The pro sports bubble

bubble1.jpgSo, to the surprise of absolutely no one who follows such things, Moody’s Investors Service lowered the ratings of the already junk bond debt of about a billion dollars that the Harris County-Houston Sports Authority issued to finance construction of Reliant Stadium, MinuteMaid Park and Toyota Center:

Moody’s believes the liquidity reserves are sufficient to cover the November 2010 payment, but their depletion may result in a payment default from pledged revenues as early as March of 2011, the report said.

If hotel occupancy tax and motor vehicle rental tax revenue continues to decline through 2010, the ratings could face further pressure, Moody’s said. Revenue from those taxes to the Sports Authority dipped by 11.7 percent in 2009 and are continuing that trend in 2010.

Of course, the romantics among us think it would be peachy to borrow even more money and resurrect the Astrodome into another kind of white elephant. This despite the fact that the markets has been telling us for over a decade now that there is no profitable purpose for it.

Meanwhile, most professional sports franchises are not doing all that well these days even with local governments providing these huge public subsidies

So, highly-leveraged debt, a high-priced product, increasingly unprofitable operations, and intense competition from a myriad of different (and substantially cheaper) forms of entertainment.

Does anyone else think that this pro sports bubble is about to burst?

Rather than a car, how about a health club membership?

fat_guy_on_a_scooter.jpgNow even driving causes obesity?

So, does that mean we should subsidize light rail boondoggles to help curtail obesity?

Thankfully, Peter Gordon asks that always knotty question: “At what cost?” After analyzing the data, he concludes:

“Cynics started doing the math many years ago and found that buying rail transit users a car would be far cheaper [than public subsidies of inefficient light rail systems]. But that would never fly with the smart set.”

“So consider the 2010 update which suggests that buying them a bus pass plus health club membership is the way to go. The various “cash-strapped” governments would save money.”

What could possibly go wrong?

astrodome-fest-plan Earlier in the week, Steve Malanga wrote about the municipal debt racquet in this WSJ op-ed. Not surprisingly, a good part of the article examined dubious decisions that local governments have made in financing sports palaces:

State and local borrowing as a percentage of the countryís GDP has risen to an all-time high of 22% in 2010 from 15%, with projections that it will reach 24% by 2012.

Even more disconcerting is what the borrowing now often finances. One favorite scheme for muni debt is giant and risky development projects.

Californiaís redevelopment regime is an object lesson. Starting in the 1950s, the state gave localities the right to create public agencies, funded by increases in property taxes, which can issue debt to finance redevelopment. A whopping 380 such entities now exist. They collect 10% of all property taxesónearly $6 billion annuallyóand they have amassed $29 billion in debt never approved by voters for projects ranging from sports facilities to concert venues to retail malls, museums and convention centers.

Critics, including taxpayer groups, say most such agency projects add little economic value. Sometimes the outcome is much worse.

In 1999, Fresno conceived plans to revive its downtown area with various projects, including a baseball stadium for the minor-league Grizzlies, which it had lured from Phoenix. The cityís redevelopment agency floated some $46 million in bonds to build the stadium. But the Grizzlies fizzled in their new home, demanded a break on rent, threatening to skip town and stick taxpayers with the entire $3.4 million annual bond payment on the facility. The team is now receiving $700,000 in annual subsidies to stay in the city.

Adding to the cityís woes: Last June, another development project, the Fresno Metropolitan Museum, went bust, leaving the cityís taxpayers on the hook for three-quarters of a million dollars in annual debt payments.

Cities now also use taxpayer-financed debt to engage in fierce bidding wars that benefit private enterprises. Charlotte, N.C., for instance, won the bidding for the new Nascar all of Fame with a $154 million offer, funded by a new hotel tax dedicated to servicing bonds for constructing the hall. But the venue employs only about 115 peopleóand an economic development study estimated the increased annual tourism from the venture wonít even equal what a single Nascar race generates.

Why did politicians offer the deal? For the dubious and hard-to-quantify purpose of ìbrandingî the city with a major attraction, according to the Charlotte Observer.

Yeah, we in Houston know all about financing those minor league stadiums. Anyone taking into consideration what we are going to do with that thing if the Dynamo and/or the MLS doesnít make it?

If that werenít bad enough, the WSJís Chris Rhoads chimed in yesterday with this article on the wasting, publicly-financed ìassetsî that Greece built for the 2004 Olympic Games:

Georges Kalaras used to view with pride the sports hall built near his home here for the 2004 Olympic competition in rhythmic gymnastics and ping pong. Now, he gets mad every time he jogs by.

"Look, it’s locked!" shouted the 38-year-old Mr. Kalaras, who works for the Athens city water company. Two stray dogs tangling with each other behind a padlocked metal fence accounted for the only activity in the complex, which seats 5,200 people.

Mr. Kalaras figured the steel and glass hall, costing taxpayers $62 million, would provide recreational space in his neighborhood. Officials envisioned concerts or shops.

Instead, when the Olympic torch went out after the Athens Summer Games six years ago, the doors closed here, as well as at many of the 30-odd other sites built or renovated for the Olympics that summer.

The vacant venues, several of which dominate parts of the city’s renovated Aegean coastline, have become some of the most visible reminders of Greece’s age of excessive spending. Sites range from a softball stadium and kayaking facility to a beach volleyball stadium and a sailing marina. [.  .   .]

Even boosters of the Olympics are having second thoughts.

George Tziralis, a technology investor, in 2007 co-authored a glowing report declaring the venues as "greatly improving the quality of life of the inhabitants of these areas, providing valuable resources to the community and the economy."

On a recent afternoon, staring at a pile of bricks on the unfinished entrance behind a locked metal fence encircling the Olympic sailing marina, he was less upbeat.

"I hope you’re calling this article ‘The Nonsense of the Olympics,’" he said. Boats filled about a third of the 120 slips at the marina, which remains closed to people who aren’t boat owners.

Later, Mr. Tziralis, 28, gestured out the window of his Opel Corsa at a huge, locked complex of mostly vacant Olympic properties, located on the former site of the city’s old airport.

"There’s no way there shouldn’t be a park here six years after the Games!" he shouted.

That complex, which cost taxpayers $213 million, includes stadiums for field hockey, softball and baseballósports with little or no following in Greece. The facility for canoeing and kayaking slalom at the site was to become a water amusement park. It didn’t.

In light of the foregoing and last weekís lessons on governmental decision-making, what could possibly go wrong with this?

Lessons on governmental decision-making

astrodome5 This blog started in February 2004 and the first post about what to do with the Astrodome was in September 2004.

Over the intervening six years, there have been a couple of dozen posts about the various boondoggles that have been proposed for the Dome. To date, no one has put up a penny to redevelop the Dome.

Despite this dismal track record, Harris County officials are still dithering over what to do with the Dome.

At least the current proposals are similar to the one that I made a couple of years ago. That is really the only one that makes much sense for the facility. Typical to Harris Countyís handling of this situation, there is no mention in the Chronicle article that Harris County officials have had any discussions with Texas Medical Center officials about development and financing of such a venture. Thus, at this point, it would appear that the only financing for such a project would be on the County’s dole.

And in an amazing display of blindness, County officials are planning not to convert the land that the Dome sits on into badly needed additional parking for the Reliant Park area if the decision is made to raze the facility. Why not generate some revenue from the land to help pay off the $35 million in bond debt that still exists on the Dome?

Oh well. There are many lessons to be drawn from this experience, but two in particular:

1. If you canít figure out what to do with something in six years, then itís probably time to get rid of it; and

2. Donít ever rely on governmental officials to make sound decisions.

Obfuscation is government’s secret weapon

Paulsen Over the past couple of years, Bill King has done a great job (and see generally here) of explaining how Houstonís unfunded public pension obligation represents a horrific burden on the city governmentís financial condition.

Given that such obligations are clearly unsustainable, why does the city government continue to provide them?

Edward L. Glaeser provides the following particularly lucid explanation of the dynamic that leads to such profligacy:

On Friday, The New York Times ran a front-page article about pensions that took note of a 44-year-old retired police officer who receives an annual pension of $101,333 despite never having earned more than $74,000 a year in base pay. The article reported that in Yonkers alone ìmore than 100 retired police officers and firefighters are collecting pensions greater than their pay when they were workingî and that ìabout 3,700 retired public workers in New York are now getting pensions of more than $100,000 a year, exempt from state and local taxes.î

The emotional response of many people is to vilify the retirees, but thatís a mistake. The individual police officers and firefighters were following the rules. They have jobs that require them to risk their lives in service of their communities, and large pensions are one payoff for accepting those risks and accepting relatively lower wages up front. Iím sure many of them are no less impatient than the rest of us and would have preferred to get more money in their 20s and less in their 50s.

The fault lies in the political process that makes their negotiating partners ó state and local governments ó more impatient than their employees. State and local governments donít want to face the short-term consequences of paying higher wages, so they structure compensation in ways that defer the costs of each new deal for years.

Politics doesnít just favor delayed compensation; it also favors forms of compensation that are particularly hard for people to evaluate. Governments almost always love obfuscation. The appeal of Fannie Mae and Freddie Mac was that they could subsidize homeownership without appearing to cost the taxpayers anything. Of course, they ended costing us plenty, just like hard-to-evaluate pension promises.

The rest of Glaeserís post is here.

Sort of reminds one of this, this and this, eh?

Truth in soccer stadium advertising

Soccor stadium proposed dynamo_4_3 Why is it that the Chronicle ignores principles of truth-in-advertising (not to mention common sense) in each of its articles regarding the proposed downtown minor-league soccer stadium?

In this most recent Chron puff piece, Chronicle reporter Jose De Jesus Ortiz suggests that, based on the anecdotal observations of several stadium supporters, the new stadium will be an economic boon for the area near the stadium.

Of course, Ortiz doesnít even mention the bountiful economic research that shows scant evidence of large increases in income or employment associated with professional sports or the construction of new stadiums.

If the Chronicle admitted that the economic benefits of the minor-league soccer stadium are questionable, but that the intangible benefits to the community override the financial risk of the deal, then at least the Chronís support of the deal would be based upon an honest presentation of the issues.

Is that too much to expect?

Houston Metro in a few years

metro mar 15 5-thumb-400x300 Houston ís Metropolitan Transit Authority has been on the receiving end of well-deserved criticism lately regarding its dubious finances (see here, here and here).

But itís always nice to realize that things could be worse. For example, we could be dealing with the San Francisco Bay Areaís Metropolitan Transportation Commission, which actually is one of the models that Metro has used in establishing its absurdly inefficient light rail system. Check this out:

The 2009 annual report from the Metropolitan Transportation Commission (MTC) is a bombshell, a wake up call, a Klaxon – choose whatever metaphor you like – if you care about public transit in the Bay Area, this report is probably going to affect your life.

It shows, more clearly than any of the reports of budget woes coming from the individual transit agencies, that the entire system is unsustainable.

Think the fare hikes and service cuts are bad now? Just wait. The MTC added up the projected budgets of the agencies and found that operating costs would exceed revenues by $8 billion over the next 25 years (emphasis supplied), while planned improvements (like new buses, and the Warm Springs BART station) will require someone to dig up an additional $17 billion in spare change from under the couch.

And thatís not even the worst of it:

In the last decade [Bay Area residents] almost doubled the amount of money [they] put toward transit, while increasing service only 16 percent and ridership only 7 percent.

Meanwhile, Houston Metro is currently proposing to sell $866 in general obligation bonds, yet it does not have non-tax revenue that is even close to covering debt service on that level of debt. Metro has not even floated what credit enhancement it proposes to provide in order to sell those bonds.

Hopefully, Houstonís leaders will nip this type of lunacy in the bud. If they need any incentive, then the Bay Area MTC is a useful reminder of the even bigger mess that Metro could be.

The bad Metro bet

metro-map-2012-revised Following on this post from last week, there were a couple of good pieces from over weekend on the cascading boondoggle that is Houston’s Metropolitan Transit Authority.

In this post, the always-insightful Tory Gattis comments on Randal O’Toole’s Wall Street Journal op-ed from over the weekend in which O’Toole focuses on the short-sighted nature of huge investment in light rail systems. At a time of fast technological innovation, why should a community place a substantial amount of its chips on an increasingly obsolescent form of mass transit such as light rail?

Meanwhile, Bill King followed his fine blog post from last week with this devastating Sunday Chronicle op-ed in which he disassembles each of the primary myths that Metro supporters use when defending the light rail system. In particular, King explains why the 2003 referendum is not a reasonable justification for what Metro is proposing now with regard to its light rail system:

The 2003 referendum had three elements: (1) a $1.2 billion LRT system; (2) a roughly 50 percent increase in bus service; and (3) initiating a plan for commuter rail.

Metro has completely abandoned the bus expansion: We have fewer buses and bus riders today than we did in 2003. It also has done absolutely nothing to further the development of any commuter rail lines and has instead gotten in the way of other groups like Harris County when they have tried to initiate some action. The voters in 2003 did not approve just a light rail plan; they approved a comprehensive, multimodal system. Metro, for its own reasons, has abandoned what the voters approved in favor of its own grandiose vision.

Additionally, it should be noted that the voters specifically restricted Metro to borrowing $640 million to build the light rail system. Metro now plans to subvert that limitation by entering into a sale/lease-back arrangement with a separate subsidiary and actually borrow more than four times what the voters approved. Metro is always quick to invoke the moral authority of the 2003 referendum but casually ignores its inconvenient restrictions.

Meanwhile, the Chronicle editorial board continues to live in a rather odd state of denial with regard to Metro. In this vacuous op-ed, the Chron attempts to put a cheery face on Mayor Parker’s appointment of several new members to the Metro board (one is actually a regular Metro rider — how about that?!) and her negotiations with federal officials regarding funding of further light rail lines.

Without any financial analysis whatsoever, the Chron asserts that Mayor Parker is moving forward with a full build-out of light rail in a fiscally responsible manner. But even a cursory review of the data proves just the opposite.

As Peter Gordon has long maintained, citizens should require their leaders to answer the following basic questions before allowing them to obligate citizens to funding boondoggles such as light rail: 1) At what cost?, 2) Compared to what? and 3) How do you know?

The Chronicle editorial board is taking a pass on asking Metro’s leaders those questions. Thankfully, Bill King and Tory Gattis are not.

The Metro Train Wreck

metrorail6The Metropolitan Transit Authority has been in the news recently mostly because of a good, old-fashioned document-shredding scandal and yet another spectacular crash.

But the more important issue facing Houstonians is that Metro is preparing to force large swaths of the community — including the key Uptown area near the Galleria — to incur the enormous cost of enduring construction of its inefficient and impractical rail lines.

Bill King has spent a considerable amount of his time over the past several years studying Metro and Houstonís transit problems. In this devastating post, King finds that Metro is close to barreling completely out of any semblance of fiscal control:

There could hardly be a more fitting image for the close of the current Metro administration than the recent photographs for a wrecked Metro buses in front of Metro’s headquarters after having been broad-sided by Metro’s Main Street light rail.

The last six years are likely to be remembered as the most ruinous time for public transportation in Houston’s history as Metro has pursued a single-minded obsession to build its version of an at-grade rail system regardless of the cost, both in financial terms and in the degradation of the bus system on which over 100,000 Houstonians rely daily.

Fortunately, Mayor Parker has ordered top-to-bottom review of the agency. Here is what that review is likely to find.

Decline in Ridership. Since 2004, Houston population has grown by over 10% from just over 2 million to 2.25 million. At the same time gas prices rose 47% from $1.81 per gallon to $2.67 per gallon. These two factors should have virtually guaranteed an increase in transit.

However, exactly the opposite has occurred as bus boardings dropped almost 24% from 88 million in 2004 to 67 million in 2009. Instead of increasing bus service by 50% as it promised the voters in the 2003 referendum, Metro has slashed bus routes and increased fares by over 50%.

Today Metro actually operates 225 fewer buses than it did in 2003. An outside performance audit in 2008 found that on-time performance fell by 29% from 2004 to 2008.

Financial Disaster. Since 2003, Metro’s sales tax revenues have increased by 43%, rising from $357 million to $512 million. At the same time, its fare revenue increased by 41% from $42 million to $60 million by charging an ever dwindling ridership more.

Yet, Metro is in the worst financial shape in recent history. At year end 2003 Metro’s current assets exceeded its current liabilities by $125 million. The budget just adopted by the Metro board projects that it will have current accounts deficit of $165 million by the end of this fiscal year, a stunning loss of nearly $300 million in just five years.

Over the same period, Metro’s debt has swelled by nearly 50% from $546 million to $816 million. [.  .  .] In the meantime, the cost of the [Metro’s Light Rail Transit lines] has risen from the $1.2 billion originally estimated to something well in excess of $3 billion.

Metro is seeking to borrow $2.6 billion to build the LRT, over four times what it promised the voters would be the limit in the 2003 referendum.

Originally, Metro assured voters that it could build the LRT without tapping the mobility payments that are so critical to the Houston and the other member cities. Metro’s projections now show that it can only afford the LRT if those payments are terminated in 2014. [.  .  .]

In 2003, after a spirited public debate, this community approved, by a narrow margin, a consensus plan to enhance public transportation with a multi-modal approach. Part of that bargain was a limited experiment with a light rail system. The voters specifically limited the resources that Metro could devote to the light rail for fear that the cost might undermine the solid, dependable bus service that existed at that time. Metro’s leadership has shredded that contract with the voters in favor of its own grandiose vision of transit that has little to do actually solving Houston’s mobility problems. In the meantime, traffic congestion continues to get worse and working families that rely on public transportation to get their jobs everyday find riding Metro a more difficult and more expensive proposition.

Read King’s entire post. Metro’s defenders typically rely on the 2003 referendum as the primary basis for their continued support of such wasteful spending. But the problem with such referendums is that they ask voters to approve large public ventures such as Metro in a vacuum while ignoring Peter Gordon’s three elegantly simple questions regarding economic choices:

1) At what cost?

2) Compared to what? and

3) How do you know?

For example, assume for a moment that voters were informed of the fact that the average urban freeway lane costs about $10 million per mile and that the average light rail line costs over $50 million per mile while carrying less than one-fifth as many people as the freeway lane. And these are only average figures.

Moreover, let’s assume that voters were informed that the expenditure of a billion or so of public money on expanding a lightly-used light rail system has real consequences, such as leaving inadequate funds to make improvements to Houston’s infrastructure that would dramatically decrease the risk of death and property damage from flooding. Or whether the billion or so being flushed down the light rail drain would be better used to fix various area traffic “hotspots” where accidents or bottlenecks occur with high frequency.

No one knows for sure, but my bet is that voting results would be dramatically different if the foregoing costs and alternatives were included as a part of the referendum.

Unfortunately, the relatively small groups that benefit from these urban boondoggles have a vested interest in keeping that threshold issue from ever being re-examined. The economic benefit of light rail is highly concentrated in only a few interest groups, such as political representatives of minority communities who tout the political accomplishment of shiny toy rail lines while ignoring their constituents need for more effective mass transit; environmental groups striving for political influence; construction-related firms that feed at the trough of Metro’s poor investment decisions; and private real estate developers who enrich themselves through the increase in their property values along the rail line.

As Professor Gordon wryly-noted in another post: “It adds up to a winning coalition.”

Unfortunately, once such coalitions are successful in establishing a governmental policy subsidizing such boondoggles, it is much more difficult to end the public subsidy of the boondoggle than to start it in the first place.

None of these above-stated reasons for mass transit appeal to the vast majority of the electorate, so this amalgamation of interest groups continues to disguise their true interests behind amorphous claims that the uneconomic rail lines reduce traffic congestion (they do not), curb air pollution (they do not), or improve the quality of life (at least debatable).

How do these interest groups get away with this? The costs of such systems are widely dispersed among the local population of an area such as Houston, so the many who stand to lose will lose only a little while the few who stand to gain will gain a lot.

As a result, these small interest groups recognize that it is usually not worth the relatively small cost per taxpayer for most citizens to spend any substantial amount of time or money lobbying or simply taking the time to vote against an uneconomic rail system.

Metro’s rail system is a bad virus that has infected Houston. The cost of treating this civic virus is growing larger each month. Without immediate re-examination of Metro’s light rail plan, the increasing costs of this plan risk turning this currently manageable problem into a major civic fiscal crisis that could negatively affect the Houston area’s growth and prosperity.

As Bill King exhibits, real leadership involves recognizing that risk and addressing it, not indulging it.

Why pay even more?

1984 Ticket In addition to being quite frustrating from a purely football standpoint, attending Houston Texans games is incredibly expensive. And as’s Lestor Munson points out, if the NFL has its way in the American Needle case currently pending before the U.S. Supreme Court, then professional franchises will have virtual carte blanche to coordinate high prices with other clubs in their leagues.

A group of sports economists led by Roger Noll have filed the brief below with the Supreme Court explaining how the NFL position in favor of an exemption from anti-trust laws will likely result in a loss of consumer welfare. In short, the economists argue that economic research provides a firm basis for distinguishing between collaborative activities of league members that enhance economic efficiency and benefit consumers, on one hand, from collusive activities that are not essential for the efficient operation of a league and that simply benefit league members by reducing competition among teams.

The owners of professional sports leagues have already received a dramatic financial benefit from the billions of dollars of public financing for stadiums that local governments have thrown their way over the past generation. Providing an unnecessary anti-trust exemption that will provide anti-competitive incentives for league members while providing no economic benefit to the members’ customers will only make matters worse.

Food for thought as Houston leaders prepare to gift-wrap another dubious public subsidy for the owners of a professional sports franchise.

Sports Economists Amicus Brief in American Needle Case