Baseball’s monopoly shows its benevolent side with ballpark subsidies

Baseball’s stadium dramas have reappeared with a vengeance this year.

First, there was the pas de trois with Washington, D.C., Mayor Anthony Williams, D.C. Council Chair Linda Cropp and MLB COO Bob DuPuy. The city’s rich stadium deal was on the table, off the table and then on again.

The public will fund about 80 percent of the roughly $550 million expense of the new stadium and grant all stadium revenue to the Nationals, in exchange for $5.5 million in annual rent. Score a victory for MLB.

Second, there was the drama in Minnesota where, after years of strong-arming tactics from MLB (including the threat of contraction), Hennepin County and the Twins finally agreed on a ballpark-financing plan. The park will cost nearly $500 million, with $125 million kicked in by the Twins.

The public share would be funded with a sales tax increase of 0.15 percent that still must be approved by the state Legislature. Get ready to put another check in the MLB column.

Then there’s the long-winded and tedious stadium battle in south Florida — a battle that was started by Wayne Huizenga in 1997 as his expansion Florida Marlins team was on the way to a World Series triumph. Huizenga didn’t get his way, so he unloaded all his best players, lowering the team payroll from $52.5 million in 1997 to $19.4 million in 1998.

Then he sold the team to John Henry. At first, Henry offered to build a new facility with private funds, but he had second thoughts and called MLB to his aid.

Commissioner Bud Selig obliged with an April 25, 2001, letter to Florida state Sen. J. Alex Villalobos: “Unless [public stadium] funding was secured, the Marlins would be a prime candidate for contraction or relocation. Bluntly, the Marlins cannot and will not survive in south Florida without a new stadium.”

Twins hope a sales tax increase, MLB subsidy will put them in new ballpark in Minneapolis.

The Marlins’ current owner, Jeffrey Loria, reached a deal with Miami-Dade County commissioners for a $420 million stadium near the Orange Bowl. The deal included a $60 million sales tax rebate from the state (something the state has regularly provided to sports teams in the past) to cover a $30 million shortfall in construction costs.

Three weeks ago, however, the state Legislature rejected the rebate. Neither Miami-Dade County commissioners nor Loria nor DuPuy was pleased. DuPuy sent a note asking for a new plan by June 9.

Some read the note as an ultimatum, which DuPuy denied. It also seems that the cost of land was underestimated, so the financial shortfall is now $45 million.

Still, the deficit is a mere 10 percent of project costs. The Las Vegas relocation alternative for the Marlins is possible, but problematic. South Florida is the better baseball market today, and the sides are close enough to make this deal work.

Sometimes lost in all the stadium politics and power plays is the fact that MLB itself has begun to provide very significant subsidies to ballpark construction.

Baseball’s post-1996 revenue-sharing system is based on each team’s “net local revenue,” defined as local revenue minus stadium costs. Stadium costs include not only operating expenses but also capital expenses.

Capital expenses can be either the upfront financial contribution of a team to stadium renovation or construction amortized over a 10-year period, or they can be the principal portion of annual debt service payments on a construction bond.

This means that a team’s contributions to stadium construction lowers its revenue-sharing burden to (or increases its revenue-sharing receipts from) other teams. Put differently, MLB as a whole is indirectly subsidizing the construction of stadiums.

Consider an example. The Yankees are proposing a new $800 million stadium that they would finance privately. If the Yankees were to amortize this sum over 10 years, it would mean that they would be deducting an additional $80 million a year in stadium construction expenditures.

Since the Yankees face an estimated 39 percent marginal tax rate in baseball’s revenue-sharing system, reducing net revenue by $80 million will save the team $31.2 million a year for 10 years in revenue transfers.

With a 6 percent discount rate, this translates into a present value of roughly $230 million. That is, MLB is indirectly contributing $230 million to the construction of the new Yankee Stadium.

While the NFL’s G-3 program has been widely heralded (and with good reason), MLB’s stadium policy actually may be more generous. The NFL’s G-3 program has provided a maximum of a $150 million loan to a team for building a new facility.

The “loan” is paid back out of sharing 34 percent of club-seat revenue at the new stadium. Because the team would be obligated to share this 34 percent anyway, the loan is really a grant.

The NFL, then, has been subsidizing team stadium construction and, thereby, helping to lower the public burden. As the Yankees example illustrates, however, MLB’s program actually can provide more league financing than the NFL’s.

Of course, it is true in both the MLB and NFL programs, the new stadiums help to generate new revenue that is subject to sharing. It is likely that the team will end up contributing more in absolute terms despite each league’s stadium subsidy.

Nevertheless, to ascertain the size of the subsidy, the proper comparison is between the amount of the revenue-sharing obligation with the program and without the program.

So, if baseball still uses its monopoly power to leverage public subsidies for stadium deals, it seems to be practicing a more benevolent form of monopoly these days.n

Andrew Zimbalist is Robert Woods Professor of Economics at Smith College.