May 31, 2001

The Imbalance Sheet

More on Minnesota

by Keith Law

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Minnesotans for Major League Baseball member Thomas Lang weighed in on last week's The Imbalance Sheet by pointing me to that committee's report on the Twins' stadium situation:

"The Twins' claims that they can't compete without a new stadium were obviously fraudulent before this year..."

I object both to your conclusion and particularly strongly to your use of the term "obviously," as I view the Twins' claims as neither fraudulent nor obviously so.

Please view the following:

http://www.mn4mlb.com/mncm/reports/committee_report.pdf

So I did. And what I found was a 70-page regurgitation of the same naïve, self-serving claptrap that has surrounded every "grass-roots" effort to con voters into funding facilities for privately-owned sports teams.

The report in question was funded in part by the Minnesota Twins themselves, and relied heavily on input from Major League Baseball, the NHL's Minnesota Wild, and major community development groups. Unsurprisingly, the report makes no mention of any input from leading economists who have examined the question of publicly-funded sports facilities, and who are nearly unanimous in their criticism of such deals.

The report relies on a long list of faulty assumptions and selective use of data to come to the following conclusion: "The economics of Major League Baseball dictate that the Twins cannot survive in Minnesota without a new ballpark." Therefore:

• Minnesotans should cough up 50% of the funding for a $300 million stadium project.

• MLB should implement the recommendations of the Blue Ribbon Panel Report.

• The team should restrict some seat prices to keep them "affordable."

• The team should also expand its charitable and community activities.

• The state should look into public ownership and/or a profit-sharing arrangement with the team.

To see why these recommendations are about as insightful as a James Jeffords speech on the New England Dairy Compact, let's look at the committee's assumptions.

That "the financial structure of Major League Baseball...is fundamentally broken."

As evidence, the committee offers little. They point out that the Texas Rangers "saw fit to sign a new shortstop for more than a quarter of a billion dollars." Of course, if Alex Rodriguez--clearly the most valuable player to hit free agency in the game's history, given his combination of talent and youth--brings the Rangers postseason success, he will generate significant revenues for the team, but the committee didn't see fit to mention that.

The committee also claims that "chances are slim that the Twins will be consistently competitive on the field as long as payrolls among the 30 clubs continue to spiral out of control." Histrionics like this do little to further the debate around baseball's parity or lack thereof. Are salaries "spiraling out of control," or are they, as the report later states, merely a reflection of rising revenues? Any economist worth his salt will tell you that it's the latter. Inputs are paid according to their marginal revenue products. If A-Rod will bring $253MM in increased revenues to the Rangers over the life of his contract, then the Rangers got a good deal.

The report relies heavily on the heavily flawed conclusions of the "Blue Ribbon" Panel's Report on Why Baseball Needs Your Sympathy. That report is notorious for relying on playoff wins as a measure of success, meaning that the 2000 White Sox and Giants, two very successful low-payroll teams, were considered complete failures, no better than the 69-win Twins of the same season. The Blue Ribbon report and the Minnesotans for MLB report both point out that high-payroll teams tend to dominate the playoffs, which confuses the causality of the relationship and ignores all the free-spending teams that have missed the playoffs in recent years.

Indeed, the Twins' continued success this year--still going strong with two wins against a strong A's team over the weekend--belies the committee's repeated mantra that the team cannot compete with a small payroll. Baseball's economic structure isn't perfect, but it's quite clear that it isn't broken. Low-payroll teams can succeed.

That revenues drive on-field performance, but that on-field performance does not drive revenues.

The committee has no qualms about repeatedly claiming that the Twins cannot compete without revenue assistance, but the report does not mention even once that the Twins' revenues are depressed because the team has been so bad.

At one point, the report includes a table, showing the franchise's attendance figure in each of its years in Minnesota, and it reveals something the committee conveniently neglected to address. From 1987 to 1993, the Twins drew more than two million fans in every year but one (1990, their first year below the 80-win mark after 1987), including more than three million in 1988. Contrast that with 2000, when the team failed to reach 70 wins for the second consecutive year and thus barely reached a million fans. A tripling of attendance would add at least another $12 million to the Twins' annual revenue, assuming that ticket prices don't rise (which they would, obviously) and that other local revenues don't change.

The committee later bemoans the Twins' relatively low local revenue totals since 1996, but omits comparable data from the aforementioned 1987-93 period, when local revenues from advertising, television, and radio contracts, and other sources, were likely significantly higher relative to other teams in the majors.

Indeed, the committee repeatedly confuses the direction of the revenue/wins relationship. In commenting on the success of teams that received new ballparks in the 1990s, the report makes two mistakes: It only looks at the attendance total in the first year of the new ballpark, before the novelty has worn off, and it doesn't mention the fact that all of the teams that moved into new ballparks before 2000 were good teams at the time of the move. We'll see how crowded PNC Park is next April when Act II of the Cam Bonifollies opens on the North Side.

That the new stadium will increase local tax revenues and drive economic development around the ballpark.

There are two separate points here, both equally misleading. Even the committee itself can't cook its books enough to make them work.

Local tax-revenue increases around new sports facilities tend to come from substitution: People who go to baseball games typically do so in lieu of some other tax-generating activity. There is clearly a segment of the population that substitutes baseball for non-taxable activities (like sitting on the couch in one's underwear watching The XFL's Greatest Hits), but economic studies to date have concluded that that segment is small.

What's more, the report itself produces a tepid case for these tax revenues. It relies on a 1997 study by Arthur Andersen that concluded that construction of a new stadium in St. Paul or Minneapolis would produce $12.8 million in one-time tax gains and $6.5 million in incremental annual taxes going forward. However, if you assume that the $6.5 million annual revenues occur in perpetuity and discount them back to today's dollars, that revenue stream is only worth about $65 million, putting the total tax gain at $77.8 million--just half of the desired public funding level for the new stadium. Oops.

The economic development argument is just as hollow. From the report:

Twelve of the 18 ballparks built or renovated since 1989 are located in or immediately adjacent to downtown central business districts. Frequently, ballparks are catalysts for redevelopment of a blighted area. Abundant evidence exists in support of the notion that these projects spur development and have a positive impact on the area...

The evidence of which they speak is nowhere to be found. Economists like Brad Humphreys (University of Maryland) and Stephen Walters (Loyola University) have looked for such evidence and have come up empty. The report claims that "abundant evidence exists in support of the notion that these projects spur development and have a positive impact on the area," but it only names one study of the subject, and that study was funded by Major League Baseball itself.

The Target Center fueled ancillary development with 22 restaurants and bars having opened in the immediate vicinity within one year. The Xcel Energy Center has spurred the opening of seven new restaurants and bars, as well as the reopening of a nearby hotel. This arena is part of an emerging entertainment district.

Restaurants and bars employ small numbers of low-wage, largely unskilled laborers who pay relatively little in income taxes. Hotels aren't much better in either regard.

For example, studies cannot adequately measure the role of Major League Baseball in attracting and retaining corporate headquarters and talented employees.

They can't measure it because it doesn't exist; even the phrasing here makes it clear that the authors came to the table with a conclusion already drawn. Many major-league cities have lost corporate headquarters or local employees in recent years despite the presence of one or more major-league franchises; indeed, Seattle just lost Boeing to Chicago, a town with one really awful baseball stadium and one 80-year-old one. This argument was used to support public funding for the two new stadiums in Pittsburgh, but repeated studies of area graduates have shown that the presence of major-league sports can't compensate for relatively low salaries or a lack of job opportunities.

A responsible, independent report would have pointed to any of the studies done on the economic impacts of local stadiums, most of which have pointed to little if any economic benefit from such developments.

That the Twins are a "valuable state and regional institution whose departure would constitute a very large loss."

This statement isn't necessarily wrong, although I have my doubts about the magnitude of that value. It's just completely unsubstantiated in the report and contradicted by loads of economic research conducted by independent sources, and once one strips away the inane economic arguments around attendance levels and competitive balance, this claim is all the committee has left.

The report repeatedly slips into sentimental hyperbole around this point. To wit:

States and major metropolitan areas need as many healthy avenues and cultural opportunities as possible for its citizens, from all walks of life, to rally around. Few institutions do this as well as sports. And no sport, over a century in our country, has captured so many imaginations--and enriched so many summer evenings and afternoons--as big-league baseball.

So taxpayers should help build the Twins a new stadium because...baseball is nice?

The problem with this argument is that there is not a shred of evidence to indicate that the presence of a major-league sport does anything to help a city or region economically. The entire first sentence is yet another bold claim without any support; they presume that these arguments are clearly true to all readers, when intelligent readers know better.

The authors are saying that baseball fans really like having a baseball team nearby. Why subsidizing the minority of voters who are baseball fans is a responsibility of the government is not entirely clear.

In short, Minnesotans for Major League Baseball had an agenda as baseball fans and a mandate from the Twins themselves to produce a report that stadium-supporting politicians could wave at the podium, with little concern that anyone would question the assumptions therein. Voters in Minnesota (and Florida and Massachusetts), you have been warned.

Keith Law is an author of Baseball Prospectus. Contact him by clicking here.