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Stadiums and convention centers as community loss leaders

March 1, 2001


Ron Wirtz Editor, fedgazette
Stadiums and convention centers as community loss leaders

It's easy to love shiny new buildings, and even easier when they are believed to be harbingers of local economic development. That's the pitch when it comes to stadiums, multiuse arenas and convention centers. But is it a strike?

Little attention is paid to the profitability of the superstructures themselves. Facilities rarely repay their construction costs, still many are fortunate to simply cash-flow in a given year. Rather, these facilities are designed to be spending magnets for the city—community loss leaders, if you will, similar to the way a grocery chain underprices soda to get people into the store. Once they've got you in the store for soda—or in this case, in the city for a ballgame or a trade show—you'll likely buy additional items to make up for the store's initial loss on soda.

As such, the main arguments in favor of publicly financed stadiums, arenas and convention centers stress the economic activity created outside, rather than inside, the walls of these facilities. While such benefits are real and legitimate, they are often inflated and oversold. "I think that's absolutely the case," said Mary Bujold, president of Maxfield Research, a Minneapolis firm. "Cities have blinders on to see whether the data [on local impact] is good."

Pick a number

Current research indicates that stadiums and arenas have a particularly bad track record when it comes to delivering on promises of community economic windfalls. University researchers Mark Rosentraub and Mark Swindell found that three decades worth of studies "lead to the inescapable conclusion that the direct and indirect economic impacts of sports teams and the facilities are quite small" and do not create much in the way of new jobs or economic development.

There is little research on the economic impact of minor league teams and their playing venues. Queried via e-mail, Rosentraub said, "Given the relatively small to nonexistent benefits from team sports at the higher levels, one should not expect anything or very, very little from minor league activities."

A Brookings Institution book on sports teams and stadiums noted the economic impact of a minor league baseball team is "equivalent to a large pet shop" in terms of revenue. A 1994 report investigated the impact of a $6 million stadium for a minor league baseball team in La Crosse, Wis. The report estimated total new annual spending at about $500,000, noting the impact was "substantially smaller" than claimed by stadium proponents. It suggested that public subsidies for such projects "should be carefully studied."

Convention centers tend to offer more bang for the public dollar. "[On] the convention side, you get a lot more economic impact," said John Kaatz of Convention, Sports & Leisure International of Minneapolis. "The sports side is less."

The reason for this is convention centers tend to attract more people from outside the region and state, which brings a larger amount of new spending to the community. But there is also a limit to that argument.

"As market size decreases, the strength of that [economic development] argument becomes shaky," Kaatz said, mainly because smaller markets often do not draw a significant number of visitors from outside the region. Nonetheless, smaller markets continue to use the argument, which Kaatz said "is a reflection of the fact that the whole [convention center] phenomenon has been generated from larger cities, and the argument has filtered down to smaller cities."

Analyzing the analysis

Advocates of new venues often attempt to define a project's economic impact on the community in dollar terms. Although each type of facility has unique considerations, the economic impact of stadiums, multiuse arenas and convention centers involves many of the same factors, and their proponents are often guilty of the same mistakes.

Problem number one is that too many studies rely on "models and assumptions that are wrong," Kaatz said. "[The models] are simply unrealistic."

For example, most analysis includes average spending estimates for local and nonlocal event goers. These figures are usually provided by local or national associations—for example, the hotel lobby or convention and visitors bureaus—with an interest in these facilities. Using this data in his own work, Kaatz said it was not uncommon to revise these spending estimates downward.

Compounding any errors in average spending are estimates on the ratio of out-of-town attendees, who are assumed to spend significantly more on meals and lodging than local event goers. And the trifecta for some reports on economic impact is the inclusion of spending multipliers—the number of times a dollar will be spent or turned over once it is brought to a community. Kaatz said he's seen reports with multipliers as high as six; he believed a more reliable multiplier was about two on the high end.

These factors can lead to significantly different conclusions. Fargo, N.D., recently proposed building a new multiuse arena to host college hockey and other events. A study of the proposal by Maxfield Research estimated the direct economic impact of the facility at between $3.8 million to $4.4 million; a second analysis by a local university economist tagged the impact at $8.8 million to $15.3 million. Much of the gap stemmed from differing assumptions regarding out-of-town attendees and their spending habits. Voters apparently were unimpressed by the conclusions of either study, as a $48 million referendum on the facility last year "got thumped pretty bad," according Pat Zavoral, Fargo city administrator.

Game substitutions

Impact reports typically ignore several other important factors. The most important are what economists call "substitution effects"—where spending for one activity merely replaces spending on other previous activities. While new entertainment options do likely bring in some new spending, advocates often mistake economic activity (all spending related to a sporting event or convention) with economic impact (new spending that otherwise would not have taken place).

Before basketball games and concerts came to town, for example, local event goers likely spent at least some of that money on other things, like bowling, or movies or fishing equipment. Such spending mobility represents a shift in spending rather than new spending. Tax dollars have also been used to encourage that shift. Geographic scope also has to be taken into account. Out-of-towners might simply be from a nearby town. While that might suit advocates just fine, it nonetheless offers little new spending in a regional sense, and scarce public resources have been used to redirect private spending.

Publicly financed venues can also end up competing with the private sector for event bookings. Missoula, Mont., studied the possibility of building a large convention center in 1996. A feasibility report noted that events with 1,000 to 2,500 attendees represented less than 1 percent of conference events in the region and "there is substantial competition among cities and towns for this limited number of large regional meetings." The study concluded that capturing a small number of big events would not justify the expense of a large facility, and building a small conference center was "a duplication of services now being provided successfully by the private sector."

Even more overlooked is the substitution effect in public spending—other priorities that could have been funded, or taxes simply not collected. Dennis Coates and Brad Humphreys of the University of Maryland-Baltimore County have done extensive research on the economic impact of stadiums and arenas. They conclude in a recent paper that "impact studies typically do not address alternative uses of public funds. Indeed, politicians often seem to think that the means of financing the stadium generates free resources that have no alternative uses whatsoever. ... [R]ules for sensible public investment should apply to stadium finance as much as they apply to public provision of highways, schools and airports."

Public spending on new venues also funnels most of the economic benefits—namely increased patronage—to lower-wage industries like lodging, eating and drinking establishments. Rosentraub's research on private sector employment and payroll in large counties found that these sectors make up about 8 percent of local jobs, but pay just 3 percent of all local wages. On the surface at least, public capital for other initiatives might produce better jobs and wages for local workers.

Measuring public good

One reason the math does not always add up regarding new venues is because advocates might be underselling the "public good" benefits that are hard to measure.

Bujold, of Maxfield Research, said weighing all the pros and cons—economically and otherwise—is much more complicated than cities typically undertake, and much of it cannot be easily boiled down to dollar terms. Bujold said that "a stadium is a kind of community gathering space. It's the idea that you get this nebulous effect to spur some community feeling," which she said was "hard to quantify" but nonetheless can spur a community's economy. "In small communities it becomes much more important. The dynamics there are entirely different."

Sports teams, for example, create a public good by virtue of the fact that they often engender community pride, interest and enjoyment outside of ticket-buying customers (what economists call externalities). "The magnitude of this benefit is unknown, and is not shared by everyone; nevertheless, it exists," wrote Roger Noll of the Brookings Institution.

How to measure the value of that benefit is an even bigger unknown. There have been few attempts to measure the "civic value" of sports teams and their venues, particularly outside of major metropolitan areas. In one recent case, researchers asked residents of Lexington, Ky., about their willingness to pay for a new arena for the popular University of Kentucky basketball team and a new stadium to attract a minor league baseball team.

By virtue of having an existing facility, the new college basketball arena represented an opportunity to improve a perceived public good (Wildcat basketball), while a new baseball stadium offered residents the choice of having a public good (a new baseball team) or not having a public good. Roughly two-thirds of Lexington residents said they were unwilling to pay higher taxes for either the basketball arena or baseball stadium. Of those willing to pay, almost half cited their desire to attend games, which the authors stressed was a private-good motivation rather than a public one.

Off-ledger contributions

Other intangible factors must also be considered in the final analysis of event facilities. Many sources, for example, pointed out that venues provide court and ice time for local teams or meeting space for community groups—a public good that doesn't show up in economic impact reports.

But by the same token, rarely do community groups lead with such arguments when stumping for a new facility, and in most cases local interests are served after private bookings. And a few sources also believed there are better ways to meet the public good portion of the equation.

The city of Sioux Falls investigated the possibility of building a 20,000-seat arena to compete with the likes of the Fargodome. A recent analysis has led the city to back off such a proposal, a move that pleased Dan Scott, president of the Sioux Falls Development Foundation.

"We think you'd be better off building neighborhood sports centers," which have comparatively lower overhead costs and much higher use, Scott said. The city has seen a rapid increase in demand for ice time at hockey rinks, and existing rinks are "in use from 5 a.m. in the morning to midnight," he said.

"I'm convinced that you have to use those dollars for facilities that have constant use," Scott said. "Meeting the need of the sporting community is a better use of the money. ... I hope that's the direction we end up taking."

See also:
Unconventional wisdom
District convention centers weathered the recession,
but the outlook is cloudy. fedgazette, January 2005

Ron Wirtz
Editor, fedgazette

Ron Wirtz is a Minneapolis Fed regional outreach director. Ron tracks current business conditions, with a focus on employment and wages, construction, real estate, consumer spending, and tourism. In this role, he networks with businesses in the Bank’s six-state region and gives frequent speeches on economic conditions. Follow him on Twitter @RonWirtz.