Convention Centers

Recommendation

Cities and counties should not use taxpayer dollars to subsidize the never-ending losses of city-owned convention centers. They unfairly redistribute wealth from taxpayers to a small number of mostly wealthy property and business owners downtown and do little if anything to improve the overall economy.

Background

Since the late 1990s, cities were caught up in a nationwide mania of building and operating convention centers and nearby hotels, often neglecting essential services in the process. This trend produced a glut of convention center space, causing cities to use tax money to offer large discounts and subsidies to attract conventions.

City leaders often justify the spending by consultant reports that always omit information regarding other cities' experiences with construction cost overruns, huge subsidies, fewer visitors than projected, and more importantly, what economic growth would have resulted from leaving the money in the hands of taxpayers. University of Texas at San Antonio professor Haywood Sanders, the country's foremost academic expert on city convention centers, concludes that the building boom since the late 1990s has resulted in only one highly qualified "success" with the rest of the convention centers being either "embarrassments or disasters." The convention centers in Raleigh and Charlotte fit the latter description.

First come the construction cost overruns

Consultants' reports promoting convention centers habitually underestimate construction costs and overestimate the numbers of conventions and attendees. The original 2003 proposal for the Raleigh convention center was $180 million, plus a $20 million subsidy for a new headquarters hotel. By the time the center was completed in 2008, the price had risen to $221 million.

These cost overruns are consistent with the pattern of cost overruns of other convention centers and other public projects. The conclusion of the first statistically significant study of 258 public transportation projects could also apply to public convention centers (emphasis added):

...[I]t is found with overwhelming statistical significance that the cost estimates used to decide whether such projects should be built are highly and systematically misleading. Underestimation cannot be explained by error and is best explained by strategic misrepresentation, that is, lying. The policy implications are clear: legislators, administrators, investors, media representatives, and members of the public who value honest numbers should not trust cost estimates and cost-benefit analyses produced by project promoters and their analysts. — Bent Flyvbjerg, Mette Skamris Holm, and Søren Buhl, "Underestimating Costs in Public Works Projects: Error or Lie?" Journal of the American Planning Association, Vol. 68, No. 3, Summer 2002.

Next come the operating losses

Contrary to the public's perception, convention centers are designed from the start to operate at a loss. Raleigh officials were undisturbed by the fact that their center operated with a $3 million loss in fiscal year (FY) 2010. Likewise, Charlotte officials unapologetically acknowledged a $3.5 million operating loss in FY 2009. Taxpayers face the gross injustice of having to cover those perpetual losses for the benefit for a few businesses and property owners downtown.

Why the losses?

In real-world economics, when supply far exceeds demand, the price must go down for a market to clear. In the world of convention centers, there is such a massive oversupply of space nationally that cities must reduce prices to next to nothing or even subsidize conventions to get groups to use their space. Even before the Raleigh convention center opened its doors in September 2008, its managers gave out more than $2.3 million in discounts to attract conventions and meetings. In an eleven-month period in FY 2011, at least 14 groups will pay nothing or one dollar for space valued at nearly $532,000.

Additionally, the Raleigh, Charlotte, and Greensboro convention centers use taxpayer-funded slush funds to offer subsidies to groups to use the centers. For example, the first six subsidies paid out by the Business Development Fund in Raleigh totaled more than $166,000. Now those funds are running out of money in Charlotte and Raleigh. A recent review of Raleigh's fund shows that the commitments from the fund will exceed revenues by 2014.

Justifying the unjustifiable

How do convention center officials justify this unending drain on taxpayer dollars? First, they argue that the money comes from visitors when they pay special taxes on hotel occupancy, car rentals, and prepared meals. Local residents, however, pay the vast majority of the prepared-meals taxes, and taxing out-of-town hotel and rental-car users is unjust because it is "taxation without representation."

Second, they argue that the conventions bring in out-of-state money to produce an economic impact far larger than the deficits, debt service payments, and subsidies paid to attract them. Raleigh's experience makes a mockery of that argument. Of the 68 conventions and meetings scheduled during FY 2009, only 15 brought in out-of-state attendees who used hotel rooms. Those organizations received, on average, a 62 percent discount on the meeting space.

Even when using an extremely generous formula, they generated only $8.1 million in economic impact. That comes nowhere near the $100 million economic impact promised by center supporters back in 2003, nor the $80 million claimed by Mayor Charles Meeker in 2008, nor even the $25 million goal listed in the city's Performance Standards for FY 2009. Nor could it come close to covering total operating losses, the debt service on the building, and the city's $20 million subsidy to the adjacent hotel, let alone the opportunity cost of tax money taken from Raleigh and Wake County residents.

In other words, a true cost accounting would likely show that the Raleigh convention center, like nearly all other public convention centers around the country, has a negative rather than a positive economic impact.


Analyst: Dr. Michael Sanera
Director of Research and Local Government Studies
919-828-3876 • msanera@johnlocke.org