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:
- Private consumption benefits of those directly using the facility.
- Public consumption benefits of those that might not directly use the facility, but enjoy having it in town.
- 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.
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?
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.
- The investment will revitalize an area in town.
- 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.
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.