JLF Memo
Apr. 12th, 2012: - johnlocke.org Manage Subscriptions

In this issue: Raleigh City Manager Russell Allen and the City Council Members Should Learn Basic Economics
By Dr. Michael Sanera

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As we predicted when the doors opened in 2008, the city subsidized Mint restaurant has closed its doors after a net loss of $400,000

Here is the short version of this sad story. Some city council members wanted to impress out-of-town guests visiting their taxpayer subsidized convention center and their $10 million make-over of Fayetteville Street.   Thus, the need for a white tablecloth restaurant featuring "low country" cuisine on Fayetteville Street.  They took an empty space in the city-owned building and gave the Raleigh Restaurant Group a cool million dollars to convert it into a glamorous restaurant.  The first month after it opened in January 2008 the Mint lost $96,000.  That's a whopping $3,100 per day. 

When The Mint continued racking up heavy losses, city council members could not admit defeat or suffer the political repercussions so they approved a renegotiated rental contract in April 2011 giving The Mint a $1,200 per month reduction in its rent.  The city defended this move by stating that the rental reduction was for 3 years on a 10 year contract and rent increases in years 4 through 10 would make up for the reduction. That excuse was laughable at the time because no one believed that The Mint would make it past three years.  Now, after one year of cut-rate rent, The Mint goes bust.

Interestingly, The Mint's owners seem to be walking away in order to open their own restaurant called Oro in the nearby PNC Plaza building leaving Raleigh's taxpayers holding the bag. Maybe they got tired of the city council members dictating the "low country" cuisine menu and the white tablecloths.

Now will the city council admit defeat and save taxpayer dollars by getting out of the restaurant business?  Not on your life.  The plan is to reopen the restaurant with new owners and a new concept. Perhaps an upscale food truck would turn a profit for the taxpayers? I forgot, the city council has outlawed trucks on Fayetteville Street.

City Manager Russell Allen claims on ABC 11 TV that the taxpayers have not lost anything on this deal.  That is true only in the fantasy world of public sector accounting, not in the real world of basic economics.  First, you have to compare the city's claim that The Mint paid $600,000 in rent to what that space could have been rented for without the taxpayers paying $1 million for restaurant equipment and renovations.  Let's say the city had rented the space to a business for retail or office space and the renters paid for their own equipment and furnishings.  The rent paid by this business would likely be at or above the $600,000 and the taxpayers would still have the $1 million in their pockets.  In addition, the city might have even raised the rent since 2008 rather than reducing it by $1,200 per month as it did for The Mint.  In addition, how much is that $1 million of restaurant equipment and furnishings worth now?  If sold at auction, the city would be lucky to get back half to a third of the original purchase price.

To illustrate this point, let's assume the city had $1 million to invest and had a choice between a bank on N. Capital Blvd that paid 5% interest and another bank on Fayetteville Street that paid 1% interest.  In order to promote downtown business activity, the city council selected the Fayetteville Street bank.  After a year, the downtown bank went out of business.  At this point the city manager claimed that the city did not loose any money because the failed bank paid the city 1% interest or $10,000. Unlike the city manager, any reasonable person would conclude that the city lost $40,000 on this decision.

Mr. Allen really needs to sign up for a refresher course in basic economics, and possibly reality, if he is to continue to provide the city council advice on economic matters.  I know several qualified NC State economics professors who would love to have him in their microeconomics class where freshmen learn about "opportunity cost." 

The city council members are getting plenty of help from the press in their effort to sweep this disaster under the rug.  The News & Observer and WRAL have failed to mention this story. It seems that their role as boosters of former Mayor Meeker's downtown boondoggles has gotten in the way of their journalistic responsibilities.  Thus, the current mayor and city council are likely to  continue to fleece taxpayers by staying in the restaurant business.  New owners with a new concept will be found and the city will give them another sweetheart deal at taxpayer expense.  And the city manager will continue to snow the public and a complicit press with his bogus public sector accounting. 

I have a suggestion.  Perhaps the city council members could become reality TV stars by inviting Kitchen Nightmares host Gordon Ramsay to teach them how to run a restaurant.

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