Field of Schemes Read online

  4. Evidence of this “substitution effect,” as economists call it, has come from sports labor stoppages, where it’s easy to measure what happens when a team is abruptly removed from the local economy. During the NHL lockout of 2004–05, wrote Minneapolis Star Tribune reporter Jay Weiner, “sales tax collection in the city of St. Paul hasn’t gone down. Businesses near the arena have suffered, but, citywide, consumers are simply spending in other neighborhoods.” An investigation by Canada’s CBC News during the 1994 baseball strike revealed “dramatic increases in rentals at the video store,” with one Toronto comedy club manager quipping: “We really feel it would be in the best interest of entertainment in Toronto if the hockey players sat out the whole season too.”

  5. In 2005 Minnesota Twins exec Jerry Bell admitted to the Minneapolis Star Tribune that those who say stadiums do not generate economic development, “At some global level they are obviously correct.… I don’t think the economic argument turns it one way or another, so why go there? If there are side benefits, great. If not, so what?”

  3

  Ball Barons

  Anyone who quotes profits of a baseball club is missing the point. Under generally accepted accounting principles, I can turn a $4 million profit into a $2 million loss, and I can get every national accounting firm to agree with me. —Toronto Blue Jays vice president Paul Beeston

  Deep Throat was always right: Follow the money. —Sports economist Rodney Fort

  When Financial World magazine conducted its yearly roundup of the sports business in 1996, it advised would-be investors to keep an eye out for teams that met three criteria: “The revenues they rake in from their venues are below the average for teams in their sport, they have no definite plans to build or move into a new facility, and their leases expire by 2000 (or can be rather easily gotten out of).” Anyone buying into one of these “undervalued” franchises—the poor, stadium-less, and mobile—could see their investments skyrocket in value, the magazine advised, by levying a build-or-else ultimatum. Topping the magazine’s to-buy list: the Hartford Whalers, which were projected to double in value if moved to a new publicly funded arena in Nashville.

  The sports industry is relatively small by the standards of the corporate world—“about the size of the pork and beans industry,” in the memorable words of former Senator Sam Ervin. But for the handful of men (and still-tinier handful of women) who own major-league sports franchises, it’s very big business indeed. Since professional sports began, running a team has always been a reasonable investment, likely to earn an owner a tidy return of a few percentage points a year. In the 1980s, though, according to James Quirk and Rodney Fort’s masterful study of sports economics, Pay Dirt, franchise values in every sport abruptly leaped upward: baseball teams by 23 percent a year, football by 19 percent, and basketball by an astounding 50 percent—meaning an NBA team bought during that decade would likely double in value in less than two years.

  There’s a pleasant myth that in the early days of pro sports, teams were run by gentleman owners, whose concerns lay more with performing a civic duty for their local community than with turning a profit. The story has a grain of truth—as late as the 1970s, most sports franchises were owned by independent moguls, some of whom could trace their families’ ownership back to the early twentieth century—but even they kept a careful eye on the bottom line. And by the 1980s, independent owners had begun to give way to even more profit-conscious corporate ownership.

  The first prominent sports team to come under corporate ownership was the New York Yankees, bought by CBS in 1964 (making the old gibe that “rooting for the Yankees is like rooting for U.S. Steel” uncomfortably close to the truth). CBS divested itself of the team in 1973 (selling it to a Cleveland shipbuilder named George Steinbrenner), but the television network was ahead of its time. By the 1990s even most wealthy individuals were being priced out of the market: With franchise values soaring past the $100 million mark, ownership of a sports franchise had passed from being a privilege of the rich to one of the super-rich.

  Those reaping the rewards of the sports-value boom in recent years have included such corporate conglomerates as Disney and Time-Warner, for which a sports team is just another item in their portfolio. The independent owners who remain are those who can afford the high-stakes world of modern-day sport—billionaires like Carl Pohlad of the Minnesota Twins or Microsoft cofounder Paul Allen, who owns the Seattle Seahawks football team and the Portland Trailblazers basketball club. For those who can afford the entry fee, the payoff can be staggering.

  Ballpark Figures

  When discussing sports finances, the first thing to understand is that the numbers literally don’t add up. Without an understanding of the inner financial workings of the sports industry, it’s impossible to comprehend the most obvious conundrum of modern pro sports: Even as revenues soar to record levels, team owners invariably insist that they are losing money hand over fist. Contract negotiations with players’ unions, in particular, have occasioned especially shrill cries of poverty, with management insisting that any concessions from their side of the table will plunge them into bankruptcy, or even result in teams disappearing altogether from the face of the map. “It will take a club to go belly up in order to stop this madness,” Montreal Expos general manager Dave Dombrowski warned ominously just before baseball management’s contract giveback demands helped spur players toward an eight-month-long strike in 1994 that cost owners hundreds of millions in lost revenues—and which was immediately followed by the leagues’ decision to expand by two teams in 1998.

  None of this is unexpected or unusual, especially in an industry faced with relatively powerful unions ready to leap on any scrap of profit growth to boost their own salaries. But unions and other skeptics can point to a statistic that belies the owners’ poverty claims: Sale prices of teams are soaring, and even a break-even or money-losing team is likely to yield a huge financial windfall for its owners once they decide to put it up for sale. As baseball owner Bill Veeck once explained, “You don’t make money operating a baseball club. You make money selling it.”

  When examining public subsidies, it’s important to remember that not all are simple cash handouts. In fact, most corporate welfare, in any industry, comes in the form of tax breaks: special dispensations to evade local, state, or federal taxes that can save corporations or wealthy individuals millions of dollars. Whenever the federal government allows deductions for one group and not for another—for homeowners but not for renters, say, or for sports franchises but not for other businesses—the subsidy may be hidden, but it’s just as real as if Congress were doling out cash from the federal treasury.

  For sports owners, tax breaks have been an integral part of doing business ever since they discovered perhaps their most incredible financial gimmick, the depreciation of players. This trick was first devised in the late 1940s by the then Cleveland Indians owner Veeck, an innovator and iconoclast who at one time or another owned three different major-league baseball teams. It was Veeck who introduced some of the most popular ballpark events of his day: As a Chicago Cubs executive, he planted the ivy that to this day distinguishes Wrigley Field’s outfield walls; he held the first-ever Bat Day; he built Comiskey Park’s famed exploding scoreboard; and in his most famous gimmick, he sent a midget up to bat (Eddie Gaedel walked and was promptly removed for a pinch runner). It’s less well known that he also claimed to have devised a plan to buy the last-place Philadelphia Phillies and import players from the Negro Leagues, five years before Jackie Robinson broke baseball’s color line, but said he was blocked by league authorities. (Veeck later bought the Cleveland Indians and promptly signed the American League’s first African American ballplayer, Larry Doby.) Veeck was much reviled by his fellow owners for his antics, but it was he who first discovered the accounting scheme that would change the face of the pro sports business: the notion that player contracts could be depreciated, just like industrial equipment, providing a potentially huge tax deduction
for owners by turning an actual profit into a paper loss.

  The sharp-eyed Veeck had noticed that a 1935 IRS ruling had allowed cash purchases of players to be written off as an expense of running a sports business—athletes could be considered just another spare part that wore out and ultimately had to be replaced. What if, he wondered, he were to treat the acquisition of a team’s entire roster at the time of purchasing a team in the same way? Better still, by declaring nearly all of a team’s value to reside in its player contracts, an owner could depreciate nearly the entire purchase price of a team over several years.

  On the face of it, this argument is absurd. Most athletes, after all, increase in value as they gain experience, at least until age takes its toll. What’s more, teams already claim the costs of player development—scouting, minor-league teams, and the like—as a business deduction, and claiming both depreciation and replacement-cost deductions is usually a sure way to raise red flags at the IRS. Yet the tax agency would instead turn out to be remarkably understanding over the years. Depreciation of player contracts quickly caught on in all four major sports and was soon standard operating procedure for all teams. When Paul Beeston of the Toronto Blue Jays bragged that he could turn a $4 million profit into a $2 million paper loss, he wasn’t just making a bargaining point with labor; he had an eye to the millions in tax benefits that the paper loss could earn his team.

  In 1970 Rodney Fort became one of the first researchers to challenge the fiction that players were a major part of the value of a sports franchise and as such could be depreciated until the team’s “value” had all but disappeared. Milwaukee car dealer Bud Selig had bought the fledgling Seattle Pilots baseball team, which had finished dead last in its only year of existence, for $10.8 million and moved them to Milwaukee, where they became the Brewers. Fort recalls how Selig’s tax documents assigned a value of $10.2 million to the players themselves, meaning that fully 94 percent of the purchase price could be written off as depreciation. “I was working with Roger Noll, and we were as generous as we could possibly be in figuring out the relative value of this team to all the rest of the kinds of players in the league at the time,” says Fort. “We came up with something like three million, tops. The judge read it, said, well, that’s a good piece of work, but I can see no reason that Selig’s choice violates the accepted rules of accounting in Major League Baseball.”

  With that invocation of the “accepted rules,” the Veeck loophole stood—meaning team owners in the four major sports could continue to reap huge rewards from this tax break. Although its benefit was reduced somewhat by the 1986 Tax Reform Act, the depreciation bonus continues to earn teams tax savings; and if depreciation isn’t enough, plenty of other loopholes remain for enterprising owners to fall back on. For one thing, they can deduct interest payments on loans they take out to buy the team; better still, owners can create dummy corporations to own their teams, lend themselves money, and then deduct the interest payments that the teams pay back to themselves. Team owners who have their own television stations—as franchise prices soar, more and more teams find themselves owned by media conglomerates—can sell themselves their broadcast rights at bargain-basement prices, creating yet another book loss.

  The list of fiscal shenanigans is endless, including the $2 million in parking and concessions fees that Anheuser-Busch, owner of the St. Louis Cardinals baseball team, diverted to another subsidiary in 1984; and the $25 million that New York Yankees owner George Steinbrenner reportedly paid himself in the early 1980s as a “fee” for negotiating his team’s cable contract. When Roger Noll was hired by the Players’ Association to look into baseball’s books in 1985, he determined that what Major League Baseball had claimed to be a $41 million industry loss was in fact a $25 million gain. For sports teams, Quirk and Fort conclude, “the balance sheet and the income statement simply lie in describing the financial health of the team, as they do with the typical tax-shelter operation.”1

  Why the federal government allows this kind of accounting to continue is “the ultimate unanswered question in sports,” according to Fort, who continues to follow the sports industry from his position in the Washington State University economics department. But then, notes Fort, baseball’s famous antitrust exemption, in place since 1922, has a similarly hazy legal footing—and a similarly cynical explanation. “The IRS is, after all, an administrative agency,” he says. “And even though none of those guys are elected, the choices they make do have political impact. And so I can envision elected officials thinking, make baseball teams fifteen to twenty million bucks poorer with the stroke of a pen, in a seemingly volatile financial situation, and all hell’s gonna break loose. And so the IRS is probably instructed by the political overseers not to do that.”

  Suite Deals

  When sports owners talk about old stadiums lacking the “amenities” of the new ones, they’re not speaking of high-tech scoreboards or spacious player clubhouses, though the newest buildings are flush with those as well. By and large, there’s one thing that distinguishes new sports facilities from old ones in terms of profit-making potential: luxury seating.

  The Houston Astrodome, which in 1966 brought the world AstroTurf and indoor baseball, was also the first stadium to offer “skyboxes,” a ring of luxury suites nestled against the building’s roof. Despite the distant view, they were an immediate sellout. Luxury boxes quickly became a fixture in the new public ballparks of the ’70s, and by the ’90s were a primary element of ballpark architecture. A luxury box in Philadelphia’s Veterans Stadium (built in 1971) might be architecturally functional, enjoying such customary amenities as private elevators and separate stadium entrances. But in structure and luxurious feel it’s quite clearly more than twenty years old—nothing like the lavish boxes in Cleveland’s Jacobs Field, with their spectacular views of the city skyline and attention to all the modern amenities corporations have come to expect from recreational outings.

  Over the course of the twentieth century, the world has been introduced to night baseball, basketball’s 3-point shot, and instant replays in football and hockey, but no innovation can match the luxury box for sheer money-making power without improving either the quality of the game or the enjoyment of the average fan. Along with their cousins the “club seats”—sort of an open-air corporate suite of prime seats with expanded legroom and waiter service—luxury boxes are about money, pure and simple. By the 1990s teams were charging more than $100,000 a year for the private suites. This was money that didn’t have to be shared either with the teams’ municipal landlords or with their fellow owners, since all four major sports exempt suite revenue from profit sharing among teams. With upward of two hundred boxes in some of the newest stadiums, this can translate into millions more a year in team profits.

  The vast new revenue streams made possible by luxury boxes, in fact, have driven much of the current wave of stadium construction, as even relatively new facilities are declared “obsolete” for shortage of suites. The stadium-building boom of the ’80s and ’90s was a huge boon to sports teams’ bottom lines because each box took what would have been a few dozen moderately priced seats and turned them into a previously unheard-of source of income.

  But luxury boxes constitute more of a subsidy than just the public money spent on building the glassed-and-carpeted enclosures themselves. The key here is the target market, which for luxury boxes—and the majority of club seats—consists overwhelmingly of corporations. When an average fan plunks down $25 for a ticket, the money comes straight out of his or her pocket, but when a corporation buys tickets, the finances work differently. Companies are able to claim sports tickets as a business-entertainment deduction, on the theory that this is a perk they use to lure clients, wining and dining them in an attempt to land business deals. Because of this, so long as a company has profits to declare the deduction against, it can rest assured that the federal government will pick up the tab for a portion of the purchase price. Team owners can then safely charge more for their
boxes, knowing that corporations will happily pay higher rates if the purchase is tax-deductible.

  This is a subsidy that’s seldom included in figures on public spending, yet the rewards for team owners can be substantial. For example, take a stadium with a hundred luxury boxes, each selling at $80,000 a year—not at all out of the ordinary for today’s lavishly appointed structures. That’s $8 million that corporations spend every year on boxes, of which 50 percent is deductible, saving them about $1.2 million in federal taxes. Multiplied by the seven thousand or so luxury boxes currently in use in the United States, the luxury-box subsidy costs the federal treasury more than $80 million a year in lost tax revenue.

  The size of the subsidy used to be even larger: Until the mid-1990s, 100 percent of business-entertainment expenses could be deducted, and that change to the tax code did, in fact, take a good bit of steam out of luxury-box sales. But it by no means stopped them entirely, as corporations continue to take advantage of this tax shelter; some teams, in fact, make a point of distributing brochures to their corporate clients detailing the best ways to use luxury-box purchases to reduce their taxes.

  The Ten-Percent Solution

  Yet another hidden subsidy lurks in stadium deals’ fine print. When cities finance these projects, they do so with federally tax-exempt bonds. Since the bond buyers don’t have to pay taxes on their income from these bonds, municipalities can sell them at lower interest rates. This reduces the cost to the city treasury (since it has to pay less in interest each year), but it comes at the expense of the federal treasury, which forgoes taxes on the bond buyers’ profits. As a result, stadiums look cheaper than they really are, with the federal government kicking in the difference.