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— Where BTF's Members Investigate the Grand Old Game
Tuesday, November 20, 2001
80% of This Article is Privately Funded
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.
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