last minute, it seems.

        I wonder how MLS will weather this summer being canceled. Baseball/basketball/football have Scrooge McDuck-sized piles of gold from national TV contracts, but MLS doesn’t.

        • According to Forbes, the average MLS team looks to have $30-40m in annual expenses, of which about $10m is player payroll. If they don’t pay their players this year and can cut a few million more in costs by not paying for flights, hiring concessions staff, etc., then you’re maybe looking at $20m per team in losses — not great, but certainly manageable for most MLS owners.

  6. Speaking of sunk costs, and Friday’s Round up, I was wondering about Tokyo Olympics. Would Tokyo be better off financially to bail out now? Not spend anymore money actually putting on the show. Or from this point forward, is the revenue from putting on the games more than the remaining expense of putting on the games. My guess is they would save more canceling.

    • It’s a good question. I have no doubt that even a “reasonably well attended” Olympics will generate a lot of money. But how much of that will be retained by the hosts and how much will go to the carpetbaggers at the IOC?

      (You could substitute FIFA, the NFL, or several other major sporting organizations for the IOC as well… they all do it.)

      I have a feeling that somewhere in the fine print of an Olympic hosting agreement, the host nation agrees to indemnify and otherwise make whole it’s partner at the IOC for any delay or cancellation, regardless of cause.

      It’s how organizations like that tend to roll.

  7. I am sure others on here have already thought of it but with the spot price of oil going negative because there is no place to store it and stadiums being empty with no sports . . . . Well, just a free thought if anyone is in the position to make use of it.

  8. Perhaps this is dumb, but isn’t it true that not all expenses are created equal? You mention that the cost would be the same if cities spent money on teachers and firefighters than on stadiums, but you can at least furlough or lay off employees (still bad and hurts lots of people to be sure). It’s the difference between canceling your Spotify and having a credit card payment. Am I missing something?

    • Sure, though you can’t actually furlough firefighters and schoolteachers if you want to keep schools open (even online) and keep buildings from burning down.

      My point was just that money is fungible, so revenues and expenses are separate parts of the bookkeeping ledger. If your tax revenue goes down, that’s bad, and if you spend a bunch of money on something that isn’t a public good, that’s also bad; but cities with stadium debt aren’t any more hosed than cities without during the pandemic — or at least, they’re not more hosed any more than they were two months ago.