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Detroit Taxpayers Lose Again

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Detroit Taxpayers Lose Again

December 9, 2016

The Detroit Pistons have recently announced plans to leave its arena in Auburn Hills and relocate to Little Caesars Arena 30 miles away in downtown Detroit. This move has been hailed as a glorious homecoming, symbolizing the revitalization of a city long in decline. The tradeoffs, however, are significant. The Pistons will be leaving behind an arena that is fully paid for, conveniently located, well maintained, and distinguished for its superior design. In return, the team will share an arena with the Detroit Redwings and must construct new practice facilities.

After 40 years, it is unlikely that the Pistons still have a nostalgic attachment to downtown Detroit that would make these tradeoffs acceptable. This move is not a story of homecoming, but a tale of crony capitalism. A generous transfer of taxpayer funds will finance the move from the Palace of Auburn Hills to Little Caesars Arena.  

The preliminary deal for the move provides $34.5 million from the City of Detroit Downtown Development Authority (DDA) to cover renovations to the hockey arena such as locker rooms and floor seats. The bonds will be paid off using city property taxes that are allocated to the DDA. At least 50 percent of this money will come from the refinancing of 2014 bonds.

A state law from 1975 requires DDA funds be used for improvement within the downtown area. However, after almost 50 years of failed economic policy, it is time to reevaluate. With $490 million in underfunded pensions and a public school system with $3.5 billion in debt, it is clear that city money could be better spent.

Detroit Mayor Mike Duggan insists that the city is getting another professional sports team for a steal: “There are a very few times in this country that a professional sports team came to a city for a $34 million contribution.”

Unfortunately, Duggan drastically underestimates the costs of this move. Little Caesars Arena has already been funded by $450 million in bonds from the Michigan Strategic Fund, $250 million of which will be paid back by property taxes captured by the DDA.

Furthermore, Duggan ignores a simple financial principle: do not buy something just because it is on sale. The refinancing money should only be spent on the stadium if it is proven to be a wise investment for the city.

A study conducted by the University of Michigan Center for Sport and Policy attempts to make that case by asserting that the total economic effect from the Pistons’ move is $596.2 million and 2,164 new jobs. Looking closely at the numbers tells a much different story. Of the estimated economic effects, $216.1 million is projected to come from construction, $90.1 million from ticket sales and entertainment, and $290 million is taken away from Auburn Hills.

The $216 million from construction is, as admitted by the authors, a high estimate, contingent on construction materials being produced locally. If some materials are manufactured outside Southeastern Michigan, as is likely the case, then the economic benefits fall to $126.6 million. Of the 2,000 estimated jobs, 1,722 of those will be created by construction and will only be temporary.

Counting ticket sales as an economic benefit is also misleading. While it is true that ticket sales do increase after a new stadium is built, this is only an increase from $73.5 million in sales to $98.7. New ticket sale value is only $25.2 million and will likely be of little benefit to taxpayers. Further, money spent on tickets is money taken away from other activities in the state.  Moving money from one spending category to another does not increase economic growth.

Moreover, $290 million in relocated economic activity is a summation of player salaries, player operations staff, Palace employees, additional employees required, sponsorships, parking, and food sales. Much of this economic activity will be of no benefit to Detroit taxpayers. Player salaries account for $115 million and Coach Stan Van Gurdy makes $7 million a year. Just by subtracting these two sources, the economic benefit declines to $168 million. This still counts sponsorships, other player operations staff, and Palace employee salaries.

Of the expected job creation in this study, only 422 jobs are permanent. Even worse than this dismal figure is the fact that these are not actually new jobs, but everyone associated with Palace Sports & Entertainment and the Detroit Pistons Organization.

Hopes of bringing new taxpayers to the city are also bleak. Only 37.7 percent of Detroit workers actually live within the city. There is no guarantee that Palace employees will follow the stadium and leave the suburbs.

The only value from this project that is not simply relocated is construction costs. None of these estimates take into account the jobs lost in Auburn Hills from consolidating two stadiums into one.

Unfortunately, this is not the first time the city has misused taxpayer money. As previously stated, the city agreed to finance 60 percent of the new Redwings stadium just days after filing for bankruptcy. The city also allocated $100 million to the Detroit Tiger’s Comerica Park in 2000 and $200 million for the Detroit Lions to play at Ford Field in 2002.

In total, Detroit taxpayers have spent $584.5 million on professional sports stadiums since 2000 and have little to show for it. Stadiums did not save the city from bankruptcy or going under state oversight.

This, of course, should not come as a surprise. Almost all scholars agree that professional sports teams have no positive economic effect on metropolitan areas. Researchers Brad Humphreys of the University of Illinois and Dennis Coates of the University of Maryland, for example, did not find a single example of a professional sports team stimulating the local economy in 37 cities over 30 years. Furthermore, stadiums were connected to a decrease in jobs in the service industry – an average loss of 1,924 jobs – and a decrease in real per capita GDP.

It is an unfortunate trend that municipalities compete for professional teams with tax incentives and new stadiums. This arms race has brought no benefit to local economies, but is politically popular. However, if teams are not given special treatment, they will fund stadiums as the market demands. The Palace of Auburn Hills was privately financed.

Moving stadiums across county lines does not magically create economic growth. While some new jobs will be created due to increased demand, it is illogical to believe that the economic effects will be anywhere near projections. Just after exiting bankruptcy, Detroit taxpayers are about to take another loss.

Allie Howell is a Michigan native and contributor to Economics21.

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