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## Tuesday, November 20, 2001

Calculus is easy compared to the owners’ new math.

I have an unusual request.   I’m having a terribly difficult time with a math problem and I just can’t seem   to figure it out. I was wondering if my readers can help me out.

Okay here’s the problem:   the owner of a baseball team and the Commissioner of the league have stated   that the owner offered to pay 80 percent (or 83 percent depending on when you   ask) of the costs of a new 300 million dollar ballpark for that owner’s team.   However, the State Legislature turned it down. The city hosting the stadium   would set up a construction fund. The owner pledged to kick in 100 million dollars   to the fund. Other private entities pledged 50 million dollars. The state pours   in 100 million dollars in the form of a zero-interest loan to be paid off by   the team into the fund. The state also throws in a 40 million dollar grant.   Finally, the state gives the team a sales-tax exemption on the purchase of the   construction materials, a tax break estimated for 10 million dollars. The amount   now in the fund would equal 300 million dollars, which is the estimated cost   of construction.

Okay, since the owner has   to pay back the loan, we can count that as his contribution in addition to the   initial 100 million he donated. Since the state doesn’t care where the private   funds come from the owner or somebody else, the owner’s share can be seen as:   \$100 Million + \$50 Million + \$100 Million (for the loan) == \$250 Million. The   total cost is \$300 Million, so dividing \$250 Million by \$300 Million we get   0.83 or 83 percent.

Now on the surface, it looks   like I’ve solved the problem. But it can’t be this, simple can it? I mean, I’ve   long since gotten past this level of math. No, they must have gotten at the   number in a much more complex way.

So I decided to go through the numbers a little more. The first thing I looked   at was the 150 million dollars in private funds. There’s 100 Million from the   team and 50 Million from other sources. Since this money doesn’t come directly   from the team, you can’t necessarily conclude this money comes at no cost to   the state. After all, the money could have been donated to the state for Hospitals,   Schools and so forth.? Also, these private funds usually come from a conglomeration   of local business, who would understandably get preferential treatment over   other businesses when it comes to ballpark-related contracts. Still, the money   is probably designed to benefit the people donating it and therefore can be   considered a private investment. We’ll give this money the benefit of the doubt   and put all of it on the private funds side of things (though it is technically   incorrect to say the team is providing it).

Okay, how about the 40 million   dollar grant? This grant comes from a state fund that’s already been set up.   The fund will be refunded from the area’s hockey team. This is a cut and dry   state contribution of \$40 Million.

How about the sales-tax exemption   on construction materials? This was estimated at roughly \$10 Million though   it most certainly could amount to more and is unlikely to amount to less. Anyway,   local businesses often receive this exemption when undertaking huge construction   projects that will benefit the area. It’s a little questionable whether building   a baseball park when the state already has one (one that’s only 17 years old)   will benefit the area, but it’s a state subsidy regardless. Put that on the   state’s side of the costs.

Finally, let’s look at the   100 million dollar interest-free loan. Now the Twins do eventually have   to pay all that money back, so it does technically count as their portion   of the costs, but they get to pay it bit by bit with no interest over 20 years.   In those 20 years, there will undoubtedly be some level of inflation, so the   5 million a year the team will eventually be paying will be less and less in   today?s dollars. Also, there’s this thing I read about ?opportunity cost.? You   see if the state gives a 100 million dollar loan to the team, that means the   100 million dollars can’t be used for other things (schools, hospitals, etc.).   Anyway, let’s suppose the state invested that money in some way shape or form.   They could almost certainly get a 6% a year yield on their money. 6% of 100   Mil is 6 Mil, and 6 Mil a year for 20 years is 120 Mil. So just doing this rudimentary   calculation, if the state chose to do something else with this money they could   eventually make \$120 Million more than they do by just by selling revenue bonds   (which they have to pay interest on) in order to come up with the cash to put   in the fund.

And why exactly does the   baseball team get such a loan and nobody else does. The owner of the team happens   to have made his billions as a banker. Has he ever given a business worth   100 million dollars (with 80% of that value in debt) a twenty-year interest-free   loan of 100 million dollars? Would any rational acting lender? If, as economists   generally conclude, that the building of a new stadium for an already existing   team in the area produces no negligible economic benefit to the area, what is   the reasoning behind giving the loan?

Wait, I’m sorry, that’s not   the point. Let’s get back to the math problem. So although the loan pays for   the original cost of constructing the stadium (\$100 Million of the \$300 Million   total) the existence of this loan is a cost to the state, in and of itself.   It is open to debate what these actual costs a\would eventually amount to. (The   state wouldn?t receive that \$120 Million interest all at once though the teams   payments would be less and less in today?s dollars to offset this). We’ll just   leave it at \$120 Million and ignore all of the side issues (some would increase   the overall cost some would reduce it) and assume they more or less balance.

But, now that I think of   it, the opportunity cost of the loan isn’t the only cost. You can’t just build   a stadium in a theoretical space. You actually have to have a piece of land   to put it on. Where does the land come from?

Well, the plan was to have   five different cities make bids to host the stadium site. Each city would donate   the land and parking area the stadium would sit upon. The cities, in this bidding   process, would be free to kick into the loan repayment fund any grants, subsidies,   perks, etc. that would help the stadium be built in its city. To the individual   city, hosting the stadium is worth a lot of money since the area around the   stadium will see its property values skyrocket and therefore generate much more   in property taxes for that city. (Note: this doesn’t result in a net   benefit for the whole state government, since the effect would balance out via   lower property values in other areas of the state, like the area where the team’s   current stadium sits). Can I count these subsidies? No, since the bidding would   have only taken place after the plan was approved, and it wasn’t approved, so   we don’t know exactly what they would have been or for how much.

But there’s another problem. If I’m mayor of a city, I can donate land, but   I can’t just plop the stadium down on top of a library or orphanage or something.   No, I have to go out and buy the land to donate. Furthermore, there’s going   to be 25 to 40 thousand people going to this place at the same time 81 days   a year in the summer time. Your average run-of-the-mill parcel of land in a   city is not equipped to handle that kind of traffic. So all sorts of street   and highway improvements need to be done, the land needs to be leveled, stop   lights and street lights need to be installed.? An electrical grid to handle   the stadiums power needs to be built, the sewage system needs to be adjusted   to fit the needs of the stadium, and all sorts of other things need to be done.   Also, if the land is in a blighted area (which it usually is since that’s where   land is the cheapest and the city would like to keep down costs), several buildings   not actually on the land but near it will need to be bought out (many will need   to be torn down), extra police will need to be assigned to the area, vacant   lots will have to be built upon, and the whole area surrounding the ballpark   has to be overhauled, in order for the paying customers to feel safe going there.   The sum total of all of these costs are called "infrastructure costs."   The estimate the team provided for these costs for this infrastructure and the   donating of the land was a conservative \$50 Million (Milwaukee’s new ballpark   cost approximately \$78 Million in infrastructure and land costs).

I have to say, these need   to be counted in the costs of constructing a new ballpark, since none of it   had to be done if the team stayed in its old park. Somebody has to pay   for it, and it isn’t going to be the team.

Speaking of Milwaukee’s new   park, what is its name? Brewer Field? Milwaukee County Stadium? Selig Field?   No, it’s Miller Park, named after the Miller Brewing Company. Why? Because the   Miller Brewing Company gave the Brewers a boatload of cash to call it that.   These are the infamous naming rights. In this plan, the team retained the naming   rights despite the fact that it isn’t their ballpark. Naming rights have gone   for as much \$100 Million, but in this case we’ll peg it at \$50 Million which   is in between the money Milwaukee and Pittsburgh got for their Stadium’s naming   rights. This really is the city?s money. If the host city is responsible for   all of the aspects on construction, they own the land, they built the infrastructure   on the land, they’ve entered a bidding process for the rights to build the stadium   on their land, than the stadium should be theirs. The money kicked into the   project from other people, like the team, is simply investing in a city project   from which they stand to reap a large benefit. There’s no reason why the stadium   should belong to anybody but the city. Still, the plan stated that the team   would in fact share ownership of the stadium with the city so the team should   have at least some of the naming rights money coming. If we peg team’s ownership   (again, to be bargained with the city after the bill’s passage) at around 35   percent (the Brewers approximate percentage ownership in Miller Park), that   means the team should get \$17.5 Million instead of the whole \$50 Million they   get under the plan, so the cost to the city here is \$32.5 Million.

Finally the plan called for   the area around the ballpark and inside the ballpark to be a sales-tax-free   zone. Items sold in the ballpark or in the general area outside would not be   subject to sales tax. This presents a significant long-term benefit for the   team. Merchandise sold at the park can now be priced higher without affecting   demand since the consumer will no longer have to pay sales-tax and be willing   to buy the products at a slightly higher price. It’s impossible to know how   much on average a year this will save the club (or cost the state depending   on how you look at it), but \$2 Million a year for a park likely to draw between   2 and 3 Million in attendance a year is certainly a more than reasonable figure.   So that’s \$40 Million at least.

Now that I’ve done all this,   the numbers should all add up close to 80 percent of the costs paid for by the   team (and other private sources, but why quibble).

Okay the team pays: \$100   Million off the top, \$100 Million more over 20 years and other sources pay \$50   million for a total of \$250,000,000.00. Now the state contributes \$40 Million   to the project in a grant. They also give the team a \$10 Million sales tax break   on the purchase of construction materials. The state could have expected to   make \$120 Million on that loan in 20 years if they had invested it. The city,   in addition to kicking in money to win the project (which we won’t count), also   will spend at least \$50 Million on acquiring the land and making it useable   for a stadium, and they forfeit \$37.5 Million they could have made in the sale   of the naming rights. So the sum total of those costs [Voros uses calculator   to deal with such high numbers] is \$497,500,000.00. Finally, the sales-tax break   for merchandise sold at the ballpark we estimated at \$40 Million. I’m unsure   whether to count this as a cost to state, or subtract it from the costs of the   project and the teams’ contribution to the project (since they keep the money).   I’ll do it both ways and whichever one gives me that 80 percent figure will   be the way they did it. Let’s see, subtracting the \$40 Million from the total   cost and the team?s contribution gives me \$210 Million divided by \$457.5 Million   which comes to 46 percent. Well, gee, that can’t be the way they did it. Let’s   do it the other way. \$250 Million divided by \$537.5 Million gives me 47 percent.   Huh?

That should have come out   to 80 or 83 percent. What gives? Let’s check, maybe I mistyped a number…

?Nope. 46 and 47 percent   again. That just doesn’t make any sense. The team and the commissioner of the   league both said that the team offered to pay around 80 percent of the   costs of a new stadium. They’ve said it numerous times in numerous papers. They   wouldn’t just say these things if they weren’t true.

So I guess the way I did   it the first time around is correct, and that all of those extra costs I came   up with afterward were just in my imagination. I guess those costs to the public   sector simply don’t exist when it decides to undertake the construction of a   300 million dollar stadium.

So knowing that, I can’t   possibly see any reason why the state could possibly be worried about the taxpayers   shouldering an enormous amount of the cost burden. Especially when it is to   help a billionaire banker team-owner out of a tough financial spot. There certainly   doesn’t appear to be any extra costs, since, if there were, that figure   couldn’t possibly come out to 80 percent. Damn that infernal state legislature,   and that over-grown bully in the Governor’s office! When the team?s president   learned that this ?reasonable? bill had been rejected, he echoed the words of   Christ during his crucifixion: "Forgive them father, for they know not   what they do." I couldn?t possibly agree more.

Voros McCracken Posted: November 20, 2001 at 06:00 AM | 6 comment(s) Login to Bookmark
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1. Voros McCracken Posted: November 20, 2001 at 01:14 AM (#604258)
I'm assuming this is a rhetorical question, but unless Ventura manages to get that 10% User Fee Tax through (which the Twins hate), I'm assuming the Public's take of the gate and merchandise would be somewhere near 0%.
2.  Posted: November 26, 2001 at 01:15 AM (#604323)
Jared--

I don't agree with your thinking. The state's taking \$100M that they would have been able to spend elsewhere. As, I think Voros stated, that \$100M could easily be invested elsewhere. Assuming a modest 6% interest per year, he comes up with \$120M in lost revenue.

However, he assumes that the \$100M base amount stays the same throughout the loan, and it doesn't.

In year 1, the state loses \$6M it could have gotten in interest, but they get back \$5M (assuming the Twins are paying them back equally each year, in once a year payments, to make it simple). Now, it's year 2: Now the state's out \$101M (the \$95 still owed plus the \$6M they lost), so this year they're paid \$5M and lose \$6.06M in interest.
Now they're down \$102.6M.

Not sure what this adds up to, but it's definitely more than the \$100M they initially lend out and more than the \$120M Voros estimates. Anybody math savvy enough to finish what I started? Please?
3.  Posted: November 26, 2001 at 01:15 AM (#604327)
Sorry, but that's the way interest works. If the state lent out that money at 6%, then they would reap the benefits that I described.

Let's simplify this, for the sake of argument. The state lends the Twins \$100M, which is paid back in a lump sum payment after 20 years. They started with \$100M and ended with \$100M. Now, suppose, instead of that option, they invest that money and make 6%. They end up with \$320M. Lending the money to the Twins cost them \$220M.

You may disagree with this way of looking at things, but there's no flaw in my logic.

By the way, I'd like to borrow \$10,000 from you. I will pay you back \$25,000 in 40 years. Since the most you could ever stand to lose from this deal is \$10,000 (your initial investment), I'm sure you'll be thrilled.
4. Kevin Harlow Posted: November 28, 2001 at 01:15 AM (#604346)
Assuming:
1) cost of money is 6%
2) 20 identical yearly payments made at end of year

P=A(P/A,i,n)
P=\$5,000,000(P/A,6%,20)
P=\$5,000,000*(11.469)
P=\$57,345,000

(P/A,i,n) taken from http://www.riskylife.com/freetools/pvatable.html

Or you can use Excel with "=PV(.06,20,5000000)" which results in \$57,349,606.09, with the difference between the two due to number of digits given in the table.

Hence, the interest-free loan (under the above assumptions) costs the city 100,000,000-57,349,606.09=\$42,650,393.91.
5.  Posted: November 28, 2001 at 01:15 AM (#604349)
Upon further review, my way of thinking of it does not reflect cost in today's dollars.
6. Big Ed Posted: December 04, 2001 at 01:16 AM (#604382)
We would do well to be careful about the expenditures for infrastructure. That is, after all, what governments are for, and money spent to improve streets, fund education, add or maintain community services, put up wrought-iron fences, provide police and firefighting are legitimate uses of public money. If John Industrialist says he want to build a plant at some sight that would be suitable for a MLB stadium (currently unused, in a run-down area so it is cheap, decent access to roads and public transit, etc.), then it is part of the government function to improve roads, sewers, etc. to help get this kind of a project off the ground. It is when expenditures GO BEYOND infrastructure that problems arise.

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