An Appalling Example Of Dereliction Of Duty By A Local Government

Citizens rely on local governments for a wide array of services that impact their day to day lives. Their main desire is that services funded by their taxes are managed efficiently and fairly. Ideally, they hope there will be initiatives that raise benefits or lower costs or some combination of both for the people in the community those government officials serve. But bureaucracy being what it is, most citizens have fairly low expectations that local governments will actually take steps to improve the lot of their community. One basic desire by taxpayers is that their tax payments not grow beyond the inflation rate. There should be, however, a special contempt for a local government that actively takes steps that will be detrimental to the long-term economic benefit of a community at the same time it will significantly increase the burden on local taxpayers. I’m referring to local government officials in Oakland agreeing to allow scarce port waterfront land to be used to build a new baseball stadium. I know a thing or two about baseball and shipping, especially the latter. This article is my detailed analysis of why this is a doubly horrendous decision on the part of Oakland government officials. My goal is that the more people who know about the specific facts related to this situation, the better the chance that this unreasonable action is revisited. There is still time to stop this nonsense. Share this article with anyone who thinks economic decisions should be based on what actually is in Oakland’s best economic interest.

Let me first say that I’m a diehard baseball fan. My love of baseball is rooted in attending dozens of games of a minor league team for the Athletics in Mobile, Alabama as a young boy in 1966 with my best friend at the time. That was the only year they played in Mobile as they moved back to Birmingham the next year. Sal Bando, Rick Monday, Blue Moon Odom and Tony La Russa were among the many future Athletics stars that played on my hometown minor league team that year. Indeed, its players would include four who went on to become managers of major league baseball teams in the future. Mobile is the hometown of home run king Hank Aaron and dozens of baseball stars and has a rich baseball history. In what will likely surprise almost everyone reading this, Mobile is actually the birthplace of more Hall of Fame players than any city other than New York or Los Angeles. Neither Chicago nor any of the 134 other US cities with a larger population today than Mobile are ahead on that baseball metric. That legacy wasn’t known to me then, but what I did know was that back in 1966 in Mobile, an 11-year-old boy could wait outside the locker room and ask and get the autograph of every player walking out. In a real sense, Mobile in the summer of 1966 was a baseball field of dreams for players and fans alike. Those wonderful afternoons kindled a passion for sports that has continued to this day. Baseball is still a favorite (sorry, Oakland, my favorite team has been the NY Yankees for the more than four decades I’ve lived in the NYC area) but its closely followed by college football (where the Alabama Crimson Tide of course will always reign as my favorite team).

There can be little doubt that a city having a major league baseball team can be a source of local pride, especially when the team is performing well. Back in the early days of baseball, its economics were different and simpler with no public involvement. Breweries owned many of the baseball teams. They that built the stadiums and in effect saw it as marketing expense, with high attendance as a good way to sell more beer. The only source of revenue was ticket and concession sales and the commercial side related completely around such stadium sales. Radio would come in later, but it would remain a small part of the economics compared to what occurred within the stadium. The original Yankee Stadium, famously referred to as “The House That Ruth Built”, was actually built by Knickerbocker Brewery in less than a year for $2.3 million and opened at the beginning of the 1923 season.

Race forward a century and the economics of baseball couldn’t be more different in size and complexity with those changes driven by media that didn’t exist when baseball started. Television coverage and various other media are now the economic underpinnings of baseball. Today, major league baseball receives $2.1 billion in revenue annually from national television coverage. The teams also collectively have contracts totaling $2.0 billion per year for local television coverage. In addition, major league baseball gets another $1.6 billion annually from sponsorship agreements, radio and other media. That totals to almost $6 billion in annual media revenue. It’s the majority of total revenue for major league baseball and is the driver of its economics. All 30 teams share the national media revenue and 48% of the local media revenue is also shared, so the teams are in effect joined at the hip in terms of the commercial side of their business.

The saga referenced in the title of this article begins in 2019 when the Port of Oakland approved a term sheet on a plan to have the Oakland Athletics takeover a 56-acre waterfront site on the eastern edge of the port. The plan was for the site to be used to build a new baseball stadium along with a mixed-use commercial and residential real estate development. While it wasn’t a binding agreement, the parties proceeded to obtain the necessary approvals and permits. The stadium would be the initial portion of a total project that reporting said would represent an investment of $12 billion. The stadium itself was expected to have a total cost of around $1 billion.

The catalyst for this plan was the Athletics displeasure with their current stadium, the Oakland Coliseum. Built in 1966 and used by the Athletics since they moved from Kansas City in 1968, it has a baseball capacity of 56,782 people. The stadium was designed to accommodate both baseball and football, where it was the home of the Raiders until they moved to Las Vegas in 2019. As such, the dual use stadium has design elements that make it less than ideal for either sport. Few consider it an attractive stadium and its age certainly stands out relative to the new baseball stadiums built across the country. Over the last three decades, 24 of the 30 major league baseball teams have moved into new stadiums. So for a variety of reasons, it’s totally understandable that the Athletics were pushing for a new stadium. A beautiful new stadium on a waterfront location already near a desirable area, to be made more so with the mixed-use commercial and residential development that would occur later, certainly checks many boxes.

According to news stories, the Athletics owners will privately fund the construction cost of the project starting with the stadium and eventually including the other developments. They have highlighted a myriad of economic benefits that will accrue to Oakland from the construction and operation of everything envisioned in the project. An artist rendering of what the complete development will look like was no doubt well received, as were estimates of the sales and other taxes that would flow directly to the city of Oakland. In exchange for all of this, the only ask by the promoters was that the city funds certain infrastructure upgrades. These initial investments along with what in effect would be granting the 56-acre site to the Athletics were no doubt teed up as little more than a fraction of the tax revenue that would eventually roll into the city of Oakland and as such produced positive net benefits.

One of the factors that presumably had the Port of Oakland supporting the plan was that the 56-acre property, known as the Howard Terminal, was not being actively used and hadn’t been since 2014 when a terminal operator that was leasing it relocated to another terminal in the port. While the port made that decision, it wouldn’t have done so without the support and acquiescence of the city of Oakland. Owned by the city, the port is governed by a board of seven commissioners who are nominated by the mayor and approved by the city council. The port is structured as a landlord port, meaning that the port enters into contracts to lease land to carriers and terminal operators who in turn provide the actual cargo handling and terminal services. That was the initial model for many port authorities and tended to result in board members and staff who may have been versed in real estate experience but were almost always politically connected. Newer ports in the US were generally built around an operating model where the port authority itself employs labor and is involved in varying degrees of cargo handling and terminal activities. These ports have larger staffs typically with significant operating experience at both container carriers and terminal operating companies. That specific sector specific experience often extends to the board. Not surprisingly, ports built around an operating model are typically faster growing than ports built around a landlord model, in large part because they are managed better and have leadership with real insight into container shipping. Their integrated approach also leads to better results in key areas such as dredging and sales that might be less focused on by landlord ports.

From the biographical information on the Port of Oakland website, the backgrounds of the senior staff and board fit with what is often seen at landlord ports. The executive director is a lawyer with no commercial container shipping experience. None of the seven commissioners have any experience in the maritime or transportation fields. Professionals who appear to be politically active dominate the backgrounds of the commissioners. The board members serve without any compensation. That may score points with taxpayers but doesn’t seem like an appropriate governance approach if you want a fully engaged board capable of making sound business decisions with far reaching commercial consequences.

The infrastructure investment asked for by the team was initially addressed by a $279 million line item tucked into the California state budget in 2021. News reports were more critical, claiming the real purpose of the item was hidden as it was claimed to funds to improve freight movement. While touting the projected financial benefits from the larger $12 billion project, Oakland officials indicated that the local share of any infrastructure investment would be mitigated by state and federal grants. The Athletics responded that the amount in the budget was some $350 million short of what they thought was needed for off-site infrastructure. The talks between the parties have continued. In a recent report authored by a professor of sports management at the University of San Francisco, he estimates that the total infrastructure costs the public is being asked to fund will be at least $850 million. That amount goes out at the beginning and before some $600 million in total future tax revenues from the project the city is being asked to divert to a new financing vehicle.

While there hasn’t been much detail reported on specifically what the requested infrastructure funds would be used for, that’s a word that is up to broad interpretation. My speculation is that what the team is calling infrastructure is in part what others would call a portion, perhaps a big portion, of the construction cost of the new stadium. I’m more certain that when something like this gets initial political support, as time goes on more is and will be pushed to the taxpayer side of the ledger. After all, with the claimed benefits of a $12 billion project and the construction and operations that would go with it, what was being asked was no doubt characterized as necessary outlays simply to prime the pump.

So what is the underpinning for why politicians seem to always be supportive of new stadium proposals, either to lure a new team or to retain an existing team? It fundamentally comes down to growth and the view that a major league baseball team would have a city and an area show more growth than it otherwise would have shown. A baseball team, according to long held political views, makes a city more attractive to companies and individuals and the growth in population and economic activity that comes with that justifies almost any means. Or so the thinking goes. That the rosy scenarios stretch well into the future and beyond the next election cycle probably has something to do with that popular view. Furthermore, the projected benefits are interfaced with so many additional factors that they are hard to confirm anyway. While teed up as facts, they are really factoids.

Like many fans, one of the things I like about baseball is that more than other sports it’s a numbers game. Batting average, earned run average, slugging percentage, stolen bases, on base average and runs batted in are just a handful of a myriad of statistics used and talked about to differentiate teams and players. Just as there is data to explain what happens on the field, there is data to test what impact teams have on the growth of host cities.

Twenty-six US cities have major league baseball teams. Of the 30 total teams, one is in Canada and the three cities of New York, Los Angeles and Chicago have two teams each. Let’s first review certain anecdotal data. There are two cities among the ten most populous cities in the country today that don’t have major league baseball teams. Those cities are San Antonio and San Jose, which rank #7 and #10 respectively. The significant growth both of those cities have experienced since 1960 is well above the average. This is highlighted by the fact that in 1960, San Antonio was at #17 and San Jose was at #57 in terms of population rank among US cities. Just as not having a baseball team didn’t inhibit above average growth at many cities, having a baseball team didn’t preclude the opposite. For example, St. Louis and Pittsburgh were the 10th and 16th largest cities ranked by population in 1960. Today, the below average growth in those cities has resulted in their population rankings falling to #70 and #68, respectively. With Oakland itself, the data doesn’t show that a major league baseball team has benefited its relative standing as today it ranks #44, down from #33 in 1960.

The table below is a more systematic review and shows where each of the 26 cities with baseball teams currently rank in terms of population and how that compares to their 1960 ranking along with the related change in ranking.

In 1960, most of the cities hosting major league baseball teams were also the largest cities in the country. In fact, the table shows that 21 of the 26 cities, or 81%, were actually among the 26 most populous cities. Of the 5 that were not, 4 were cities where baseball would expand to after 1960. Those cities were Miami, Phoenix, Oakland and Tampa. The only city that had baseball teams then and now and that wasn’t within the 26 most populous cities was Kansas City, which just barely missed the 1960 cutoff as it ranked #27. In other words, in 1960 the team’s locations were correlated very closely with population dynamics, something that isn’t surprising in a commercial model where attendance is key. As the table shows, the overall average ranking of all 26 cities in 1960 was 16.6, or slightly above what the average would be if perfectly correlated with the most populous cities.

Race forward to today and 17 or some two-thirds of the 26 cities have declined in their relative population rank. As a result, only 13 or one-half of the cities remain within the 26 most populous cities in the country. With the overall average of all cities now at 28.4, that is a striking reduction of 11.8 in the average population ranking of the baseball cities. The 8 cities showing gains grew their average ranking by 6.1, while the 17 cities showing losses declined their average ranking by 20.9. The actual data clearly shows that from 1960 through today, it is difficult to make any case that major league baseball played any role in allowing host cities to grow above average. Indeed, the data suggests the opposite and those cities without teams showed more population growth and with that better economic growth.

The reason that team owners are seeking new stadiums has little to do with physical obsolescence and more to do with financial obsolescence. A key reason for that has been the growing use of sports entertainment by corporations. Recognizing that they are usually not as price sensitive as individual baseball fans, teams have courted that lucrative niche with season tickets and an array of amenities. One that has proved particularly rewarding is private boxes and luxury suites. However, the stadiums built many decades ago weren’t configured to maximize those units and didn’t lend themselves to being easily modified. To achieve that, new stadiums had to be designed and built with such units and the related amenities. That’s why the new stadiums almost all have less total capacity than the stadium the team previously used, whether it’s in the same city or a new city. For instance, the new stadium planned for the Howard Terminal would have a capacity of 34,000, or 40.1% less than the Oakland Coliseum presently used by the Athletics. That would actually make it the smallest stadium used by any major league baseball team. That means that it will have lots of space dedicated to the luxury suites and related amenities that appeal to corporate and institutional customers. The flip side of that, at least in terms of the experience at some of the other newer baseball stadiums, is that there are fewer seats for individual fans and that typically results in higher prices for those seats. This is yet another consequence for taxpayers being asked to reach into their pockets for the new stadium.

This preference for stadiums that maximize the luxury suites to address the corporate market is augmented by the way such income is treated in the revenue sharing framework. Unlike the gate receipts where 48% is put in a pool shared by all teams, my understanding is that more of the income from luxury suites stays with the team. Whether intended or not, that sets up a mechanism that provides even more of an incentive for a team to seek a new stadium. In effect, this establishes a bit of gamesmanship between the teams and the more a team sees its competitors taking advantage, the more they want to follow suit to stay even. It wouldn’t be surprising if this element in the revenue sharing framework was inserted by major league baseball with the express goal of it leading to more new stadiums.

While the commercial aspects of baseball are very different and significantly larger than they were in the past, an enduring aspect of the business is that overall profit margins as a percent of revenue are relatively low. Indeed, in a presentation in 2020, major league baseball claimed that its cumulative earnings before interest, taxes and depreciation totaled $250 million for the previous decade. While the players union disputed that figure, what is apparent is that based on actual transactions the value of major league baseball teams continues to rise consistently and sharply. It is abundantly clear that baseball teams are not valued based on typical multiples of cash flow or earnings, but more on which the next billionaire who wants to own a team decides to pay for it. Like a unique work of art, the valuation of all teams is benchmarked based on the latest actual transaction.

The specific economic situation of the owners of baseball teams along with the players brings up an issue that also needs to be addressed. Most of the owners of the teams today are referred to as billionaires by the press. They all have significant wealth, generally earned in some other field that has also been augmented by the rising values of their team ownership position. The average salary for a player in major league baseball today is $4 million per year. Is this group of billionaire owners and multi-millionaire players really in need of the sort of public assistance funded by taxpayers that are involved in these stadium schemes? It fundamentally reduces down to a transfer of value from taxpayers, all of which are have-nots compared to this group, to a group that doesn’t need or deserve public assistance. It simply makes no sense. At a very basic level, it is reverse discrimination. The Athletics should be treated no differently than any other business, most particularly smaller businesses whose initiatives study after study show are most responsible for job and economic growth. Favoritism to any group, most particular to one at the very top of the economic scale, has no place in government policy making.

Just from the above, most reasonable people will conclude that it makes no sense for Oakland politicians to proceed with taxpayers underwriting more than $1 billion for a project where history and data show have projected economic benefits that should be viewed skeptically. However, it is actually much worse. By proceeding with this project, the Howard Terminal site is transitioned away from its highest and best use as a marine container terminal. Unlike the typically illusory benefits of a new stadium, the tangible economic activity from a much needed new container terminal will add solid jobs and growth to Oakland and the entire region.

My spectator avocation may be baseball, but my career vocation has been in the container sector since 1980. My operating and investment experience in that area put me in a position to scope out the potential benefits from using the Howard Terminal site for what it was designed to be. While that site hasn’t been used to actually berth and engage in cargo handling activities since 2014, the actual events of the last two years highlight that the past isn’t prologue. Importantly, it is worth noting that the Port of Oakland made the decision in 2019 to set this project in motion. That was before the pandemic and the resulting maritime supply chain bottlenecks that resulted in an array of issues, most vividly over 100 container ships waiting for berths off the coast of California.

In my regular reports on US container volume and the results of the container carriers, I’ve written extensively about the causes and effects of the maritime bottlenecks during the pandemic. In an Op-Ed two months ago in leading maritime publication gCaptain entitled “Time For Major Investments In New Container Ports And Terminals”, I highlighted that the US is now handling four times as many inbound containers compared to 1995 with fundamentally the same container ports and terminals. I noted the multiple indications that the US port system was approaching capacity and that it simply is not in a position to accommodate the further geometric growth on the horizon. I outlined some suggested approaches while stating that in the absence of taking meaningful steps, the disruption that was evident in the maritime supply chain during the pandemic will become more consistent and pervasive in the future. The full Op-Ed is available by using the following link: https://gcaptain.com/time-for-major-investments-in-new-container-ports-and-terminals/.

New marine terminals at the very least require a place where container ships can dock. That and the related structural pier already exist at the Howard Terminal site. Those are notable and impressive assets that would go totally unused if the site were utilized for a stadium. Why would anyone want to waste something with such a remarkable replacement cost value? That fact skews the highest and best use of the site more towards marine terminal compared to a multi-use real estate project. More importantly, it is the closest thing to an almost ready to use new container terminal site at any of the largest US ports. Those ports have increased their capacity in large part by stacking containers higher. They can’t expand outward as they are ringed in by the cities around them. Looked at in the reality of the facts as they exist today, the Howard Terminal site is a veritable oasis within an industry thirsting for additional container terminal capacity. While it presumably could use some additional investment to maximize its potential, I doubt there is any other site in the entire country that is as close to being a functioning new container terminal. I’m fairly confident that if the Port of Oakland had the staff and board that is typically seen at operating ports, they would recognize the extraordinary value in bringing the site back to full operating status. In fact, I can envision them pounding on the table that such an approach is the highest and best use of the property and that the stadium idea is nuts. I’ll take a shot below at outlining the economic benefits that would come from such an approach.

The Port of Oakland is the 8th largest container port in the US in terms of inbound container volume. For the twelve months ending September 2022, total inbound volume was 1,013,695 twenty-foot equivalent units, or TEU’s. That represented 4.0% of the total inbound loads at the top 10 US container ports, which collectively handle some 87% of total US container volume. Of all the large ports, Oakland is the most balanced in that export loads have the highest ratio when compared to import loads. Over the same trailing twelve month period, Oakland’s outbound loads totaled 763,312 TEU’s, or 75.3% of inbound volume. In comparison, the overall relationship at all ports has outbound volume equal to just half that ratio at 37.6% of inbound volume. The much higher ratio of outbound loads at Oakland is largely driven by a significant amount of agricultural exports in containers, owing to its proximity to the Central Valley farmland. The more balanced a port is in terms of containers in both directions, the more attractive it is to carriers and the more cost efficient it tends to be for all stakeholders. With its relatively attractive container balance situation, on that metric the Port of Oakland is in an enviable position relative to other large US ports. However, volume growth at the port has consistently lagged compared to the other ports. Inbound volume for the latest twelve month period compared to 2016 represents an annual growth rate of 2.4%, less than half the 5.9% growth rate in inbound volume for the top 10 US ports combined. That was the second lowest growth rate among those ports over that period. In a broader comparison going back to 2005, the growth rate of inbound volume at the Port of Oakland actually had it ranking last among the top 10 US ports.

Despite the port’s less than exemplary record in terms of its relative growth, the macro-economic factors are moving in its favor. The widely reported congestion problems at LA/LB, the gateway for 39.3% of inbound containers over the last twelve months, will have both shippers and carriers rethinking existing port mixes. Beyond that existing volume, even at half the historical overall growth rate, the total volume of inbound containers into the US will be twice as much in 25 years and four times as much in 50 years. It is inevitable that the Howard Terminal site could be put to use as a fully operating container terminal. The only uncertainty is the precise timing. Given the reality of the information learned during the pandemic that the US port system is approaching capacity and the certainty of continued future volume growth, that timing is likely more prompt than one would think.

A reasonably well run container terminal can achieve an inbound volume equal to 2,000 TEU’s per acre per year. That would translate into the 56-acre Howard Terminal site handing 112,000 TEU’s inbound annually, or an 11.0% increase on the port’s current inbound volume. Assuming it maintains the current outbound ratio that is equal to 84,336 TEU’s outbound annually. The ability of a new terminal in Oakland to handle additional outbound volume is relevant as agricultural exporters were especially adversely affected during the congestion that accompanied the pandemic. The overall estimated volume of 196,336 TEU’s would involve $8.5 billion of goods moving through the new terminal each year. In addition to a significant number of high paying jobs at the marine terminal itself, this new activity will generate local jobs related to the further movement, warehousing and management of the goods in those containers. More detailed estimates could be made about the array of tangible economic benefits that would flow from such a new terminal, but a key point to underscore is that those benefits are all additive. Beyond the unverifiable projected benefits of a new stadium, remember that most of those activities occur at the existing stadium and in that sense little is actually additive.

It’s understandable that baseball teams want taxpayers to underwrite new stadiums. Perhaps they became spoiled from the days cities would build them and lease them for nominal amounts. While that’s no longer done, clever mechanisms have been developed to achieve similar goals. In the Oakland case, the devil is in the infrastructure details. You can also be fairly certain that devil will only get bigger over time. When somebody else is effectively paying for your capital assets, you get irrational on the replacement cycle for those assets. In the capital asset intensive shipping industry, we could only wish that there were local governments that would pay for our ships if we called at there port. Even with that, however, I suspect my board would think I was daft if I went in front of them with a plan to replace a ship with one 40% smaller while the existing to be scrapped ship is less than halfway through its physical life. Hard to make a case that makes real economic sense, as it’s more about staying even or subtraction than it is about addition. Reducing the Oakland situation down to what it fundamentally involves, it’s really about using illusory economics to justify an athletic outcome. That is a misplaced priority on the part of any government official.

It’s especially unfortunate that the local government officials who put this plan in motion were at the Port of Oakland. In addition to a poor analysis of the instant situation, they are ignoring their core mission. Their entity is known as the Port of Oakland, not the Ballpark of Oakland. What is also surprising is that the new information learned during the pandemic and the clear growing need for new container terminals didn’t apparently result in this 2019 decision being revisited. If the people tasked with promoting and championing a port don’t do that, how is it that we can assume that the best decisions are being made related to gateways that are extremely important for the economy? The ramifications of course go well beyond Oakland, as containers going from and to that port involve many states and the cargo in those boxes will eventually go to almost all states. While it’s a local decision, it has statewide and national consequences and stakeholders in those broader areas should also weigh in. Indeed, this situation begs for the involvement of policy makers in Washington, DC, as what happens or doesn’t happen in our largest ports have broad nationwide impact.

Moneyball was a 2003 best seller book that became a popular 2011 movie based on an innovative initiative by Oakland Athletics manager Billy Beane had for evaluating players. He developed an analytical, evidenced-based approach based on various metrics to select players that proved very effective. It was credited with bringing the Athletics to the playoffs in 2002 and 2003 despite having one of the smallest payrolls in major league baseball. Many baseball teams now use variations of this approach.

What in effect is going on in this situation is a current version of moneyball. Instead of being focused on selecting the best players, this game is focused on getting the most dollars from Oakland taxpayers. They are the ones being played, by both the Athletics and by local politicians. Don’t play their Three-card Monte game. Athletics trumping economics becomes a problem for everybody. This plan has taxpayers losing at the outset and the only return they get for a significant additional tax burden is a future with less economic activity than if the Howard Terminal was put to its highest and best use. The taxpayers of Oakland should have a simple and resolute answer for the Athletics requests: “No. It’s your business and whatever you want to do should stand on its own without taxpayer funding. We have no business offering you anything different from what we offer every business.”

John D. McCown is a shipping expert who has been involved as both an operator and investor in the shipping sector for four decades. He was the co-founder and former Chairman & CEO of innovative U.S. flag container carrier Trailer Bridge, Inc. Following that he focused on the shipping and transportation industries from an investment perspective when he was the transport sector head at a $20 billion hedge fund. His primary interest now is on entrepreneurial projects within the maritime space. Mr. McCown writes extensively on maritime subjects and is the author of the recently published book “Giants Of The Sea”, the story of the modern cargo shipping industry and the entrepreneurs mostly responsible for its development. He is the holder of an MBA from Harvard Business School and two maritime related patents.