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Wednesday
Jul102013

Baseball Math

Baseball math is intense.

It’s Sabermetrics, or the specialized analysis of baseball through objective evidence [Wikipedia]. Sabermetrics painstakingly collects every minor tidbit of information, weighs each statistic against all known variables and computes a prediction; it even addresses margin of error.

It’s designed as system of due diligence. Running the numbers, running them again, and predicting the future outlook against all known variables. These algorithms are intense, although too often offer more precision than real world accuracy. Making the connection can be a long-shot, but Bill Lindeke of Streets.MN puts saberurbanism into prespective;

A baseball game is an aggregation of hundreds of repeated, discrete events … Cities, on the other hand, are extremely complex systems that flow continuously without separable events. … While certain things are measurable (traffic flows, tax receipts), so much remains inherently quantifiable, and the complex interactions of everyday life are not remotely reducible to sets of numbers.

There is no question that Lindeke is correct. In my mind, it’s best to view the importance of Sabermetrics through the lens of The Onion [and also here]. However, when it comes to basic municipal financing –something tangible – we can take away a lot from sabermetrics. Obsessive and objective number crunching and impartial analysis never hurts.

Here’s a classic case of stadium financing in St. Paul, Minnesota. The City is in the process of building a new $66 million stadium for an independent professional baseball team with a known $29 million construction capital shortfall.

Ballpark Construction Capital Cost Breakdown:

Construction $54 million
Environmental Remediation [add't] $8.8 million
Local / Utility Improvements [add't] $3.3 million
Total $66.1 million

 

Upfront Capital Cost Breakdown (by Municipality / Private Entity):

State of Minnesota    
Bonding $25,000,000  
Economic Development Grant $2,000,000  
Total $27,000,000  
     
City of St. Paul    
Capital Improvement Budget $1,500,000 * Redirected from local infrastructure
Neighborhood Funding (STAR) $1,500,000 * Redirected from local neighborhoods
Public Works Budget $1,500,000 * Redirected from Public Works
Riverfront TIF Fund (Redirected) $1,500,000 * Redirected from Riverfront TIF Area
Sale of Previous Stadium $3,000,000 * Sale to Port Authority (PPP)
* Spending $700k to demolish old stadium
Total $9,000,000 * Agreed to provide $17 million
     *($8 million shortfall)
St. Paul Saints Organization    
Upfront Downpayment $1,500,000  
Total $1,500,000  
     
Total Monies Available $37,500,000

* $66.6m Total Cost with
$37.5m Avail. in 2013 = $29m shortfall

 

The St. Paul Saints have promised a $10 million contribution: $1.5 million will be paid upfront for stadium development, while the other $8.5 million will be paid in rent over the next 25 years; approximately $340,000 per year (or around $6,800 rent per game). The St. Paul Saints won’t own the stadium, so the $6,800 per game contribution is more akin to a rent. In the financing scheme, the baseball team has the advantage as they are able to spread their contribution (and financial risk) over 25 years while accuring no debt.

The Saints’ remaining contribution, $8.5 million, needs to be paid, presumably upfront, it is unclear who will pay the initial cost which the team will pay-off (or rent) over the course of 25 years.

When looking to mitigate risk and maximize public return on investment, finding long-term, sustainable funding sources for infrastructure is essential. In this case, St. Paul has a funding shortfall of $8 million from it’s promised $17 million. Where the remainder of funds is coming from is currently unknown. If a city isn’t able to cover upfront capital costs, how confident are you that they will be able to afford on-going, long-term maintenance costs of the infrastructure without pulling resources from other city essentials?

Or, will it become a political football of getting something you want, not covering your end of the bargain, asking for forgiveness and then doubling-down? It’s a long story; you can read about it here

A question that reaches beyond scrutinizing numbers: why would you break ground on a stadium site in 5 days without a clear understanding of how to address an $8 million funding shortfall? (The $8 million municipal shortfall still doesn’t include the additional $8.8 million in unfunded environmental cleanup liabilities).

Running quasi-sabermetrics on the game-to-game operations doesn’t yield great returns either. The Saints currently average an attendance of approximately 4,911 per game (current capacity = 6,069). Let’s give them the benefit of the doubt that they can add an average of 1,000 additional people into the seats per game in the new stadium.

(5,911 people x $10 ticket) x 48 home games = $2.83 million ticket sales per year

These aren’t new ticket sales, so the $2.8 million is deceiving. Under the assumption of an additional 1,000 fans per game, the number reveal much fewer ticket sales.

(1,000 people x $10 ticket) x 48 home games = $480,000 new ticket sales per year

$480,000 of additional revenue will be generated per year; most of which will go to the St. Paul Saints. Even considering sales tax, this is not an economic windfall considering the City will be effectively paying $680,000 per year (amortized over 25 years) for what amounts to a 16 percent increase in ticket sales revenue. For St. Paul to make up its end of the financing bargain, they would need to immediately impose a $1.13 tax per ticket sold over the next 25 years, not accounting for debt service payments.

What about food and alcohol sales? Again, any revenue induced from sales would have to be weighed against current revenue (and ignore the economic theory of substitution effect). You’ll have additional sales from the additional 1,000 fans in attendance, but for those already attending? You don’t drink more beer by the virtue of sitting in a new building.

Let’s see how the numbers work:

Revenue Generated [Beer]    
MN Liquor Excise Tax Per Gallon $.08 per gallon * 8 pints per gallon ($.01 per beer)
MN Sales Tax .09 percent * Percentage is rounded up
Cost of Beer $4.00 * Estimated average beer price

 

Per pint of beer, the tax revenue works out to be approximately $.36 cents. Now, let’s assume each $1,000 additional fan buys 1 beer; that’s $360 in new revenue generated from alcohol sales per game. Over the course of 50 games, this generates around $18,000 in new revenue. Yet, when you examine the long-term liabilities of stadium financing and costs, does this number even move the dial?

You run the numbers. Do they add up?

Baseball, and sports for that matter, play an integral role in our lives. I coach baseball, play in numerous Rec Leagues and have friends who write ridiculously detailed (and occasionally insightful) pieces for major online publications covering everything (for example; Power Ranking Every Minnesota Vikings Team of the Past Decade). Sports are an important element of society, but that doesn’t mean we shouldn bend over backwards to accommodate if we’re not in a position to afford it.

Of all the stadium deals out there, St. Paul isn't the worst. There are bigger fish to fry. The stadium is tucked into a part of downtown unlikely to see development and it will add a social element to downtown that can't be rivaled at the current stadium. It's not a bad design either. I just wish I was writing this under circumstances where the financing was under control.

In these cases, we need financial due diligence; and a hint of common sense. Maybe, I wish there were more Sabermetricians interested in municipal financing. 

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Reader Comments (4)

Initiative 91 in Seattle attempted to eliminate the miserable scenario outlined above via a city ordinance banning net loss sports facilities deals:

http://clerk.seattle.gov/~scripts/nph-brs.exe?s1=%22fair+value%22+sports&Sect4=AND&l=MAX&Sect1=IMAGE&Sect2=THESON&Sect3=PLURON&Sect5=LEGI2&Sect6=HITOFF&d=LEGA&p=1&u=http%3A%2F%2Fclerk.seattle.gov%2Fpublic%2Flegisearch.htm&r=1&f=G

Then Chris Hansen spent much of 2012/13 trying to buy his way into a basketball franchise (Seattle's team was sold to Oklahoma a few years ago) and every politician in the county tried to dance around the ordinance.

July 10, 2013 | Unregistered CommenterSophia Katt

I think the social and political psychology of attracting a team is interesting; I just dislike how we play the game of 'economic development' or some tax revenue windfall, when the reality is that it is providing a social good.

July 10, 2013 | Unregistered CommenterNathaniel

When confronted with bad stadium math the most common reactions from elected officials are;

"We re looking at the team's proposal in greater detail" or "There are not the droids you are looking for..."

July 10, 2013 | Unregistered CommenterR. John Anderson

Yet another example of the hidden dangers of "public-private partnerships". Socialize the losses, privatize the profits. Taxpayers, and communities lose just about every time.

July 10, 2013 | Unregistered CommenterDennis
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