The Chargers to Leave San Diego for LA, Is this the End of a Business Model?

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Jan 12, 2017 (San Diego) It is official. The Chargers organization is moving to Los Angeles for the 2017 season. Here is the statement from Dean Spanos.

 After much deliberation, I have made the decision to relocate the Chargers to Los Angeles, beginning with the 2017 NFL season.

San Diego has been our home for 56 years. It will always be part of our identity, and my family and I have nothing but gratitude and appreciation for the support and passion our fans have shared with us over the years.

But today, we turn the page and begin an exciting new era as the Los Angeles Chargers.

LA is a remarkable place, and while we played our first season there in 1960 and have had fans there ever since, our entire organization knows that we have a tremendous amount of work to do. We must earn the respect and support of LA football fans. We must get back to winning. And, we must make a meaningful contribution, not just on the field, but off the field as a leader and champion for the community.

The Chargers are determined to fight for LA and we are excited to get started.

 

This is a blow for many fans, but this was inevitable after the voters rejected the new partially taxpayer funded stadium. With this, the voters not only sent a direct message to Dean Spanos in particular but the National Football League and less directly other professional leagues. This might be the end of a business model used by the professional leagues for decades. In short, this model relies on using tax payer money to expand and improve their facilities. There is always is a threat that teams will move. This is both a carrot and a stick.

The argument from the leagues goes like this. We have a limited supply of teams. There are no other competing leagues. If you want to be great and have civic pride, you need us, or we will go. So you will contribute to our business by partially, in some cases fully, paying for sports facilities. It is an argument that has worked, so we are not surprised the Spanos organization used it once again. This time it did not work. There are two reasons why it did not work.

The first, and likely the most obvious is that the Chargers have not been a competitive team for decades. The last time the Spanos family put together a competent squad was before the negotiations started to improve Qualcomm Stadium in the early 2000s. Incidentally, taxpayers are going to be left holding the bag on that one, since it is not fully paid off. So many voters were not inclined to pay for a new stadium for a team that quite frankly sucked.

Then there is the second reason. Speaking of the renovation of the Q, many older voters do remember that one of the Agreements with the chargers was the ticket guarantee. If the stadium did not fill up, the city guaranteed to pay for the empty tickets so they could be on national television. This led to the team having it both ways and after that went into effect, the Spanos family promptly sold off the good players. The city faced a fiscal crisis soon after, and it had to sue the Chargers organization. Granted, it was one of the many causes of the economic crisis of the early 2000s, which included raiding the city retirement fund bringing it to under 70 percent of reserves. But many older voters were not willing to play that game again.

The stadium that is about to be built in Los Angeles, which they will share with the Rams, who incidentally also left San Louis holding the bag, will be built by the two teams. This will not have taxpayer money in the mix. This is not the first time this happens, but it is starting to become a trend. Perhaps the extorsión of city coffers is over because the teams did overreach. They wanted new stadiums when the old ones were not even paid off yet.

So what will this mean for San Diego? The city will need to find a use for the Q. Perhaps the plan to transfer it to San Diego State will happen after all. The property then can become part of the expansion of a state university. That is what great cities do incidentally, develop the kind of assets that actually attract employers and good jobs. Sport teams do not.

This precise point was addressed at the Press Conference where San Diego State President Elliot Hirshman not only gave his condolences to the fans, who “did not deserve this,” but also said the site will have to be redeveloped. He did not say how, but there are expectations that San Diego State will play an important role.

For city leaders, this is a major blow. Though Mayor Kevin Faulconer did confirm one of our conjectures early in the process. The owners never negotiated in good faith. The city and the county proposed multiple plans to develop the Fashion Valley site. The mayor ultimately supported Prop C, which went down in flames in November, To this, Council-member Scott Sherman said it was going to fail. No tax increase requiring a two-thirds majority has passed in this city in a long time.

Faulconer also stated that “Dean Spanos made a bad decision. The Chargers just lost San Diego. Losing on a quality of life and 56-year tradition.” He also said that the community showed a sense of community and loyalty to the team. This felt like the move from the San Diego Clippers to Los Angeles all over again.” 

Supervisor Ron Roberts added that “This is a very disappointing day for us.” He also said that the Chargers were positive that the Carson plan (where they would build a stadium with some public funding and share it with the Raiders) was “a slam dunk.” He also said that to them it was my way or the highway, and he revealed that the stadium would have needed $200 million dollars more than the known $700 million. That would have meant a $900 million dollar public subsidy. Given the numbers floated by the plan ranged anywhere from $1.2 billion to $1.7 billion, and they intended to fund at least $150 million through Personal Seat Licenses, and the league was going to put though about $300 million, exactly how much money was the Spanos family willing to spend? Just a back of the envelope math gives us $1.3 billion of money from other sources, but the Spanos.

Nor does this back of the envelope math include the other costs of giving them a stadium downtown, which was the only option they wanted. These range from moving the Metropolitan Transit System (MTS) yard, in the half a billion, and the impossibility of moving the train yard, this is now a federal entry facility for import goods. This is one reason why Ron Roberts said that there was a limit to the public largesse, never mind that he, and every person on the stage is a fan, and hates to see them go.

With the Chargers leaving the city will also have money that otherwise it would not have given the numbers floated, for the sorely needed repairs to infrastructure. It is not just your potholes, which are the obvious problem. We have a water system that on average is over 50 years old, and is failing. The city can also invest that money in things like libraries, fire and police stations. All of these attract investment and real jobs. Perhaps they can try to get business incubators in those neighborhoods south of the eight, that are hurting for money and jobs, good jobs. Then there is affordable housing.

To those who say, but they generate a lot of money. They do not. According to Roger Noll, among others,

 “NFL stadiums do not generate significant local economic growth, and the incremental tax revenue is not sufficient to cover any significant financial contribution by the city,” said Noll, a senior fellow at the Stanford Institute for Economic Policy Research. He has written articles and books and given talks on the public financing of sports stadiums.

 

Back in 2014, we took a deep dive into this issue as well after the city voted to host the All-Star game. We wrote back then. that the projection of windfall to the city did not take into account things like the substitution effect, where fans will go to the game and not to dinner, since they have a limited income.

Now San Diego is not the only one saying no to the business model. Other cities, such as  Los Angeles, as previously mentioned the new facility is not being funded by the city. So is Oakland who told the Raiders no. The studies showing that these are not good investment for cities just keep stacking up. This study adds the effect of crowding out where people just avoid the area reducing economic activity for other businesses. I know that I avoid both downtown and the Q when there is a game.

We at Reporting San Diego know from reading the budget that Comicon has a much larger effect in city economics, and the General Fund though the Transient Occupancy Tax (TOT) than all sport teams combined. So the effects that stadium boosters push have not occurred in San Diego.

Now to the hardcore Chargers fan, let me address you for a second. I know it is hard to lose your team, and that you are now burning merchandise in Kearny Mesa. Your chosen franchise to follow has not done well because the Spanos family had no need to have a competitive team. As I stated above, they sort of did when they got the city to pay for the seat price guarantees and the renewal of the Q. It is not lack of loyalty to the fans. He owns a business, and as such his only goal is maximizing profit. An expensive player roster could cut into that. This goes for all league owners, not just Spanos, but some are in markets where they need to win to keep the money flowing in. In San Diego, that has not been the case for decades.

Now that they are going home (the Chargers started in Los Angeles over five decades ago), perhaps they will finally get a competitive team on the field. You will get to see them, perhaps, get to the playoffs, and the taxpayers will not pay the price. So while it will not be as the San Diego Chargers, it will be what you consider your team. This is economics and you are a minor part of that calculus. The teams make a lot of money from the tv contracts and franchising. Fans attending the games are really not that big of a deal, and selling merchandise will happen either way. Mind you, fans used to be more important to the business model.

The Spanos family knows that some of you will burn your jerseys, and never again follow the team. Oh well, that is the cost of doing business. After all, there are a bunch of new fans to be made in the Los Angeles market, where they will be forced to compete. Since the Oakland Raiders will soon be the Las Vegas Raiders, that rivalry will continue, one that would have ended if they both moved to Carson. I suspect that this was one reason the Carson deal was not approved by the league. That artificial rivalry makes the league a lot of money. Oh and the city of Las Vegas was foolish enough to pay for that stadium. Then there are rumors that the league wants to expand and that they are not fully behind this move either. Mind you, for entirely different reasons than you.

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