Kucinich Asks for Policy Clarification on Financing Stadiums With Tax-Exempt Bonds

This is the second hearing in a series of hearings on the State of Urban America. The series intends to take a closer look at American cities, their progress, their problems, and their future. Today's hearing will examine the use of taxpayer-financed debt for the construction of sports stadiums, convention centers, and hotels, as well as recent regulatory changes by the IRS that could significantly increase the use of tax exempt bonds for historically private activities. Last week, our hearing looked at the subprime mortgage industry and the problem of foreclosure, the pay day lending industry and the enforcement of the Community Reinvestment Act. In the coming weeks we will also take a look at the retail and grocery store industries as well as access to health care in the heart of urban America.

Today we are taking a look at the use of tax-exempt financed debt for the construction of sports stadiums, convention centers, and hotels. My own city of Cleveland has had experience in this regard.

In 1990 the Central Market Gateway Project was formed to develop new stadiums for the Cleveland Indians and the Cleveland Cavaliers. They mounted a ballot initiative, known as Issue 2, and made claims in their paid advertising that will sound familiar to our witnesses: "Who wins with Issue 2? We all do! 28,000 jobs for the jobless; neighborhood housing for the homeless; $15 million a year for schools for our children; revenues for City and County clinics and hospitals for the sick; energy assistance for the elderly." The public relations campaign was coupled with hardball threats from Major League Baseball to relocate the Indians. The initiative passed by a narrow margin and by 1996, the total cost was up to $462 million, two-thirds of which came from the public, and by 1997 that cost was still rising.

Cleveland had a municipal football stadium and an intensely loyal fan base, affectionately known as the "Dawg Pound." But that wasn't enough, and the Cleveland Browns left Cleveland for a new stadium built with taxpayer subsidies in Baltimore. NFL officials insisted that a new stadium and not renovations would be necessary to get a replacement football team. Cleveland replaced its stadium with a football-only structure paid for primarily with tax money.

After spending hundreds of millions of taxpayer dollars to subsidize stadiums for professional baseball, basketball and football, Cleveland's economy does not have much to show for it. We have among the highest poverty rates in the nation, and one of the highest foreclosure rates. This month marks the 132^nd month, or exactly eleven years, in which Ohio's job growth is below the national average. This figure is an unprecedented figure nationally. And whereas Ohio is growing slower than the rest of the country, Cleveland is growing slower than the rest of Ohio. During the 2000 recession, Cuyahoga County lost 75,733 jobs or 9.3% of all of its jobs. The Gateway Project, which promised to generate tens of thousands of new jobs, ushered in a period of net jobs lost since its construction. The Gateway Project neighborhood is particularly striking because the neighborhood is even more vacant and has even fewer jobs after the construction of the Gateway Project than before.

Nationally, sports stadium construction is not effective at boosting the local economy and revitalizing urban neighborhoods. Academic research shows that on all counts, sports stadiums add no benefit to the cities in which they are built -- no new jobs, no additional revenue for schools, no new business, no additional value.

In a review of the academic literature, economist Andrew Zimbalist concluded, "Few fields of empirical economic research offer virtual unanimity of findings. Yet, independent work on the economic impact of stadiums and arenas has uniformly found that there is no statistically significant positive correlation between sports facility construction and economic development."

While taxpayer financed stadiums do not seem to add to the wealth of the public who pay for them, they do add wealth to team owners. Consider the Detroit Tigers and the Detroit Lions. We will hear about them and their stadiums from one of our witnesses today. The value of the Detroit Tigers rose from $83 million in 1995 to $290 million in 2001, the year after the team moved into their new stadium. The Lions' increase in value is even more dramatic, rising from $150 million in 1996 to $839 million in 2006.

Economic benefit to the team owners was certainly the case for President George W. Bush who, in 1989 spent about $600,000 to buy a small stake in the Texas Rangers baseball team. During his ownership, Mr. Bush and his co-investors were able to get voters to approve a sales tax increase to pay more than two-thirds of the cost of a new $191 million stadium for the Rangers as well as surrounding development. Mr. Bush and his partners also received a loan from the public authority charged with financing the stadium to cover their private share of the construction costs.

By 1994, the Rangers, in their new, publicly financed stadium, were sold for $250 million -- a three-fold increase in value in merely five years and one that was in largely attributable to the new taxpayer subsidized stadium. Mr. Bush personally came away with a profit of $14.9 million. In this case, the tax-exempt financing indisputably benefited the owners of the Texas Rangers.

Public financing of sports stadiums benefits the team owners but not, according to the academic consensus, the public. So is tax exempt financing of stadium construction an appropriate use of taxpayer funds?

Well, the law on this matter is the 1986 Tax Reform Act. As our witnesses will testify, the '86 Act removed sports stadiums from the list of eligible private activities that could be financed with tax exempt private activity bonds. That was the state of affairs until last year, when the IRS issued three rulings. Two of them were private letter rulings favorable to the Yankees and Mets, allowing them to use previously prohibited private payments for debt service on tax exempt bonds. Thus, the new Yankees and Mets stadiums can be built at taxpayer expense. The third was a proposed rulemaking that generalized the Yankees and Mets rulings. The effect of these three rulings would seem to subvert the intent of the '86 Tax Reform Act, as regards the public financing of sports stadium construction.

Today, we will have the opportunity to hear from experts from around the country, as well as from the Chief Counsel of the IRS, on these questions.