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The Final Four: Economic Air Ball?

March Madness is upon us -- and the cities hosting NCAA Tournament games across the country are counting on a big boost to the bottom line. But that may be nothing more than hoop dreams. Victor Matheson, an assistant professor of economics at the College of the Holy Cross in Worcester, Mass., has studied the Final Four dating back to 1970, and he has found that host cities actually experience lower income growth on average the year they welcome the Big Dance compared with other years.

With one exception: Smaller cities that are the site of the tournament's opening rounds can reap some economic and marketing benefits, Matheson says. But when it comes to the marquee event, the waves of out-of-town fans tend to scare away the locals, canceling out any potential windfall.

So is this year's Final Four host, St. Louis, in for a disappointment? Are regional host cities Chicago, Albuquerque, Syracuse, N.Y., and Austin, Tex., better off steering clear from such major events in the future? BusinessWeek Online SmallBiz Editor Rod Kurtz recently spoke with Matheson about his findings. Edited excerpts from their conversation follow:

Q: Cities like to claim that events like hosting the NCAA Tournament can put millions in their coffers. What's the reality?

A: Economists down the line always find that these [claims] are overblown, and the impact is a fraction of what is claimed.

Since 1970, cities that have hosted the men's Final Four actually experienced [a slowdown in] economic growth. So the year that they host the Final Four, economic growth is actually lower in that city than in other years. There are all sorts of things that go into a model when you're estimating growth, but it appears you have worse-than-average years hosting the Final Four.

Q: Where do local promoters get such high estimates of money boosting the local economy?

A: There are some numbers that are good and some aren't. They'll estimate how many people are coming to town and estimate how much they're going to spend, and create a formula. The initial impact is multiplied, usually by a factor of two. If they're saying $50 million [in benefits], they're estimating people spending about $25 million, and then an additional $25 million as that money circulates through the economy.

Remember, the Final Four crowds out all kinds of other activity in a city. So while you're bringing basketball fans in town, you're reducing other business and tourist activity, and you're reducing business among people who actually live in the city. People tend to stay away from the city and stay away from the craziness.

Q: But there can be an upsides, right?

A: Certainly, if you've got an existing facility, bringing in the NCAA Final Four can be good. But when you're using a big event as the carrot to build a big stadium, in hopes of attaining those supposed benefits, that's where you really need to be careful. The New York Jets are using a potential Super Bowl bid and a potential Olympic bid to get taxpayers to build a new stadium.

Q: The NCAA Tournament, however, is unique from other sporting events like the Super Bowl, because it's spread out over two weeks and involves many cities.

A: There's certainly something to be said for that -- this impact is at least spread over a bunch of cities and it does rotate. So there are small impacts that go to lots of places. One of the first rounds is here in Worcester, Mass., and they're bringing people here who wouldn't necessarily be here in March -- and that's a good thing. But if the money to build the arena was justified by pointing to these benefits, that's a problem.

Q: If you were a mayor, would you go after hosting the Final Four?

A: If you're talking about just the costs of hosting and making the city attractive to the event, the costs are moderately low, although security costs have risen, unfortunately, after September 11. Most of the events will make up those direct costs, usually by the amount that they bring in through additional hotel packages.

But if you're talking about the true underlying costs, that's a concern. You have places like Indianapolis bidding to build a replacement for the RCA Dome and looking to spend a couple hundred million dollars of taxpayer money to build it so they can keep getting the Final Four.

Q: What about indirect impact -- like national TV coverage and an influx of visitors who may eventually return?

A: There are certainly some nonmonetary benefits, but it's ridiculous to say hosting the Final Four has these immeasurable benefits. I certainly don't know of a business that has moved to a city because it hosted a sporting event. So if you point to the image factor, I'm not sure what you're getting for that.

And the second thing is, just because you host an event doesn't mean you'll be making a positive image. Jacksonville hosted the Super Bowl and you had a lot of people coming back saying "Hey, it's nice, but there's not much to do there." Munich with the '72 Olympics certainly didn't come out with a better image.

Of all the stadiums I've seen nationwide, the only one that seems to be worth the money the city spent on it is the Staples Center in Los Angeles. It's being used all the time. You've got the [NBA] Lakers, the [NBA] Clippers, the [WNBA] Sparks, the [NHL] Kings, semi-pro teams, arena football, even the Grammys. So that facility is used about 250 days a year. If you can really have a venue like that, you're in great shape. On the other hand, Miami and South Florida have three arenas and two pro franchises. That's exactly the way to lose money.

Q: We see the same argument with other events, like political conventions. Same lackluster results?

A: The Democratic Convention in Boston definitely had a negative [economic] impact on the city. The disruptions on people because of the security forced them not to go to work. People cleared out. The same thing happened in New York with the Republican Convention. There were lots of people in town, but Broadway, for example, had a dead week.

Q: A new study says the NCAA Tournament could be responsible for $889 million in lost productivity, because people check scores all day and talk about games at the water cooler. Do you buy that?

A: The NCAA Tournament is the American version of the World Cup. During the World Cup, countries like Argentina shut down. Yes, this is a big distraction, and it's going to be a big time-waster for the next few weeks. But after that, we'll find something else to waste our time.

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