Public radio’s “Marketplace” offers a short discussion of how and why communities use public debt (bonds) to build private assets such as football stadiums (and, er, cultural facilities). According to their guest, policy researcher Steven Malanga of the Manhattan Institute, it’s a bit of a shell game where the shells all end up empty. He blames the local politicians who fall for the sales pitch and don’t do the math:
…they use debt, public debt, to help build these stadiums. And, essentially, these are bonds that go out decades… And two things generally happen: either these stadiums don’t pay for themselves in many cases, which leaves taxpayers on the hook, or if the venue does happen to be successful — as in the case of the New Jersey Meadowlands — politicians can’t help milking these things. They take the revenues and they put them somewhere else and they don’t pay off the bonds. It’s kind of like the equivalent of not paying off your mortgage. And that eventually leaves taxpayers on the hook too.
The logic behind using public debt can often make sense: The community wants to encourage construction of an asset with public value — a stadium, an arts center, a zoo — so they share their access to low-interest bonds. And, in fact, the strategy has worked wonderfully in many cases where the asset has been created, the bonds have been paid, and the cash that might otherwise have been spent on construction has earned market interest.
The problem comes when neither side does the math, or tracks the progress of the bonds over time. Or, the problem comes when the financial markets explode and many of the banks involved in the bonds go into a panic. This latter challenge has left many cultural projects with outstanding bonds in an intractable bind.
The Marketplace story is brief, and uses a broad brush. But it does highlight the idea that public debt is a tool among many tools for communities to shape themselves for the better. Like many other tools, if not used with care and respect, bonds can also cause major injury.
Debt built the modern city and even the (now disappearing) middle class. That sports stadiums don’t pay off financially is not surprising, but as the president of the Indianapolis Colts said when they were blackmailing the taxpayers for their second new public stadium in 20 years: “What would Indianapolis be without the Colts?”
The best arguments are always emotional and cultural. Economics is rational, but people aren’t…
The NY Times ran a terrific story on this last Tuesday, 7 Sept: “As Stadiums Vanish, Their Debt Lives On” http://www.nytimes.com/2010/09/08/sports/08stadium.html?_r=1&emc=eta1
Michael’s absolutely right about the emotional logic, however: If you want to know how much a professional sports franchise is worth to a city, look at how much those cities that have lost them have been willing to spend to get new ones back.
The moral of the public bonding story for cultural facilities, however, is not to build on spec: Know (don’t just hope you know) where the payoff money is coming from before you turn the first shovel of dirt.