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Economy Lab

Why L.A. won't get an NFL team any time soon Add to ...

Frances Woolley is a professor of economics at Carleton University



Why has Los Angeles, the second largest city in the U.S., been without a National Football League franchise since 1994?



It’s economics. NFL franchises aim to make profits, so minimize costs and maximize revenues.







Player salaries are the largest component of an NFL franchise’s costs. Yet franchises have limited room to cut salaries. From 1994 until the expiration of the collective bargaining agreement in 2010, the NFL had a salary cap that set a floor and a ceiling on total player compensation. Moreover hiring cheap players – or coaches – can reduce a team’s competitiveness.



So NFL franchises cut costs by negotiating sweetheart deals with their host cities. The 49ers’ new stadium is being subsidized $444-million, while three years ago Indianapolis committed $720-million to a new home for the Colts. If Minneapolis isn’t prepared to contribute to the cost of repairing the Vikings’ stadium’s collapsed roof, another city will likely offer the Vikings a new home and tax concessions.



If Saskatchewan attempted to use its potash revenues to lure the Toronto Maple Leafs to Saskatoon, would it be successful? Probably not. Leafs TV generated $7.7-million in revenue in 2009. A move to a smaller market would compromise that revenue base.



The NFL, however, is egalitarian. All national revenues, such as sales of television rights, are divided 32 ways. Each NFL franchise receives an equal share. It is impossible to say how important national revenues are relative to other revenues for the league as a whole, as only one NFL team -- the publicly owned, small-market Green Bay Packers -- makes its financial information publicly available. In 2010, three-fifths of the Packer’s income - $157- out of $258-million – came from its 1/32 share of national revenues.



The revenue sharing system means there is little incentive for a team to move from a small to a large market. Yes, if the Vikings moved to LA, the NFL could potentially gain millions of additional Southern California viewers – and millions more in revenue. Yet the Vikings would only receive 1/32, or about 3 per cent, of that revenue. That’s not enough to offset higher stadium or property tax costs.



Interestingly enough, however, the overall effect of equal revenue sharing on total profits is ambiguous. Yes, incentives to move to large revenue-generating markets are muted, dampening national TV and other revenues. At the same time, the revenue protection created by equal sharing means that teams are very mobile. That mobility allows franchises to push for taxpayer subsidies, lowering costs.



But the NFL is not concerned with profits, anyways. It is a tax-exempt non-profit organization.



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