FoS 20 interview: Roger Noll thinks the stadium subsidy tide just might be turning

With 2018 being the 20th anniversary of the publication of the first edition of Field of Schemes — and also, not coincidentally, the 20th anniversary of the launch of this website — I wanted to do something special to mark the occasion. And so I am very pleased to announce the first installment of the FoS 20 interview series, where I chat with stadium and arena experts I’ve gotten to know over the last two decades to discuss where the subsidy racket has come and where it might be going.

The choice for guest #1 was an easy one: Stanford University economist Roger Noll was one of our first big interviews for the articles that ended up blossoming into our book. Noll continues to be one of the nation’s most knowledgeable followers of sports business, and if he still has lots to say that’s pessimistic about that world — those wagering on future success for the Las Vegas Raiders and Major League Soccer might want to avert their eyes here — he actually thinks there may be some signs of a light at the end of the subsidy tunnel.

Click the audio player below to listen to the audio interview in your browser, or skip down to the transcript if you prefer to read a lightly edited version of our talk. Either way, enjoy, and I’ll be back next month with another installment.

ND: Hi, everybody, and welcome to the Field of Schemes 20th anniversary interview series. Our guest for this inaugural episode is Roger Noll, who is an economics professor at Stanford and one of the definitive experts on sports economics, including coauthoring the book “Sports, Jobs, and Taxes,” which was one of the first in-depth investigations of the sports industry, including stadium deals and their financial implications. Hi, Roger, thanks for taking the time.

RN: Hi! My pleasure.

ND: So I remember back when Joanna Cagan and I were first working on the book, and we were first starting to do the research, we contacted you with questions like “Are cities being blackmailed into having to put up more money than it’s worth for the economic benefits they get back?” And your response was something like: “Yeah, it’s even worse than that, because there really aren’t any economic benefits to speak of!”

RN: That’s right.

ND: We’re still in the same situation, right? That’s remarkably unchanged. Is there anything we’ve learned in the last two decades to tell us otherwise or if there’s any exceptions or anything?

RN: Oh, I see a new dawn arising. Admittedly, this is inconsistent with the Raiders deal in Las Vegas, but in general in the last few years the resistance against huge public subsidies for stadiums has increased, and it’s much more difficult now for a team to get a large public subsidy than it was in the early 2000s. I think it definitely got worse after you talked to me last time. That sort of peaked in the early 2000s, and then since the Great Recession it’s been hard for a team to get a large public subsidy.

What you observe now is that the subsidy is more likely to become indirect, and more like conventional ways of attracting companies to locate in your area, like giving them the right to develop a whole bunch of land with tax increment financing of infrastructure, and things like that. So you give them tax breaks, but you don’t do it directly. It’s like the Los Angeles Rams facility and the L.A. area.

So I actually think that it’s hit its peak. And of course Las Vegas, which is an interesting one to talk about because it now looks so out there — it’s so different than any deal that’s been done in the last few years. The Las Vegas Raiders deal is now the exception, whereas in 2000 to 2005, it would have been the rule.

ND: Let’s step back for a second and first talk about the about how things have changed in the last few years. What do you attribute that to? That people finally read our books?

RN: Well, I don’t know how to apportion blame between you and me! But I think that notwithstanding the power of the press, the other thing that happened of course is that a bunch of cities got in deep financial trouble for the deals they made in the late ’90s and early 2000s. You know, Cincinnati, and the Phoenix area. So I think that that the reality came home that as the price of stadiums went up and up and up and up, and they became a significant component of a budget of a city or a county, that the failure to generate the incremental revenue that was promised in the initial plan caused serious financial harm that could easily be attributed to the stadium deal. And that has added a lot of a lot of heft to the arguments of the opponents.

So I do think that sports just overreached. They kept getting more and more and more money, a large part of which went to investing in much more elaborate facilities — things that had a lot more bells and whistles that went well beyond what you would actually need to have an economically viable business investment. And this caused financial hardship that then meant that the next round of requests for new stadiums, people did not respond as favorably as they had in the past.

ND: There’s a couple of other outliers, right? You’ve got the Texas Rangers, you’ve got the two stadiums in Atlanta, maybe you could throw the MLS stadium in D.C. in there. But you’re saying that those are becoming more the exceptions to the rule than the other way around?

RN: Yeah, what I’m saying is that the hit rate has gone down. It used to be the case that 75 percent of the time, teams would get a good deal. And now it’s down to like 25 percent of the time. You’re right, there’s still some bad deals out there. But there’s also a lot more deals where all the local government is providing is the land and the infrastructure, and the team is basically paying for the facility. And the way that it makes it work out financially is they get ancillary development rights in the area surrounding the stadium.

And this is actually a good thing for cities because it forces teams to do more like the Washington Bullets [ed. note: Wizards, obviously; Noll is old-school] facility in downtown D.C., where you actually try to develop a sports facility to be more integrated in the local economy as opposed to be walled off from it. In the late ’90s and early 2000s, the design of a sports facility was you’d have a facility and then you’d surround that with a parking lot, and you’d surround that with a freeway. So the probability that someone could actually escape and spend a dollar outside the facility was zero.

Now, if you’re going to be building an ancillary development that’s integrated with the sports facility, that enhances the value of the facility and the value of the surrounding businesses. Even though a smaller fraction of the net business may be going on inside the facility, the fact that it’s integrated with the greater community is actually beneficial. So that’s why the Los Angeles experiment with their new facility for the Rams and Chargers is especially interesting, because no one has ever successfully integrated a football facility into a local community before. And this will be a first if it works.

ND: I assume it’s a challenge because the football stadium is in use such a small amount of time. All sports venues, you have the problem that it’s just people flooding in and flooding back out a limited number of times a year. But football’s the worst for that, right?

RN: Football is exactly the worst. That’s why it is the singularly worst investment that a local community can make is to build a pro football stadium. But we’ll see what happens with the Rams. I don’t think there is any real solution to it, but you can make it better by having the facility be built in such a way that it has more uses, it is more modular. I don’t know whether they’re going to succeed in doing this in Los Angeles, because I don’t know enough about the plans — of what the inside of the facility is actually going to look like. But it’d be interesting to see if they experimented so that instead of, except for a few tractor pulls, being used ten times a year, it will be in fact use maybe 50 times a year. If they can do that, that’s a big benefit for the community.

ND: We’ve talked plenty of times over the past 20 years about the expectation that if the direct subsidies dried up, you would just see a lot fewer new stadiums being built. And that may be the case, but I certainly am surprised that you’ve got Los Angeles, you’ve got the new Warriors arena in San Francisco, you’ve got the Islanders talking about one in New York. MetLife. The new arena renovation that’s going on Seattle. It’s not unheard of for team owners or arena developers or people like AEG to say we actually will invest private money in sports venue. Is this a surprise to you? Or do you think this has to do somewhat with finding other ancillary ways of bringing in money that aren’t directly through trying to pay off the construction costs just by selling tickets.

RN: It’s a surprise that it’s gone as far as it has. It’s not a surprise that qualitatively this is the direction it’s taken. My expectation was that what they would do is simply make the stadiums less expensive — have fewer bells and whistles. But also, if you can recall, I remember talking to you about how Fenway Park was the past and it might be the future. The Boston Red Sox were forced into this by the lack of footprint. They had they didn’t have a lot of land. So they were forced to have the neighborhood be a beneficiary of Red Sox games as opposed to being a competitor.

So it doesn’t surprise me that there has been this attempt to have greater integration of the facility and the local community. And the dual use aspect of it that the Rams and chargers are playing in the same facility — again, 20 years ago, NFL teams thought it was anathema to share stadiums.We were in an area where sharing od stadiums was almost done — all of the shared stadiums had been essentially dispensed with, in all of sports, and we were moving to every team controlling its own facility. Again in football, especially, it makes no sense not to share stadiums multiteam team cities. And now we have two!

I think those things were foreseeable. But I think that the integration of the facility into multiuse, and with the rest of the community, the degree to which it is going to happen we underestimated it. And it’s probably going to happen more than we thought was possible 20 years ago.

ND: Which is much better from an urban planning standpoint, clearly. The one thing I wonder is whether it opens the door to — you know, we already have seen the shift away from direct subsidies, just going to the state legislature and asking for 300 million dollars in cash, to, well, give it to us in terms of tax breaks, give it to us in terms of free land, give it terms of other operating subsidies things down the road, because that’s easier to get to get passed. And we’re going to make this back by building other development around the stadium.

But then I wonder whether you’re at risk of seeing more things like the proposal in Anaheim that didn’t happen with the Angels — where it was, “Oh, we’ll pay for a whole new stadium! We just want development rights to the entire parking lot.” And the mayor there demanded a assessment and discovered that the value of the parking lot was worth more than the renovations they were doing. So I wonder whether there’s an opportunity for a different form of extracting public wealth or public opportunity cost or public value — just not through cash.

RN: Well, there’s always that danger. Tthat is to say that what form the subsidy takes, it’s still a subsidy. I was deriving joy from the fact that the actual magnitude of the subsidy has roughly been cut in half by now. I view that as a gain.

But you’re right, it’s still there. And it’s still an uneconomic investment. It still doesn’t have a good return on investment. So yeah, it would be better to have it be zero, but it’s certainly better to have it be two or three hundred million than to be 700 million. That’s sort of my take on it.

ND: I don’t mean to be the voice of doom. But as someone who has predicted that the tide was turning before and been completely wrong…

RN: Oh, I agree with you! And your skepticism is deserved. I agree that if these things turned out to be hugely successful, then I can imagine the magnitude of the subsidy coming back, so that any community benefits that arise from these multipurpose developments get completely captured by the owner of the sports team. That would be too bad. I can see that possibility happening. At least for now, that’s not where we are. And then if it turns out to be that this is the problem in the future, we can write another book!

ND: Let’s talk for a second about the Raiders, because I think you called that the worst deal you’ve ever seen. I think I’ve called it the worst deal I’ve ever seen.

RN: I think it was the worst deal we’ve ever seen!

ND: Talk a little bit about why it’s the worst, and then how on earth this happened. Because I think a lot of us thought, “Man, Mark Davis has painted himself into a corner. He has failed to get a chunk of the L.A. market. He is screwed.” And he walked away with 750 million dollars. How did this happen?

RN: I think he’s still screwed. In the sense that, yes, he got 750 million dollars of a two-billion-dollar facility. But if you read the financial plan, it is completely insane. They are expecting that something on the order of 40 percent of the people in attendance at those games are going to be people who drive up from L.A. They have 25,000 people per game getting to the game by walking from their hotels on the strip to the facility. And notwithstanding that in September in Las Vegas it’s 100 degrees, and the closest hotel on the strip is three quarters of a mile away.

So they’re expecting NFL fans — who are not exactly working class — to walk in 100-degree heat for somewhere between three quarters of a mile to three miles to get to a football game, and the reason that this is in the plan is they have no parking.

And they’re anticipating that the number of Las Vegas area people who will attend a game is 15,000 fewer than the number of season tickets they sold this year in Oakland.

ND: So, are we looking at a scenario where this could be a disaster for both the state of Nevada and the team? I would say that this was the first time but I guess we’ve had, I mean, arguably the Marlins stadium…

RN: This is the first.

ND: Well, the Marlins stadium was not a success for both sides, and the Glendale arena — there’s a few where everybody winds up unhappy. But this seems like it could potentially be not just everyone ending up unhappy, but it being a complete disaster for everyone.

RN: Exactly. When I said first, I meant the NFL. But you’re right, it looks like the Phoenix Coyotes. That’s exactly what it looks like. They’ve gotten themselves into a fix where their own forecasts of the local market demand for their product is substantially less than the local market demand for the product where they currently are — and they’re moving anyway.

ND: Is this just because Mark Davis check for 750 million dollars on it, and thought, “I can’t pass this up”?

RN: I don’t know anything. I’m trying to put a rational actor spin on it. My expectation is that the only way this makes logical sense is Mark Davis thinks he’s going to sell the team within the next couple of years.That maybe Sheldon Adelson or Steve Wynn or somebody like that will buy it and make it part of the Strip, basically.

I can’t see that this makes financial sense. Because when Adelson pulled his $650 million out of the deal, and that was replaced by a bank loan of 650 million, that sort of sealed the doom as far as I’m concerned for the Raiders as a business entity. Because they will collect a significant amount of money for naming rights and PSLs and all that. But he’s going to be hundreds of millions of dollars in debt to build this himself, with projected revenue substantially less than he has now.

So I think the only conceivable way out for him is that he will sell it to one of the hotel moguls in Las Vegas, and that that mogul would buy it because they think they can somehow integrate the marketing of their hotel chain. As you know the strip in Las Vegas, almost everything on their is owned by one of three companies. So if one of those companies buys the Raiders, they may think they’re getting a marketing advantage over their competitors for their casinos. So maybe that’s what he has in mind. But I can’t see the football team in and of itself being a viable enterprise in a stadium, even with its $750 million subsidy.

ND: This does seem to be one of the directions that things are heading, where you are seeing more stadiums being built as kind of loss leaders in these battles among big hotel owners or casino owners or arena operators, AEG and people like that. I can only understand this plan to spend a billion dollars on a new arena in Belmont Park in Queens as a turf war between Madison Square Garden and the owners of Barclay Center and things like that. Because as much as New York is a huge market, there’s a lot of arenas here right now. I can’t imagine it makes sense any other way.

RN: I think you’re absolutely right. And that is bearing in mind that an arena makes more sense than a stadium. Even so, New York now is well beyond full capacity for arenas, and building still another one makes no sense at all.

ND: Let’s talk for a second about shelf life. One thing that we have seen, even if the subsidy numbers are going down, is that 20 years ago we used to say when stadium is 30, 40 years old, the owner is going to want to start demanding a new one. Now it’s 20 years and you start looking ahead ot 20 years, so 10, 15 years down the road, it’s not unusual for an owner to say, “Well, you know, we’ve got to start talking about what comes next.” How long can this continue, this trend? I guess there’s two questions: One is what’s driving that? Is it just that they think they can get away with it? And the other is: Is there a limit? Can literally you start asking for a new stadium before the old one before the previous one is finished being built?

RN: This is one of the most interesting things going on in sports. And I think it has a two-part answer. The first part of it, of course, is you keep asking for more and more frequently because as sports become more and more popular in society, more closely integrated into the social fabric of a city, the greater the leverage the owner has to get more. So that’s the first part. The second part is the huge technological change has taken in the actual design and operation of sports facilities. As you know, the footprint of a contemporary stadium or arena is several times as big as the footprint of an arena or a stadium would have been built at the same seating capacity 25 years ago. And that’s because so much more stuff is being put inside the stadium there. It’s basically the shopping mall. So what’s gone on is the opportunity for ancillary revenues other than just selling tickets, and how that requires more space, and how that then leads to the demand for at least a serious renovation, if not a complete replacement of an older facility.

Now, both of these arguments hinge on the growth of the sports continuing. And I think for Major League Baseball and the NBA I don’t have any problem with that. I don’t see the end coming soon. For football, it’s not so clear. I mean, the NFL may well have peaked two years ago. The all-time historical peak of interest and willingness to pay for the NFL may well have peaked in 2015 or 2016.

And if that’s the case, then it’s going to come to an end. Because that takes away both the demand side for generating still more revenues, and it takes away the leverage of the owner to get more out of a local government. Meanwhile, back in the NBA, they are continuing to get bigger and better facilities with more and more opportunities for revenue generation inside. And they have actually a better prospect for integrating the facility into the local neighborhood for spillover benefits that they can capture.

So the NBA is different and it may well continue on the path it’s been on for the last few years. And likewise Major League Baseball. For the NFL and then to a lesser extent hockey I don’t see it continuing. And so I think that we may see a divergence here that the NBA and MLB sort of continue on the path, and the NHL and the NFL find it getting increasingly difficult to get new stadium deals, and the expected useful life will start to creep up again to the 30-year or 40-year range it was before.

ND: Do you have guess at what’s going to happen with MLS? Because it seems like they’re kind of in this weird cusp where they’re both building interest from a fairly low level — they’re going from being the fifth most popular sport to 4A — but legitimately growing in popularity. But at the same time, they are starting from a far distant beginning point, and so much of their business model seems to be based on, “Well, we’re just going to keep selling more expansion franchises and hope that that keeps” — right?

RN: I’ve had to spend a lot of my time in the last couple of months explaining precisely why the MLS is not a Ponzi scheme, but you might think so.

No, you’re absolutely right that the profitability of the original set of franchises in MLS is completely dependent upon expansion. It is true they have secured some television. They have increased their popularity. But it’s nowhere near enough to justify the prices of the franchises and the costs of the stadiums. And obviously expansion can’t go on forever. Plus, this additional problem is they are a sport that depends upon a vibrant minor league system.Every nation on earth that has good soccer, or football, has multiple divisions. MLS has taken this policy attitude that it’s going to try to mimic baseball where the MLS teams control the minor leagues. And that just raises their costs again. It doesn’t create a viable community-based independent demand like we see for second and third division clubs in Europe. And without promotion and relegation, you don’t have this positive prospect of teams going up and down so occasionally they get to be major league teams.

So I don’t see the business model of MLS justifying the amount of expansion that’s currently going on and the expenditures on new facilities. So I think if we move out 10 years, what do you think is going to happen, I think MLS has a good chance of having happen to it what happened to the North American Soccer League in the 1980s when they did the same thing: They got overexuberant and overexpanded.

ND: Now you’re the one who’s even more pessimistic than me. I’m not saying you’re wrong! But that’s the nightmare scenario that everybody is afraid of.

So I’m sure you get this question all the time, because I certainly do, which is people saying so what’s a good deal? What is a reasonable involvement that governments should have? Whether it’s what’s an example of a specific stadium that’s good, or how do you determine what a price point is. Because don’t think you or I ever say—

RN: Never should do it.

ND: Never should do anything — nobody should ever build stadiums, we should just shut down all sports and make them go play in some other country. And there obviously is some benefit to having a team, to having a new stadiums, to all these things, even if it’s nowhere near what the owners and their boosters claim. So what answer do you give to that, in terms of what makes sense for governments to do — or what’s a way for governments to figure out what they should do.

RN: I actually think there is a positive case to be made for government involvement in the provision of localized sports facilities in the same way that they provide libraries and parks and symphony orchestras and ballets — that this is part of the culture of a city. And if government is honest up front and says, “We’re not doing this because we’re all going to get rich. We’re doing it because we want this to be a part of our community, want it to be part of the cultural environment of the community in which we live,” that’s fine. Then where does that lead you? It leads you in actually the direction things have been going in the last few years, with a few exceptions, which is the integration of the facilities into the local community, giving responsibility for the design of the investment and the cost of the investment in the facility itself to the sports owner. If you’re going to subsidize it, you can give them the land and give them the infrastructure, but you don’t want to be paying directly for the bells and whistles. You want the decision about bells and whistles to be done by the team itself so that they only spend money on things for which there is some purpose other than being a monument to the owner. If, like in the case of Jerry Jones in Texas, for example, he’s willing to pay for monuments to himself — and that’s okay, I don’t have any objection to that — but the citizens of the community don’t have to build monuments. They don’t have to build his pyramids — he can build them himself.

And so I think that approach where you use things like giving away the land and the infrastructure and giving them some property tax breaks, but not paying for the stadium itself and not committing yourself to underwrite the operating revenues of that facility, subsidize the team and its operations, that’s the way to go. And if you present it that way — yes, we’re giving them something, but you decide as a citizen whether to vote for it on the basis of whether you’re willing to pay to have a local team be part of our community — that’s the right way to run the politics. My objection I think, and pretty much yours too, has always been don’t try to sell us snake oil. Don’t try to tell us we’re all going to get rich when we’re not.

ND: I guess the question then is how do you determine what the value is right of the team and of a stadium and things like that to fans and to taxpayers. Because clearly there is a value. But if you’re going up there and you’re saying. “Oh, this is not could be an economic benefit, we’re just doing this as a community asset,” unless you’re having some sort of referendum about it, you can still just go through and ask whatever you want, and just say, “Well, we’re being upfront about it now: We’re just we’re just doing this because we think it’s cool.”

RN: Most cities do not have a referendum every time they build a park. As long as the politics of it is discussed openly and the facts are presented in an objective fashion then I’m not so much worried. I mean, you can get corrupt situations where essentially a team might bribe a city council to give it a subsidy. But I don’t think that’s been the fundamental problem historically. I think the fundamental problem historically has been that the politics of large stadium subsidies dictated making the economic argument that somehow this was going to make all the property in the city more valuable.

Now we know from experiences in the ’90s and 2000s that it’s not true. We have lots of data now to say it’s not true. So I think it’s fairly easy to beat off that argument now, compared to what it was 20 to 30 years ago. And if people stop making that argument and local governments continue to decide they want to help teams and keep them, and it’s part of the normal political discourse of the community, I wouldn’t be terribly upset if indeed what is the common way to deal with it now becomes the norm. I would be upset obviously if the profitability argument came back and cities started just giving straight cash subsidies for stadium construction like the Las Vegas deal. I think that that would be a bad deal.

ND: But you’re you’re actually somewhat hopeful that things are heading in a direction that we may not be having the same conversation in another 20 years.

RN: I think that’s right. I mean I would say cautious optimism is the exact right way to put it.

ND: I guess I can’t hold you to that if you have a qualifier there. But I hope you’re right.

RN: I do too!