Economic-Impact Study

By Steve Yeskulsky

Often in these challenging times, parks and recreation professionals are asked to quantify the economic viability of an event or program. By grading an event primarily on customer surveys, participation and profit margin, it is conceivable such an event could be marginalized. Economic-impact analysis, while highly contested by some economists, can be an invaluable tool in depicting the validity of a program to officials and governing boards. Although it does require some research and social-science aptitude, an economic-impact study is very much approachable, and can produce tangible numbers. In its most pure and basic form, an economic-impact analysis seeks to measure the potential change in a local economy by an event, facility or new program. According to Daniel Rascher, President of SportsEconomics and co-author of Financial Management in the Sports Industry , “The key is to measure what the local economy would look like with the event and without the event. The net gain (or loss) is the economic impact. In other words, without the event having occurred (or facility having been built), what would the local economy look like?” In general, an analysis is performed by estimating attendance at an event and then surveying a segment of attendees as to their spending habits while at the event, labeled direct spending. Most economic-impact studies go on to add a multiplier to the equation, which accounts for money circulating through the economy after the event is over (indirect spending).

What It Does

The first important question is, What does an economic-impact study do for an organization? First, it is an invaluable public-relations tool, laying out for the public and decision makers the social, economic and community benefits of proposed events and/or athletic facilities. Second, it can show areas within a community that need and will benefit from potential athletic and leisure projects. Finally, an economic-impact study defines how a project has affected a community. Rascher states that an analysis “can show to what extent the event, facility, etc., provides economic value to the locality. As a result, local governments can determine which events to bid on; owners can use the information to market their event, possibly getting some public funding for their event. The study can also be used to determine where the patrons come from (and how to market to them in the future). Sponsors can use the information to determine the demographics and psychographics of the attendees.”

Many times, a study is associated with large sporting events, such as the Super Bowl, college bowl games and the World Cup. Conversely, a study can be just as valuable for intermediate and smaller events and facilities. Traveling carnivals, adult/youth athletic tournaments and a new recreation center all have a direct and indirect economic value. While a weekend youth baseball tournament may not have the immediate economic impact on a local community as a Major League All-Star game, a thorough analysis can reveal its ripples across an economy.

The Formula

What makes up an economic-impact formula? Numerous formulas are available; the difference resides in whether the research for the makeup of the formula was drawn from primary research or secondary resources (Brown, Rascher, Nagel & McEvoy, 2010). Lastly, but most importantly, the formulas are different in the application of multipliers and associated multiplier-modeling techniques used. This variance in formula construction is one of the leading causes why an event can have two vastly different economic values. It is also worth noting that the author or proponent of a study plays a major role in how the end number comes out.  According to Don Schumacher, Executive Director of the National Association of Sports commissions, “All numbers are estimates. If you wish to begin understanding the accuracy of the claim, check to see who paid for the study! All too often, studies are impacted by the need to show tremendous news when just good news would suffice.” In an effort to standardize the process, some municipalities have gone to local sports commissions for guidance and/or hired outside firms to develop formulas on their own.

Whether it’s an economic-impact study on the Super Bowl or a request for proposals to construct a community athletic complex, all formulas have the same core components. Large events tend to account for the various local taxes and what local residents do during the event, among other items. The components of a formula are:

• Attendance (out-of-town preferable; local attendance, if included, should be separate)

• Number of days/nights in the area (area should be defined in the study)

• Projected spending per traveler

• Multiplier (if applicable).

For example:

• Attendance x number of days x projected spending = economic impact.

• If a multiplier is used, it can be inserted after projected spending. The more challenging part of this exercise is obtaining the data for the formula.

Data Collection

Data can be collected in many ways and by almost anyone, including staff, volunteers and research firms. The key is to keep everyone using the same techniques and forms. Attendance numbers can be obtained from ticket sales, attendance counters by gate staff or by estimating from registration information. Surveys at the event or attached to registration forms are an effective way to gather information on the number of days spent in the area and projected spending habits. Offering an incentive or possible discount on registration for completion of this form will help ensure a better return. If resources are limited and/or a large range of participants is not obtained, many sports commissions and state tourism agencies have calculators that have most of the data and formula already configured (albeit broader and mostly estimated).MichiganStateUniversityhas a great free Tourism Economic-Impact Calculator available online. While the outcomes derived from these formulas may not be as accurate as those conducted with raw data from the event, it will nonetheless provide a glimpse of the economic impact. For more precise numbers, the National Association of Sports Commissions has developed a useful economic-impact template. According to Schumacher, “The tool allows members to estimate what might happen before the bid and can be very helpful after the fact in creating the final estimate. If a study is conducted during the event, the template produces even better estimates. This tool allows computation of direct spending only, spending adjusted for displacement (estimating what would have happened anyway without the event) and/or spending less displacement times a multiplier.” Lastly, keeping accurate and accessible records of all data collection is helpful for any future economic-impact study. This is especially useful when attempting to project the economic impact to a board or governing body for a similar event.

An Eye On Multipliers

It seems every time the Super Bowl is played, the debate over the validity of economic-impact studies surfaces. In the eyes of many economists, the place in which most analyses run aground is the multiplier. More specifically, it is the size and type of multiplier that churns the debate. A multiplier shows the change (positive or negative) to an economy from an event or facility construction. Multipliers exist for nearly every industry in theU.S., and vary widely by industry and area (California Economic Strategy Panel, 2002). Some of the regional variances and items that effect how a multiplier is calculated are population, rural vs. urban areas and diversity of industry mix within a region. The multiplier, described by some economists as a rippling effect in an economy, accounts for money circulating after the initial round of spending has stopped. There are numerous multiplier modeling techniques, such as RIMS II (Regional Input-Output Modeling System, version II), ROI (measuring financial Return On Investment) and IMPLAN (Impact Analysis for Planning). These multiplier models have data on nearly all the industry groups in theU.S., and are based in part on information from the U.S. Bureau of Economic Analysis. Before deciding on one of these economic-impact models, factors such as cost, the time period of analysis and the level of detail in the multipliers should be considered (Bonn & Harrington, 2008).

The champions of multipliers in economic-impact studies simply point to the need to quantify the indirect and induced effects of activities on an economy. Meanwhile, detractors point to heavily inflated multipliers, leading to overstated economic-impact estimates. Schumacher states that in some cases, multipliers can become a real problem. “It is difficult to accept more than a multiplier of 2. We are aware of instances where a study used a multiplier of 6!” Multipliers are many times based on an area’s normal economic patterns, and as such may skew a study by including induced economic fallout that is not present. For example, large special events and athletic tournaments--while they bring in people and money from outside the local economy--many times do not have a lasting economic impact. The induced effect, which accounts for additional permanent jobs and/or population in a community, makes up one component of the total effect. Using multipliers in these circumstances may overstate an event’s true impact on a local economy.

While multipliers arguably have their place in economic impact analysis, it is more how they are “derived” than “used” that is the question. Don’t let multipliers and mega events muddy the waters of a great resource for every parks and recreation professional.

Works cited:

Bonn, M., & Harrington, J. (2008) A comparison of three economic impact models for applied hospitality and tourism research . Tourism Economics Journal 14 (4), 769-789.

Brown, M., Rascher, D., Nagel, M. & McEvoy, C., (2010). Financial Management in the Sport Industry .Scottsdale,Arizona: Holcomb Hathaway, Publishers.

CaliforniaEconomic Strategy Panel (2002). Using Multipliers to Measure Economic Impacts .California Economic Strategy Panel Publications. 1-2.

Steve Yeskulsky , CPRP is the Director of Recreation and The Arts for the City of Hyattsville, Md. He can be reached via e-mail at syeskulsky@hyattsville.org .