How the Seattle Sonics Became the Oklahoma City Thunder and the Economic Implications

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1 How the Seattle Sonics Became the Oklahoma City Thunder and the Economic Implications One of the most popular sports in the United States today is basketball and a large part of that popularity is facilitated by the National Basketball Association, otherwise known as the NBA. The average NBA franchise makes approximately 100 million dollars annually; so to say the league is a success would be a bit of an understatement. There is an NBA franchise in almost every major city in the U.S. and the league has both national and international viewers. However, there are only a limited number of franchises in the NBA and it is rare that the league expands by adding another. Many cities therefore compete for franchises to come to their city and often use tax payer dollars in order to attract new teams. One would assume then, that the economic impact of an NBA franchise must be quite significant in order to attract such intense competition between politicians throughout the country. Furthermore, the soaring payrolls of NBA players and jobs created by a new stadium would also seem to be additional evidence of a positive economic impact. An examination of the big picture however, leads to a different conclusion. In contrast to popular belief, professional sports franchises do not have a significant impact on the local economies in which they re located. There is no better to show proof of this claim then by examining the economic impacts of the movement of a sports franchise from one city to another. In order to prove this point the most recent move of an NBA franchise will be examined. The economic impact on the city losing the team and on the city gaining the team will both be analyzed.

2 Recently the NBA approved the movement of the Seattle Sonics franchise to Oklahoma City. The Sonics, who had been playing in Seattle since 1967, were purchased by Oklahoma City native Clay Bennet a few years ago. As of September 2008 he will now be the proud owner of the Oklahoma City Thunder for the basketball season. Mr. Bennet decided to move the team from Seattle after he had difficulty finding funding for the building of a new stadium in the surrounding area. Furthermore he also had trouble funding the renovation of KeyArena, where the Sonics previously played their home games. The lack of support led Bennet to begin looking at other cities where he could move his franchise to and possibly find more willing investors to contribute to a new stadium. Oklahoma City rose to the surface after it showed a strong desire for an NBA team when the New Orleans Hornets played in the city during the and NBA seasons. The team played in Oklahoma because of damage done by Hurricane Katrina to New Orleans Arena. This desire along with Oklahoma City being Bennet s home town led him to move the team south from Washington to Oklahoma. Moving an NBA franchise is a very difficult task and Clay Bennet had to go through numerous steps in order to get permission to move the team to Oklahoma. The first step required him to gain the approval of the board of governors of the NBA. This part didn t prove to be difficult as the movement was passed earlier this year with only 2 dissenting votes out of 30. The next part of the process on the other hand was much more difficult. The Sonics had a lease agreement to stay in Seattle through the 2010 season and Bennet would have to break this agreement in order to get the team to Oklahoma City for the upcoming season. Bennet offered to buy out the rest of the contract from the city for ten million dollars in order to free up the franchise. However, the city of Seattle demanded at least sixty million dollars for estimated losses the city would incur by the team leaving. The monetary impact of

3 the team s absence could not be agreed upon by the two sides. This disagreement led to a highly publicized trial in the city of Seattle this summer that centered around the economic impact this sports franchise had on its local economy. Each side in the trail hired expert economists to try and prove their points to the judge and gain the right to determine where the team would play in the upcoming years. The city of Seattle employed the services of economists who believed the movement of the team would have drastic negative consequences on the city of Seattle. The team, in contrast, brought in economists who believed moving the team would have a negligible or even positive impact on Seattle s economy. The arguments of both sides must be examined in the context of urban economics and more specifically urban growth models to expose contradictions and flaws in each. The six day trial began with the city s attorneys arguing that Seattle would be irreparably harmed if the team did not fulfill its lease agreement. The city listed civic pride and charitable activities as some of the intangible benefits they would lose in an effort to keep the team in the city for at least two more years. Seattle then brought in their expert economist, Lou Hatamiya, who estimated that the franchise brought in million dollars a year to the city and nearby Snohomish County. In addition, Hatimiya stated that the franchise generated 1200 to 1300 full and part time jobs in the area. The city s attorneys accordingly asked for millions of dollars in damages if the team were to leave the city. The Sonics in their arguments to support the team s move to Oklahoma generated far different estimates of the team s impact on the local economy. Bennet, in fact, cited the arguments of many sports economists who studied the movement of franchises, and stated that

4 professional sports teams do not have a significant impact on a city s economy whatsoever. The Sonics legal team then brought in Brad Humphreys, a professor of economics at the University of Alberta, to further prove their point. Humphreys testified that there would be no measurable impact on Seattle s economy if the Sonics move. The Sonics also brought up a recent survey which found that 66 percent of Seattle residents stated that the team s exit would make no difference in their everyday lives. The differences between these two estimates are drastic but an economic analysis of the situation shows that there are many weaknesses in the arguments of the city of Seattle. The first major weakness is in the models used by the city s economist, Lou Hatamiya. In order to determine his estimates on Seattle s economy Hatimaya used the revenue input/output model. This model has been widely rejected by economic journalists because it often overestimates economic impact by factors in the economy. In addition, Hatimaya s multiplier was inflated, as he used the entire payroll of the Sonics team as part of the investment towards the economy. This leads one to believe that Hatimaya s estimates of the Sonics economic impact are far too high. Hatimaya also stated he believed the team created 1200 to 1300 additional jobs for the city. A look into the historic impact of additional jobs created by new franchises and new stadiums shows this estimate is extremely high as well. A recently built stadium in Arizona for their Diamondbacks generated only 340 new jobs despite costing 240 million dollars. A complete study of all cities with professional sports teams supported similar results as it found the host team had a positive impact on employment in the city in only about 25 percent of the cases. In fact, in approximately 20 percent of the cases studied the franchise actually had a negative impact on total employment. Therefore, it is very likely that the real effect of the

5 Sonics absence would not only decrease total employment by a relatively small amount, but could even possibly even increase it. Economic principles also go against the city s argument in this case. The estimated loss of the Sonics revenue to the city can be disproved by the Substitution effect which states that sports teams generally do not create new spending but instead redistribute existing spending. The loss of a team like the Sonics, then would not be a significant loss to Seattle because the amount of money spent on entertainment in a local economy is a set amount that can be spent on a variety of different entertainment options. The money being spent on entertainment will not leave with the Sonics, but rather will be spent in other areas such as restaurants and theaters. Additionally, season ticket holders would save money to spend on other goods or they would spend it on other franchises in the area such as the Seahawks or Mariners. Overall the substitution effect shows that the money spent on the Sonics would not leave the area but would stay in the city in other forms of entertainment. From an economic point of view the facts show that the loss of the Sonics from Seattle would not cause any significant changes. Perhaps this is why the case was settled out of court for a sum of money far less than what the city initially asked for. In the settlement the city received 45 million dollars and the right to the team s history, and the Sonics were free to leave for Oklahoma City. Seattle will also receive an additional 30 million dollars if its legislatures approve funding for a brand new stadium and no new NBA team arrives by It would then appear that from an economic viewpoint that Seattle quietly was the victor in this scenario. Seattle, based on the previous history of other cities in similar situations, should not suffer any significant losses from the team s departure and will gain 45 million dollars to reinvest in the economy if it so desires.

6 In the real world though this deal comes off as a victory for owner Clay Bennet who was able to successfully get out of the lease agreement and bring the team to his hometown. However, despite Bennet s Sonics being economically correct in large part with their arguments during the course of the trial, Bennet and his Sonics have their flaws as well. On one side they are claiming that leaving Seattle will not lose the city any money, but on the other side they are promising the team will bring in an additional 180 million dollars a year to Oklahoma City. This seems to be an apparent contradiction unless there are some differences between Oklahoma City and Seattle that would make Oklahoma City a more profitable area to house a franchise. A comparison of the two cities shows otherwise as Oklahoma City actually has many disadvantages as a host city when compared with Seattle. Seattle is a significantly larger metropolitan area than Oklahoma City, and although for basketball the loss may be less severe because of smaller seating capacity, the losses add up in other areas. The most obvious loss is that the Oklahoma City Arena does not meet NBA standards, and at full capacity would generate much less profit than KeyArena, where the Sonics played in Seattle. The next loss would come from a smaller amount of viewers, which would decrease the value of cable television contracts with the team. These losses along with the smaller market of Oklahoma City show that Oklahoma City is no better at generating profits than Seattle and leads one to question why the team would want to move to Oklahoma City in the first place. The answer to that question appears to be in the increased investment the Sonics would receive from Oklahoma City as opposed to Seattle. Before leaving the city Clay Bennet searched for possible funding for a new arena in the Seattle area after the 300 million dollar renovation plan for the Sonic s current stadium fell through. He then went on to find investing capital in Oklahoma City which is presumably the main reason why he moved the team there.

7 In order to account for the loss in revenue Bennet is asking a lot from his hometown. In addition to the 30 million dollar relocation fee the city must pay, the Oklahoma City voters increased the sales tax in order to fund the necessary upgrades to the Oklahoma City Arena and build a new practice facility. These upgrades will serve to add premium seating and luxury boxes to the arena in order to generate more profits for the team. Bennet is also asking for a favorable lease agreement from the city which would give him an overwhelming majority of the team s revenues and free himself from having to pay any of the building s operating costs. In other words, the team is using taxpayer dollars to increase its own profits based on unsubstantiated promises to bring in additional revenue to the city. One could make a strong argument that the city s willingness to adhere to Bennet s demands is the main reason why the team is in Oklahoma City. The demands will probably continue to get steeper as well, as the team will likely look to replace the Oklahoma City Arena in the next couple years. Bennet himself has said the stadium does not meet NBA standards and should be replaced in a few years. This will also most likely come at the expense of taxpayer dollars, just as the proposed 500 million dollar Renton Arena would have if it had been built outside Seattle. And even if the stadium costs less than Renton Arena it still will not create the desired impact. Gary Sauer, an economics professor at Clemson University, has researched the economic impacts of franchise movements over the past 30 years. Based on his findings a new franchise, on average, costs approximately 300 million dollars, and a new arena about 250 million dollars. This would put the total cost of a new franchise and a new arena at 550 million dollars. That is a significant burden to carry, especially since Sauer s research also shows there are no significant employment increases or tax benefits that come with a new stadium. In fact

8 Sauer s partner in research, Kurt Rotthoff, found that in some cases jobs declined in this scenario. All these factors do not bode well for Oklahoma City. In their efforts to attract the team it is likely the city has given up more than it will receive. The revenues Bennet promised the city one can assume will be offset by the tax dollars the city gives up in order to keep the team satisfied. This situation is very similar to one that arises when states or cities try to attract firms by promising them tax abatements. Instead in this case the firm, the Seattle Sonics, is promised tax dollars, but effect is largely the same. The effect is that of the winner s curse, where the winner otherwise known as the city that gets the firm is the one who makes the highest or most incorrect benefit of the firm s worth. The transfer of these tax dollars from Oklahoma City to the Sonics and a possible new arena could create some problems for city as well. A lack of tax dollars might create infrastructure problems for Oklahoma City in the future. The city government and public education level in the area would suffer from these problems. Economics tells us the city would have been better served putting the money towards other areas in order to generate urban growth. A better strategy to generate urban growth would have been to invest that money towards education such as community colleges and public universities in addition to primary educational investments. Investments in transportation such as highways, bridges, airports, and mass transit are other good areas to invest tax dollars in order to generate growth. These strategies will put Oklahoma City s tax dollars to better use as they will create human capital and better public goods, which will in turn increase salaries in the area and make the city more attractive.

9 Although from an economic point of view the addition of a professional basketball team by Oklahoma City does not seem like a good idea there other factors to consider. There are certain intangible benefits that come with the adoption of a pro sports team that cannot be measured on a monetary basis. So while the city may not be gaining anything from a monetary standpoint due to the team s arrival there are certainly some positive things the team will bring that you cannot put a price on. The team will allow the city to have a sense of commonality as fans in the city will together put their support behind the team. Any charitable work done by the players or the organization also cannot be measured with a dollar sign and helps the city to grow. Intangible benefits such as these are often what citizens think of when trying to attract a professional franchise. Seattle in turn will lose some of these intangible benefits as they now have one less franchise in their city. If one were to research the topic they would find that there are many diehard fans in the city of Seattle that were very sad to see their Sonics leave. The former owner of the Sonics, Howard Schultz, even tried to file a lawsuit to rescind the sale of the team to Clay Bennet in order to keep the team in Seattle. Pride like this cannot be understated but there are negative intangibles associated with teams as well. Increased traffic and distractions from work by water cooler talks are just a few of the negative intangibles associated with professional sports teams. These intangibles reduce the efficiency of the city and will be passed on from Seattle to Oklahoma City during the upcoming basketball season. In the future the loss of the team will most likely have little direct impact on the city of Seattle, but the team may be affected by its own efforts to get another team. It is well known that the mayor of Seattle, Greg Nickels, has asked the NBA for another team. However, the NBA has not made any promises to the mayor other than that stating that if they are considering

10 moving a team or adding an expansion franchise they will notify the city. The NBA doesn t have to let Seattle know anything though, as they like most American sports leagues have a complete monopoly on the market. Only the NBA can decide what cities to admit into the league and they have no competition in their market. This often leads to a bidding war between cities who want an NBA team, which can later turns into a scenario of the winner s curse discussed earlier. If another NBA team is added to the league, Seattle will likely be pitted against somewhere like Kansas City, another city who at one time had an NBA franchise, and is looking to get one back in the city. This is what could hurt Seattle down the road as politicians may bid for the team based on empty promises that the team will bring new income to the city. In these types of situations politicians should restrain themselves from overestimating the impact a professional sports team can have on their city. This will help prevent cities from overbidding for teams and falling into the trap of the winner s curse. If politicians can come to the realization that economic impact of sports teams is nominal it would reduce the amount of tax dollars given to sports franchises and increases the spending on public goods. This would generate more urban growth in the right places and prevent the mislocation of teams in the wrong markets. Overall, based on economic analysis it seems that the Seattle economy will not lose anything significant from the transfer of the Sonics franchise, and with their settlement may actually gain something economically. This is perplexing though, as the city spent a lot of time, money, and energy on a trial to keep the team in the city. The best explanation for this would have to be that the citizens of Seattle highly value the intangible benefits that come with the team and overlook the economic impact. The loss of the team may hurt the hearts of the fans of the team but economics shows it will definitely not hurt their wallets.

11 The arrival of the team to Oklahoma City, on the other hand, will have the opposite economic effect. The citizens of the city will gain intangible benefits such as civic pride but will lose part of their tax base to the team. Based on previous analyses it seems the city is giving up too much of its tax dollars to provide the franchise with a new home. The city is showing all the symptoms of the winner s curse as it bet the house in order to acquire a professional sports team. Due to economic factors such as the substitution effect and a low spending multiplier it is highly unlikely that Mr. Bennet s team will live up to its promises of bringing 180 million dollars in additional revenues to the city. Especially if the is city paying for the renovations and operating expenses of the current arena and pays for some of the cost of a brand new arena in the future. In the end, the movement of the Seattle Sonics to Oklahoma City is further evidence that professional sports franchises are not good investments to spur urban growth in an economy.