Open Government Project
A Government Watchdog Group
State of Texas
City of Galveston
Public Interest Groups
GISD Sports Complex
by David Stanowski
12 April 2010
Economics is not physics.
Whenever an attempt is made to forecast the future of the economy, or the likely outcome of a business venture or public works project, there is no simple equation that can be written to tell us exactly what will happen. In other words, the final outcome cannot be known with a high degree of certainty. A thorough analysis of the conditions surrounding the project can be undertaken in the hope that the probable, or even the most likely outcome might emerge from the fog. That is what this article will seek to do. It will not assume that there is a "correct answer" to the question of whether the City of Galveston should build the proposed sports complex. It will merely explore the evidence and try to outline possible outcomes and consequences.
It must be assumed that the City of Galveston has not been blessed with an abundance of bold, decisive, and visionary leadership, or it would not have just entered its 50th year of decline. With few leaders to choose from, it is very important to acknowledge those who do exist.
One of the many reasons that this city has continued to decline is its inability to fully utilize its most valuable assets. The Seawall and its beaches are a perfect example. Some at City Hall seem totally unconcerned by the precarious situation that the City finds itself in, because their financial security is not highly dependent on the health of the local economy.
Johnny Smecca is NOT one of those living in this kind of denial. On the contrary, Johnny is acutely aware of the fact that his hometown is in great jeopardy, and he has spent countless hours serving this city, in a variety of ways, in an effort to do what he could to reverse the decline. In 2004, he stepped forward to make the case that the City finally needed to implement paid-parking on the Seawall in order to create a revenue stream to keep its beaches clean and re-nourished, and to develop amenities that could upgrade the beach front and boost the local economy. Advocating this position in the face of strong opposition showed real leadership!
It is difficult to understand why so many voters chose to continue giving away access to this valuable asset to day trippers from Houston; but Johnny's defeat at the polls did not make him any less correct about the need to charge for parking on the Seawall, and his willingness to stand by his convictions in the face of public opposition made his leadership even more authentic. If real leadership reveals itself, but many refuse to acknowledge it, then it should not be surprising that the City continues to flounder.
There is No Such Things as Free Parking!
Imagine for a moment what the last few years might have been like with a fully- developed Seawall, and the lost opportunities are mind boggling!
Since Johnny Smecca is the leader of the group that believes that the proposed sports complex will be of great value to this city, everyone should consider his arguments very carefully. This article will attempt to do just that by examining the pros and cons in detail.
There are three fundamental questions that must be answered about the sports complex:
1. Do the students at Ball High need a better football stadium?
2. Will a first-class sports complex serve as a symbol that city government actually sees and understands that the City is in serious decline, and is taking the first steps to reverse course?
3. Will such a sports complex be able to act as the engine for significant new economic activity in the City?
The first question is rather simple to answer. Most people would probably agree that the current stadium should have been upgraded, or a new stadium built to replace it, many years ago. It is easy to understand the frustration of those who have been forced to deal with the conditions at the current stadium while relying on, what turned out to be, empty promises that something would be done to improve them.
However, the current proposal did not seem to seriously consider the options to upgrade the current stadium, or to build a less-expensive stadium that did not include a full sports complex. Detailed drawings and prices of the three options considered side-by-side could go a long way to answer the criticism that the proposed plan is too expensive and grandiose. If it was clear exactly what the extra money was going to buy, for the precise additional cost; it would not leave such matters to the imagination.
The second question is difficult to answer. If the sports complex could serve as a symbol of the City's recovery and not only encouraged the middle class to stop leaving, but also made people feel safe to return; the investment, for this reason alone, could be well worth the money! However, if the City has not yet fixed its substandard schools, has not yet limited the number of public housing and Section 8 units that it allows on the Island, and has not yet even begun to upgrade its infrastructure; will the sports complex be enough to convince people not to leave, and even to return? There is no way to know the answer. Those who come to the conclusion that the sports complex will be effective in this way, must do so based on a leap of faith. Of course, it could be argued that all great undertakings ultimately rely on something just this intangible.
Many articles about similar facilities support the contention that the proposed sports complex would generate substantial additional economic activity in the City of Galveston.
Spartanburg County, SC
Most research projects are based on a search for truth. But the goal in economic-impact studies is to legitimize a position. Economic-impact studies are usually undertaken in order to justify a public expenditure in quantitative dollar terms, with the expectation that the results will reinforce the case for sustaining or increasing resources allocated to the service. In these circumstances, there is a temptation to manipulate the procedures to strengthen the case.
After carefully reading through several articles like those listed above, it does become clear that most narratives of this sort are published by promoters or boosters of public-sector sports facilities, so they know that their forecasts of the economic impact of new projects need to be quite lofty to gain public support, or if they address existing facilities, they tend to add in indirect benefits and "impact multipliers" in the hope of maintaining support.
The next stop in this analysis was long-term academic studies on existing sports facilities.
Pro sports stadiums don't bolster local economies, scholars say
Caught Stealing: Debunking the Economic Case for D.C. Baseball
In the full report available through the link above, Professors Humphreys and Coates explain why sports have not had the intended positive economic impact that is always assumed to be the case. The "Substitution Effect" explains as sport-and-stadium-related activities increase, other spending declines because people substitute spending on sports for other spending, and the “Leakages and Multipliers Effect" demonstrates that while money may be spent in local economies during sporting events, this spending may not wind up in the pockets of local residents, but the taxes used to subsidize these events are paid for by local taxpayers.
Also, to the extent sport spending has a multiplier effect at all—spending on sports may have a much lower local multiplier than spending on other entertainment goods. In other words, non sports entertainment spending has a bigger ripple effect in the economy than sports-related entertainment spending. Therefore, the economic gains from sports-related spending will never be large enough to fully offset the economic loss from a decline in non sports entertainment spending due to the Substitution Effect.
Professors Robert A. Baade, Victor Matheson and Robert Baumann added a third effect to those mentioned by Humphreys and Coates; "Crowding Out", which results from the congestion caused by a game that dissuades local citizens from venturing near the playing venue during the event, which reduces economic activity.
Similar studies claim that new stadiums or franchises also can have hundreds of millions of dollars of annual local economic impact. Our detailed regression analysis of taxable sales in Florida over the period from 1980 to mid-2005 fails to support these claims. New stadiums, arenas, and franchises, as well as mega-events, appear to be as likely to reduce taxable sales as to increase them. Similarly, strikes and lockouts in professional sports have not systematically reduced local taxable sales. While these results, like any econometric estimates, are subject to some degree of uncertainty, they clearly place doubt on boosters' claims of huge economic windfalls. Cities would be wise to view with caution economic impact estimates provided by sports boosters, who have a clear incentive to inflate these estimates. It would appear that
"padding" is an essential element of many games both on and off the field.
While it can certainly be argued that having a professional sports teams brings with it the positive intangible benefit of raising the profile of a city, the argument that those teams have such an economic impact on the local community that they deserve hefty public subsidies is simply not at all supported by academic studies.
Ogden on Politics
Selling the Big Game: Estimating the Economic Impact of Mega-Events through Taxable Sales
Past league-sponsored studies have
estimated that Super Bowls, All-Star games and other sports mega-events increase economic activity by hundreds of millions of dollars in host cities. Our analysis fails to support these claims. Our detailed regression analysis of taxable sales in Florida over the period 1980 to 2005 reveals that, on average, mega-events ranging from the World Cup
to the World Series have been associated with reductions in taxable sales in host regions of roughly $34.4 million per event.
The authors explain that these poor results are, once again, due to Substitution, Crowding Out, and Leakages.
Do College Football Games Pay for Themselves? The Impact of College Football Games on Local Sales Tax Revenue
In this paper, we analyze monthly sales tax data for a period of several years from four small to medium-sized cities in Texas: Austin, College Station, Lubbock, and Waco.
Model (1) indicates that, on average, an additional NCAA football game held in Austin, College Station, Waco or Lubbock, during the sample period reduced local sales tax revenues but the parameter estimate was not statistically different from zero. Thus, any increases in local sales tax revenue caused by visitors and residents contributing new spending to attend the event, seems to be offset, on average, by reductions in local spending in other areas.
Sports, Jobs and Taxes: The Economic Impact of Sports Teams and Stadiums
The authors of this book point out that since professional sports franchises have not been shown to be of economic benefit to their host city, tax payers end up subsidizing the wealthy owners and athletes. Sports fans are also being subsidized by taxpayers who have no interest in sports.
As a life-long sports fan, and someone who has lived many years in cities with professional sports franchises that I regarded as greatly enhancing the quality of my life, I expected that the economic benefits touted from these teams were somewhat over blown, but I was shocked that the academic studies showed that there was simply no positive economic impact from pro sports!! Except, of course, for the owners and players.
Although these academic studies covered professional sports, college sports, and mega events, none of them directly addressed the type of school-district complex proposed for the City of Galveston which means that the reader must decide whether it is likely that the results of such a study would be markedly different from those shown above.
The only reason that there is a need for these "sports studies" is due to the fact that taxpayers often end up paying for professional sports facilities, and always do so in the case of those for schools and parks. If the owners of pro teams paid for their own facilities, as they should; no one would care. However, the taxpayers still need to decipher the truth between the projections of boosters and the studies of academics when deciding if they want to support more facilities for parks and schools, on the premise that they will generate significant economic benefit for their city.
Income versus Additional Cost:
If the assumption is made that an excellent football stadium can be built for $20 million or less, then the additional $15 million to expand this project into a full-scale sports complex is not primarily intended to serve the needs of GISD students, but to take advantage of the opportunity to host tournaments and special events to generate new economic activity for the City.
If this $15 million is financed with a 20-year bond, at 5% interest, the annual, fully amortized, payment will be $1,203,638. If the annual operations and maintenance costs, just for these facilities, are assumed to be $100,000; then the total annual cost for the first 20 years would be $1,303,638 for the expansion into a sports complex.
There is no doubt that the facilities offered by a sports complex will generate additional economic activity in this city. However, who will profit from this additional activity in the private sector, and will it be enough to offset the additional $15,000,000 cost to the taxpayers? If tournaments and events are designed in such a way so as to require overnight stays, they will certainly boost the income of the hotel industry more than any other. However, the HOT collected does not flow back into the general fund to help relieve the burden on the taxpayers.
Restaurants and retail outlets are likely to reap most of the remaining benefit which does increase revenue to the general fund through an increase in local sales tax collections. How much additional spending, subject to city sales tax, must be generated from non-residents each year while attending events at the sports complex to offset all the additional costs of building a sports complex instead of just a football stadium? (Remember: spending on hotel rooms and food at grocery stores does not count)
$1,303,638 / .02 = $65,181,900
Is it realistic to believe that spending an additional $15,000,000 on these extra facilities will generate an additional $65,181,900 of spending each year from non-residents at restaurants and retail outlets? If the answer is yes, then the sports complex makes sense. If the answer is no, then it will be a drain on the City's economy, and GISD should be satisfied with a football stadium.
Currently, the world is awash in debt. The U.S. national debt stands at $12.68 trillion. Contingent obligations for Social Security, Medicare, Medicaid, veterans benefits, and pensions add another $108 trillion. State, county, and local governments are nearly $3 trillion in debt. Total government debt and obligations at all levels now stands at $123.6 trillion. Adding in business and consumer debt, and this country has surpassed all of its previous debt levels by all measures.
This means that the economic reality for the foreseeable future will be one of forced reduction in debt. Anyone swimming against this current by adding to their debt load is taking an enormous risk, because high debt levels are the quickest route to insolvency.
Regardless of the comments about how little this sports complex will cost the average Galveston homeowner each year, the risky part of the process is the need to increase the total debt at GISD over 50%, from $65 million to $100 million during a time of world-wide forced debt reduction. In some ways, it may seem like the right time to build this project, but is it the right time to take on more debt; especially as everyone is still struggling to recover from Hurricane Ike?
Collectively, homeowner equity in this country stood at 80% in 1952, but it has plunged to only 38% this year! Since 30% of all homeowners have no mortgage, those who do actually have far less than 38% equity collectively. The necessary de-leveraging in this market will maintain strong downward pressure on prices for a few more years. Percentage price declines in the commercial real estate market have now equaled those on the residential side, and vacancies and loan resets are exerting great pressure on commercial prices, too.
With debt servicing for the sports complex slated to be paid from property taxes derived from the value contained in the local residential and commercial real estate markets, the risk profile of this project is far less certain.
As people are forced to focus on paying down debt, it will leave less money for discretionary spending. With unemployment likely to stay high for years to come, and food stamp usage accelerating, will families continue to participate in things like sports tournaments, or will they be forced to stay closer to home? In addition, now that we have been "blessed" with socialized medicine, the federal government is already discussing the need to implement a 20-25% national sales tax (in addition to existing state and local sales tax) to pay for our "free" health care. How will this drain on our personal resources effect spending on these kinds of sporting events? Will it remain one of the few things that many can still afford, or will people cut back here, too? These are the future opportunities and risks that are so difficult to know.
Will the Convention & Visitors Bureau, in conjunction with GISD, be able to do an acceptable job of organizing and promoting tournaments and special events?
Will Galveston be able to compete against other cities for summer events when local hotel costs will be much higher than in cities without a beach?
How much will the inability to sell alcohol limit the potential of special event revenue?
Should GISD build a sports complex before it brings its schools up to par?
Is GISD the proper City agency to own and operate a facility designed be an economic engine?
Many school districts across the county are on the verge of bankruptcy. Is GISD in the financial position to take on this debt, and operational costs, without jeopardizing its educational function?
Kansas City School District Faces Bankruptcy; Closes 29 of 61 Schools
Once again, I applaud Johnny Smecca for understanding the nature and magnitude of the problem that this city faces, and proposing a possible solution. There is no doubt that Ball High needs a much better football stadium, so the first point of the debate will center on whether most taxpayers want to pay for a football facility that costs this much, and includes all of the other features; or something less expensive.
There is a chance that this sports complex could represent some kind of a rebirth of the City that would help to promote population growth, but the odds of this happening seem so remote when many people will only utilize the stadium 5-6 days each year, for football games, and so many other facets of day-to-day life in Galveston remain broken.
Finally, I am a life long sports fan, and shared the belief of many fellow sports enthusiasts that our love of sports must surely translate into great economic benefits for the host cities of games. However, after doing the research for this article, I am still surprised at how much the glowing projections of sports facility boosters differ from the findings of economists who study the impact of sports on local economies. As with all of the other issues involved, the voters will have to sort out the truth of this matter to their own satisfaction.
My biggest concern about this project is the need to add so much debt at a time when the whole world is being crushed by debt, and needs to reduce it dramatically. We can only hope that after weighing all of the information very carefully, the voters will make a wise decision!