When the Pohlads Sell the Twins the Taxpayers should get part of their profits

 

There's excitement in the air as the Pohlads announce plans to sell the Minnesota Twins baseball team after purchasing the team for $44 million in 1984.  Estimates are that the team is now worth $1.5 billion, and the sale will net the Pohlads a lot of money.

The state of Minnesota, Hennepin County, and Minneapolis taxpayers who subsidized the team should tax the profits to get back their investment in the Twins.

Professional sports are big business and very profitable. Profitability is largely due to the public subsidies it receives. Professional sports play on fan loyalties and threats to move as ways to extract corporate welfare from taxpayers. Many justify the subsidies by contending that sports stadiums provide. major economic stimuli for communities.  Yet no major, credible study supports this.  Viewed from an opportunity cost perspective, public investments in sports yield lower returns for the community than investments in museums, schools, or other public amenities. Yes, sports may contribute to the quality of life in an area, but they are not good economic investments for taxpayers.

Among the tactics sports owners use to increase their profitability is getting taxpayers to pay for the stadiums. Studies indicate that public investment in a new sports facility is one of the prime ways that teams and their owners increase profitability.  The Pohlads have benefited twice from the taxpayers in Minnesota.

 First prior to Pohlads purchase of the Twins in 1984, taxpayers provided subsidies to build the Metrodome. There was $155 million in bonds for the facility and $30 million in bonds for surrounding infrastructure.

Years later in 2006, the Pohlads successfully convinced the state of Minnesota, Hennepin County, and in Minneapolis to subsidize Target Field. This came after they threatened in 1999 to leave the state of Minnesota if Saint Paul taxpayers did not build them a stadium.  While St Paul voters rejected the tax and the team did not leave, just seven years later Minneapolis, Hennepin County and the State of Minnesota came up to bat and hit a home run for him.  They provided $90 million in bonds for infrastructure, $ 260 million in bonds for the facility, and Hennepin County enacted a 0.15% sales tax.

Thus, twice taxpayers have subsidized the Twins, a private business operating for private gain. As a result, the Pohlads original $44 million investment now will produce an estimated 1.5 billion sale. Such a gain is way beyond the inflation rate.  The $ 44 million in 1984 today would be worth $133 million.  The $1.5 billion far exceeds the rate of inflation and cannot be explained simply by increased valuation the Pohlads have added to the Twins unless one also includes the public subsidies.

While no one begrudges Poland's making money, they did so significantly at taxpayer support.  What they have now is an unrealized capital gain on their investment produced largely in part by public investment in their private business.  Their sale will be a realized capital gain.

Taxpayers are entitled to a part of that gain and the value of the team when it is sold. Exactly how much is not clear.  But nonetheless, the public made the Twins so profitable and valuable, and they are entitled to its fair share of the return on their investments.

The Legal Football Field: Forcing the Vikings to Stay in Minnesota

Does a snow-collapsed Metrodome mean the Vikings are on the hook for another season in Minnesota? Quite possibly according to the 1979 contract between the team and the Metropolitan Sports Facilities Commission (MSFC). Yet while the news of the day suggests this is the case, as does the 2002 litigation surrounding the Twins and the Dome, there is no certainty that a court would force the team to stay on another year. At stake here are complex legal issues and principles worth reviewing and clarifying.

The crux of the issue here is the expiration of the Vikings lease-contract with the MSFC at the end of the current football season and rumors that unless public financing is forthcoming to build a new stadium, the Vikings are leaving. In the last couple of days the original lease agreement was reviewed and an interesting contract clause was located. It states in section 15:3:

"For each football season, or part of football season, while this Agreement is suspended, the term of this Agreement ... shall be extended by one football season."

The occasion for invocation of this clause is the collapse of the Dome earlier this year due to snow and the playing of home games at TCF Bank stadium (UMN) and then in Detroit.

Now under the normal rules of contract law, parties generally are not in breach if they are unable to perform for reasons beyond their control. Impossibility to perform is generally accepted as a defense against claims of breach of contract. However, section 15.3 appears within a part of the contract titled as “force majeure.”

Generally force majeure refers to acts of God–acts that are beyond the control of parties such as severe weather, floods, wars, or other acts unforseen by the parties. Normally a roof collapse due to snow would qualify as force majeure. Yet 15.3 also covers this issue and states that: “In the event of a total or partial destruction rendering the stadium not suitable for playing home games...” Thus, the contract appears to define force majeure here, meaning that the collapse of the Dome might well require the Vikings to stay on another year.

But there is still another legal issue at stake here–the concept of specific performance. Generally if contracts are breached the courts do not order specific performance–that is they do not order that the breaching party must actually perform the contract. Instead, the remedies for contract breaches generally are monetary–one pays money. Now there are several formula to calculate damages and they will be ignored here. However, the point is that there are very few instances in Minnesota law where specific damages are awarded.

Specific performance is not generally awarded in personal service contracts or in the case of commercial leases. Landlords usually cannot compel a tenant to stay on and the reverse is usually true too–a tenant cannot require owners to rent to them. Specific performance is ordered only when there is no way to measure or monetize the damages (figure out how to place a cash value on the damages), when the performance called for is something unique–the transaction of real estate for example–,or when the contract contemplates or calls for specific performance.

In the case of the Vikings agreement with the MSFC, one could argue that the agreement itself allows for specific performance by the fact that section 15.3 defines force majeure and what should happen when the team cannot play in the Dome due to its incapacity. Moreover, section 20.8 of the Agreement also provides that the parties can insist upon the “strict and prompt performance of the terms of this Agreement.” Arguably, this clause permits specific performance.

Additionally, one could argue that the nature of the contract–compelling performance of a professional sports franchise–involves something so unique that monetary damages cannot replace the loss. In effect, losing a pro football franchise is something that cannot be replaced with normal contract money damages and therefore specific performance is required. Don’t bet on this as a winning argument.

Furthermore supporters of specific performance can turn to the case of Metropolitan Sports Facilities Com'n v. Minnesota Twins Partnership, 638 N.W.2d 214 (Minn.App. 2002). Here the Twins were required to remain playing in the Dome after major league baseball wanted to contract the league and shutdown the Twins. That case involved an injunction to prevent the contraction. Unlike the Vikings’ lease, the Twins’ had an obligation to play in the Dome unless their force majeure clause applied. It excused them from performance if they were unable to play a home game for a reason beyond the Team’s and the Commission’s control, including strikes, an act of God, a natural casualty, or a court order. Contraction was not force majeure.

The facts in that case are very different from the one with the Vikings. Here, the issue is not contraction but possible breach of contract. Moreover, the Twins case was about a temporary injunction to prevent a team from being eliminated and not simply leaving town. With the Twins, if they were contracted the harm was permanent and it might not be possible to collect money damages. Here, the possibility to collect money damages does exist.

Overall, the Vikings’ agreement with the MSFC gives the latter and the state a new legal tool to use for bargaining. Whether a court would actually enforce it may be immaterial to the uncertainty of how a judge might interpret it and how the agreement might provide a leverage for negotiation.

Twins Fever Infects the Minnesota Legislature

With the Twins’ home opener at target field this week talk of a deal on a new Vikings stadium at the State Legislature emerged. By Thursday Governor Pawlenty described the prospects for a publicly supported stadium possible but unlikely.
Regardless of the Governor’s prognosis, why are we even talking about public commitments for a stadium when the state is billions in the hole?

Perhaps the biggest argument made for the stadium is done so on economics. Does it make sense for a city or community to fund the construction of a new sports stadium in order to stimulate economic development? Listening to sports reporters, team owners, and many elected officials, the answer is yes. Yet while it may be fun to root, root, root, for the old ball team , does it make economic sense for the public to provide tax dollars to pay, pay, pay to for new stadiums? What are the facts and what do we know about the impact of sports stadia on economic development and urban revitalization? The overwhelming evidence is that the public use of tax dollars for a sports stadium is economically inefficient and a bad investment that produces no real net economic benefit to a community. In short, giving money to building stadia is simply sportsfare—welfare for sports.

In general, as one surveys local debates about stadium construction in the United States, three basic arguments are employed to support using public money to build sports stadia. First, proponents claim that building a new stadium will have a big impact on the economy, generating many new jobs and bringing new businesses to the area. However study after study has demonstrated that advocates of public spending on stadia consistently exaggerate the benefits of sports to a local economy.

A 1996 Congressional Research Service (CRS) report, “Tax-Exempt Bonds and the Economics of Professional Sports Stadiums” concluded that sports stadia represent a small percentage (generally less than 1%) of a local economy. It also stated that there is little real impact or multiplier effect associated with building sports stadia. By that, if one looks at the economic impact of the dollars invested in sports stadia, the return is significantly smaller than compared to other dollars invested in something else. Moreover, the building of stadia merely transfers consumption from one area or one type of leisure activity to another, and that overall, sports and stadiums contribute little to the local economy and instead represent an investment that costs the public a lot while failing to return the initial investment. Dollar for dollar, the opportunity costs of investing in sports stadia is a terrible option if the goal is economic development, job development, or producing new economic development in a community. In short, the nearly $3 billion in sports subsidies it documented produced little, at the cost of over $120,000 per job.

Literally hundreds of other studies and books by individuals such as long-time sports economists Arthur T. Johnson in Minor League Baseball and Economic Development (1995), Mark Rosentraub in Major League Losers (1997), Kenneth Shropshire in The Sports Franchise Game (1995), and Roger Noll and Andrew Zimbalist in Sports, Jobs, and Taxes (1997), and Michael N. Danielson in Home Team (1997) reach the same conclusion—public support of professional and minor league sports is a bad investment. In practically none of the cities these studies examined did new sports stadia lead to any significant new private investment or provide for any significant economic benefits to the local economy besides the jobs generated by the initial capital construction of the stadia. More importantly, the new stadia generally were not even profitable or self-financing.

Nor could cities point to rising land prices or economic development in the surrounding community. Even as tourist attractions, the stadia either simply transferred sales from somewhere else, failed to demonstrate that the local hotels were filled as a result of the sports events. Finally, in terms of the much ballyhooed job production, outside of initial construction and the salaries for the players themselves, part time, seasonal, and no benefit beer and peanut sales jobs were the fare for what the billions of public dollars produced.

A second claim to support public investment in a stadium is that keeping a sports team is necessary to ensure that one remains a first class city. Would the Twin Cities of Minneapolis and St. Paul (which the State Legislature voted in 2006 to authorize a sales tax worth upwards of $300 million for a new stadium) or any city be any worse off by losing a sports team? Without a sports team, most cities would still have parks, museums, zoos, arts facilities, good neighborhoods, schools, and the general quality of life that separates first and second class cities from one another and suburbs.

Moreover, if one accepts this logic of sports being necessary to make a city first class, can we say that New York City became second class when the Giants and Dodgers fled for California in the 1950s, or that Los Angeles became second class when it lost the Angels to Anaheim or the Rams to Saint Louis? The answer is obviously no.
Professional sports are only one small piece of what makes a city first class. Moreover, professional sports are also only a small part of the local entertainment puzzle with many consumers often transferring their consumption to other forms of entertainment, including amateur sports, if pro sports are not available. Similarly, sports are even a smaller piece of the local urban economic pie such that its presence or absence is not significant in the face of other features in a thriving and diverse urban area. In addition, with the cost of attending sports events so high, often approaching or exceeding $200 per game for a family of four, many sporting events are no longer an affordable family entertainment option. Instead, sports owners look to other corporate interests to buy tickets, thereby making sports an aspect of a city’s first class status that is beyond the reach of most of its residents.

Finally, advocates for a publicly-funded stadia say that such funding is necessary to maintain owner’s profits. The issue here is not profitability, but the level or amount of profits the owners want. They want to make more money and who is to blame them for that desire. However, there are a couple of different issues here. First, many owners say that larger stadia with more seats are necessary if they are to make more money. To support that, owners often trot out attendance figures to show declining profits.

Attendance figures tell only part of the story since they are only a small part of the revenue stream for owners. Revenue from luxury sports boxes, corporate sponsorship and ads, television and radio contracts, and promotions make up a far bigger and more profitable part of what owners receive from their sports adventures. Yet even this money is not enough because owners often claim they are not making as much money as other owners and thus, building a new stadium is a key to upping their profits. Clearly the end result of this “keeping up with the Jones” logic is to constantly push up the average profitability of all sports teams such that there will always be some teams below the average demanding financial assistance.

Overall, while communities may choose to invest in sports facilities because of the cultural amenities they offer, doing so for economic development reasons is another stupid public policy and political myth that deserves to die.

The economic case for public subsidies for sports stadiums is simply another political myth and a stupid public policy idea that is constantly recycled and never dies. In future posts I will discuss other stupid public policies and political myths that cost taxpayers money.