The Risks of 'Revitalization'

Tucson is about to commit hundreds of millions of dollars to a new convention center. Will this be money well-spent--or will it become another boondoggle like Tucson Electric Park?

For decades, Tucson has stayed out of the national convention race. But now the city plans to enter the intense, costly and financially risky competition for convention business--in a big way.

"People are shocked when I say Tucson isn't in the convention business," says Tucson Convention Center director Rich Singer. "There's a huge upside for growth here."

Heywood Sanders, professor of public administration at the University of Texas at San Antonio, believes otherwise. He's done a detailed analysis of the financial performance of convention centers and publicly owned adjacent hotels, and he concludes: "The capacity of boosters to participate in foolishness (is amazing)."

To introduce Tucson into the nationwide convention competition, Singer believes the community should remodel, in phases, the existing TCC, which opened in 1971. The cost of those remodels: up to $123 million.

Singer also thinks the city should use its Rio Nuevo funds and tax-free bonding capacity to build a new, publicly owned convention-center hotel priced at $200 million, while erecting a new arena estimated to run $130 million.

Singer points out the potential attractiveness of Tucson if these improvements are implemented, based on survey results from a nationwide group of meeting planners.

"But we have to do them all," he insists. "That's the beauty of it. We're fixing everything. ... The variety of projects (in Tucson) is really important to downtown. The diversity of people they will attract will make it work."

Sanders, who knows quite a bit about Tucson's proposed convention-center upgrades, is skeptical--especially when it comes to the convention-center hotel idea and its optimistic financial predictions.

"If I was on your City Council," he says, "I'd be really scared."

The 707-room hotel, to be owned by the city but managed by Sheraton, will not only cover its own expenses, but also earn a profit, backers say. The Tucson City Council has already endorsed the project.

These profits, boosters say, could be used to help renovate the existing Hotel Arizona, next to the convention center, and buy a strategic piece of vacant property nearby. Alternately, the profits could help cover the cost of the proposed new arena.

But Sanders can list case after case of convention-center hotels which were predicted to be profitable but actually turned out to be money losers--in cities from Omaha, Neb., to Myrtle Beach, S.C., to Sacramento, Calif.

As one specific example of fiscal reality, he points to Overland Park, Kan. Opened in December 2002, their 412-room convention hotel was paid for with close to $92 million in bond funds. According to projections, the revenues of the facility should have easily covered the bond's debt service.

That hasn't happened, admits Kristy Stallings, deputy city manager of Overland Park. Approximately $5 million in guest-tax money has been poured into the project to cover the bond payments.

Despite that subsidy, Stallings labels the hotel a success. "The hotel is actually doing very well," she says, "and is the market leader in all measures that matter."

Charles H. Johnson IV agrees with that assessment. His Chicago consulting firm did feasibility work for the Overland Park hotel as well as for the Tucson Convention Center, and he considers the Kansas project a success.

Stallings blames the decline in travel after the Sept. 11 attacks, along with the ensuing downturn in the nation's economy, for Overland Park's publicly owned hotel performing below expectations. "It didn't generate the revenues forecast," she says, "but that's always a risk."

Those are risks more and more municipal governments are willing to take as they get into the convention-center hotel business. "But as cities across the country rush to build hotels and claim convention riches," notes the Baltimore Sun in a 2005 article, "some find horror stories and others, a mixed verdict."

Singer doesn't believe that will occur in Tucson. When asked about the chances of the convention-center hotel not making a profit, he says: "I don't see that happening."

Such optimism is based on several factors. First, the planned remodeling of the TCC is expected to bring in a substantial number of new meeting-goers who will want to stay in the hotel. Added to that is the lack of quality hotel rooms currently existing downtown. Finally, Singer hopes to make Tucson a regular stop on the East Coast-West Coast rotation of some convention groups.

These factors were highlighted in a convention-center feasibility report prepared last March by C.H. Johnson Consulting. It concluded: "With these expansion recommendations, a headquarters hotel and an arena function removed from the center, the TCC will become a highly effective and balanced venue."

The Johnson firm also took a look at the convention-center hotel proposal. In its June 2007 analysis, it predicted the facility would have annual income above expenses of more than $11 million. That figure, however, does not include debt service on the bonds which would be used to construct the hotel.

Since Johnson's study was released to the Weekly only recently, Sanders in Texas hasn't seen it, but he is skeptical of its findings nonetheless. Based on his analysis of other predictions made by Johnson's firm, Sanders says: "Their forecasting record is open to some serious questions. ... In case after case, their forecasts didn't happen."

In response, Johnson calls Sanders "a thorn in the industry for a few years," and rolls off several convention-center projects he's been involved with which he says have seen substantial growth in revenues. These include Austin, Texas; Nashville, Tenn.; San Jose, Calif.; and Portland, Ore. However, Johnson admits he's using anecdotal evidence, since his firm usually doesn't track what happens after its projections are made.

According to additional information supplied to the firm by some of its clients, the convention center in Jackson, Miss., had 8 percent more event days in 2006 than the Johnson company forecast. Between 2003 and 2006, Osceola County, Fla., also collected considerably more in taxes than the firm had predicted.

If the convention-center hotel in Tucson is as risky of a business venture as Sanders predicts, the development team behind the Sheraton proposal has given City Hall a possible way out: They have offered to assume ownership of most of the hotel if the city contributes financially to the construction costs.

"That private/public approach requires a pretty significant infusion of dollars," says the city's finance director, Jim Cameron. "It makes more sense to go public ... because it creates advantages and benefits from the hotel's revenue stream."

Sanders doesn't believe that revenue stream is likely to even cover the costs of the bonds which will be sold to pay for the hotel's construction. He insists there will have to be government backing of the bonds if they are to be sold, and that backing may have to be used repeatedly, as in the case of Overland Park.

Government backing of bonds is exactly what Phoenix is doing with their publicly owned Sheraton convention-center hotel, now under construction. The 1,000-room facility will be paid for with $350 million in bonds, approximately 55 percent of which will be backed by rental-car and hotel-tax receipts.

"I don't know anybody who has really focused on the bond backing," Cameron says about Tucson at this point. "I don't think it's necessary right now."

If the local backing of the bonds is required, Cameron thinks the tax incremental financing provided to downtown's Rio Nuevo district might be one potential source of funds. "But we have many other projects," Cameron says of this pot of money, "so we don't want to tie it up."

Without City Hall pledging some local revenue to help pay for the hotel if needed, Sanders says it just won't be built.

He says that bond underwriters learned their lesson from a financially disastrous convention-center hotel experience in St. Louis a few years ago. "The (governmental) backing is needed, because these hotels perform rather more modestly than predicted, often doing half to two-thirds of the business anticipated."

This financial give-and-take should sound familiar to anyone who has been around town awhile. A decade ago, county officials promised that no additional taxpayer money outside the identified revenue streams would be needed to pay for the southside baseball stadium, Tucson Electric Park. In addition, officials forecast a retail renaissance along Ajo Way near the ballpark.

However, these commercial improvements have largely failed to materialize. Instead, only county-owned facilities moved into the neighborhood.

At the same time, the revenues for the park fell well short of projections (See "Squeeze Play," Feb. 24, 2000). That led to some restructuring of the stadium debt, but even that wasn't enough. Almost $6 million in cash had to come out of county coffers to pay for the park. In addition, two years ago, $485,000 in county general-fund money was used to help pay the debt service on the bonds.

To compound these problems, the publicly owned stadium is now in the process of losing two of its three professional-baseball tenants, one of which is heading to a Phoenix suburb.

The uncertain future of Tucson Electric Park could cast a monsoon-sized shadow over the TCC proposal. But in Tucson, governmental monetary and redevelopment forecasts always seem to be sunny, at least at first.

Even Sanders believes the proposed convention-center hotel may succeed, but not because of its proximity to the TCC. Instead, he indicates tourism and other factors might make the hotel profitable, just as they did in Austin.

On the other hand, Sanders also says: "There's no body of evidence that a publicly financed hotel makes any difference in the increased performance of a convention center."

Several of those involved with the industry strenuously disagree, including Rick Vaughan, of the Metropolitan Tucson Convention and Visitors Bureau.

"Hotel rooms are always an issue," Vaughan says, citing responses from meeting planners about holding their get-togethers at the TCC. "They tell us they're not coming because of the hotels."

Vaughan believes implementation of all of the proposed improvements--the convention-center remodeling, the convention-center hotel and the new arena--will change the perception of Tucson in meeting planners' eyes. "They will at least allow us to be in the game," he says.

The feasibility study done by the Johnson consulting firm on the proposed convention-center improvements noted that the facility now "is a poor performer nationally and within its peer set."

To correct that supposed shortcoming, the study recommends constructing 21,000 square feet of additional meeting rooms to basically triple that space.

Adding more meeting rooms to the TCC, though, has been a bone of contention for years. In 1994, Tucson voters by a 2-to-1 margin defeated a request to sell general-obligation bonds to do just that.

The Johnson convention-center study also calls for developing a 28,000-square-foot ballroom to complement the present 20,000-square-foot one. At the same time, it recommends enlarging the current 114,000-square-foot exhibit hall by about 20 percent.

If these improvements are implemented, the Johnson report states the TCC will "approximately double the economic and fiscal impact of the facility to the economy."

The study estimates $102 million in new annual spending will occur in Tucson, and will result in 1,460 new jobs when these changes are made. It also forecasts $6.1 million in additional taxes should be generated each year.

Those attending TCC events--a number which is anticipated to go from 175,000 to 360,000--will pay these taxes. Some of them, of course, will be from outside of Tucson.

"Those people come to town and spend money," Singer from the TCC says about these conventioneers and meeting-goers. "It's the greenest form of economic development. Their money generates taxes, which is money we can spend on ourselves."

Based on his review of actual convention-center performances nationwide, Sanders casts doubts on this optimistic scenario. In 2005, the Brookings Institution published a report by him titled "Space Available: The Realities of Convention Centers as Economic Development Strategy."

Sanders pointed out that the supply of available square footage in convention centers around the country was growing at a much faster rate than demand. In addition, his research showed that the number of people attending conventions "has actually plummeted."

Many in the convention industry quickly attacked these findings. Singer says about Sanders: "His statements were correct, but he cherry-picked his examples. Plus, he doesn't talk about second-tier cities (like Tucson) or the winners. He isolated failures to make his case."

Replying, Sanders declares: "I haven't been criticized by independent or academic (analysts), just industry people who have trotted out little substantive evidence."

One point Sanders makes in his research is that as convention centers across the country have enlarged their facilities, the competition for business has led to shifts in the way promoters of the mammoth centers behave. Instead of restricting themselves to gatherings that attract huge numbers of attendees, Sanders writes, these centers "are expanding in order to accommodate simultaneous small- and medium-sized events, the kinds of events that now use far smaller centers."

Such an expansion of a major facility is now underway in Phoenix. Transforming itself from the 68th- to the 20th-largest convention center in the country, the city is almost tripling its space to 872,000 square feet. As a result, officials hope to increase the number of annual convention-goers from 135,000 to 375,000, a number more than five times higher than that projected for Tucson.

"It provides an economic engine for taxes," suggests Douglas MacKenzie, spokesman for the Greater Phoenix Convention and Visitors Bureau, of the $600 million expansion. "The dollars (spent by visitors) go directly into the community."

Officials from both Tucson and Phoenix downplay the potential competition for convention business between the two cities--but they also did the same regarding spring training baseball.

"I think our markets are different," MacKenzie says. "Every city is competitive, and Phoenix offers a high level of product. I'm sure there will be some competition."

Vaughan, of the local visitor's bureau, agrees, but lists several advantages Tucson can provide to attract new conventions.

"It doesn't take you 45 minutes to get to the desert," he says, in comparison to Phoenix's downtown. "Plus, we offer something unique not experienced anywhere else."

That might be, but according to a report recently released by two convention-industry groups, the business is currently in a "buyers' market" for space. Sanders says that means that a center wanting to attract users often has to offer deeply discounted rates, and the price of hotel rooms must also come at bargain prices.

A February 2007 Washington Post article highlights these problems for the 4-year-old convention center in the nation's capital. Instead of being the economic bonanza promised by backers, the newspaper states: "Convention attendance is dropping, the surrounding neighborhood is yet to be transformed by the promised new development, and conventioneers are filling fewer hotel rooms than expected."

Ignoring those potential problems, elected officials across the country continue to approve expansions of convention centers. "The Answer Is Always Yes," was the headline of a 2005 Forbes magazine article on the outcome of convention-center proposals.

"Politicians, playing local hero, are incapable of finding reasons not to build," the article states.

Sanders observes: "Tucson can conclude this is a pot of gold for downtown, since there is a religious-like belief these projects will revise downtowns. But the history is, it doesn't work. Instead, it's a highly competitive market, and (these projects) are the equivalent of rolling a whole lot of dice, each of which has to come up right."

But Johnson's convention-center study estimates that if the improvements are made, tens of thousands of additional out-of-towners will use the TCC. As people in the convention industry like to point out, these people are the biggest spenders in the travel business, dropping an average of $275 a day.

At the same time, the proposed downtown arena is expected to attract many more people to the area. Projections predict that annual attendance at arena events will escalate from the present 168,000 to 688,000, with about 40 percent of those the illusive fans of a still-undetermined minor-league hockey team.

According to the theory that convention centers can help revitalize downtowns, all those additional people should bring vitality back to the area. As Vaughan says, "The perception of downtown now is there's nothing to do. This project helps build excitement for locals."

In Sanders' opinion, though, money to be spent on the convention center and the proposed adjacent hotel could be invested more wisely elsewhere.

"Today, as all cities are obligated to compete with dozens of others," he writes starkly in his Brookings Institution report, "the prospects of real economic development and opportunity based on the convention strategy appear nil."

Sanders proposes spending the money "to build flexible local economies and workforces capable of adapting to social and economic change."

That philosophy, however, doesn't appear to be politically palatable, especially in an era where keeping up with the competition is seen as essential.

Another factor in determining what Tucson does at the TCC is the source of funds it will use for many of the improvements. That Rio Nuevo tax incremental financing money is restricted mostly to brick-and-mortar projects.

But if Sanders is correct, the promised financial and redevelopment rewards forecast for downtown and the TCC won't be realized even after all the money is spent.

When that has happened in other cities, he indicates, the financial race simply escalates: The next step advocated by politicians and convention-center boosters is often the expenditure of even greater amounts of public money.

"The argument is they must do something more," Sanders says. His research has shown communities keep throwing taxpayer dollars at attracting the elusive convention business, through adding more downtown attractions, installing new center management or increasing the facility's promotion budget.

But Tucson hasn't even begun the process yet. Eventually, though, the City Council will be asked to finalize the community's entrance into the convention-center race. By all estimates, the council will vote yes--just like almost every other elected body in the nation that is asked the same question.

The results won't be known for years, but if Sanders is right, the community could be left with another Tucson Electric Park--a facility built on boosters' dreams which faded in the reality of the Sonoran Desert.