Thinking about Arenas

There has been a flurry of stories in the past couple of days concerning the fact that the Penguins are demanding a new arena or else they’ll move as soon as the lease is up in two years. There has been some blogospheric talk about this issue, but not a whole lot. Jonathan Potts is leading a good anti-publicly funded new arena discussion at his place, but within the comments is an excellent counter-argument by DJH Highlights who is arguing that the economics of the arena are not primarily a hockey issue but a capacity issue for national touring shows. The slightly less rational argument is being expressed on talk radio by Mark Madden.

We are going to see lots of claims and counterclaims in the next several weeks about the desirability or lack there-of of publicly funding an arena. We will see wild numbers thrown about promising Pittsburgh will be revitalized single handedly if we build an arena for concerts and the Penguins. We will see predictions of economic and tax collection doom if we do not build an arena. We will see concerns about Pittsburgh being a third class city on its way to becoming a slightly less snowy Rochester.

I want to offer a few simple questions and mental guidelines for evaluating these and other claims that will be made about the arena. They are not difficult evaluatory strategies nor are they challenging intellectual propositions. Instead they are some basic first cut rules of thumb that should help clarify the debate.

  1. What frame and point of view is someone talking from? On the government side, neighborhood and city leaders should have the narrowest view of costs and benefits while state officials should have the broadest analytical framework for the definition of self interest changes when the scope of projects are examined. The same applies for the private sector — Mr Lemieux probably has a different point of view than a contractor who is in line to repair the 31st Street Bridge if funding is made available.
  2. How many people from outside of the region come into Pittsburgh to see shows and games? If this number is large, then the arena produces positive incoming cash flow for the region. If it is small, then the arena is primarily for regional self-consumption.
  3. If the arena did not exist or will not exist in Year X, how much money that is currently spent at the arena will be spent on other regional entertainment/leisure business providers and how much will leave the region and go to Cleveland for concerts, and Columbus or Buffalo for hockey games?
  4. What are the tax impacts of losing ~30 high to very highly compensated workers to city, county, state tax flows (NOTE: The Lock-out provides a great natural experiment where if I had more time, or if someone was paying me, we could figure out real easily, but this is a blog think piece)
  5. What are the employment effects, both short and long term of not having the arena or the Penguins (NB: The Lock-out again provides a great experiment)
  6. What is the substitution effect of losing X Penguin dates for Y new concerts/other events to fill the space. If the arena has a waiting list of demand to get into the building then the negative effect of losing the hockey team is fairly minimal.
  7. How many shows and how much money would be lost in the region if the arena did not exist and all events had to go to either the Peterson Event Center or the Palumbo Center? What is the net change here?
  8. What is the opportunity cost of X million dollars per year being dedicated to paying off future debt service obligations incurred due to arena construction versus being able to repair the 31st Street Bridge, paying into the municipal pension funds so it would not be absolutley crazy for the county to talk to the city about more mergers of services and manpower.
  9. What are the positive and negative externalities that are generated by having a 1st class arena and a 3rd class professional hockey team in town? Are the positive benefits that can not be captured by private investors very large to justify public subsidy? What is the marginal add-on value of the Penguins or hosting Aerosmith to the city in terms of advertising, positive spuny feel good attitudes, city pride, exposure of the city to outsiders etc. If this value is large, then subsidies make a lot of sense, if it is small, then subsidies do not make a lot of sense.
  10. If the public makes $X million dollar investment, what is the probable future return on investment, or are costs socialized and profits privatized? If the ROI for public dollars in both explicit monetarization and public externalities beats the 10 year T-bill by a fairly significant margin, then this is a good idea. If not, then not so good of an idea.

These are ten basic questions that should be kept in mind when you hear arguments for and against public subsidy for a new arena. If a new arena can be financed entirely privately, then I say good luck, but public subsidy should raise the level of debate and inquiry by a significant margin.

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