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Why Should We? 

A closer look at the Cubs' plea for public money

UPDATE: After our story went to press, media outlets reported that alternative Cubs renovation proposals—such as financing via a Cubs TIF district, preservation tax credit, or 1 per cent Metropolitan Pier and Exposition Authority restaurant tax—are now under consideration. "I don't know where any of those ideas are coming from," John Patterson, spokesperson for Senate President John Cullerton (who will sponsor the bill at the Illinois General Assembly), told me Friday. "The problem wasn't the amusement tax, it was the backup to the amusement tax. The bond counsel had a problem with the plan to back that up [with the 2 percent Illinois Sports Facilities Authority hotel tax discussed in the story below]. If that can be remedied, a legislative proposal could be presented in the January veto sessions." Patterson also said it's up to the Ricketts family, owners of the Cubs, to refine the proposal. "It's their ballpark, so they are the ones who would come to us with a proposal. There's been talk of other proposals, but at present there are no others."

Like Yogi Berra said, you can observe a lot just by watching. The Cubs watched the Sox and Bears get state funds to pay for building and renovating their stadiums. Now Cubs owner Tom Ricketts wants his.

The proposal he's put on the table is for a loan of between $200 million and $300 million, which Ricketts says the Illinois Sports Facility Authority (ISFA), a state body headed by former governor Jim Thompson, could raise by issuing bonds. The state would pay off the bonds as the Cubs repaid the loan over 35 years out of the amusement tax on their tickets.

Should a state that happens to be $13 billion in debt make this kind of commitment with the public's money? Those of us who are Cubs fans and go to their games are already paying plenty. Those who aren't and don't might not like to see tax dollars spent to benefit a baseball team.

The Cubs argue that everyone will benefit. Nevertheless, the plan got a generally cold reception and the Cubs are now saying it's not written in stone. But for the moment it's all there is, and it deserves a close look. Let's start by examining the numbers.

Ricketts's idea is for the amusement tax, which the Cubs pay to Chicago and Cook County, to be frozen at 2009's dollar amount. If attendance stays steady as ticket prices rise, the amount of amusement tax the Cubs owe in the future will also rise—but the additional revenue would go to the state to pay off the loan. If you follow Ben Joravsky's reporting for this paper on tax increment financing, this scheme will sound mighty familiar.

Since the centerpiece of the proposal is the amusement tax, let's take a closer look at both the tax itself and the ticket pricing, which will determine what the tax will be.

"The ticket price increase will be a maximum of 5 percent per year, which is below the [Major League Baseball] average of 6 percent per year," promises Dennis Culloton, spokesman for the Ricketts family.

On Chicago sports tickets, the amusement tax is 12 percent. Nine percent goes to the city, 3 percent to the county. Chicago's professional sports teams all folded the tax into their ticket prices until this year, when the Cubs broke ranks. A letter to season ticket holders at the start of the 2010 season explained, "We have broken out the amusement tax portion so you can know where your resources are going."

The letter also said 2010 ticket prices were "essentially unchanged for 50% of our tickets," though raised "in our most desired locations." Which means what? Well, one of the most desirable locations is club-box infield, and that ticket to the "platinum"—or most desirable games—stayed at $100. But in 2009 the price had included the amusement tax; in 2010 it was the pretax price. So the ticket was actually 12 percent more expensive.

What's more, in 2009 the Cubs charged platinum prices for only 14 games. In 2010 they raised that number to 26. And for 2011 they've added a new category above platinum: the club-box infield price for the 13 new "marquee" games is $112, $125 with tax.

But let's look at the sort of tickets the Cubs would have us believe were "essentially unchanged" in 2010—for instance, upper deck reserved infield, where I sit. The tax-inclusive platinum price of $28 in 2009 rose to $30.24 in 2010—an 8 percent hike. My season ticket package went up by 8.8 percent, and for 54 games instead of 55. The Cubs have told season ticket holders that after various adjustments "our average ticket price in 2011 is flat compared to 2010 pricing." In my case, the platinum tickets will still be $30.24, but my package will contain ten of the new marquee games, each costing $33.60 with tax. My package overall (now for 56 games) has gone up 5.7 percent.

In other words, the Cubs have ways to keep ticket prices "flat" or "essentially unchanged" and still hike them—and by more than 5 percent in a year.

When a venue breaks the tax out of the cost of admission, it's usually making a point: "If you think ticket prices are too high, don't blame us—blame the government." By breaking out the amusement tax a year before proposing that hundreds of millions of dollars raised by this tax be spent on themselves, the Cubs seem to have been greasing the skids.

And here's a second message it's easy to tease out of their pitch: The more we raise ticket prices, the more the Cubs benefit.

For the sake of discussion, let's take the Cubs at their word that ticket price hikes will never exceed 5 percent a year. They're all but promising that regardless of economic conditions they'll give prices a healthy boost every year for the next 35 years. (Last time I looked, by the way, the national rate of inflation was 1.2 percent.) And they're betting that no matter how high prices go, we'll keep paying.

But if the Cubs can't raise prices, or if attendance falls off as the prices climb, then amusement tax revenues don't soar above the 2009 baseline figure and the deal falls apart.

The Cubs tell us that in 2009 they paid $16.1 million in amusement taxes. That's the baseline they're using. As that tax was 12 percent of ticket revenues, we can calculate that these revenues came to about $134 million.

If these revenues increase by 5 percent a year for 35 years, the Cubs' total ticket revenue over that period could be $12.7 billion. The total amusement tax generated would be $1.52 billion (a little under $700 million, the Cubs tell us, when converted into today's dollars). The incremental amusement tax revenue—that is, everything above the $16.1 million they paid the city and county in 2009—would come to slightly under $1 billion.

Normally, that would mean nearly $750 million for Chicago and $250 million for Cook County. What's it used for? "The city money goes into the corporate fund, and is used for general revenue, public safety, health, transportation, things like that," says Laurence Msall, President of the Civic Foundation. "But 100 percent of the county money is earmarked. It goes directly to public safety."

A billion dollars sounds like plenty to pay off a $200 million loan, doesn't it? But consider a $200 million loan for 35 years at, oh, 4 percent interest. The annual payment works out to $10.5 million. For a $300 million loan the annual payment would be $15.5 million. Is it realistic to think these payments could be made out of the Cubs' incremental amusement tax revenue?

In the short run, no. The Cubs can't generate $16.1 million in amusement taxes, raise ticket prices by 5 percent, and right away generate $10.5 million more. It'll be years before they come close to that.

Over the first five years—roughly the time the Cubs say it will take to do all the building and renovating they have in mind—the team would generate about $12.9 million in incremental revenue. That's not much, just a little more than enough to cover one year's payment. Over the first ten years the Cubs would generate about $51.6 million—not quite enough to cover five years. Even over the first 15 years, generating about $123.2 million, the Cubs would still be behind.

How to bridge the gap until relentless ticket-price increases let the Cubs catch up? Expect the state to issue plenty of zero coupon bonds—bonds that don't pay off until they mature and are redeemed—and the Cubs to structure their loan so that they won't have to begin repaying the state until year 11 or so. From then on incremental amusement tax revenues should be enough to cover their payments, if—and this could be a big if—Cubs fans continue to tolerate the annual 5 percent price hike.

Of course, the longer the Cubs wait to begin repaying the loan, the more they'll wind up paying in interest. And even though the state bonds would be tax exempt—assuming the Cubs pass a host of tests to qualify for that status—ISFA might have to promise a pretty healthy return to sell them.

Because the earnings aren't taxed, tax-exempt bonds normally can get away with a lower rate of return than commercial bonds. But Illinois is in such bad financial shape that last December Fitch lowered its rating on ISFA bonds for the Bears stadium construction project from A+ to A-. If that demotion sounds trivial, it isn't. Fitch's top rating is AAA, or prime. The lower the rating, the higher the interest Illinois must offer to lure buyers because of the growing risk of default. One more downgrade—something no one rules out—and ISFA bonds would be rated BBB and ISFA would have to think about buying bond insurance to reassure investors. Below BBB, Illinois would getting into junk bond territory.

For protection, Ricketts wants access to the 2 percent hotel tax that in 2009 brought the Illinois Sports Facility Authority $33.4 million in revenues (down from $38.2 million in 2008). Trouble is, this revenue stream is spoken for through 2032: it's already paying off $50 million in bonds issued in 2003 and 2008 for improvements at Cellular Field and $398 million in bonds issued in 2001 to pay for the spaceship atop Soldier Field.

And maybe the Cubs could come up with another serious source of revenue to help cover the debt—or to sign the five-tool free agent that otherwise, with all that debt, they couldn't afford. What might that be?

Well, the Bears sold personal seat licenses, ranging in price from $900 to $10,000, to help fund the 2002-'03 Soldier Field renovation. Personal seat licenses, or PSLs, are onetime purchases that grant the buyer lifetime rights to buy season tickets. According to a 2007 Bloomberg article, the San Francisco Giants sold them to raise over $50 million, and the Saint Louis Cardinals $40 million, to help finance new ballparks. The Houston Astros and San Diego Padres have sold seat licenses too.

The Cubs could sell 10,000 PSLs at $4,000 each and raise $40 million. If they charged a 12 percent amusement tax on the PSLs they could scrape together another $4.8 million toward repaying their loan. But that might be a bad idea: Bears fans who bought PSLs in 2002 unhappily paid the amusement tax, and now they're suing to get it back. The gist of their class-action suit is that a PSL doesn't constitute entertainment in and of itself. It just gets you in the ballpark, so to speak.

Are PSLs on the table? "That's not an option right now," says Lissa Druss Christman, chief creative officer of Culloton's PR firm. "They are not part of this process."

Let's assume the Cubs have nothing up their sleeve and that the bond issue, the loan, and the repayment all go off without a hitch. I'll even throw in that in 2046, when the loan's finally paid off, the Cubs celebrate by winning the World Series.

The question remains: Why should our destitute state lend the Cubs this kind of money—money that would otherwise flow to the city and county, neither much better off than Illinois?

This week Culloton might have been acknowledging that Ricketts's proposal is in trouble when he told me that "the ultimate plan that gets introduced [in Springfield] may look different than what has been discussed to date and reported in various media outlets." He went on, "The details of the public-private financing and of how we get there are still being worked out."

But ultimately the issue may not be the details—the amusement tax. It could turn out to be the whole idea of public-private financing.

"If you make the argument that this is a good investment, you need positive economics," says Robert Baade, PhD, a professor of economics and business at Lake Forest College and the coauthor of a 2008 article for the Southern Economic Journal, "Selling the Game: Estimating the Economic Impact of Professional Sports Through Taxable Sales." "The city has to derive greater economics from it than from any other project. But the city is in such dire straits. It would be a colossal miscalculation for the state to fund it."

In other words, before Illinois decides how good it should be to the Cubs, we should think hard about how much the Cubs actually matter to the economy. Baade argues that promoters of expensive stadium projects routinely make overblown cases for the projects' "direct economic impact." They're unrealistic about the number of new visitors the home team will draw and what they will spend and how much of that money they'd have spent regardless.

Of course, the Cubs beg to differ.

"Our projection is that the numbers are realistic, and incremental growth will be substantial over 35 years," Dennis Culloton says.

The Cubs' case is laid out in an economic study commissioned by the club and released this month by Convention Sports & Leisure, a consulting firm. It describes the Cubs and Wrigley Field as an economic engine that generates $379 million in net new spending a year, "spending that would not have taken place but for the team and ballpark."

Bill Rhoda, director of sports services for CSL, tells me, "The number includes operating costs, tickets, concessions, merchandise, televisions rights. It's spending that is new to the economy. We adjusted the number to be sure it is only net new spending." He says it also includes tours, rooftop activity, and other events at the ballpark.

The CSL study predicts that the Wrigley Field renovations Ricketts proposes, including a new "triangle building" next to the ballpark, would generate another $39 million a year in direct spending and, when indirect spending is also taken into account, $66 million in "incremental annual economic activity." What's more, it would generate an additional $9.1 million a year in property, sales, and restaurant taxes. According to Baade, projections such as these frequently overlook three factors. The first is the substitution effect: much of the money sports fans spend when they go to a game they'd have spent on other activities if they hadn't gone, so it's not actually new economic activity. Second is crowding out: game-day congestion causes people who aren't going to the game to avoid the area, thus reducing other kinds of economic activity. Third is leakage: spending triggered by a sporting event might not benefit local residents—for instance, hotels that raise their rates the weekend of a big series don't necessarily add staff or otherwise share the bounty with their employees.

The Cubs' study "assumed a lot of revenue was displaced," Rhoda assures me. "We are not double-counting."

The CSL study claims that Cubs fans spend $77 million a year on lodging, $111 million on restaurants, $48 million on retail and merchandise, and $49 million on non-Cubs entertainment. The key to these numbers, it says, is "the incredible draw of the Cubs around the country." The study also reports that 73 percent of the annual 3.3 million people at Cubs games come from beyond the city and that 56 percent of those visitors are visiting Chicago "solely to attend a Cubs game."

And the Cubs say the average visitor taking in a Cubs game spends $104 on a ticket, food, and merchandise. But they don't say how many fans come to Wrigley Field from places like Milwaukee and Rockford and will head home after the game no matter how enticing Wrigleyville becomes. Or say they're in Chicago solely to see the Cubs because that's why they took the Red Line down from Evanston.

And what about time-switching, an economic principle that falls under Baade's substitution effect? Time-switchers like to plan their trips to Chicago so they can take in a ballgame, but they'd be coming here anyway. Should they be counted among Wrigley-drawn tourists? Rhoda says CSL also made allowances for these types.

"Wrigley Field is a valuable landmark and tourist attraction," says John Patterson, spokesman for Illinois senate president John Cullerton, who says when the time comes he'll sponsor a bill authorizing state help. "We want the Cubs to stay at Wrigley for the foreseeable future."

As does almost everyone. But economic sense requires more than warm wishes. Baade looked over the summary of the CSL study and e-mailed me, "Tax revenues will not be increased for the City unless it can somehow be demonstrated that the public support of the renovation will in fact boost the entire Chicago economy. Otherwise you simply shift demand from one locale to another. That might not even occur in the case of Wrigley Field itself unless you get more fans spending more money in the friendly confines. Why would one expect that to happen?"

Something to remember: the Cubs already play to capacity crowds, and Ricketts isn't planning to expand Wrigley Field. His proposal is less about attracting more visitors who'll take in a game than about attracting more visitors who won't. Ricketts says he plans to invest a "comparable amount"—presumably $200 million or so—in neighborhood development. That would be the triangle building, containing a Cubs museum, a hotel, restaurants, and retail shops. Culloton says Ricketts wants to create "a destination 365 days a year."

Incidentally, that's why the local alderman, Tom Tunney, says he's supporting Addison Park on Clark, the controversial $100 million mixed-use development directly across Addison from Wrigley. It's going to bring a hotel, more shops, and even more restaurants to the immediate neighborhood. Those developers don't have even a TIF going for them, let alone state financing, yet they're managing.

Tunney hasn't embraced Ricketts's proposal with open arms. In fact, he's called for a "rigorous cost-benefit analysis," as he put it to the Sun-Times. But the history of big-league sports owners who want public subsidies, as Baade reminds us, is that after the sputtering and hissing subside, they usually get them. "The players and owners are the ones who generally benefit," Baade told me, and "those who want these subsidies repackage it until they get it passed."

The Sox and Bears got theirs. How can the Cubs be denied? "I worked on the Yankees' stadium deal," says Mark Ganis, president of Sportscorp, a Chicago-based sports-business consulting firm. "The Mets ended up getting the same deal that the Yankees did. If it is viewed by the government as fair for one team, it is seen as fair for another. If I do it for one team, I have to do it for another. Seattle did a similar thing for baseball, then found a way to approve it for football. Detroit did the same thing. In most jurisdictions there is a feeling of fairness that presides."

And what might Cubs fans expect to gain from this evenhandedness? According to Culloton, "After renovations are made, the market would be such that fans would pay a higher premium for certain kinds of seats."

Thirty-five years of price hikes, with a mysterious "higher premium" coming around five years in. Consider this fair warning.

Ten years ago, Crain's Chicago Business wrote about the proposed Soldier Field renovations: "It won't hurt if the legislators slow the process down and enable the public to openly examine the plan's details. . . . In short, let's really know what we are getting into."

As Yogi Berra would've said, it's deja vu all over again.   

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