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Cambridge Economic Research's Study on the Economic Impact of an NBA Franchise on Louisville.

Cambridge Economic Research's Study on the Economic Impact of an NBA Franchise on Louisville.

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A study was conducted by Cambridge Economic Research to determine the economic impact that an NBA Franchise would have on the city of Louisville, Kentucky
A study was conducted by Cambridge Economic Research to determine the economic impact that an NBA Franchise would have on the city of Louisville, Kentucky

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Economic Impact of an NBA Franchise on Louisville

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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 ...................................................................................................................... 15 Valuing Benefits from Net Job Creation............................................................................................................ 17 Measuring Tax Benefits..................................................................................................................................... 18 Comparison of Jobs & Tax Revenue Benefits with Public Outlays .................................................................... 21 Conclusions ....................................................................................................................................................... 22

Economic Impact of an NBA Team on Louisville

Executive Summary
The 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 25 years. 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 NBA’s 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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Economic Impact of an NBA Team on Louisville

NBA Franchises – Supply & Demand Fundamentals
Since 1990, American cities have spent more than $15.6 billion in state and local tax revenues to attract professional sports teams to American cities. Some sports economists consider this to somewhat of a welfare system that transfers billions of dollars from taxpayers to wealthy investors and their extraordinarily well-paid employees. This system thrives because state and local government leaders -- dazzled by promises of economic growth from sports and mesmerized by visions of enhanced images for their communities -- have failed to do their homework. The subsidies given to professional sports are the result of two factors: (1) the privileged position that is accorded to professional sports by our culture and (2) the artificial scarcity of league teams created by the NBA, MLB, NFL, and NHL. Elected officials are keenly aware of the political value of attracting a professional sports franchise to town regardless of the underlying cost-benefit calculus. Our culture has an emotional attachment to sports that leads us to over-value the potential role of professional sports in economic development. In spending hundreds of millions to attract major league sports teams, a large number of people believe that a sports franchise, with its celebrity athletes, can be elixirs for any number of social, economic, and political ailments. The media’s attention to sports has encouraged many cities to reshape or establish their images and reputation. As early as the 1950’s, Mayor D’Alessandro recruited the St. Louis Browns to (who became the Orioles) to show that Baltimore was a big league city. One sports economist as refers to this as “simple collective foolishness when it comes to matters of the heart.” 1 As recently as 2008, the slogan for Oklahoma City’s campaign to recruit the Seattle Sonics was “Big League City”. OKC paid tens of millions of dollars to break the Sonic’s lease in Seattle, spent $20 million to build a practice facility, and committed to a $100 million to renovate its arena, which had been built just 5 years before. The renovation added clubs, additional luxury suites, office space, a Kid's Zone, additional concessions, flooring upgrades, integrated video and scoring systems, , view lounges and upgraded 'general use' locker rooms. NBAspecific amenities were built including 'NBA ONLY' locker rooms and facilities, a practice court, media broadcast facilities, lighting, and sound, an NBA press room, an onsite NBA and team store, and ticket/staff rooms. Why have professional sports gotten so expensive for cities and states? There are many more cities wanting NBA franchises than are available. At present, at least eleven cities are aggressively or actively pursuing NBA Franchises. There are only four teams that are considering relocating. Table 1 lists these markets by size. Anaheim, in the Angeles metro area with 13 million people is the largest. Louisville, with 1.3 million residents, is the smallest. The monopoly that the NBA maintains contributes to the institutionalization of subsidies by local government. Professional sports leagues preserve a monopoly by limiting the total number of teams available for public consumption and by limiting the number of teams that play in a certain region despite sufficient consumer demand for additional franchisees. The anti-trust protection extended to North American professional sports leagues contributes to the ability of teams to extract subsidies for new facilities, relocation fees, moving expenses, break lease fees and costs that other relocating businesses have to bear themselves.

1

Coates & Humphries, “Do Economist Reach a Conclusion on Subsidies for Sports Franchises? North American Association of Sports Economists, August 2008. Cambridge Economic Research

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Economic Impact of an NBA Team on Louisville
Because the number of teams is regulated, cities must compete to offer prospective teams the most lucrative incentive packages. Small markets, like Louisville, are at a disadvantage because they must compensate for their limited attendance and television market size by offering more financial incentives and better deals on facility rents and revenue sharing to offset lower advertising revenues.

Table 1 Cities Actively Pursuing NBA Teams
Ranked Population Anaheim Seattle by Population (millions) 12.9 3.5

NBA Teams Considering Relocation
Ranked by Population Sacramento Kings Memphis Grizzlies Minnesota Timberwolves Milwaukee Bucks Home Population (M's)

1.8

St. Louis Baltimore

2.8 2.7

1.2 3.3

Pittsburgh 2.4 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: Rasher & Rasher, NBA Expansion Viability Study; Sacramento Kings Relocation: 10 Cities, October 2012 Since 1990, 27 of the 30 cities that host NBA teams have built new arenas at a total cost of $5.1 billion. Even when a city has a facility constructed, costs of bringing a franchise team there can be staggering. Although St. Louis had spent $280 million building a new football stadium after it lost the NFL Cardinals to Phoenix, it cost the City over $100 million in lease break fees, relocation fees, lease rights, costs to build a new practice facility, and stadium upgrades to attract the Rams NFL team to the city (Table 2). Missouri Senator Tom Eagleton reflected the general sentiment when he said; “Why do the deal for the Rams? Because some people around the nation think St. Louis’s best days are behind us. We needed to do something dramatic.”

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Table 2

St. Louis Rams Team Relocation Costs - Anaheim to St. Louis
Millions $
To meet Anaheim financial obligations in

Relocation Fee, Moving Expenses Practice facility Lease Rights Stadium Improvements Total Costs
Note: 1995 prices adjusted for inflation using CPI

39 20 23 12 15 $109 Million

Source: Rosentrab, Major League Losers, 1997.

Table 3 looks at the average stay in hometown cities for “footloose” NBA franchises. These teams are rumored 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 Seattle Kings Memphis Grizzlies New Orleans Hornets NJ Nets Washington Wizards Year Established 1948 1995 Number of Relocations 6 2 Avg. Stay (Years) 10.3 8.5

1988 1967 1961

2 4 4

12.0 11.3 12.8 11.0

Avg. Length of Stay in Home City Source: Mark S Rosentraub, Major League Losers, 1997

The significant investment by local governments suggests that the economic returns of professional sports must be quite large. Economic benefits are often proffered as the justification for subsidies. Sports leagues cater to ever-expanding global markets. Wealthy individuals and powerful conglomerations sell teams for hundreds of
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Economic Impact of an NBA Team on Louisville
millions of dollars. Table 3-A shows current values of NBA teams, which range from $92 million for the Milwaukee Bucks up to $900 million for the Los Angeles Lakers, averaging just under $400 million.

Table 3-A Values of NBA Franchises – 2012
Team Los Angeles Lakers New York Knicks Chicago Bulls Dallas Mavericks Boston Celtics Houston Rockets Golden State Warriors San Antonio Spurs Phoenix Suns Orlando Magic Toronto Raptors Portland Trail Blazers New Jersey Nets Oklahoma City Thunder Utah Jazz Detroit Pistons Cleveland Cavaliers Washington Wizards Los Angeles Clippers Denver Nuggets Philadelphia 76ers Sacramento Kings New Orleans Hornets Indiana Pacers Charlotte Bobcats Minnesota Timberwolves Atlanta Hawks Memphis Grizzlies Milwaukee Bucks Averages Current Value ($mil) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 900 780 600 497 482 453 450 418 395 385 382 370 357 348 335 332 329 328 324 316 314 300 285 283 277 272 270 269 268 $ 390 1-Yr Value Change (%) 40% 19% 17% 13% 7% 2% 24% 3% -4% 0% -4% 4% 14% 6% -2% -8% -7% 2% 6% 0% -5% 2% 2% 5% -1% 3% -8% 1% 4% 0.5% Revenue ($mil) $ 208 $ 244 $ 185 $ 166 $ 146 $ 150 $ 139 $ 139 $ 136 $ 140 $134 $132 $ 89 $ 126 $ 120 $ 141 $ 149 $ 109 $ 108 $ 113 $ 116 $ 104 $ 109 $ 101 $ 101 $ 97 $ 109 $ 99 $ 92 $131 Operating Income ($mil) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 24 75 59 (4) 8 18 22 14 13 (16) 7 (8) (24) 25 (16) 10 33 (3) 9 (1) (10) 6 (3) (11) (26) (7) (15) (25) (8) $5

Source: Forbes, The Business of Basketball on www.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 into perspective is to look at the proportion of jobs that they provide in the local labor market area. A case study was recently performed on the role of sports to the economy of Portland, Oregon, home of the NBA Trail
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Economic Impact of an NBA Team on Louisville
Blazers. The study found that there were 762 jobs in spectator sports in the Portland MSA. This represents less than 0.1% of employment in the Portland MSA. Wages for these jobs is $116.6 million a year, just 0.4% of the region’s total employment.2 This includes all professional and semi-professional sports teams; athletes involved in professional sports; and businesses associated with auto, horse, and dog racing. The Trail Blazers make up the bulk of this category, but is also includes payroll and employment related to a minor league baseball team, Portland International Raceway, Portland Meadows horse-racing track, a Greyhound-racing park, and other small spectator sports venues. Professional sports teams are small to medium-sized businesses. They are vibrant and vital components of any host city’s economy, but, in terms of economic impact, are no more important than other small and medium sized firms. In no city do professional team sports account for as much as 1% of private sector jobs.

Promoting Sports Investment through Economic Impact Analysis
Due to the diminutive size of the sports sector, a pro sports team is not an economic engine for any city. The ability to host and support expensive professional sports teams is the result -- not the cause -- of economic development. But promoters of public investment in sports assert that the economic benefits of sports are bigger than team revenues or contributions to local payroll. For example, the Memphis Chamber of Commerce released a study by Younger Associates showing that the economic impact of the NBA Grizzlies is $223.3 million a year, supporting 1534 jobs and generating $5.2 million in local tax revenues. 3 St. Louis Regional Commerce and Growth Association claims that the baseball Cardinals generated an annual regional economic impact of $163 million. These projections come from studies called economic impact analyses – predictive tools that are the dominant marketing device used by sports investment campaigns. Every campaign to persuade voter to approve special taxes and funding to bring a major league franchise to a community is supported by an economic impact analysis. Proponents use these studies to argue that sports investments are justified because the predicted benefits exceed the costs. The term “economic impact” refers to a measure of the spending, wages, or jobs associated with a specific project. The economic impact of a team can be bigger than its revenue or payroll because the impact is not limited to immediate spending at the ballpark. Each firm interacts with other parts of the economy when it purchases goods and services or when its employees spend part of their income. These secondary transactions are elements of the firm’s overall economic impact. Looking beyond the revenue and payroll of a team is perfectly legitimate. But promotional studies have tended to overstate the impacts of sports teams and events.

2

Santo, Charles and Gerald Mildner, Sport and Public Policy, Human Kinetics, 2010.
Younger Associates, Economic Impact of the Memphis Grizzlies, 2010

3

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Economic Impact of an NBA Team on Louisville
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 spectator’s 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 people’s 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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Economic Impact of an NBA Team on Louisville
spending that is redirected from elsewhere in the local economy. Promotional impact studies ignore or understate the effects of consumer substitution and leakages from the local economy connected to sports facilities. These studies assume that all of the spending on pro sports teams is new to the local economy and that this spending has a similar effect on the local economy as other spending on goods and services. Both of these propositions are false. Most consumers have a relatively inflexible leisure budget. The more time and money that is spent on a sports team, the less is available for movies, restaurants, golf, bowling, amusement parks, theaters, and concerts. 4 Similarly, the more that people spend at restaurants and clubs near a stadium, the less they will spend elsewhere within the metro area. The net effect of a new team or stadium on consumption in the team’s local community is likely to be close to zero, although sports teams do cause a significant amount of shifting of leisure budgets within the local area. 5 If sports teams attract new money into an area, the net effect of spending can be substantial. But the only way for spending on pro sports to be “new money” is if it is spent by visitors from outside of the metro area. Table 4 shows that estimate of the percent of pro sport attendance from outside of the home team’s metro area range from 5% to 30%. The TAMS report estimate of 10% is excludes visitors who are in town on other business or social visits. In the last section of the report, we present estimates of the economic impact of an NBA franchise team on Louisville. We will use the synthesis estimate of 15% from outside the metro area to estimate the amount of visitor spending that can be counted as “new money” injected into the local economy. Table 4

NBA Attendance
Percent from Outside of Metro Areas
Source Santo & Mildner Siegfried & Zimbalist TAMS 2006 Report Synthesis Date 2010 2002 2012 Percent Visitors 5% to 30% 5% to 20% 10% 15%

Table 4-A shows our projections of visiting fans from outside of the metro area that an NBA team would attract to Louisville, which we estimate at just over 100,000 a year.
4

Baade, Robert A. and Allen R. Sanderson, “Employment Effect of Teams and Sports Facilities,” in Noll and Zimbalist, eds., Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums, The Brookings Institution, Washington, D.C., 1997, pp. 92-118. 5 Coates & Humphries, “Do Economist Reach a Conclusion on Subsidies for Sports Franchises?” North American Association of Sports Economists, August 2008.

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Table 4-A

Estimates of Visiting Fans from Outside the Metro Area
Louisville NBA Team Number of home games Average Attendance (1) Total Attendance Nonlocal fans (2) Number of visiting fans from outside of Louisville MSA
(1) Based on Memphis Grizzlies 2012 Avg. Attendance (2) See Table 4

44 15,700 690,800 15% 103,620

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 Grizzly’s $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 player’s 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. If all consumption expenditures are conducted in the area of a person’s permanent residence, 29% of an NBA payroll would be available for local distribution, in contrast to 93% of the average payroll. If the typical NBA player pays a marginal rate of 35% in federal and state income taxes, saves 30% of his after tax income, and spends 10% of his income on imports (e.g., travel, internet purchases), 10% of gross payroll of NBA teams would be injected into the local economies of their host cities. So, for every dollar paid to NBA players, only
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10 cents stays in the local area.

Survey of Economists
George Bernard Shaw, the Irish playwright and co-founder of London School of Economics, famously jested that if all of the economists in the world were laid end-to-end, they would not reach a conclusion. In a 2005 survey of a random sample of American Economic Association members, Robert Whaples(2006) asked economist if they agreed or disagreed with the following statement: “Local and state governments in the U.S. should eliminate subsidies to professional sports franchises.” Possible responses were “Strongly Disagree,” “Disagree,” “Neutral,” “Agree,” and “Strongly Agree.” Figure 5 shows that 85% of Economists agree that professional sports team should not be subsidized. Of these, twothirds of economists strongly agree. Only 5% of economists disagreed that sports subsidies should be stopped. 6 This question was one of about 20 policy issues included in the survey. It received the highest degree of consensus among economist of all of the 21 policy issues.

Figure 5

Survey of American Economic Association Members
Responses to “Subsidies to Professional Sports Franchises Should be Eliminated”
70% 60% 50% 40% 30% 20% 10% 0% Strongly Agree Agree Neutral Disagree Strongly Disagree

Source: Whaples (2006)

6

Whaples, R., Do Economist Agree on Anything? Yes! The Economists Voice, (3)(9) 2006.

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Economic Impact of an NBA Team on Louisville Review of the Literature on Subsidization of Professional Sports Teams
Over the past 25, more than 50 articles on the economic impacts of professional sports teams have been published in economic journals by sports economists. The results in this literature are strikingly consistent. No matter what cities or geographical areas are examined or which variables or models are used, economists have found no evidence that professional sports franchises and facilities have a measurable economic impact on the cities that host them. Pioneer sports economists Baade and Dye (1988) examined the economic impact of professional sports on jobs, value added, and capital spending by manufacturing firms in eight metropolitan areas with pro sports teams over a 12 year period. They found no evidence that the presence or absence of a professional sports franchise increased any of the indicators of economic growth. Baade and Dye (1990) next examined the economic impact of professional sports on personal income. They found no relationship between the presence of sports franchises and facilities and income growth. In 1996, Baade examined the economic impact of professional sports on jobs in the Amusement and Recreation and Commercial Sports industries in 48 metropolitan areas over three decades. The 48 metropolitan areas in the sample included both cities with professional sports teams and cities with no professional sports teams. They found that that there was no evidence that the presence of professional sports teams have a positive impact on per capita income or jobs. Hudson (1999) examined the economic impact of professional sports on urban employment in 17 metropolitan areas over a twenty year period. This study considered the number of professional sports franchises in the metropolitan area. They found that professional sports teams had no effect on employment in the 17 metro areas. Likewise, Coates and Humphreys (1999) examined the impact of professional sports on the level and growth rate of per capita income for all 37 metropolitan areas that had an NFL, MLB or NBA franchise over the period 1967-1994. The authors concluded that professional sports had no positive effect on metropolitan area per capita income and may have a negative effect. Strikes in professional sports leagues are useful for analyzing the economic impacts of professional sports franchises because they provide an opportunity to evaluate whether pro teams really make a difference to the local economy. In a landmark 2001 study, Coates and Humphreys looked at the impact of major league work stoppages on the level of income per capita in urban areas. They found that real income per capita in metropolitan areas did not fall during work stoppages in professional sports leagues, supporting the emerging consensus in the literature that professional sports teams have no tangible effect on local economies. Coates and Humphreys (2002) used another “natural experiment” -- playoff appearances by franchises -- to measure the economic impact of major sports events on per capita income in metropolitan areas. The results indicate that income in metropolitan areas that host post-season NBA, MLB, and NFL games is identical to income in metropolitan areas that did not host to postseason games, disputing the idea in promotional 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
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Economic Impact of an NBA Team on Louisville
professional sports reduce real per capita income in cities due to substitution effects (money spent on pro sports 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 capital income 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.

7 8

US Census Bureau, 2010 MSA Business Patterns for Louisville/Jefferson County, KY-IN MSA. Lertwachara &. Cochran, 2007

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Economic Impact of an NBA Team on Louisville Economic Impact of an NBA Team on Louisville
In this final section of the report, we present projections of the net benefits that an NBA team in Louisville might bring to the city and the surrounding region. We have used a model developed by two economists with the Federal Reserve Bank and Published in the Federal Reserve Bank of Kansas City’s Quarterly Economic Review which was developed to help cities project the local jobs and tax benefits of a major League Sports Franchise in order to compare them with costs. Unlike the conventional economic impact models that inflate the economic impacts of recreation and leisure industries, the Federal Reserve’s model counts only “New Money” brought into a region by visitors by a professional sports team. Economic research has shown that most consumers have relatively inflexible leisure budgets, both in terms of time and money. The more time and money that is spent on a professional sports team, the less is available for movies, amateur & college sports, restaurants, golf, bowling, amusement parks, theaters, and concerts. Consumers in cities with NBA teams spend the same amounts on sports and entertainment as those without teams. Economic impact studies that promote subsidies to sports teams do not recognize that this local spending is diverted to pro sports from other businesses in the community9 Studies done by promoters of sports teams usually use the one of three input-output models that are popular with consultants: RIMS, REMI, and IMPLAN. These models are based on out-of-date BEA data in inter-industry linkages. They do not reflect the current state of the global trade market and do not account for increased trade leakages due to the growth of non-local sourcing over the past two decades. Projections made with these models count spending by local MSA residents as new money to the economy, rather than as money diverted from other local businesses. They also fail to take into account the rapid leakage of NBA salaries out of the local economy, since, as we have seen, only 29% of NBA players live in their hometown cities. Cambridge Economic Research has applied the Federal Reserve’s model to project the potential economic impact of an NBA franchise on Louisville. The model quantifies three classes of benefits from professional sports teams:

-

Net jobs created by pro sports teams, both direct and indirect Increased City income taxes on astronomical team salaries Growth in the City’s 7.5% hotel tax receipts.

The model also counts sales taxes. In Kentucky, however, sales taxes accrue to the State rather than to local jurisdictions, so they are not included in our projections for the Metropolitan Statistical Area (MSA).

Measuring Job Creation Benefits
To estimate the number of jobs created from hosting a professional sports team, it is necessary to distinguish between gross and net job creation. Gross job creation is the number of jobs that can be observably linked to
9

Baade, Robert A. and Allen R. Sanderson, “Employment Effect of Teams and Sports Facilities,” in Noll and Zimbalist, eds., Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums, The Brookings Institution, Washington, D.C., 1997, pp. 92-118 Cambridge Economic Research

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Economic Impact of an NBA Team on Louisville
the presence of a sports team. Such observable jobs are created mainly within the stadium itself and at nearby businesses catering to people who attend sports events. Gross jobs created at a sports stadium include the players and other team employees; stadium management, maintenance, and support staff; and the various vendors selling goods at stadium events. Gross jobs also include positions created at businesses near the sports venue which are supporting by preand post-game spending. This spending supports a number of local businesses, such as parking lots, restaurants, nightclubs, and souvenir shops. It includes jobs created by business and employees that are the direct beneficiaries of the new jobs. Some additional tourism-related jobs linked to the presence of a sports team may also be created further away from stadiums. These arise from the spending of people who visit a host metro area to attend a sports event—for instance, at hotels and restaurants located throughout the metro area. The presence of a professional sports team also creates job losses, because individuals who spend money to attend sports events have less to spend at businesses elsewhere in the host metro area. Less spending results in job losses. Benefits arise only from a net increase in jobs. Economic research shows that people’s total spending on entertainment is not affected by the presence of a professional sports team. The more people spend on attending sports events, the less they may spend on movies and restaurants located near a stadium, the less they may spend at restaurants and nightclubs located elsewhere. Because the job losses from lower spending are spread across a large number of businesses and a wide geographic area, they usually cannot be observably linked to the presence of a sports team. In addition to observable gross jobs, hosting a professional sports team also creates unobservable “local multiplier” or indirect jobs. These jobs arise from changes in local spending due to gross job creation and the offsetting job losses. For example, local spending by team players and visitors supports jobs across a range of local industries. The total number of jobs created in a host metro area is some multiple of the observable number of jobs created. Because indirect jobs cannot be easily linked to a sports team’s presence, the size of the local multiplier is controversial. Estimates of total job creation in the stadium impact studies use local multipliers as high as 2.5. In other words, these studies assume that 2.5 total jobs are created for each initial observable job created from hosting a sports team. Based on independent economic studies, the Federal Reserve Model incorporates a jobs multiplier of 1.25 to estimate the spinoff from a major league sports team. This means that, for every gross direct job created (including athletes, team employees, stadium management, concession vendors, and parking lots, restaurants, clubs, and shops surrounding the sports venue), an additional 0.25 jobs will be created in the metro area. The Federal Reserve’s sports jobs multipliers are more realistic than those of conventional models used by consultants supporting pro sports investment because a large portion of local spending goes to purchase goods and services produced outside the host metro area. In addition, as has been discussed, most

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professional sports players reside outside the metro area in which they play. Taking account of job losses and using estimates of the local multiplier from independent studies suggest that the net number of jobs created from hosting a professional sports team is quite low. It is almost certainly less than 1,000. The methodology and numbers reported in Hamilton and Kahn suggest that Baltimore’s hosting of the Orioles baseball team has created just 770 jobs in the Baltimore metro area (major league baseball has twice as many home games as does the NBA).

Valuing Benefits from Net Job Creation
In addition to measuring the number of net direct and indirect jobs created, it is necessary to quantify the value of these jobs to the metro area. It is important to realize that a metro area’s existing residents may not benefit at all from net job creation. Consider the case of metro area residents who already have high paying jobs which they enjoy. How do they benefit from more jobs in a metro area? On the positive side, property prices are likely to rise and local governments may be able to raise revenues from a larger tax base, in turn allowing for lower tax rates. On the negative side, a rise in property prices could make housing less affordable, particularly for lower income tenants. Using a combination of econometric techniques and economic intuition, sports economists have estimated metro area benefits to range from $0 to $2,000 per net job created in hotels, restaurants, and amusement and recreational establishments. 10 This is low because so many jobs created are low paid, part-time, and day-ofevent only. It recognizes that some jobs will be lost in the metro area due to substitute spending on professional sports which will divert revenues from established businesses in the community. Valuing the job creation benefit from a team requires combining the estimates of the number of net jobs created with the value of these jobs to the host metro area. Applying these estimates to our projections yields estimates of the value of net job creation of $0 and $1.0 million a year. Using the midpoints from each of these ranges as a baseline results in a net job creation value of an NBA team in Louisville of $500,000 per year (500 jobs times $1000 per job). Table 7

Net Job Creation from Hosting an NBA Team
Louisville, KY Number of net new jobs created Benefit per job Net Job Creation Benefit (500 jobs *$1000 benefit)*
*Uses mid-points of the ranges to estimate net benefits for Louisville. Sources: Rappaport & Wilkerson, Economic Review, Federal Reserve Bank, First Quarter 2001

0 to 100 $0 to $2000 $500,000

Rappaport & Wilkerson, 2001. Dollars adjusted to 2012 prices.
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Measuring Tax Benefits
The 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 Area
Louisville NBA Team Number of home games Average Attendance (1) Total Attendance Nonlocal fans (2) Number of visiting fans from outside of Louisville MSA
(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

44 15,700 690,800 15% 103,620

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 season that 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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Economic Impact of an NBA Team on Louisville
Table 9

Projected Hotel Tax Revenues
Louisville NBA Team Visiting Fans from Outside the MSA Overnight Hotel Stays (50%)* Visiting Team Hotel Nights Nights Rooms Hotel Nights Total Team & Visitor Hotel Nights Avg. Hotel Room Cost** Annual Hotel Sales 7.5% City Hotel Tax*** 103,620 51,810

88 35 3,080 54,890 $ 102 $ 5,598,780 $ 420,000

* Assumes 50% day trips from within the bi-state region & 15% homestays. ** Louisville CVB *** The City of Louisville gets 7.5% of the 15% hotel tax. Source: Cambridge Economic Research.

Due to the high wages commanded by major league ball players, the major benefit of an NBA team to the City and its residents would be the income tax that would accrue to the City on the wages paid to NBA Players. Louisville’s earnings tax ranges from 1.45% for non-resident workers up to 2.2% for residents. We have assumed that 29% of team will reside in the Louisville MSA and that 71% will live outside of the MSA. Of the players that live in the MSA, it is assumed that 50% live in the City and 50% live the suburbs of Louisville MSA, based on the proportion of the population in each place. The total annual taxes on Team Salaries are estimated at $1.27 million (Table 10).

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Economic Impact of an NBA Team on Louisville

Table 10

Projected City Income Tax
Louisville NBA Team Number of Players Average NBA Salary Total Players’ Salaries Head Coach & General Manager (M$) Total Top Staff (M$) City Income Tax from Team Salaries Annual City Income Tax Revenues @ 2.2%-City Residents (1) Annual City Income Tax Revenues @ 1.45%-Non- Residents (1) Total Income Tax from Team Salaries Wages from Spinoff Jobs Net Jobs Created (2) Average Wage in Louisville Service Industries (3) Total Wages from Spinoff Jobs Created City Income Tax from Spinoff Jobs Created Annual City Income Tax Revenues @ 2.2%-City Residents (4) Annual City Income Tax Revenues @ 1.45%-Non- Residents (4) Total Income Tax from Spinoff Jobs Total City Income Tax from all New Jobs Annual City Income Tax Revenues @ 2.2%-City Residents Annual City Income Tax Revenues @ 1.45%-Non- Resident Total City Income Tax from New Jobs (M$) $ $ 362,000 1,077,000 $1,439,000 $ $ $ 102,000 67,000 169,000 $ $ 500 18,500 9,250,000 15 5,100,000 76,500,000 5,000,000 81,500,000

$ $ $ $

$ $ $

260,000 1,010,000 1,270,000

(1) Based on a 2002 survey by Siegfried & Zimbalist that showed that 71% of NBA players lived outside of their “hometown”. Assumes that 71% of the team lives outside of the Louisville MSA (Siegfried & Zimbalist, 2001). Of the 29% that live within the MSA, it is assumed that 50% live in the city and 50% live in the suburbs. (2) See Table 4. (3) Average wage for jobs in Amusement & Recreation, Hotel & Restaurant, & Service Industries In Louisville MSA, US Census Bureau, 2010 MSA Business Patterns (4) Assumes that 50% of workers live in the city and 50% live in the suburbs. Sources: Rappaport & Wilkerson, Economic Review, Federal Reserve Bank, First Quarter 2000 & Cambridge Economic Research

The 500 net new jobs that will be created (see Table 7) will also yield additional city income tax benefits. We
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Economic Impact of an NBA Team on Louisville
have used the average wage for relevant service industries in the L ouisville MSA ($18,500) in order to project wages and taxes from these spinoff jobs. They are expected to produce $169,000 in income taxes. The combined income tax benefits from team wages and wages from spinoff jobs is estimated at $1.4 Million a year.

Comparison of Jobs & Tax Revenue Benefits with Public Outlays
Adding together the annual estimated values of the net job creation, hotel tax, and income tax benefits yields baseline estimates of the value of hosting an NBA team that total about $2.4 million a year. This is about 1% of the level of benefits typically claimed by Economic Impact Studies supported by promoters of NBA franchises. For example, in 2010, the Memphis Chamber of Commerce issued a report claiming that the impact of the NBA Grizzlies is $223 million a year. 11 The impacts of the Houston Rockets are projected at over $243 million a year and the San Antonio spurs were estimate by a promotional study to produce benefits totaling over 100 million a year. 12 Table 11

Total Economic Impact
Louisville NBA Team Benefits to the City of Louisville Net Job Creation Benefit Hotel Tax Increased Income Taxes Total Projected Economic Impact on Louisville

$ $ $ $

500,000 420,000 1,440,000 2,360,000

Sources: Tables 7,8, & 9; Rappaport & Wilkerson, Economic Review, Federal Reserve Bank, First Quarter 2001.

How do our projections of $2.4 million annual benefits from an NBA franchise in Louisville compare with potential costs? Table 3 of this report shows that, for the teams that are currently rumored to be considering 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 stadium upgrades 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 doesn’t expire until 2044. This could cost

11 12

Younger Associates, Economic Impact of the Memphis Grizzlies, September 2010. Rappaport & Wilkerson, 2001. Projections adjusted to current dollars using CPI.

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Economic Impact of an NBA Team on Louisville
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 lure the 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-ofthe-art in design and technology. The City’s 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.

13

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

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Economic Impact of an NBA Team on Louisville References
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Author’s Bio

Margaret Collins, AICP Director Cambridge Economic Research 71 Putnam Ave. Cambridge, MA 02139 Email: econresearch@comcast.net Margaret Collins, Director of Cambridge Economic Research, is certified urban planner with over 20 years of experience in analysis of public policy for economic development. She is an expert in economic and fiscal impact analysis of policy initiatives to catalyze tourism, including professional sports franchises and convention and cultural facilities. She has advised cities, non-profits, research foundations, and economic development agencies throughout the world on the economic and tax costs and benefits of public investments in tourist-serving buildings and infrastructure. In projecting economic impacts, he firm uses a full range of state-of-the-art models and methods including: REMI; IMPLAN; case studies; cost–benefit modeling; multiple regression analysis; and demographic and economic forecasting. Prior to establishing Cambridge Economic Research, Ms. Collins was Director of Land Use with Economic Development Research Group. Previously, she was Director of the Scotland office of Roger Tym & Partners where she worked with international urban renewal agencies and developers on a range of tourism, economic, and real estate development projects. She has a MA in Urban Planning from Washington University and a BA in History and Political Science from Webster University and is a former Chairman of the American Planning Association. She has published a book and several articles on the economic impacts of convention centers and professional sport stadiums. She speaks regularly on these topics.

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