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February 16, 2006

Bronx Bummer

The Yankees' Stadium Deal, Revisited

by Neil deMause

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When I sat down last month to write an article exposing what I thought was an interesting wrinkle in one of the latest new ballpark plans--that the Mets and Yankees can recoup the lion's share of their "privately funded" stadium costs from the public and from their rival clubs--I didn't plan on getting into a public war of words with Smith College economist Andrew Zimbalist.

Now that Zimbalist has issued his rebuttal, though, I'm glad for the opportunity to get to the bottom of the question of just who'd be paying the $1.8 billion tab to replace Yankee and Shea Stadiums. As I've been stressing for months now, it's not as straightforward a question as it sounds, what with the current craze for financing agreements that are more complex than the save rule.

As Zimbalist correctly observed on BP Radio, I'm a journalist, not an economist--though I do consult with economists and other sports business experts on a regular basis, to check both my reasoning and my Excel skills. That said, he's an economist, not a journalist, and may not have all the information on the nuances of the New York stadium deals. So I've spent the last couple of weeks digging through the public record, and the not-so-public record, to clear up the facts of the matter. The result is going to take a bit to explain and will delve in places into economic minutiae, but try to keep your eyes from glazing over for just the next few minutes--this is worth getting right, not just for the sake of New York taxpayers, but because it's an excellent lesson in the difficulties of ferreting out the true costs of modern stadium deals.

Though my original article was about the Mets, I had called out Zimbalist for an op-ed he wrote in the New York Times praising the similar Yankees deal, and that's what he focused on in his response. Let's examine Zimbalist's arguments one by one.

In fact, because the state's contribution of $70 million for parking garages would be repaid from the parking receipts (or indirectly via a subcontracting deal), the public outlay would be lower.
Yankees president Randy Levine has been going around saying this, which may be where Zimbalist got it from--but that doesn't make it true. Last November, New York City parks department spokesperson Warner Johnston told me point blank in an e-mail: "The State will not be receiving any garage revenue." Other city officials have since confirmed this to Patrick Arden of New York Metro.

That's just the state, though. It's been known since November that the city would collect "ground rent" from the private developers who would actually build and operate the new garages. (The total construction cost would be $234 million--that's right, nearly a quarter-billion dollars just to give suburban fans a place to park.) Only in the last few weeks has that figure been revealed: $3.2 million a year, with annual increases pegged to the Consumer Price Index. If we assume a 3% inflation rate, over 30 years the city would collect enough rent to defray about $61 million worth of stadium costs.

There's an additional wrinkle, however: To make room for the new garages, the city would be losing 1,350 existing parking spaces, on which it currently collects 60% of the gross revenues. (A private parking operator, Central Parking, gets the rest.) The city hasn't divulged its net income from these spaces, but with parking at $12 a car, over 81 games, plus a handful of postseason games plus whatever drivers happen by during the off-season, $1 million a year seems like a reasonable guesstimate. Scale that up for inflation--nobody thinks Yankee fans will still be paying $12 to park in the year 2036--and the lost parking spaces would have generated about $19 million in present value.

Total net return to the city, then: $42 million. We'll toss that into the hopper as a plus for city taxpayers, along with the state's $70 million in red ink.

Furthermore, the city will be able to sell off memorabilia from the present Yankee Stadium, which will lower its net costs.
The latest team to abandon its old digs, the St. Louis Cardinals, sold 12,000 pairs of Busch Stadium seats for $470 apiece, bringing in about $5.6 million, though some of that went to pay shipping and sales costs; assorted lockers, bases, and urinals brought in another $889,000. Given that we're talking souvenir chunks of the House That Ruth Built here, let's be generous and assume a $10 million payday from the auction house.

Since the average amount of public funding for new stadiums over the last 15 years hovers around 70 percent, the Yankees' plan to pay 75 percent themselves is prima facie fair. Moreover, if one compares the present plan to the deals offered by former mayor Rudy Giuliani in 1996 (for 100 percent public funding) or 2002 (for 50 percent public funding) for a new stadium, the Yankees seem to have taken a major step forward.
It's certainly a step forward from the public having to shell out for the whole shebang, though it's worth noting that the current plan has just about the same taxpayer cost--$400 million--as the last Giuliani plan, if for a more expensive project overall.

In any case, though, "cheaper" doesn't equate to fair. I'd rather get mugged for $20 than for $100, but I'd ideally prefer not to be mugged at all. The question shouldn't be whether the Yankees' plan is better than the average stadium ripoff, but whether it's a good deal for city residents and taxpayers.

DeMause deducts each of these "hidden subsidies" from the $800 million and concludes that the Yankees are spending just $326 million. Therefore, the Yankees' share is 326/800 and the public share is 474/800. If so, the public share would actually be 59 percent, not the 58 percent reported by DeMause (and for some reason DeMause is leaving infrastructural spending out of this equation.)
If this is how I'd calculated the costs, Zimbalist would be right to suspect me of smoking the wacky weed. It's not, though. As I explained in my BP Radio appearance the weekend before Zimbalist's article appeared, and again in my mailbag a few days later, I was comparing the Yankees' share with the public share, while excluding the two other parties who would be stuck with large chunks of the construction bill: The other 29 MLB teams, and the garage developers. Using the figures I had at the time, this came to: 36% public, 26% Yankees, 25% MLB, and 13% parking garage developers. (I'll be updating these numbers at the end of this article.) Taking only the split between the Yankees and the public, then, it came to 58/42, with taxpayers getting the short end of the stick.

My bad, though, for being unclear here. This is one reason why we need to get away from this notion of "public/private split" as the best way of evaluating fairness in stadium deals. If some private developer agrees to tack on a $500 million convention-center-and-professional-velodrome next door to your stadium-to-be, does that make it a better deal just because the public's "share" of the total looks smaller by comparison?

We'll return to this issue a bit later as well. For now, on to Zimbalist's next point, which was a bit of a head-scratcher and is the main reason this article was so long in coming.

Under MLB's revenue sharing system, the contribution made by each team is based upon its net local revenues. To arrive at net local revenues a team is allowed to subtract stadium expenses. If the team owns the stadium, it is permitted to amortize its investment in the stadium over ten years. If it does not own the stadium, there is some dispute whether the investment should be amortized over ten years or over the period of the lease (40 years), where the investment is treated as a form of prepaid rent. In all likelihood, the Yankees lease will be considered an operating, not a capital, lease, and the team will amortize its investment over 40 years.
What Zimbalist is arguing is that the Yankees can't deduct their actual payments, but rather only the original cost of the stadium, spread out over 10 to 40 years--that the stadium revenue-sharing deduction, in accounting terms, needs to be amortized rather than expensed. This would come as a bit of a surprise, given that every single media report on the revenue-sharing deduction has assumed that for each dollar spent paying off stadium costs, teams can deduct one dollar from their declared income for revenue-sharing purposes. In fact, it's what Andrew Zimbalist himself told me, when I asked him for clarification after this deduction first came to light two summers ago.

Moreover, Zimbalist ignores one important detail: The Yankees would not be making any up-front investment in the new stadium. Rather, a city development agency would be selling $800 million in bonds, and the Yankees would pay them off via both payments in lieu of taxes (PILOTs) and "rent" payments. (I put "rent" in quotes here because it's not a rent that the landlord, the New York City Parks Department, will ever collect.) As for what those annual payments would be, the city ain't saying, but assuming an interest rate of 6%--not unreasonable for a mix of taxable and tax-exempt bonds--we come up with an annual payment of $58.1 million. Deducting $58.1 million annually would (according to Zimbalist's own formulas) save a top-revenue team $22.6 million a year, for a present-value savings of $311 million.

(Contrary to what Zimbalist alleged, for all my figures I have used present value--a way of totaling up future spending that takes into account that it's better to be paid for a hamburger today than next Tuesday. I've used a 6% discount rate rather than Zimbalist's rather high 7%, but the difference in the final numbers should be negligible.)

Is it possible, though, that baseball has some internal rule that forces terms to amortize stadium costs, even when they're paid out as annual expenses? The Basic Agreement is silent on this matter, and none of the sports economists or baseball business experts I contacted could say for sure. The best we can say, then, is that the value of the Yankees' revenue-sharing break would be somewhere between $117 million (if a 40-year amortization), $230 million (if a ten-year amortization), and $311 million (if deducted as annual expenses).

That's a huge difference, and it's incredible that no one, outside of the handful of men who make up baseball's internal cabal, seems to know how one of baseball's basic stadium finance tools works. (One renowned sports economist actually replied, "I don't know, but if you find out, can you tell me?") But then, the very existence of the stadium-finance deduction remained a secret for almost two years after it was put in place in the 2002 CBA; if baseball does one thing well, it's hide information.

The Yankees' lease stipulates that the team can deduct from rent payments its expenses for the maintenance and operation of the ballpark. These expenses have been growing by leaps and bounds and will continue to do so if the Yanks stay in the current facility. Indeed, the amount of the team's rental payments has dropped markedly in the last four years due to these expenses. If the Yankees stayed put, the team's rent five years from now would more likely be zero than remain in the $7.5 million range.
According to official figures from the city parks department, here are the Yankees' rent payments from 2000-04, and during the five years previous:
                                      1995-99       2000-04
Gross rent                        $32,400,000   $60,900,000
Maintenance deduction             $21,000,000   $23,500,000
"Stadium planning" deduction               $0   $10,970,000
Net rent                          $11,400,000   $26,430,000
 
In other words, the city's rent receipts from the Yankees are going up, not down. While maintenance costs have edged slightly upwards, the Yankees' gross rent has nearly doubled, thanks to a formula that charges the team more when it's doing well at the box office. With the Yankees drawing 3-million-plus fans a year--and charging them $25 a head for the privilege--the city has been cleaning up.

Clearly, the Yankees' attendance can't keep going up forever. But unless George Steinbrenner goes all Huizenga on us and plunges the Yanks into a decade-long rebuilding program, it's more likely that future rents will go up than abruptly plummet to zero, especially once the Giuliani-era "stadium planning" deduction comes off the books. If anything, my estimates--$7.5 million a year in lost rent, without even an adjustment for future ticket-price inflation, amounting to a total of $103 million in present value--are on the conservative side.

The only way city rent revenue would drop, then, would be if Yankee Stadium suddenly started throwing rods like an out-of-warranty Chevy. Which brings us to Zimbalist's next assertion...

But still more important is that the Yankees' lease also stipulates that the city is responsible for all major capital expenses on the stadium. Thus, when a piece of the stadium roof fell a few years ago due to a loose bolt, the city had to spend millions of dollars to repair it. Mayor Bloomberg has estimated that if the Yankees were to continue in the ballpark, it would cost the city more than $100 million in capital expenses.
Actually, it was a chunk of metal called an "expansion joint" that fell, not from the roof but from the underside of the stadium's upper deck. And I've been unable to confirm that the city spent "millions of dollars" on repair; according to press reports at the time, while the event was scary, the resulting damage was superficial (some busted ceiling panels and a crushed loge seat) and easily repaired.

In any case, though, the issue here is the future maintenance costs, which Mayor Bloomberg actually said would run $350 million over the next 30 years; the city's environmental impact statement says $574 million. When I asked the city for an itemized breakdown of Bloomberg's projected maintenance costs, though, Parks Department spokesperson Johnston replied that "both stadiums are getting very old and as with any aging building require a lot of upkeep and maintenance," then added that "in our discussions with both the Mets and Yankees, team representatives made it clear that they desired facilities on par with other first class major league baseball facilities located around the country. The cost of such work would represent a major cost to the City of New York."

Follow that? The mayor's projected "maintenance" costs, in other words, include not only maintenance, but also upgrades to put the stadium "on par with other first class major league baseball facilities." Around these parts, that's what we call "renovation," which would clearly cost a bundle, though still likely nowhere near the $1.2 billion price tag on the current plan. Moreover, since the Yankees would be reaping the benefits of the improvements, there's no reason they couldn't be asked to pay all or part of the costs.

His next deduction is $15 million in "present rent." It is not clear what he is referring to here. If it is to Mayor Bloomberg's two-year extension of the $5 million annually for five years from Mayor Giuliani, then the figure should be $10 million, not $15 million. This money is to be spent on planning for the new stadium.
The rent rebate--which has let the Yankees deduct up to $5 million a year in "stadium planning" costs, a parting gift from Rudy Giuliani during his last week in City Hall--would indeed only be extended from 2006 to 2008 under the new stadium plan. However, there's an additional $5 million that Zimbalist overlooked: According to the city's Memorandum of Understanding with the Yanks, the team would also be allowed to convert $5 million in deferred rent into a rent credit for 2006. Two years of $5 million rebates, plus a $5 million rent credit, equals $15 million.

I did previously neglect to translate that into present value, though. Doing so now gets us a net transfer from city taxpayers to the Yankees in the amount of $13 million.

There may be other worthy objections to the plan and in a perfect world the financing may be different. I am not arguing those points. I am only observing that in the current world, given the recent experience of stadium financing plans, the Yankees have made a fair proposal to New York City and New York State.
So, how fair is this proposal? Let's add up everything we've gone over so far, and see who's left holding the bill.

Below I've itemized every cost of the proposed Yankees stadium complex that I've been able to document. Some of these will be familiar from my previous article on the Mets' stadium finances. Others are drawn from a report issued last week by the government-watch group Good Jobs New York, which identified a whole list of previously unreported public costs ranging from relocating water mains to rebates on mortgage-recording taxes.

Before I get to the calculations, I should note two potentially controversial items: the sales-tax exemption on construction materials, which I've mentioned before, and that mortgage-recording tax break unearthed by the Good Jobs report. Whether the Yankees would benefit from these, to the tune of $44 million, isn't in question. However, Yankees officials have argued that, thanks to a federal "empowerment zone" that was expanded from Harlem to include the Yankee Stadium area in the 1990s, these are "as-of-right" subsidies that the team would get anyway.

This is somewhat of a grey area, but I've decided to include these as part of the public stadium costs--while the empowerment zone indeed makes the Yankees eligible for tax breaks, they're still approved on a case-by-case basis, and would need to be specially authorized for the stadium. If you feel differently, though, trim $44 million from the public cost figures below.

So with that out of the way, drumroll, please:

PUBLIC COST:

      $136 million city money for land and infrastructure
       $13 million city rent rebates on current stadium
       $70 million state garage subsidies
        $5 million operational fund (city)
        $5 million operational fund (state)
      -$62 million city garage ground lease
       $19 million lost city garage revenue
      -$10 million memorabilia sales (city)
       $55 million tax-exempt bond subsidies (federal, city and state)
       $44 million future property-tax savings (city)
       $11 million sales-tax breaks on construction materials (city)
       $11 million sales-tax breaks on construction materials (state)
      $103 million forgone city rent revenues
        $8 million forgone city mortgage recording tax
       $14 million forgone state mortgage recording tax
        $1 million present value of additional reserve fund in year 2039
     -------------
      $423 million

YANKEES COST:

      $800 million bond payments
     -$117-311 million revenue-sharing deduction
     -$103 million forgone future rent
      -$13 million present rent rebates
      -$44 million future property-tax savings
    --------------
      $329-523 million

GARAGE OPERATORS COST:

      $164 million garage construction
       $62 million ground lease
    --------------
      $226 million

MLB COST:

      $117-311 million revenue-sharing deduction
    --------------
      $117-311 million
 
Calculating stadium costs isn't like calculating on-base percentage; tweak any of those numbers up or down by 10%, and you'll get no argument from me. But the overall picture should be clear: The public would be putting up roughly 33% of the cost of a plan that has been sold as being "privately funded." And at the end of the day, George Steinbrenner's share of the tab could end up being less than that of New York taxpayers.

Still, though, that's better than the bad old days, right? Kicking in a third of the cost of a baseball stadium may lighten the public purse a bit, but it's still preferable to when cities were expected to pay the whole load, and team owners would just sit back and light their stogies with the proceeds. And besides, aren't stadiums supposed to be public-private partnerships?

That's the standard argument made by stadium-building moderates, and I'm becoming more and more convinced that it's a load of crap. Instead of comparing today's stadium flavor-of-the-month to the lousy deal the guy down the block got, or going halfsies with the local billionaire and calling that fairness, we need to be looking at investor equity. It shouldn't matter whether the public is putting in 75%, or 33%, or 10%--what should matter is that if we the people are putting in the same share of the cost as the team, we should be reaping roughly the same share of the benefits.

On those grounds, the Yankees deal--and the Mets one I discussed last month--are absolutely dismal. In both cases, the public is putting in about as much, if not more than, the private ballclubs. Yet the private teams are getting all the new revenue streams: the naming rights, the luxury suites, the concession stands in the cavernous new food courts, which when added up should more than pay back their investment, with a tidy profit left over. Taxpayers, meanwhile, would only get whatever additional tax revenue resulted from the new digs--not much, since the teams would literally only be moving across the street. Even the optimistic projections of the city's own economic consultants have the city and state pulling in a present value of just $225 million in new tax revenues, not nearly enough to pay back the public's costs.

That, in my book, is not a fair deal. So while the notion of teams putting up their own money for stadium construction may look like a step in the right direction, once all the back-loaded subsidies are accounted for, these deals still aren't good ones for taxpayers. And that's before getting into the "other worthy objections," like the disruption of heavily used public parks, or the loss of one of New York's most popular and historic tourist attractions, or the construction of thousands of extra parking spaces in a neighborhood where asthma is epidemic, just so that the most lucrative team in baseball can afford another six-pack of Jaret Wrights.

Reasonable people can disagree, of course, and I wouldn't be at all surprised to see future revelations make the above numbers change yet again. But if you think that taxpayers will come out ahead from Mayor Bloomberg's offer to George Steinbrenner, I've got a bridge to sell ya.

Neil deMause is an author of Baseball Prospectus. 
Click here to see Neil's other articles. You can contact Neil by clicking here

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