Cambridge Economic Research- Impact of NBA Franchise in Louisville

7/30/2019 Cambridge Economic Research- Impact of NBA Franchise in Louisville

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Economic Impact of an NBA

Franchise on Louisville

Submitted to:

Boxcar PR

Louisville KY

by:

November 15, 2012


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Contents

Executive Summary ................................................................................................................................................. 3

NBA Franchises Supply & Demand Fundamentals ............................................................................................... 4

Promoting Sports Investment through Economic Impact Analysis ........................................................................ 8

The Multiplier Concept ....................................................................................................................................... 9

Sources of Exaggeration in Economic Impact Analysis ....................................................................................... 9

Substitute spending......................................................................................................................................... 9

Leakage of NBA Wages ................................................................................................................................. 10

Survey of Economists ............................................................................................................................................ 12

Review of the Literature on Subsidization of Professional Sports Teams ............................................................ 13

Conclusions of the Literature Review ............................................................................................................... 14

Economic Impact of an NBA Team on Louisville ................................................................................................... 15

Measuring Job Creation Benefits ...................................................................................................................... 16

Valuing Benefits from Net Job Creation............................................................................................................ 17

Measuring Tax Benefits ..................................................................................................................................... 18

Comparison of Jobs & Tax Revenue Benefits with Public Outlays .................................................................... 21

Conclusions ....................................................................................................................................................... 22


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Economic Impact of an NBA Team on Louisville

Cambridge Economic Research 3

Executive SummaryThe NBA maintains a virtual monopoly over professional basketball, limiting the total number of teams to 30 --

far fewer than the number of cities that want to host them. This makes for fierce competition among cities for

a very limited number of footloose NBA franchises. The result is public subsidy packages to entice teams that

can range up in the hundreds of millions.

Extending large public subsidies to teams is usually justified by Economic Impact Analysis. Studies

commissioned by supporters of public investment in major league franchises exaggerate the economic and

fiscal benefits that they bring to local economies, claiming that they add up to hundreds of millions of dollars.

There are two inherent flaws in the conventional economic impact analysis supported by sports promoters. (1)

They fail to account for local substitute spending and (2) They do not recognize the degree to which the high

salaries of NBA players leak out of the local economy.

Promotional economic impact analysis assumes that all money spent by local fans is new money into the

economy. In fact, budgets for entertainment and recreation are the same in cities with and without major

league sports teams. Entertainment spending is not affected by the presence or absence of a major league

team. Money spent on professional sports is money that is diverted from other forms of entertainment

including movies, concerts, amateur and college sports, restaurants, theaters, and clubs. Only money brought

into the area by tourists can be considered to the new money in the economy.

Research has shown that just 29% of NBA players reside in their home MSA, meaning that 71% of the wages

paid to players leak out of the hometown area in the first round of spending, due to tax, saving, and lifestyle

factors. We estimate that, for every dollar paid to NBA players, just 10 cents stays in the local economy.

We have conducted an exhaustive review of the literature published in economic journals cover the past 25years. The results in this literature are strikingly consistent. Economists have found no evidence that

professional sports teams have a measurable economic impact on the cities that host them. Sports economists

concur that pro sports are not the cause of economic development; they, rather, the effect if it.

We have used a model designed by the Federal Reserve Bank to project the potential economic impact of an

NBA Franchise on Louisville. This model adjusts for substitute spending and for wage leakage. The model

projects that benefits from new jobs and local taxes are projected at $2.4 million a year. Given the average

tenure of an NBA team, this stream of benefits would have a net present value of just under $19 million.

This is insufficient to support the costs of attracting an NBA team, which, based on experience in other cities,

can easy run up into the hundreds of millions. Even when a city has a new facility like the Yum Center

available, costs to adapt it to the ideal mix of uses to suit the NBAs current business model can be well over

$100 million. Due to changing business models and technologies, cities are required to undertake expensive

facility renovation at regular intervals. As well as stiff front-end charges, Louisville would need to commit to

multi-million dollar renovation programs for Yum Center going forward to keep an NBA franchise in town.


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Because the number of teams is regulated, cities must compete to offer prospective teams the most lucrativ

incentive packages. Small markets, like Louisville, are at a disadvantage because they must compensate fo

their limited attendance and television market size by offering more financial incentives and better deals o

facility rents and revenue sharing to offset lower advertising revenues.

Table 1

Cities Actively Pursuing NBA Teams NBA Teams Considering Relocation

Ranked by

Population

Population

(millions)

Ranked by

Population

Home

Population

(M's)

Anaheim 12.9

Seattle 3.5

Sacramento

Kings 1.8

St. Louis 2.8

Memphis

Grizzlies 1.2

Baltimore 2.7

Minnesota

Timberwolves 3.3

Pittsburgh 2.4

Milwaukee

Bucks 1.8

Vancouver 2.2

Cincinnati 2.1

Kansas City 2.0

Virginia Beach 1.7

El Paso 1.7

Austin, 1.7

Louisville 1.3

Sources: Rascher & Rascher, NBA Expansion Viability Study; Sacramento Kings Relocation: 10 Cities; Cambridg

Economic Research.

Since 1990, 27 of the 30 cities that host NBA teams have built new arenas at a total cost of $5.1 billion. Eve

when a city has a facility constructed, costs of bringing a franchise team there can be staggering. Although S

Louis had spent $280 million building a new football stadium after it lost the NFL Cardinals to Phoenix, it cos

the City over $100 million in lease break fees, relocation fees, lease rights, costs to build a new practice facilit

and stadium upgrades to attract the Rams NFL team to the city (Table 2). Missouri Senator Tom Eagleto

reflected the general sentiment when he said; Why do the deal for the Rams? Because some people aroun

the nation think St. Louiss best days are behind us. We needed to do something dramatic.


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Table 2

St. Louis RamsTeam Relocation Costs - Anaheim to St. Louis

Millions $To meet financial obligations in

Anaheim 39

Relocation Fee, Moving Expenses 20

Practice facility 23

Lease Rights 12

Stadium Improvements 15

Total Costs $109 MillionNote: 1995 prices adjusted for inflation

using CPI

Source: Rosentrab, Major League Losers, 1997.

Table 3 looks at the average stay in hometown cities for footloose NBA franchises. These teams are rumore

to be considering moving to new venues. It shows that the average stay in one city for these teams is 11 years.

Table 3

Tenure of Selected NBA Teams

Team

Year

Established

Number of

Relocations

Avg.Stay

(Years)

Seattle

Kings 1948 6 10.3

Memphis

Grizzlies 1995 2 8.5

New

Orleans

Hornets 1988 2 12.0

NJ Nets 1967 4 11.3

Washington

Wizards 1961 4 12.8

Avg. Length of Stay in Home City 11.0

Source: Mark S Rosentraub, Major League Losers, 1997

The significant investment by local governments suggests that the economic returns of professional sports mus


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be quite large. Economic benefits are often proffered as the justification for subsidies. Sports leagues cater t

ever-expanding global markets. Wealthy individuals and powerful conglomerations sell teams for hundreds o

millions of dollars. Table 3-A shows current values of NBA teams, which range from $92 million for th

Milwaukee Bucks up to $900 million for the Los Angeles Lakers, averaging just under $400 million.

Table 3-A

Values of NBA Franchises 2012

TeamCurrent Value ($mil)

1-Yr Value

Change (%)Revenue ($mil)

Operating

Income ($mil)

Los Angeles Lakers $ 900 40% $ 208 $ 24

New York Knicks $ 780 19% $ 244 $ 75

Chicago Bulls $ 600 17% $ 185 $ 59

Dallas Mavericks $ 497 13% $ 166 $ (4)

Boston Celtics $ 482 7% $ 146 $ 8

Houston Rockets $ 453 2% $ 150 $ 18

Golden State Warriors $ 450 24% $ 139 $ 22

San Antonio Spurs $ 418 3% $ 139 $ 14

Phoenix Suns $ 395 -4% $ 136 $ 13

Orlando Magic $ 385 0% $ 140 $ (16)

Toronto Raptors $ 382 -4% $134 $ 7

Portland Trail Blazers $ 370 4% $132 $ (8)

New Jersey Nets $ 357 14% $ 89 $ (24)

Oklahoma City Thunder $ 348 6% $ 126 $ 25

Utah Jazz $ 335 -2% $ 120 $ (16)

Detroit Pistons $ 332 -8% $ 141 $ 10

Cleveland Cavaliers $ 329 -7% $ 149 $ 33

Washington Wizards $ 328 2% $ 109 $ (3)

Los Angeles Clippers $ 324 6% $ 108 $ 9

Denver Nuggets $ 316 0% $ 113 $ (1)

Philadelphia 76ers $ 314 -5% $ 116 $ (10)

Sacramento Kings $ 300 2% $ 104 $ 6

New Orleans Hornets $ 285 2% $ 109 $ (3)

Indiana Pacers $ 283 5% $ 101 $ (11)

Charlotte Bobcats $ 277 -1% $ 101 $ (26)

Minnesota Timberwolves $ 272 3% $ 97 $ (7)

Atlanta Hawks $ 270 -8% $ 109 $ (15)

Memphis Grizzlies $ 269 1% $ 99 $ (25)

Milwaukee Bucks $ 268 4% $ 92 $ (8)

Averages $ 390 0.5% $131 $ 5

Source: Forbes, The Business of Basketball onwww.forbes.com/nba-valuations/list

Without a doubt, professional sports teams are big business. But just how big is big? One way to put this int
http://www.forbes.com/nba-valuations/listhttp://www.forbes.com/nba-valuations/listhttp://www.forbes.com/nba-valuations/listhttp://www.forbes.com/nba-valuations/list


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The Multiplier Concept

At the center of economic impact analysis is the concept of the multiplier. The multiplier accounts for the fact

that an injection of spending in one sector of the economy can set off waves of activity in related sectors. As

the initial spending circulates and recirculates through the economy, its impact is multiplied. To project the

overall economic impact on the local economy, the initial local spending is weighted by a factor called the

multiplier.

Suppose that a city hosts a tournament and that 100% of the spectators attending the event are from outside

of the metropolitan area. Suppose that the sole purpose of each spectators visit is to attend the tournament.

If these visitors spend $100,000 in the metro area, that $200,000 represents the initial injections of money

into the local economy. This initial spending will flow to hotels, restaurants, and other local establishments

where visitors spend money. These businesses will in turn spend money with the local economy, buying goods

and services from local suppliers, paying employees who live in the metro area, and paying taxes to the local

government. This first round of additional spending is called the direct impact.

Not all of the $10,000 of initial spending will be circulated within the local economy; some of it will lead out of

town as some of the local business will source supplies and will employ staff from outside of the metropolitan

area. Only the money that stays in the local economy can be considered an economic gain to the city. The

money that remains in the local economy is subsequently spent again, just like the local injection. The

businesses that received a share of the direct impact in the first round of spending now circulate the money to

their suppliers and employees and pay taxes. Of course, more leakage occurs as some of this money escapes

to nonlocal sources.

This second wave of spending is the beginning of a chain reaction of future waves called indirect impacts. The

wages paid to employees along the way further the economic ripple effect. The portion of earnings that these

workers spend on local goods and services is known as induced impacts. Some money escapes in each

round into savings or nonlocal spending until the initial injection disappears. The multiplier is the sum of the

direct, indirect, and induced impacts. For example, if the tourist industry has a multiplier of 1.67, a direct

impact of $100,000 generates a total impact of about $167,000 in sales.

Sources of Exaggeration in Economic Impact Analysis

Although the multiplier is a valid economic concept and economic impact analysis is a legitimate technique, it

is often misused. The projection process requires the analyst to make numerous assumptions, including

defining the local area, estimating the direct impact, and choosing the multiplier. These assumptions leave

the process open to error or manipulation and allow the exaggeration of impacts. Because economic impact

studies are usually commissioned by team owners or groups trying to justify a public investment, the potential

for bias is high, leading to deleterious policy decisions.

Substitute spending

Economic research shows that peoples total spending is not affected by the presence of a pro sports team.

The Economic Impact analyses conducted to support sports subsidies fail to account for substitution spending

and incorrectly assume that all money spent at stadiums or sporting events is new money, rather than


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Table 4-A

Estimates of Visiting Fans from Outside the Metro AreaLouisville NBA Team

Number of home games 44

Average Attendance (1) 15,700

Total Attendance 690,800

Nonlocal fans (2) 15%

Number of visiting fans from outside of Louisville MSA 103,620

(1) Based on Memphis Grizzlies 2012 Avg. Attendance

(2) See Table 4

Leakage of NBA Wages

Approximately 53% to 75% % of total NBA revenues go to the players as salaries and benefits. For example,

$70 million of the Memphis Grizzlies $98 million annual operating budget goes to salaries of player, high paid

executives, and team owners. The top NBA players draw salaries of $13 million to $27 million a year, with the

average being $5.1 million. Studies commissioned by pro sports boosters assume that 100% of these salaries

go into the local economy.

The wages of very high income individuals (the top 1%) have less local economic impact than those of average

citizen. This is because very high income households have high marginal tax and savings rates. They make

large federal tax payments and save a high proportion of their incomes, which leaks out of the local area and

into the global financial markets. Neither federal taxes nor savings gets recirculated in the local economy.

Most very high income earners spend more time travelling than the typical worker and many have multiple

residences. They are therefore more likely to spend money out of town than is normal. Because a large share

of the consumption expenditures of these individuals is on goods produced or sold outside the local economy,

the standard economic expansion multiplier overstates the first-round effects of payroll and team profits on

the local economy.

In order to shed light on the proportion of NBA players salaries that leak out of their host economies,

Siegfried and Zimbalist obtained home address data for all NBA players. Based on these data, they found that

only 29% of NBA players lived in the hometown of each U.S. team. For all workers in those same cities, 93%

lived in the local area. The difference between basketball players and other workers has important

implications for the economic impact of local expenditures as over 70% of salaries leak out of the local

economy as soon as they are paid and thus have much less economic impact than wages paid to other

workers.


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economic studies that postseason games are an important source of economic impact.

In 2003, Coates and Humphreys looked at jobs and wages in two sectors of the economy that are closely

linked to activities in stadiums and arenas: the services and retail sectors. Their results suggest that

professional sports reduce real per capita income in cities due to substitution effects (money spent on prosports is diverted from other local businesses) and to the low-paying jobs created in the hotel and restaurant

industries. In the Louisville MSA, for example, the average wage for workers in amusement &recreation and

in hotels and restaurants is $ 18,500, less than half of the average $38,700 wage for the Louisville MSA. 7

Lertwachara and Cochran (2007) considered the change in the local and regional before and after expansion

or relocation of a new franchise into the city. Their evidence includes new teams from each of the four major

US professional sports leagues -- MLB, NFL, NBA, and NHL. They found that new pro sports teams have an

adverse impact on local per capita income for U.S. markets in both the short and long run.8

Lavioe and Rodriguez (2005) examined monthly hotel occupancy rates in eight Canadian cities over the period

1990-1999. They found that hotel occupancy rates were not significantly lower during the 1994 NHL lockout.They did find, however, that departure of an NHL franchise actually had a positive impact on hotel occupancy

in one city. In two cities, the arrival of two new franchises had no impact on hotel occupancy. Kiel and

Matheson (2010) evaluated the impact of NFL franchise on home values. They found that, the higher subsidy

a city extends to an NFL team, the lower the housing prices in the metro area. This suggests that housing

values in cities extending major subsidies to NFL teams are negated by the increased tax burden that is

incurred to finance subsidies. .

In a recently-released study, Geoffrey Propheter (2012) conducted an analysis of personal income in 30 NBA

cities. He found no evidence that the presence of professional basket had an impact on personal income. He

discovered that, in cities that had built new facilities for NBA teams from 2001 to 2009, average per capitalincome declined by an average of $2,430. This reflects the extent to which cities are willing to forego

economic growth in exchange for intangible benefits of being a nationally recognized sports city.

Conclusions of the Literature Review

Economic impact studies conducted over the past 25 years conducted by sports economists concur that pro

sports are not the cause of economic development; they are the effect of a healthy local economy.

Professional sports teams are not drivers of economic development. They are the result of a strong economy

and a robust and diverse tax base that can provide generous subsidies to pro sports teams. They are not

economic catalysts; they are economic complements.

7US Census Bureau, 2010 MSA Business Patterns for Louisville/Jefferson County, KY-IN MSA.

8Lertwachara &. Cochran, 2007


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*Uses mid-points of the ranges to estimate net benefits for Louisville.

Sources: Rappaport & Wilkerson, Economic Review, Federal Reserve Bank, First Quarter 2001

Measuring Tax BenefitsThe City of Louisville gets tax revenue from sports spending from two main sources: the Hotel Tax and the

Income Tax. Although there is a 6% sales tax on fan and tourist spending, this accrues to the state rather than

the city. Of the total 15% tax levied on hotel rooms in Louisville, the City receives 7.5%. Table 8 shows our

projections of additional hotel taxes that would be generated by an NBA Team in Louisville.

Table 8

Estimates of Visiting Fans from Outside the Metro AreaLouisville NBA Team

Number of home games 44

Average Attendance (1) 15,700Total Attendance 690,800

Nonlocal fans (2) 15%

Number of visiting fans from outside of Louisville MSA 103,620

(1) Based on Memphis Grizzlies 2012 Avg. Attendance

(2) See Table 4

Sources: Rappaport & Wilkerson, Economic Review, Federal Reserve Bank, First Quarter 2001

& Cambridge Economic Research. 2001 prices converted to 2012 using the CPI

Attendance at home games has been estimated by multiplying the number of home games by projected

attendance. Average attendance has been projected based on Memphis Grizzlies 2012 average home game

attendance of 15,700. Based on data provided in Table 4 of this report, we have estimated that 15% of the

NBA audience will be from outside of the MSA. Attendance at the games by visitors from outside of the

Louisville metro area is projected at 103,620.

Hotel tax revenues generated by these visitors and by visiting teams. The latter are projected is estimated in

Table 9. The city gets 7.5% of the 15% hotel tax in Louisville. It is estimated that 50% of visitors from outside

of the MSA will spend a hotel night in the City; others will be day trippers from the bi-state Kentucky-Indiana

region or will stay with friends or relatives while visiting. Hotel taxes from visiting teams are projected by

assuming that team members will spend 2 nights in Louisville during each of the 44 home games per seasonthat would be held there. Based on these estimates, we project total hotel taxes from a potential NBA team

in Louisville at $420,000.


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relocation, the average length of stay in any city is 11 years. The net present value of an annual stream of

benefits of $2.4 million a year over 11 years is $18.6 million at a 6% interest rate.

Although Louisville already has a new arena, there are significant other costs of relocating a team that cities

are asked to pay. Table 4 shows that these include lease break fees, relocation fees, lease rights, and stadiumupgrades to attract an NBA team can range around $100 million. The City would need to compensate the

University of Louisville for breaking their lease on Yum Center, which doesnt expire until 2044. This could cost

hundreds of millions of dollars. Louisville would have to build a practice facility which can range from $20

million (St Louis & Oklahoma City) up to $60 million (Orlando).

It is likely that team owners would want adaptations and upgrades at the Yum Center. Yum Center has 71

private suites. The average for NBA arenas is 90 suites. The more-recently built arenas have from 100- 185

private suites.13 St. Louis, which had speculatively-built an NFL stadium, had to spend $15 million building

additional luxury suites for the Rams and Oklahoma City spent $100 million on adapting their existing arena

for the Thunder.

The initial spending on facility upgrades needed to attract an NBA team to the Yum Center is the tip of the

iceberg. NBA teams are constantly revising business models, necessitating expensive changes in arena design

to allocate the ideal mix of arena uses (suites, club seats, clubs, food, retail, hospitality, infrastructure, locker

room amenities) to maximize profits and to placate celebrity team members. Rapidly changing

communications and media technology also requires frequent systems upgrades. Cities are forced to pay for

multi-million dollar renovation programs on a regular basis in order to keep major league teams in town.

At present, the City of Phoenix is spending $10 million on updates for the US Airways Center to keep the NBA

Sons in town. Detroit is footing a $15 million for adaptations to the palace at Auburn Hills to expand private

suites, clubs, and lounges. Anaheim is spending $20 million to keep the NHL Ducks in town and to try to lurethe Kings away from Sacramento. Minneapolis is planning to spend $155 million to keep the Timberwolves at

the Target Center.

St. Louis spent $30 last year on up-scaling the Edward Jones Dome to meet the demands of the Rams.

Recently, the team asked the City for an additional $700 million to adapt the facility to the current state-of-

the-art in design and technology. The Citys underfunded schools are among the worst-performing in the

nation.

Conclusions

The projected annual stream of $2.4 million in economic and fiscal benefits to Louisville has a net present

value of just $18.6 million over the 11- year life expectancy for an NBA franchise team. It is unlikely that this

could begin to cover the public costs of attracting an NBA franchise which could easily run up into the

hundreds of millions. In addition, facility adaptation and maintenance costs going forward would be an

onerous burden on taxpayers in a city of Louisville scale and tax base.

13Amway Center is Orlando has 185 luxury suites and Barclay Center in Brooklyn has 100 suites.


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Documents

Cambridge Economic Research- Impact of NBA Franchise in Louisville