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by Tom Isler | March 01, 2008

ChicagoSan AntonioHilton Branson Convention Center in Missouri

 

Left to right: Chicago's McCormick Place, San Antonio's Henry B. Gonzalez Convention Center, Missouri's Hilton Branson Convention Center

  

 

 

 This is the last in a three-part series on the economics of the meetings industry, following “Gauging the Value of Meetings” (January) and “Where Bed Taxes Go” (February).

The decision to spend hundreds of millions of dollars of public funds to build or expand convention centers is never an easy sell to taxpayers. Complicating matters is the fact that, once built, most centers are designed to lose millions more each year in operating deficits, with the promise that groups ultimately will more than make up for the loss by boosting the local economy during their stays.

The hard sell hasn’t prevented cities -- from Boston to San Diego, from Anchorage, Alaska, to Erie, Pa. -- from investing in new or expanded facilities. As of last July, Tradeshow Week pegged the total amount of exhibit space in the United States and Canada at 85.9 million square feet, up 11 percent from 2003. Limited growth is expected to continue for the next few years.

Some critics say supply is outstripping demand. Proponents of new centers believe that’s irrelevant, arguing that individual buildings don’t need to compete against all of the rest. Centers square off against those with similar capacities, or within a geographic region, or in destinations with similar attributes or attractions. Buildings also compete against their own track records. The most common argument officials make in support of expanding centers is the fact they’re losing groups that have outgrown the building.

“It’s not about an arms race,” says Richard Scharf, president and CEO of the Denver Metro Convention and Visitors Bureau, who oversaw the Colorado Convention Center’s latest expansion in 2004. “It’s about what expansion can do and how it can help you grow market share. It’s very individual to each city. Each city has its own fingerprint that’s completely different from everyone else’s.”

While market conditions might be unique to each city, all centers are designed to be engines for economic activity and growth. But existence doesn’t guarantee success. “If you’re a politician, the fear is you’ve invested in a white elephant,” says Jim Kaatz, partner at Wayzata, Minn.-based Convention, Sports & Leisure International, a consulting firm that studies convention centers. If buildings don’t perform well, the economic burden on cities is compounded: Not only do municipalities fail to attract anticipated visitor dollars to support local businesses, not only do they fail to generate enough tax revenue to cover the debt incurred during construction, but they’re put on the hook to cover ever-growing operating losses.

As the country braces for recession and as challenges continue in the real-estate and debt-capital markets, the decisions to invest in convention centers and the process of building them will only get tougher. And more attention will turn to cities that recently have taken the plunge; soon, they’ll be asked: Has the investment paid off?

Following the money

An analysis of convention centers begins with the funding model. “When you look at a project, you have to look at who’s actually paying,” Kaatz explains. For most cities, he notes, “the whole objective is to tie as much of the economic base to visitors as possible.” A typical arrangement calls for a dedicated hike in the hotel tax, the reallocation of some of the existing hotel tax to fund the center, a car rental fee and possibly other surcharges on select businesses, such as restaurants. Still, most centers require public operating subsidies.

Although visitors end up footing most of the bill, it’s misleading to talk about convention centers as “self-funding,” argues Robert Canton, Tampa, Fla.-based director of sports, convention and tourism services for PricewaterhouseCoopers. The activity within the center rarely covers the operating costs or bond debt, he says, and tax windfalls are generated in large part by leisure and business travelers who aren’t in town for conventions. “All the other economic activity” -- jobs and businesses created to support center operations and clients -- “is what justifies investment,” Canton explains.

A common argument against building centers -- that cities should invest the money in education, for example -- is largely specious. In most cases, cities don’t have the cash lying around; they create revenue streams to fund the projects only because businesses that benefit from the centers agree to additional taxes and fees.

In some cases, however, money for centers does come out of existing municipal coffers, and an argument could be made that the dollars should be invested differently. In Philadelphia, where a $700 million expansion of the Pennsylvania Convention Center is under way, funding is coming out of the state’s casino revenue. However, the primary impact of convention centers is felt locally. “It’s hard to justify benefits for the entire state,” notes Jim Dunn, general manager of the Palm Springs (Calif.) Convention Center, which is city-owned and -funded.

The dispersal of funds should not be judged purely on economics, argues Steven Carvell, professor and associate dean at the Cornell University School of Hotel Administration in Ithaca, N.Y. “It’s a social and political issue,” he says. Cities could choose to build an office park that brings in high-tech, high-paying jobs, but convention centers support the hospitality industry, which employs a lot of low-wage and minority workers. “It’s a factor to consider when deciding how to spend public money,” Carvell adds. “It’s not just about getting return on investment.”

Nor can convention centers be expected to perform in a vacuum. In general, cities that make the best convention destinations are places that can draw visitors on their own. “Destination amenities are just as important as convention centers, as far as development goes,” Canton says. Cities that build convention centers in hopes that other development will follow are taking a larger risk and might have to wait longer to see a return.