455term outline

Should Detroit Finance The Red Wings Event Center? 1
Should Detroit Finance The Red Wings Event Center?
Nicholas Haywood
Eastern Michigan University
Econ 455W (Cost- Benefit Analysis)
Winter 2016 Term Paper

Abstract
What is the true cost of publically financing a sports stadium? The purpose of
this term paper is to determine through a cost benefit analysis, if building a new
stadium for a team is fiscally worth it. Does building a sports stadium really create
an abundance of jobs and is there a big enough multiplier effect to make the
argument that it will increase a cities generated tax revenue? I will be using data
from Detroit public files and other reports to understand the cost that the city
incurs, because Detroit is currently in the midst of building a billionaire his million-
dollar stadium. I will also be looking at what externalities a city incurs once a sports
team leaves. During this term paper we will be specifically looking at the city of
Detroit’s decision to publically finance almost 60% of the brand new Detroit event
center. The ultimate goal of this paper is to find out if building the event center is
worth it and if the city of Detroit could have better spent that money elsewhere. I
also will be finding the present value, monetary value and using the Detroit’s fiscal
situation to better understand the true cost and value of the stadium.

Should Detroit Finance The Red Wings Event Center?
To finance or not to finance, that is the question. “Over the past 20 years, 101
new sports facilities have opened in the United States, a 90 percent replacement
rate, and almost all of them have received direct public funding” (Gordon 2013).
This fact is very important when looking at the new Red Wings (Wings) event
center, because nearly “60% of the proposed $450 million USD, is publically
financed” (Shea 2013). According to Shea in Crain’s Detroit, the city of Detroit’s
261.5 million USD will come from property taxes (2013). The city of Detroit was
named the best sports city in the country, by USA Today (2015), which means I must
consider utility of the fans of Detroit’s utility gained from watching the Wings, i.e.;
civic pride. I will be looking at the present value of the stadium and looking at what
else the city could be doing with the money. I will also be analyzing over the area
where the stadium is being built. I plan to be investigating the externalities of what
would happen if the team were to leave the city of Detroit. In addition I will look to
see if there is a multiplier effect and if so, what is the true strength of it. Finally, to
truly understanding the true cost we need to look inward at the recent history of
Detroit’s fiscal background and the long history of the Wings in Detroit. It is also
very important to note the only people who would receive benefits from this
project: the citizens of Detroit. The reason why I am only concerned with the
benefits received by the citizens of Detroit is because they have standing. Well other
citizens of the state of Michigan, United States, or other countries might benefit,
their benefits are only transitive, due to the fact they would spend their money and
gain benefits elsewhere if this stadium wasn’t built in Detroit.

First, let’s look at the history of Detroit and the Wings. The Wings moved to
Detroit in 1926. The Red Wings have been playing in the iconic and deteriorating Joe
Louis Arena since 1978. The Wings iconic history is filled with 11 Stanley Cup
Championships, 64 Hall of Famers, and 64 Playoff appearances. 25 of those 64
appearances have came on the Wings current playoff streak, the longest active
playoff streak and close to the longest in sports history. All of the previously stated
facts were checked at The Detroit Red Wings’ sports encyclopedia (2016). These
facts are important, because the Wings have embedded themselves in Detroit. Mr.
Ilitch’s team may arguably be one that generates the most civic pride out of any
major sports team. It is up there in terms of value with New York and the Yankees,
St. Louis and the Cardinals, and Boston and the Red Sox’s. These cities wouldn’t be
the same without their historic teams and when measuring the civic pride we really
only have one method to find the best approximation of civic pride: public
surveying. I will be using a study conducted in 2006 by Indiana State University to
show how much more the Wings mean to the city of Detroit than any other sports
team. Looking at this data in appendix A, it shows us civic pride for the Wings in
terms of Willingness to Pay (WTP) compared to the Tigers, Loins, and Pistons. The
closest in terms of average WTP is the Lions, which is still 36.21 USD away from the
Wings. The Wings consumers have an average WTP of 56.05 USD (Appendix A).
According to the survey’s done by the Owen, we see that the total WTP in millions is
309.5 USD (2006), which is still larger than the other three major sports team’s WTP
put together. This shows a larger case for using civic pride as an argument to
advocate for publically financing the Wings’ new stadium. I think that using civic

pride is a weak argument for advocating for publically financing a sports stadium,
but people would rather feel civic pride. According to the latest census data Detroit’s
population is 680,250 (2014). So for example lets say that all of Detroit values the
Wings at the average WTP previously stated of 56.05 USD. Then we could quantify
the city’s civic pride for the Wings by multiplying the population by the average
WTP (680, 250 X 56.05) therefore, quantifying Detroit’s civic pride for the Wings to
be 38,128,012.5 civic pride units. 38,128,012.5 is a rather large value for civic pride,
but it is jaded due to the fact not every Detroiter is a Wings’ fan or they might not
even like hockey. A better estimate would be to say approximately 70% of Detroit
gains civic pride from the Wings; therefore ([680,250 X .7] X 56.05) Detroit would
have 26,689,608.08 civic pride units for the Wings. Even if Detroit has a level of civic
pride valued at 38,128,012.5 units, it still makes it hard to use this argument
because we are pushing the value of civic pride (i.e. utility) to advocate to spend
millions of tax payers dallors. People love to have a reason to go downtown on a
Saturday to eat, drink, watch a game, the experience that downtown Detroit has to
offer. Politicians, city officials, and sports organizations often use this argument to
rationalize financing a new sports stadium and the public is often content with it,
because they do love the experience. All these things add up, and on top of that,
every new sports stadium will often see an All-Star Weekend, which is another key
source of civic pride. For example, when the Superbowl was brought to Detroit.
Detroiters went crazy over the Superbowl and All Star Weekend when one of Mr.
Ilitch’s other team, the Detroit Tigers hosted it. Of course there is many other ways
we could be allocating millions of dollars, like towards education, infrastructure,

and other improvements to the city. Therefore we can’t just use civic pride as an
argument for advocating publically financing a new sports stadium.
One of the things I really like about where Mr. Ilitch and the city of Detroit
are building this new event center, is that it is located “West of Woodward Ave. and
I-75 and in a blighted area” (Shea 2013). Blighted property is property that is
dilapidated, unsightly, and considered to destroy the surrounding properties value.
The seizure of this blighted land is meant to have the city improve the area’s overall
quality. Improving the quality of the area tells us that rational consumers will want
to pay a higher price and demand the property more, i.e. increasing the property
value. For example as exemplified in JC Reindi’s article in the Detroit Free Press; a
house directly across from the stadium site wasn’t bought and its face value
increased dramatically to 4 million USD (2016). This land would have sold for
maybe 25,000 USD (Reindi 2016); the construction of the new Wings event center
has instantly increased the property value in an area where the city had blighted
homes. The property in that area went from blighted homes to high valued property
that everyone wants; whether it is business, residential, or more land for Mr. Ilitch’s
palace. I think that using blighted land for a publically financed stadium is a great
idea and the benefits outweigh the costs for this scenario. This allows the
government to get rid of unwanted and harming land, while improving the area
through a new prestigious stadium and increasing the property value of the area.
Therefore, the citizens of Detroit would see a benefit. This benefit is hard to
numerically measure though, because property value is a capital investment and
there is no set value, due to consumer preferences. For example consumerA might

be willing to $100,000 for property X now that stadium is built and consumer B
might be willing to $1,000,000 for property X. It will be hard for us to measure
producer surplus since the stadium hasn’t been built yet, and only time will tell.
Using the property value argument is valid and will be how we consider the benefits
to potential residents, commercial, and business properties. We would measure this
value numerically by the change in property value. Therefore, we would subtract
new property tax value (PT2) minus old property value (PT1) equaling the change
in property value (PT3). The reasoning behind this is that Detroit would only
receive PT1 from someone buying the property when the new Wings’ stadium
wasn’t there. When the Wings’ stadium started construction we observed an
increase in property value reaching a level where the city would now receive PT2
and the city would subtract PT1 to get the true change in property of market value,
which is PT3.
Now let’s talk about a major flawed argument sports team owners use:
building this stadium will generate X dollars in tax revenue for the city. Owners
make this argument so they can justify having their stadium paid for by the city’s tax
dollars. We do not consider the money spent by the citizens of Detroit in this area,
because that is just a substitution effect for tax revenue. The sad reality is that we
only will see generated revenue from people coming from outside the city to watch
this sporting event, which sounds great in theory, but in reality the cost always out
weighs the benefit. For example let’s look at Camden Yards home of the Orioles in
Baltimore, Maryland, which is considered the “most successful new baseball
stadium & export facility in sports” (Zimbalist & Roger, 1997). Zimbalist and Roger

stated that the Oriole’s Park draws about a third of its crowd at every game from
outside the Baltimore area, which equates to about 3 million USD in tax revenues a
year. When compared to it’s 200 million USD investments, it is clearly a bad use of
taxpayers money (1997). It’s important to note that 33.33% of Camden Yards’
attendees in 2015 would be 9,790 consumers and they play 82 home games (29,374
multiplied by .3333 equals 9790.35≈ 9,790), as found at ESPN.COM (2015). To
clarify Camden Yards’ max capacity is 45,971 consumers according to ESPN.COM
(2015), meaning Camden Yards does not regularly sell out and sells approximately
63% of its seats. This leaves the city of Baltimore with a Present Value Benefit (PVB)
to Present Value Cost (PVC) ratio of .015, which is abysmal. It would take almost 67
years for Baltimore to make back it’s 200 million USD investment, which will never
happen because the average life expectancy of a Major League Baseball (MLB)
stadium is 48 years when you take the two outliers of Fenway and Wrigley, the two
oldest stadiums according to Jeff Neuman of Real Clear Sports (2012). This means
that unless Camden Yards is the next Fenway Baltimore is at risk. Which also means
the tax payers of Detroit could be bilked as well, because they paid 261.5 million
USD. This means the city of Detroit would have to generate more outside revenue
than the sporting venue of Camden Yards, which generates a third of it’s revenue
from consumers outside the city of Baltimore. According to Phillip Miller of
Minnesota State University “the average life expectancy of a National Hockey League
(NHL) stadium was 30.1 years in 1991 and 11.9 in 2004” (2009). This is highly
problematic for two reasons; there is an alarming rate of how dramatically fast
stadiums are being replaced, and this also means the Wings will have to generate

21.97 million USD in tax revenue from outside Detroit, if they stay on track with the
league average. If the Wings could meet the Oriole’s high standard and generate 3
million USD in tax revenue per season from outside the city of Detroit, this stadium
would have to survive and operate for 81.17 years. The Wings’ new stadium
standing 81.87 years is extraordinary long time, because the oldest stadium in the
NHL is Madison Square Garden at the elder age of 48. Also, I must note that we can’t
double dip benefits from property value increases in the multiplier effect, because it
will give us a misleading number. Say a business that wouldn’t have moved to
Detroit if the Wings stayed at Joe Louis arena moves to Detroit because of the new
stadium and they pay a higher property tax; we will not count the higher property
tax, in the multiplier effect because it will be counted in the property value
argument. Another part of the multiplier effect often talked about is job creation.
According to Ian Thibodeau of Mlive, the Wing’s new stadium “will create 8,300
construction jobs and 1,100 permanent jobs” (2015); both of these are good things,
but only “51 percent of the construction will be done by Detroiters” (Thibodeau
2015). The Wings’ new stadium will only create 4,233 temporary jobs, which could
have been used in a cheaper manner to increase the infrastructure of Detroit. It is
reasonable to assume that the city could had made a cheaper jobs program that
would create 1,100 or more permanent jobs. Therefore, the multiplier effect is a
terrible argument for public financing a stadium.
Now it is important to do the math and look over the fiscal situation that Mr.
Ilitch and the city of Detroit have gotten themselves into. According to Crain’s
Detroit Business’ Bill Shea, the total cost of the stadium is 450 million USD, 188.4

million USD will be out of ownership’s pocket, and the city will give the Wings 261.5
million USD in tax money in bonds, with an interest rate of 5.91, and all of the 450
million USD project will be tax exempt for 30 years (2013). Therefore, we have a
present value cost to the city of Detroit is 261.5 million USD. The Wings can average
20,027 attendees during the current 2015- 2016 season according to ESPN (2015-
2016). Which will lead me to believe that the Wings will generate a similar level of
attendance once the new stadium opens. This means the planned 20,000 seats to be
built in the new stadium will be filled every home game. Due to the benchmark
number being 33.33% of attendees coming from outside the city; set by the Orioles
as previously stated, I will approximate that around 25% of the Wings attendees
come from outside the city of Detroit because of the popularity of the Wings, i.e. the
civic pride argument and the consumer WTP from appendix A. Therefore, 5,000
people will be coming to see the Wings play 41 home games. Now let’s say that we
can generate approximately 1000 dollars in tax revenue whether it came from the
game, eating downtown, etc. Therefore, 1000 multiplied by 41 equals 41,000, also
equaling our PVB. We will also approximate that this new stadium will last 25 years,
which was equated by adding the years played in Joe Louis (39) and the NHL
average stadium lifespan (11.9), then dividing by 2 which equals 25.45. Now we will
calculate the NPVB as a constant stream of benefits calculated as 41,000/.0591[1-
(1/(1+.0591)25)=528,239.6629 ≈528,239.66. The PVB to PVC ratio on this project
would be calculated as 528,239.66/261,500,000 and would equate to approximately
.2%. These two numbers are absolutely awful, the return investment doesn’t allow
for the city of Detroit to benefit in the ways it could be from spending this type of

money. If these were any other projects, the city of Detroit would not even consider
investing this much. For the city to even think about investing this much, the Wings
would have to generate way more than 41,000 USD per season to rationalize
publically financing the new Wings’ stadium. No rational city would finance this city
according to basic economic principal. In cases when cities don’t finance the
stadium, public officials will often see backlash from fans because of the civic pride
or the team will threaten the city with leaving for another city that will give then
money they want.
Up to this point, all signs are pointing to this being a bad investment for the
City of Detroit. So let’s consider what would happen if the Wings left the city of
Detroit. According to Zimbalist and Noll stadium, costing 225 million USD using tax-
exempt bonds usually has a present value loss in taxes of approximately 70 million
USD (1997); therefore, the Wings would be saving approximately a little over 70
million USD in taxes if the Wings left. “Sports facilities now typically cost the host
city more than $10 million a year”(Zimbalist & Noll, 1997). This statistic is rather
problematic because the city of Detroit also has the Lions and Tigers, meaning that
Detroit is either forgoing tax revenues from the teams or its citizens are anteing up
by paying extra in taxes for their beloved teams. So having the Wings leave the city
of Detroit would allow the city to save it’s citizens 10 million USD or have an extra
10 million USD to spend on other projects. According to Gordon Citizens of
Baltimore pay 20 USD per capita per year for Camden Yards (2015). Every article
bears proof that cities are better off letting a franchise walk away from the city,
rather than investing millions in a sport stadium. For example, Tim Marcin wrote

about the topic of teams leaving and he found that when the Seattle Sonics left the
city, “team’s old arena became more profitable than ever” (2016). Marcin’s article
then goes on to talk about how the 1 million USD they were losing from the Sonics,
they are now collecting and are reinvesting it on the city and also has become “one
of the fastest growing cities” (2016). It seems that if the city of Detroit were to take
a cost minimization strategy, it would most likely see an increase in productivity in
it’s tax dollars and would be more beneficial for the citizens of Detroit and not a
single man’s interest. From the research I have gathered it looks like the city of
Detroit has made a terrible fiscal decision. This begs the question of what could
Detroit do with the money they spent or would be saving in the future if the Wings
had just picked up and left town?
Detroit’s current fiscal state is the main reason why I think the cost by far
outweighs the benefits Detroit announced bankruptcy on July 18, 2013 and within
the same week announced that they were going to publically fund 261.5 million USD
of the Wings new stadium. Detroit’s public schools are on the brink of bankruptcy. If
that’s not enough, Detroit’s unemployment rate is 10.2%, according to the Bureau of
Labor Statistics. These are all points that need to be addressed, not building a new
stadium for a billionaire. Mr. Ilitch has a billion dollar company in Little Caesars, two
wildly successful sports franchises in the Wings and the Detroit Tigers. The only
thing that made sense for the city of Detroit to give Mr. Ilitch in this stadium building
process is the blighted land.

Conclusions and Recommendations
It is very evident that the city of Detroit would be better off without
publically financing the Wings’ new stadium. There are no significant monetary
benefits and extremely large costs. Mr. Ilitch had the fiscal ability to fund most of if
not this entire stadium and should have, but he acted how any rational consumer in
the market place would. He consumed the free land and stadium he is getting, just
like a college kid would consume their free pizza, without any second thoughts. The
city’s money would better spent elsewhere, mainly in their blundering public school
systems. It could had create job programs to reduce its large 10.2% unemployment
rate or use that money to pull itself out of bankruptcy. The city of Detroit’s public
officials should really reevaluate their priorities and think of the citizens first. It is
very clear that this project should have never started.

References
Gordon, A. (2013). America Has a Stadium Problem. Pacific Standard.
http://www.psmag.com/business-economics/america-has-a-stadium-
problem-62665.
Shea, B. (2013). Detroit taxpayers to fund 60 percent of Red Wings arena plan
shows. Crain’s Detroit Business.
http://www.crainsdetroit.com/article/20130725/NEWS/130729909/detroit
-taxpayers-to-fund-60-percent-of-red-wings-arena-plan-shows.
Scott, N. (2015). Detroit takes the title of ‘Best Sports Town’. 10 USA Today 10 Best.
http://www.10best.com/awards/travel/best-city-for-sports/.
Detroit Red Wings. (2016). Detroit Red Wings, Sports Encyclopedia.
http://www.sportsecyclopedia.com/nhl/det/redwings.html
Owen, G. J. (2006). The Intangible Benefits of Sports Teams. Public Finance and
Management Volume Six, Number 3, pg. 321-345,
http://www.cas.unt.edu/~jhauge/teaching/sports/owen.pdf.
Census. (2014). Quick Facts Detroit city, Michigan, United States Census Bureau.
http://www.census.gov/quickfacts/table/PST045215/2622000
Reindi, C. J. (2016). $4M price tag for empty house near Red Wings arena. Detroit
Free Press. http://www.freep.com/story/money/business/2016/02/16/4m-
price-tag-empty-house-near-red-wings-arena/80462712/.
Zimbalist, A., & Roger, N. (1997). Sports, Jobs, & Taxes: Are New Stadiums Worth the
Cost. Brookings.
http://www.brookings.edu/research/articles/1997/06/summer-taxes-noll.

ESPN. (2015). MLB Attendance report 2015-2016. ESPN.COM
http://espn.go.com/mlb/attendance/_/year/2015.
Neuman, J. (2012). What’s the Life Span of a Ballpark. Real Clear Sports.
http://www.realclearsports.com/articles/2012/04/23/whats_the_life_span_
of_a_ballpark_97668.html.
Miller, A, P. (2009) Facility Age and Ownership in Major American Team Sports
Leagues: The effect on Team Franchise Values. Minnesota State University,
Mankato, Economics Department.
http://krypton.mnsu.edu/~qp8847pw/papers/NFL%20NHL%20NBA%20Fr
anchval%20Paper%20May%202009.pdf.
Thibodeau, I. (2015). Detroit Red Wings Clips. MLIVE.COM.
http://redwings.nhl.com/v2/ext/DRW_Clips_PDF/DRWClips072915.pdf.
ESPN. (2015-2016). NHL Attendance report 2015-2016. ESPN.COM
http://espn.go.com/nhl/attendance.
Marcin, T. (2016). NFL Los Angeles: Rams Relocation Good News for St. Louis
Economy. http://www.ibtimes.com/nfl-los-angeles-rams-relocation-good-
news-st-louis-economy-2263922.

Appendix A
Table from The Intangible Benefits of Sports Teams, Owens (2006) used for civic
pride

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