Convention Center: The Skeptical Study No One Ever Talks About


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The road to convention center skepticism tends to run through the office of Heywood Sanders, the urban development academic at the University of Texas at San Antonio who writes extensively about convention center economics, and who is coming to Nashville this weekend to participate in a public forum on the proposed Music City Center. (Sanders did an interview on Liberadio(!) earlier this week.)

But for all of the public conversation about a new convention center over the last couple of years, a skeptical analysis by one of the state's top economists has gone virtually unnoticed. Bill Fox at the University of Tennessee, who comments frequently on regional economics and public finance, published (with two UT colleagues) a piece two years ago in that coffee table staple State Tax Notes on the issue of whether new and expanded convention centers are a good idea from economic and finance perspectives.

We can't share a link to the article, which seems not to be publicly available online (it's "deep web," as the librarians say), but we'll offer up several excerpts after the jump.
Three well-known issues arise in the context of public funding for development projects such as convention centers. First, public funding of a venture intended to benefit private businesses effectively shifts the risk of the project from the private sector to the public sector. Taxpayers will primarily shoulder shortfalls, if they occur, with higher than expected general funding obligations. The track record for recent projects indicates many new or expanded centers perform well below expectations because increases in supply continue to far exceed growth in demand, which suggests higher than anticipated subsidies.
Careful analysis is necessary to discern whether the convention center actually offers economic benefits to the community, and it is not sufficient to observe that the convention center must be successful because it is busy. Convention centers likely provide no real economic benefits to the community if their main clientele are tradeshows, religious groups, and other primarily local activity. The location of those events is merely shifted from local hotels or other convention space to the new convention center. A convention center can result in net economic gains only if it attracts visitors that otherwise would not come to the city or if it keeps people home who would otherwise attend conventions in other cities. And, of course, the direct economic gains are generally much smaller than the expenditures because much of the economic effect spills outside the city.
A 2004 KPMG study reports that as competition increases, convention centers in 'first-tier' cities have begun to target smaller meetings that previously might have gone to second- or third-tier sites. The result is many sites at all levels now offer incentives and ''discounts'' on various services to secure a steady stream of convention business. Although we make no attempt to predict the convention business, communities should be fully aware that the supply of space is increasing rapidly as demand has been stagnant. Without a substantial rebound in convention business, utilization rates for the industry as a whole may continue to decline, creating additional downward pressure on rates for all but the most desirable locations.
The decision to build or not to build a convention center is not a separate and independent decision and should be made as part of an overall economic strategy....there are significant opportunity costs, in terms of spending on other services or leaving funds in the private sector, to investing in convention centers, and cities should not believe that the centers will be totally self-financing from tax revenue and user fees directly associated with the center. There are also opportunity costs in the use of the land area, and some of the possible other uses of the space would yield property tax and other revenues to the city that likely will not result from the convention center.
Successful convention centers can create important economic benefits in the city, but there are few direct ways to transfer the private-sector gains into tax revenue (to pay for the convention center and for other purposes) without also taxing others who are not beneficiaries of the facility....Proponents are likely to overstate the benefits and understate the costs because they are promoting a project whose risks are being borne by someone else (normally the entire city) and they often stand to reap a disproportional share of the benefits. Benefits that are overstated include the likely number of new visitors, the amount that each visitor will spend, the economic benefits from the expenditures, the size of the multiplier, and every aspect of the economic impacts. Finally, it is essential to distinguish between the real benefits of the convention center, which represent actual increases in the economy, and redistributions that take place when economic activity is moved from one place to another within the city.
This is not to suggest that the entire piece is negative; it considers potential benefits and offers some financing suggestions with which the proposed center is more or less consistent. It is telling, however, that many of the points of skepticism that Fox raised are now getting little or no attention in public discourse about the project. And by the way, we get the distinct impression that Fox and his colleagues would frown upon the Dean administration's current political strategy toward the convention center, which is to approve the thing in pieces rather than waiting until we have a full and transparent picture of costs involved:
A decision for or against a new convention center should be made with full information about the total cost of the project. In addition to direct construction costs of the center itself, most new centers require an attached hotel and additional parking, both frequently requiring public subsidies or guarantees. Restrictive financial structures, above-average capital costs, and revenue stream variability make private capital difficult to obtain. Further, public money is often necessary to ensure investment-grade bond ratings. Additional public resources are often needed to fund annual operating deficits and public infrastructure improvements necessary to support the growing tourist economy that will accompany a successful convention center. Further, use of the site for a convention center may cause the community to forgo future property tax revenue that would result if the site remained in the private sector, and that can be a significant opportunity cost of the convention center. All of those costs are important components of the funding requirements and should be considered as a comprehensive package.


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