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August 04, 2004

Yankees stadium-finance FAQ

And here we go again, answering real questions from fictionalized readers...

Q: Why are you saying that George Steinbrenner would be using "other teams' money" to pay for the Yankees' new $750 million stadium? Isn't it a legitimate business practice for companies to deduct expenses before reporting income?

Yes, and it would be here too, if baseball had "income-sharing" instead of "revenue-sharing." The way the 2002 collective bargaining agreement works, teams pay a percentage of their gross local revenues (i.e., before expenses) to the league, which redistributes the cash to low-revenue teams. This was the big concession that the union granted to owners in order to avoid a strike: by reduces the value of putting fannies in the seats (a $10 million-a-year player suddenly has to sell $16 million a year in tickets to earn his value to the team, since $6 million of that gets sent to other teams), a flat-percentage revenue-sharing plan makes owners less willing to spend money on players, thus reducing both player salaries and competitive balance, as Doug Pappas presciently predicted.

There is, however, an exception to the "before expenses" rule: Teams can deduct "stadium operations costs" before calculating their revenue for sharing purposes. And, as has recently been revealed, teams are allowed to count stadium debt as a "stadium operations cost." This means that any money spent on stadiums is effectively a deduction against revenue-sharing, allowing the team owner - in this case, Steinbrenner - to reduce his revenue-sharing check by millions of dollars a year, even if his actual revenue stays exactly the same.

A quick thought experiment reveals why this could end up creating a huge incentive for teams to knock down their old stadiums and build new ones, even if they're not needed. Let's say Joe Owner has a choice between two options: He can sign Barry Bonds Jr., the world's first shortstop-pitcher with a 1.000 on-base percentage, to a 30-year, $750 million contract, hoping that enough fans will come out to see him that he'll make his money back. Or he can spend that $750 million on a new stadium, knowing that he'll immediately recoup $300 million of that in reduced revenue-sharing, leaving only $450 million to be made back in increased ticket sales. Which would you pick?

Q: This only works for high-revenue teams like the Yankees, though, right? Say, the Florida Marlins couldn't take use this dodge, since they don't pay revenue-sharing?

Actually, they could. The Marlins pay revenue-sharing the same as the Yankees, and they also receive revenue-sharing checks based on their revenues - the less money they make, the bigger the check. In fact, as Andy Zimbalist has calculated it in his book May The Best Team Win, the Marlins actually end up paying a higher marginal "tax rate" than the Yankees, meaning they'd benefit even more from a stadium-debt deduction. If nothing else, this should encourage Miami officials in their efforts to get Marlins owner Jeffrey Loria to cover the remaining $30 million stadium-finance gap with his own money.

Q: I still don't get your argument. The Yankees earned this money themselves, so how is getting to keep it a subsidy?

The same way it's a subsidy when Cablevision gets to keep the money it earns as owners of the Knicks and Rangers instead of paying property taxes. A tax break - or a revenue-sharing break - is just as much a subsidy as being paid cash money.

Q: Okay, so other baseball teams would be getting stuck with about $300 million of the cost. What about the public?

No one really knows. Cost estimates of the "infrastructure improvements" the Yankees are asking for have settled in at the $300 to $400 million range, to build a parking garage, clear Macombs Dam Park and create replacement parkland, and add a commuter railroad station. (The Bronx Borough President's conference center/hotel plan now appears to be separate, at least for the time being.) How would this money be raised? Would the public get revenues from the garage or would the Yankees or a private developer? Would the Yankees pay rent? Property taxes? All this is as yet a mystery.

The one thing we know for sure is that the Mets will be demanding a subsidy of equal value, so whatever the Yankees' public subsidy demand ends up being, double it.

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