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Photo Credit: Sergei Belski / USA Today Sports

Defining public benefit in an arena context

If you’ve been following the never-ending Calgary arena saga over the past few months and years, you’ve probably heard a phrase repeated ad nauseum by Calgary mayor Naheed Nenshi.

Public spending must come with public benefit.

The phrase hasn’t been used to necessarily stamp down any contribution from the City of Calgary’s coffers to the new Flames building, whatever form it may take, but it’s basically been an attempt to frame any contributions. So far, proponents of the arena project – ranging from the Flames to Tourism Calgary and others – have touted the public benefits of the potential building.

But every round of rhetoric from either side of the arena debate avoids the most important aspect: actually defining what constitutes “public benefit.” What is it? And how do you measure it?

What is public benefit?

When we discuss public benefit, we’re not just discussing arenas. It can be broadly applied to things that governments pay for (in part or in full) but not everyone necessarily uses. In terms of recent things built in Calgary, think about the C-Train extensions, the new public library building and the ring road – not everyone directly uses them, but it’s hard to dispute that there’s a benefit to the citizenry as a whole as a result of the city contributing to them.

In the context of arena funding, public benefit encapsulates three broad things:

  1. Private consumption benefits of those directly using the facility.
  2. Public consumption benefits of those that might not directly use the facility, but enjoy having it in town.
  3. Opportunity costs of the land, funding or other resources that otherwise would have been used in other ways.

Charles Santo (2007) explains in a bit more detail in a piece from the Journal of Urban Affairs:

Private consumption benefits accrue to fans that attend games and are directly related to the concept of consumer surplus. In this context, consumer surplus arises when the amount that a person is willing to pay for a ticket to a sporting event is greater than the actual cost of the ticket. The difference represents a benefit to the consumer. Public consumption benefits encompass the intangible rewards associated with hosting a team, and are related to the economic concepts of positive externalities and public goods — two types of market failure. A variety of government interventions are justified on the grounds that the market does not efficiently provide public goods or properly account for externalities on its own.

Private consumption benefits:

In the context of a Victoria Park Arena, for example, private consumption benefits are simple to capture: a finite amount of individuals on a finite amount of dates will shell out money to go to events at the new building.

But you’ll also probably say to yourself, “Hey, doesn’t the Saddledome already serve that purpose?” Yes, and fundamentally speaking a new arena merely moves already-existing economic activity north a few blocks. Aside from what’ll probably be a bit of an initial spike in peoples’ willingness to shell out money to check out the new building, a Victoria Park Arena won’t really create economic benefits.

Public consumption benefits:

Given that the tangible, direct economic benefits argument is basically a wash, a lot of the discussion of public benefit will probably hinge on this muddier concept. Santo explains: “Sports teams also produce certain public goods — benefits that are jointly consumed and from which no one can be excluded. These might include things like civic pride, greater community cohesion, and the image benefits of ‘big league city’ status. Such benefits accrue to fans as well as nonfans.”

Only 20,000 fans a night can go to the Flames game and shell out for the direct enjoyment of that experience. But everyone can enjoy the city having a team and the broader fandom, everyone can feel excited about a new building and the attention the city gets, and so on.

This is also referred to as “the opera effect” – you might not go to the opera, but you like that the city has one. In a sense, the broader basket of entertainment choices is also presented as a public consumption benefit even though no additional economic activity is created.

That’s not to say that everyone will value these things, but nobody’s actively excluded from doing so. Fundamentally speaking, these benefits are what’s known as an externality of the direct investment in the arena. The economic activity that results from an arena is what you’d put on a balance sheet (and can easily be captured), but the broader “warm-and-fuzzies” of the new building are much wider spread but also basically impossible to capture in a tangible way.

Opportunity cost:

Finally, it’s irresponsible to discuss public benefit without thinking about the downside of the investment in an arena: you can’t spend that money (or use that land) for something else. If the city gives money to the project directly or borrows money for that purpose, it makes it challenging for it to do other things.

How do you measure public benefit?

The most common method of valuating projects like the arena is by using a method known as “contingent valuation.”

Contingent Valuation is a method of estimating the value that a person places on a good. The approach asks people to directly report their willingness to pay (WTP) to obtain a specified good, or willingness to accept (WTA) to give up a good, rather than inferring them from observed behaviours in regular market places.

Because it creates a hypothetical marketplace in which no actual transactions are made, contingent valuation has been successfully used for commodities that are not exchanged in regular markets, or when it is difficult to observe market transactions under the desired conditions.

From whatever sample size is used in the survey, a valuation for the marketplace is extrapolated. It’s not a perfect method, but it’s easier than going to every person and asking them their willingness to pay.

Examining NFL stadium subsidies, Noll and Zimbalist (1997) examined things from the opposite side of the spectrum: instead of trying to come up with an agreeable number, they conceptualized things by the cost of the subsidy to the individual. Looking at a stadium subsidy of $250 million for a population of 5 million citizens, the cost of servicing the debt to finance the stadium would be roughly $5 per resident per year.

They concluded: “It does not vastly stretch credulity to suppose that, say, a quarter of the population of a metropolitan area derives $20 per person in consumption benefits annually from following a local sports team. If so, the consumption benefits of acquiring and keeping a team exceed the costs.” That’s not to say that the entire population gained a benefit from following the sports team, but that enough people did to make such a deal palatable.

If you choose to subscribe to this method, the specific nature of the support would determine the cost to each resident of financing the funding and so it’s a little tough to guess what the translation factor would be to an individual citizen. That said, if you take Noll and Zimbalist’s simple proposal and drop it down to a Calgary scale (e.g., 1.2 million residents and a similar level of individual willingness to pay) you’d have a public contribution to the building of around $60 million.

What’s the right level?

At this point, I think it would be naive to presume that the Flames will get zero public support from the City of Calgary for a new arena. If the city was entirely unwilling to give the Flames any support they probably would’ve told them to go fly a kite and the club would be exploring other options.

Once the mechanism is figured out, the challenge will be going to the population and selling the idea. In what’s generally known as a hockey town, it’s probably not out of the realm of possibility that more than a quarter of the population gains some level of intangible benefit from the construction of a new building – whether it’s through Flames fandom, enjoying more entertainment options or just via the amorphous concept of “civic pride.”

But what’s civic pride worth? Especially in light of an economic slowdown, immense pressures on city resources (financial and otherwise) and a series of competing civic priorities. The city’s faced challenges over the past year in terms of finding ways to help out disadvantaged citizens, expanding their transit network and figuring out ways to deal with changes in property taxes that threatened several local businesses. In that climate, can any investment in an arena be justified?

Recent justifications

If you look at the five most recent NHL buildings that received public funding – ignoring T-Mobile Arena in Las Vegas, which was privately funded – there are typically two big justifications to handing public funds over to a team’s new digs.

  1. The investment will revitalize an area in town.
  2. The team was going to leave.

Edmonton, Detroit, Brooklyn and Newark all cited fixing up an inner-city community as a reason to hand over funds. Edmonton and Newark also cited, along with Pittsburgh, concerns about their team up and moving.

The Flames probably aren’t going to move. Or at least, Ken King doused the fires of suspicion caused by comments he made on Toronto radio last month. The usage of a new arena to anchor redevelopment of Stampede Park could be used as justification for funds, though the level of public outcry will probably depend on how much public funding the project received and how it’s framed by the city.

To me, it’s not a question of whether or not the city will throw public money into the project. I’m all but certain that they will. But the crux of the discussion should be how much money and what public benefit it’s meant to serve.

Works cited

Noll, R. and Zimbalist, A. 1997. “The economic impact of sports teams.” In Sports, jobs and taxes: The economic impact of sports teams and facilities, Noll and Zimbalist (eds.), Washington, DC: Brookings Press.

Santo, Charles A. 2007. “Beyond the economic catalyst debate: can public consumption benefits justify a municipal stadium investment?” In Journal of Public Affairs 29(5).

If you’d like to learn more about municipal finance options for stadiums, Google Scholar is your best friend. There’s a large amount of literature decrying the economic benefits argument for stadiums. It’s mostly NFL-related, as you’d expect.

  • Bottsy777

    Good article, however I think it can be argued that you missed a fairly major point. There is currently a lost opportunity with the existing Saddledome in other events which by-pass Calgary due to not being able to hoist their rigging from the ceiling. This is a known fact, and should be a part of the evaluation. Therefore your statement that “Given that the tangible, direct economic benefits argument is basically a wash” is actually false to some extent. We can I am sure argue what level of increased direct economic benefits could or would occur, however to dismiss it outright isn’t giving this situation a true evaluation. One only has to look the 8 Garth Brooks Concerts in Edmonton, to understand the increased economic benefit a new building could derive. This sole event in itself has changed a few of my own personal friends stance on a new Event Center.

    • BendingCorners

      I disagree. It’s possible a few people who would be otherwise unemployed will earn wages on those nights, but the entertainment dollars spent at a concert (or a game for that matter) are dollars that are not spent at another location in the same city, by the same citizens. Depending on whether the city collects more taxes per dollar spent at a concert than at some other venue, the city might be ahead or might be behind. But that still does not take into account the cost of borrowing in the first place; the extra concerts would have to generate a lot more tax revenue than the alternative activities in order to cover that cost. That is an unlikely outcome.

  • Backburner

    After reading this, CalgaryNext idea makes so much more sense, minus the location. Public would be willing to pay for a field house, Flames organization for an arena.. Why not put the two together? However, my beef with King still remains about planning. You can’t tell me you couldn’t have covered the cost over the last ten years paid for by the fans. This guy should be fired.

  • Burnward

    There is no recreational economic driver in Canada that comes close to what an NHL team can bring.
    Public funding should never be the sole source for a new facility, but imagine the hit if the team left.
    The Flames do provide a service to the city. Also an important part of community and local pride.
    It’s a special thing up here.
    Which only makes this discussion about funding more difficult.

    • BendingCorners

      Yes we will miss them when they leave. Except of course they have nowhere to go. A new arena would be bright and sparkling for a while but the current building works for hockey. Extra concerts wold be fun and make more money for somebody, but $400MM? A bit much.

    • BendingCorners

      I wouldn’t trust the Flames to honour a revenue-sharing agreement. We had one on the Saddledome and the owners bullied the city into a rewrite because the team was losing money. It will happen again.

    • MarbledBlueCheese

      Yeah, I’m tired of the province blowing all that cash on infrastructure, healthcare, and education. Nuts to them–let’s give it to a billionaire living in London so he can have a more profitable business.

  • BendingCorners

    Ugh. Here we go again. The key concept in the public consumption argument is that because some citizens gain a net emotional benefit then all citizens owe it to them to contribute. It’s not a bad argument when applied to things that are open to the public or that attract new citizens (growth being a good thing). But a private for-profit arena charging expensive admission is not in the same category as a park or library or recreation center, which any citizen can use just by showing up.
    Gary Bettman made the comment a few months ago that without public funding the owners wouldn’t earn sufficient return to justify building a new arena. In his opinion a new arena would be a good thing and so he wants the city to cough up the money. But if the return isn’t there for the owners, it won’t be there for the city either.

    • calgaryfan

      If the owners are not making enough money to justify a new arena then they should just shut up and continue with what they have. They could also leave and try to find a better option which is very unlikely.

  • BendingCorners

    If the author is right and some funding is inevitable, let’s hope it at least involves the owners writing a cheque up front, not paying their share out of future enhanced revenues. I’m not sure why an arena needs to cost $400MM but simple math suggests that in a city with maybe 400,000 ratepayers that works out to $1,000 per ratepayer, fan or not, plus interest. I suppose adding $100 to our property taxes for 20 years would cover it, but I think we need a referendum before agreeing to any public funds, with a fully costed proposal. I would vote no, because the current building is good enough and will last for decades or possibly centuries. But 50%+1 gets you a new arena.

    • freethe flames

      Asking permission to spend taxpayer money on an arena is a good use for a referendum. But the facts need to be clear. It might even cause more people to vote in the fall election. Also would be good to know where city councilors fall on the issue. Also to be discussed should be the bid for the Olympics.

  • BendingCorners

    One reason KK gives for a new arena is to hold more concerts. Why do we want to hold concerts in hockey arena? Half the seats can’t be used because they are behind the stage. If Calgarians really want lots of good concerts a new 10,000 seat Arts complex with superb acoustics would make more sense, and cost less. Then the Flames can concentrate on hockey.

    • Hubcap1

      Simple, the Flames owners get to make plies more money off every event held in THEIR building. And there is the crux of this situation the owners want to HAVE the building but NOT OWN IT and contribute no property tax. I say let them have their cake, but pay for it as well.

      • MontanaMan

        You’re not in business are you? It sounds good to say “let the billionaires build it themselves” but the reality is that’s not how business works. The three levels of government and the Flames ownership will agree to a business plan that will get the arena built. There’s a lot of posturing and negotiation going on now but eventually, the deal will get done.

  • MontanaMan

    Let’s hope a decision is made soon so we don’t need to read another 100 articles on the evil plan to build an arena. And for Marbled extolling the wisdom of the provincial governments spending on health care, infrastructure and education – you’ve got to be kidding.

  • Newbietwo

    Just build the damn thing and get it done.. I’m sick of the party politics, the complete lack of understanding developement, socioeconomics, investment structures and the crying wolf leadership.. agreement or not its already affected my vote come October because this is becoming high school on both sides.. my specific comments I’ll save for my drinking buddies who share my values

  • RealMcHockeyReturns

    A couple problems with the article (but more so the narrow-minded comments from non-fans apparently hijacking this site):

    1) “In what’s generally known as a hockey town, it’s probably not out of the realm of possibility that more than a quarter of the population gains some level of intangible benefit…”…..very lowball estimate. I would guess closer to 70% based on my large base of business and personal contacts. A bit unfair.
    2) Based on a friend’s opinion in the entertainment field, I am hearing at least 30 more events per year come in, even with Flames, Hitmen, and Roughnecks lready plying in new arena.
    3) Who says the arena cannot have attached public benefits like some lovely parks in and around it and the creation of a zone that could also include another arts complex. Perhaps an indoor complex with small music-venue/theatres it and perhaps an outdoor stage where amateur/college theatre groups and musicians could busk/perform with corporations sponsoring the stage or troups. Further, othe entrepreneurs will invest dollars in more entertainment venues as the new entertainment zone development continues. Perhaps Calgary becomes Stratford West and Nashville or Austin north with the right people and groups involved.

  • The GREAT WW

    I fully support public funding for the new arena…

    I support city of Calgary property taxes used for the arena (mostly because I don’t pay Calgary taxes…)

    I support provincial taxes being used (mostly because I would like to see Edmontonians paying for half the arena…)

    I support federal money used for the arena (mostly because they would waste the money on something else anyway….)

    WW

  • Puckhead

    A new arena will be built in time (5-10 years) but for now the Saddledome is more than fine.

    These articles are already getting tiresome and I think I will start scrolling past them until something more concrete is announced.

  • Lucky 13

    Being on the west coast I don’t keep up with everything that goes on in Calgary, but one thing that bothers me is how much waste there is of taxpayers money.

    I get that the mayor, provincial government doesn’t want to get involved in public use of citizens money for a new arena. Times are not rosy for many people living there. I have family there and they are Flames fans as I am, but food and shelter comes first for any sane person.

    Also when I think of what has happened to the Heritage Fund over the last decade, it bothers me that owners feel the right to assume they are entitled to a share of funding.

    Ken King should be ashamed of the way he has handled all of this… maybe he’s the problem.