SHOULD
GOVERNMENTS OWN CONVENTION CENTERS?
Heartland Policy Study
By Edwin S. Mills
No. 33 -- January 21, 1991
Taxpayer-financed convention centers
have become increasingly popular with state and local
government officials. Centers have been built or planned
in most large cities and in many metropolitan suburbs
and small cities and towns. (1) According to the
International Association of Auditorium Managers, the
convention industry's trade association, "work was
completed or started . . . on 250 convention centers,
sports arenas, community centers and performing-arts
halls at a cost of more than $10 billion" between
1975 and 1985. (2) Billions more may be spent during the
1990s. The enthusiasm for convention centers shows no
signs of abating.
Why have government officials
developed such an attachment to convention centers,
during a period in which other government-run business
activities are being returned to the private sector? Are
taxpayers getting their money's worth, as feasibility
studies conclude? Or do government-supported convention
centers represent a subsidy for businesses, paid for by
hard-pressed taxpayers?
Correct ways of analyzing these
questions are not difficult to find. All that is
required is careful thought and common-sense economic
principles. This Heartland Policy Study
addresses convention center issues by just such methods.
A brief review of the issues is presented in Part I. In
Part II, the author discusses the measurement of
convention center construction and operating costs,
while in Part III he explains how
"multipliers" are used to predict convention
center benefits. Part IV expands the analysis with a
discussion of government management of
convention centers.
The analysis points to several key
conclusions, most notably that convention center
construction, ownership, and management are business
activities best left to the private sector.
Government-owned and -operated centers rarely cover
their annual operating costs, much less their capital
costs. Contrary to popular belief, government subsidies
to convention centers do not "multiply" into
unique economic benefits that cannot be achieved by the
private sector. Thus, in Part V the author recommends a
course of action that includes an immediate moratorium
on public financing of convention centers and
privatization of existing government-owned and -operated
facilities.
I. BACKGROUND
What is a convention center? The term
is used loosely to refer to facilities that serve a
variety of closely related activities. Conventions, in
which members of a professional organization, political
party, civic group, or business group meet to exchange
views, are an important class of convention center
activity. Trade shows, in which products are displayed,
are a second important activity conducted in convention
centers. A third category, public performances, includes
concerts and sporting events. Indeed, in some cases
there is no meaningful distinction to be made between a
covered sports stadium and a convention center.
Sometimes a single structure serves both purposes; at
other times a convention center and a stadium are
located near each other, as would be true of the
proposed domed stadium and expansion of McCormick Place
in Chicago.
The meetings and convention industry
expanded rapidly during the 1980s; some $28.2 billion
was spent in 1987 alone. (3) According to a Laventhol
& Horwath analysis of data reported in The
Meetings Market, between 1979 and 1987 the number
of conventions held nationwide increased at an average
annual rate of 3 percent; total attendance increased at
an average annual rate of 9 percent. (4) The Trade Show
Bureau reports "a 68 percent increase in exhibit
space during 1980-1987 and predicts a similar growth
rate for the next decade." (5)
Convention center business is part of
the economy's service sector, and the entire sector has
been the source of rapid output and employment growth
during the last decade. Convention center activities are
important parts of business communication and marketing,
public entertainment, and leisure activities. Assuming
continued prosperity, such activities will almost
certainly continue to grow rapidly through the 1990s.
Their important role in state and
local economies notwithstanding, convention centers are
controversial. At the heart of the controversy are
questions as to who should plan, finance, build, and
operate them.
At first glance, the answer appears
obvious. Convention center operation and the many facets
of the meetings industry are well-developed private
business activities. Indeed, there are dozens of
privately owned and operated convention centers, among
them the International Exposition Center in Cleveland,
Ohio; the Sands Hotel in Las Vegas, Nevada; the Valley
Forge Convention Center in Valley Forge, Pennsylvania;
and the Odeum Sports and Exposition Center in Villa
Park, Illinois. Merchandising marts across the country
have spacious exhibit areas and, depending upon how
broadly you define the term "convention
center," most major hotels qualify. The services
provided by these private facilities are paid for by
exhibition, admission, and related fees.
The fact that there is a large private
convention center business suggests strongly that no
special characteristics of the business justify
government involvement. Nevertheless, many (probably
most) convention centers are built and operated by
government agencies. Virtually all of the largest
downtown centers -- in New York, Chicago, Boston,
Washington, Atlanta, Denver, and elsewhere -- are
financed and owned by governments.
Why are tax dollars directed toward
government-owned convention centers, when the services
such centers provide appear to be the natural province
of the private sector? Millions of dollars and
significant non-financial resources are at stake. In the
mid-1980s, the Jacob K. Javits Convention Center in
Manhattan was constructed at a cost of $478 million. (6)
The first expansion of McCormick Place in Chicago --
currently the largest trade show facility in the nation
-- cost over $300 million, (7) and the facility's
promoters are seeking an additional $1.4 billion for
further expansion. (8) The construction of the
Philadelphia Convention Center will carry a price tag of
$523 million upon its completion in the mid-1990s. (9)
II. MEASURING THE COST OF
CONVENTION CENTERS
Like any real estate facility,
convention centers incur two types of costs: capital and
operating. Capital costs are construction, land,
architectural, consulting, and related costs incurred in
building the center. Operating costs are recurrent
annual costs incurred in operating the center, mostly
labor costs. In most planning documents for large
freestanding centers, annual operating costs are
estimated to be from 2 to 4 percent of the capital
costs. Annualized capital costs (10) are probably in the
vicinity of 10 percent of original costs. Consider, for
example, a typical convention center built in the late
1980s, with one-half million square feet of exhibit or
meeting space. It might have cost $250 million to build.
Its annual capital costs would be approximately $25
million; its annual operating costs might be about $7
million.
The extraordinary and deeply
disturbing fact is that, among all middle to large
government-owned convention centers, few appear to
generate sufficient revenues from sale of services to
cover their annual operating costs, much less debt
service and other annual capital costs. One survey, of
25 government convention centers with more than 300,000
square feet of meeting and exhibit space, found yearly
operating losses averaged 42 percent of revenue. (11) By
way of illustration, operating cost data for each of 17
civic centers financed by Illinois' Civic Center Support
Act are summarized in Table 1 on the following pages. As
noted by analysts for the Taxpayers' Federation of
Illinois, which accumulated the data on the state's
centers.
Of the 17 existing civic centers,
three operate in the black, four break even, and (eight)
run a deficit. Data for two others are not yet
available. Of the seven facilities that appear
financially successful, only the Egyptian Theater in
DeKalb and the Pekin Civic Center do so without local
operations subsidies.
. . . The lesson to be drawn from the
history of the (Illinois) civic center program seems to
be that few projects will be able to hold their own
financially. (12)
TABLE 1
TABLE 2
Doing the relevant forecasting,
costing, estimation, analysis, and computing requires
years of training and experience, and a rare combination
of ability and intuition, but the details of the
procedure are not of concern here. The issue here is
whether convention centers are different from other real
estate projects and whether government ownership is in
the public interest. The answer to both questions is
"no."
If a private business proposed to
build and operate a convention center, it would proceed
only if the discounted sum of anticipated net revenues
exceeded the firm's estimate of the capital costs of the
project. But if such a criterion were applied to
feasibility studies of government-financed
convention centers, virtually none would be built. Why
do governments develop convention centers that
apparently would not be undertaken by private
developers?
Governments and their consultants
invariably claim that convention centers generate
important economic benefits that would not be generated
by private developers. Without these alleged benefits,
the claim of special status for convention centers falls
to the ground. The benefits can be referred to as
"multiplier effects" of convention centers.
A. The construction multiplier
It is claimed by proponents of
government-run convention centers that each dollar a
government spends to construct a convention center is a
dollar of extra income on the part of the workers,
suppliers, and construction company owners who do the
work. Since they have a dollar of extra income, they
spend most of it to increase their living standards,
just as would anyone else who received an extra dollar.
If the recipients spend $.80 of the extra dollar, and
save $.20, the additional $.80 of spending becomes added
income for its recipients.
Specifically, a construction worker
who earns a dollar working on a convention center will
spend some of the extra income on food, clothing,
entertainment, etc. for his family and himself. If the
family's total extra spending adds up to $.80, the $.80
is additional income for suppliers of goods and services
the family purchases. Recipients of the $.80 of
additional income also spend 80 percent of their extra
$.80 income, or $.64. That becomes extra income for its
recipients, who in turn spend most of it. The process is
assumed to continue indefinitely. Economics textbooks
show that for every extra dollar of spending, the total
additional income generated is 1/(1-C) where C is the
fraction of additional income spent by each recipient,
.8 in the example. (16) Using this formula, the
"construction multiplier" for this
hypothetical convention center project would be 1/(1 -
.8), or 5. In other words, for every $1 spent on
constructing the new facility, a total of $5 in
increased income will result.
Not surprisingly, government officials
whose communities develop convention centers are
concerned with income generated by the centers within
their own jurisdiction, not income generated elsewhere.
The State of Illinois, for example, values only income
generated for Illinois residents, not income generated
for residents of other states. In fact, however, a
proportion of the spending claimed to result from
convention centers is spent on goods and services
produced outside the government's jurisdiction. For
example, if a construction worker on the convention
center site actually lives in another state, or at least
spends part of each dollar's extra income on a vacation
outside the state or on a TV set produced outside the
state, these are leakages outside the jurisdiction, and
the multiplier must be adjusted to take them into
account. After adjustments for leakages and tax effects,
usual construction multiplier estimates are between 1.5
and 3.5. (17)
Government spending has no
unique multiplier effects. Misrepresentation is
inherent in government's use of the construction
multiplier, because there is nothing unique about
government convention centers. Whatever multiplier
effect a government convention center might achieve, the
same multiplier effect would result from a private
convention center.
Just think what a wonderful world it
would be if state and local government spending on real
estate projects actually did have unique
multiplier effects. We could simply turn over all real
estate development to government agencies and they could
spend the state into prosperity. The basic absurdity of
the idea is apparent. Government spending does not have
unique characteristics that generate prosperity in ways
that private spending does not. Indeed, there is some
empirical support for the conclusion that government
officials spend money less wisely and
productively than do their private, taxpaying
constituents. (18)
Governments do not usually attribute
explicit multiplier effects to privately financed real
estate developments. It is assumed that if the private
group did not spend the money developing Project A, they
would instead spend it developing Project B. Thus, one
multiplier effect would be obtained at the expense of a
similar one, and the net multiplier effect of a
particular project would be zero.
Exactly the same reasoning applies to
projects financed by a government agency. State and
local governments do not manufacture money. They get it
from taxes paid by people who would have spent the money
on other goods and services if they had not been
required to pay the government. (19) The spending by
individuals would have created exactly the same rounds
of secondary spending that result from government
spending on the convention center project. (20) Thus,
the "negative multiplier effect" caused by
taxation precisely offsets the positive multiplier
effect of the government spending. (21) This is true
regardless of whether new tax dollars or old tax dollars
(redirected from some other use) must be used to finance
the investment in a convention center. If they were not
used for the convention center, taxes could be lowered,
or at least not raised. The important point is that the
money used by government to fund convention centers
comes out of its citizens' pockets. It matters not
whether taxes must be increased to serve this purpose.
Governments count costs
as benefits. The use of a construction
multiplier results in another important difference
between how governments calculate benefits and costs of
convention centers and how a private developer would
make the calculation. Governments count the locally
paid wages and salaries on the construction project as a
benefit, whereas a private developer would count them as
a cost. Putting labor costs on the benefits
side of a cost/benefit analysis makes the project appear
to be a better investment than it actually is.
The implicit assumption of
government's approach to the calculation must be that
the workers on the projects would be unemployed if the
convention center were not built. No additional real
income can be generated on the spending side of a
project unless there are unemployed resources that can
be put to work by the spending. In fact, however, the
U.S. economy has been near full employment for two
years. There are almost no unemployed workers or
equipment that could be put to work building convention
centers. (And even if there were, it is unlikely that
the unemployed labor would be, or could become, union
members -- a credential generally necessary for work on
government construction projects.) This is not to say
that there are no unemployed persons who would like
jobs, but rather that very few of these persons could be
put to work on large construction projects. Thus,
available resources must be bid away from other,
competing projects, thereby raising their costs or
delaying their construction. These are significant
"opportunity costs" rarely taken into
consideration by the planners of government convention
centers.
B. The outside money
("export") multiplier
A second multiplier benefit attributed
to government convention centers is claimed to arise
from the fact that most persons who attend events at
these centers come from outside the jurisdiction. At
large meetings and trade shows, most attendees certainly
do come from outside the city, and many come from
outside the state. For concerts and sporting events,
most come from a much smaller area, perhaps from within
a relatively large metropolitan area. (22)
Out-of-town conventioneers spend money
primarily on local hotels, restaurant meals, and evening
entertainment, although also in retail shops and on
local transportation. Estimates made in the late 1980s
place expenditures per attendee at conventions at about
$125 per day, roughly $500 for a typical convention.
(23)
It is alleged that the money spent by
convention attendees generates local income, and that
the spending by recipients of this additional local
income generates additional rounds of income and
spending, resulting in a multiplier effect similar to
that discussed above. Once again, leakages outside the
jurisdiction must be estimated and subtracted from the
calculated multiplier benefits.
Government spending has no
unique multiplier effects. And once again,
there is nothing special in the export multiplier
calculation about convention centers or about government
ownership. Any local business, private or
government-owned, that produces goods or services for
sale outside the jurisdiction generates multiplier
effects similar to those generated by a convention
center. A local manufacturer of automobiles sold outside
the jurisdiction, a hospital that treats nonresidents
for health problems, or a financial exchange that buys
and sells financial instruments for nonresidents have
exactly the same effect. Similarly, guests of most
hotels come from outside the jurisdiction of the state
or local government in which they are located. The sale
of convention center services to nonresidents is an
export from the jurisdiction no different from the sale
of a locally produced car to a resident of another
state.
The export multiplier concept is
basically valid for all export sectors, but its
magnitude is vastly exaggerated. As is true of the
construction multiplier, the assumption implicit in the
export multiplier calculation is that unlimited amounts
of unemployed labor and other inputs can be put to work
to produce the additional goods and services assumed to
be produced in the various rounds of spending. If the
local economy is fully employed, or if the unemployed do
not have the skills and training needed to produce the
goods and services demanded, the multiplier effect of
new exports will be negligible, regardless of whether
the producer is a government convention center or a
local auto assembly plant.
Suppose a convention center is built
in a community where there is full employment. Any new
jobs at local hotels or restaurants, and the income
those jobs provide, must go to workers who commute from
other jurisdictions or to workers who move to the
community to take the jobs that have been created. In
neither case is there any benefit to residents already
living in the community. Likewise, even though local
workers may be unemployed, they will not get the jobs if
they lack the skills, training, or credentials (e.g.,
union memberships) required.
Every community has at least some
residents who would take jobs if they were available,
but many communities in the late 1980s had very few. Any
jobs created in such communities go to in-commuters or
in-migrants. In a local economy that is anywhere near
full employment, it is inconceivable that the outside
money multiplier is anywhere near the range of 2.0 to
3.5, as is commonly assumed. (24)
Clearly, there is no guarantee that
the initial spending of, say, $500 per attendee will
generate even $500 of income for local residents, let
alone additional income from subsequent rounds of
spending. Many of the jobs immediately generated in
local hotels and restaurants may go to in-commuters or
to in-migrants, and many go to already-employed
residents who are induced to change jobs by modestly
higher pay. It is unlikely that subsequent rounds of
spending would generate jobs and income for local
residents if the initial spending did not.
It is likely that export sales
generate some additional local income. State and local
governments have long recognized the economic potential
of export businesses, and have sought to encourage their
development. Yet rarely is it thought that the
multiplier effects of export businesses justify
government financing, ownership, and management. Rarely
is it thought that outside money multipliers are larger
than the total value of the goods and services produced
by project. And rarely is it thought that the multiplier
benefits are so large that investment is justified even
if sales from goods and services produced do not
generate enough money to cover operating costs. These
assumptions attach to only a handful of export
businesses -- and convention centers are among the most
significant.
Taxes are no easier to export
than direct fees for services. Sometimes the
government bonds issued to finance convention center
construction are wholly or partly financed by taxes on
hotels and restaurants in the vicinity of the convention
center. The justification given for such financing
methods is that event attendees will use these
facilities and thus indirectly pay the principal and
interest cost of the bonds to finance the convention
center that attracts them. But it is never explained why
convention center attendees might be more willing to pay
high taxes on hotels and restaurants than they would be
to pay higher fees for the use of the center to retire
the bonds. Do the advocates of government convention
centers believe that convention planners can be tricked
into booking a particular city's convention center by
hiding the true costs in hotel, restaurant, and bar
bills? It seems unlikely that convention planners or
conventioneers are so easily fooled.
In any case, the idea of having hotels
and restaurants collect revenues to pay for a convention
center is greatly oversold. Taxes that might be paid by
attendees are rarely anywhere near high enough to pay
the carrying costs of the bonds issued to build the
center. (25) The capital costs of convention centers are
predominantly paid by local taxpayers. These taxpayers
are asked to provide what amounts to a large subsidy to
nonresident attendees, a subsidy justified by the claim
that it generates large indirect benefits to residents.
But as we have seen, the procedures for calculating
indirect benefits are fallacious or result in gross
exaggerations of benefits.
IV. CONVENTION CENTER
MANAGEMENT
Governments tend not only to develop,
finance, and own convention centers, but also to manage
them. Although this report focuses primarily on
unnecessary government intervention in development,
finance, and ownership, some comment regarding
government management of these centers is necessary.
Government ownership of
convention centers does not make government management
necessary or even preferable. Commercial real estate
management -- of offices, shopping centers, apartments,
etc. -- is a well-developed sector of the private
economy. Many commercial properties are managed by
organizations other than those that own them. Some of
these management firms are quite capable of managing
convention centers, and some already manage privately
owned facilities.
Incentives in the private
sector. As is true of most activities carried
out by both the private sector and government,
convention centers tend to be more efficiently managed
by private firms. Three mechanisms at work in
the private sector make this so. The first is
competition. New profit-seeking businesses are free to
enter the market and challenge existing firms that may
be less efficient or less attentive to buyers' needs.
The result is downward pressure on costs and upward
pressure on quality and efficiency. In the government
sector, competitive incentives are rare or, where they
exist, perverse. For example, in the
"competition" among government agencies for
tax dollars, an agency that provides a high level of
service within its budget is likely to be
"rewarded" with a smaller budget increase than
an agency unable to live within its means.
The second mechanism at work in the
private sector is the investment of personal resources.
In a private firm, owners have invested their own money
in the business to earn a return, and that motivates
them to manage the business efficiently or to hire
managers who will do so. The consequences of
mismanagement or waste are often direct personal loss.
In the government sector, mismanagement and waste make
it more difficult for an agency to serve its clients
within its current budget -- giving the agency a strong
case for increased subsidies.
Efficiency in the private sector
derives from a third incentive. Private firms have
bottom lines -- profit-and-loss statements -- that guide
their day-to-day management decisions. Government
agencies have nothing that compares to a bottom line.
Profits are fictional or discouraged; the "use it
or lose it" mentality pervades government agencies,
particularly as the end of a fiscal year approaches. As
government convention centers have demonstrated time and
again, it doesn't hurt to run deficits; losses are
bankrolled by the taxpayers.
Of course, none of these three
mechanisms works perfectly in this imperfect world. Some
businesses are poorly managed for years before they
reform, are bought out, or go bankrupt. Moreover, all
three mechanisms are present in the management of some
government-owned convention centers to some degree.
There is often competition among government-owned and
private facilities. The fact that so many governments
have built or are planning convention centers makes
competition among facilities more intense every year.
(Incidentally, increasing competition, coupled with the
promise of subsidies to cover losses, means that
government convention centers will be encouraged to cut
fees for services to gain a competitive edge. As a
result, they run up increasingly large operating losses
that taxpayers will be required to finance in coming
years.)
Incentives in the government
sector. In a democracy, governments are said to
have an additional incentive to provide efficient
management of public assets. Government officials are
ultimately responsible to the people and can be turned
out of office if they do not pursue the people's
interests. But elections tend to be fought on general
issues, and it would be rare for mismanagement of a
convention center to be an important factor in a
political campaign. In addition, it is notoriously
difficult to pin blame for mismanagement on particular
officials. As a result, governments tend in large degree
to be influenced by narrow interest groups, not by
voters' interests. With convention centers, among the
most important interest groups are their customers,
their managers, and the unions that represent
construction and operating workers.
Inefficiency in government benefits
each of these special interest groups. Customers benefit
by underpricing of service, government managers by
increasing budgets, and unions by over-employment of
workers, higher-than-market wages, and favorable work
rules. (26) Mismanagement may make for good newspaper
copy and a story on the evening news, and an official
occasionally may be fired (27) or even convicted, but
mismanagement apparently tends to go on. Government
watchdog agencies sometimes investigate notorious cases
of bad management, but to no lasting effect. (28)
Convention center mismanagement will
not be solved by tighter government controls or better
government managers. The fundamental solution is to
recognize that government agencies face distorted
incentives, and thus must get out of the convention
center business.
V. SUMMARY AND CONCLUDING
REMARKS
Nothing in this report should be
construed as opposition to convention centers
themselves. The business has expanded rapidly and there
is every reason to permit the private sector to supply
the facilities on a competitive basis. But there is
no economic reason for governments to own convention
centers. There are many privately owned and managed
convention centers -- some are part of hotels or motels
and some are freestanding structures -- and there is a
substantial business sector that can develop and manage
them just as it develops and manages other commercial
real estate.
Convention centers are naturally
competitive and could be more competitive if governments
did not intervene so much. The sponsors of large events,
such as trade shows, consider holding their activities
in one of many locations, and large convention centers
are forced to compete with each other for the business.
Small and medium- sized centers located in small cities
and in the suburbs of large metropolitan areas compete
intensively for small and local events. This
competition, in the private sector, leads to greater
efficiency and attention to customers' needs. But in the
government sector, where profits are discouraged and
losses subsidized, competition leads to ever-greater
burdens on taxpayers.
As has been shown, convention centers
produce economic benefits that cannot be captured
completely by their owners, be they government agencies
or private firms. But this makes convention centers no
different from other businesses that produce goods and
services for "export" outside the local
community. The author has yet to see a convincing demonstration that the
private sector in a given community will fail to supply
"enough" convention center space.
If they wish to encourage the
increased private development of convention centers, the
first thing that state and local governments should do
is to declare moratoria on new government-owned or
-financed convention centers. The city or state that
does this will benefit even if other cities and states
do not follow its lead. (29) At the same time, state and
local governments should de-politicize the process of
determining where, when, or by whom a new facility can
be built. Any private developer able to attract
sufficient financing and assemble the necessary land for
the facility should be permitted to build. Private
developers of convention centers should not be treated
any better or worse than other private developers of
large and important real estate projects.
The most difficult question is what to
do with existing government-owned centers. To the extent
that they are inefficiently managed, such
government-owned facilities are worth more to an
aggressive private owner than to taxpayers. In fact,
since taxpayers will not even receive the return of
their capital let alone a return on their
capital, government-owned convention centers are
presently worth nothing to taxpayers. Thus, any money
that a government received from the sale of its
convention center would be a net return to taxpayers. Whatever
indirect benefits the center may generate for the local
economy would continue to be generated if the center
were sold to a private owner.
Selling existing government-owned
centers to private investors may be time- consuming,
since myriad legal, political, and economic issues would
need resolution. Care would need to be taken that the
sale was business-like and carried out to obtain the
best return possible for taxpayers. Britain now has
extensive experience selling public enterprises and
assets to the private sector and could be studied for
models and procedures that could be used here. Also,
many of the nation's larger accounting firms now have
departments that specialize in privatization and can be
expected to have expertise in this kind of activity.
Convention centers should be owned and
operated by private firms. There is no more
justification for government ownership of convention
facilities than there is for government ownership of the
myriad other export businesses whose benefits extend
beyond the local community. Popular belief and
"multiplier theories" notwithstanding,
governments cannot produce unique economic benefits that
are not also produced by the private sector. In fact,
because governments have few incentives to manage
convention centers efficiently, private
ownership and operation of these facilities is likely to
produce far greater economic benefits for state and
local taxpayers.
Published by The Heartland Institute.
Nothing in a Heartland Policy Study should be
construed as necessarily reflecting the views of The
Heartland Institute or as an attempt to aid or hinder
the passage of any legislation. Copyright 1991 by The
Heartland Institute. For additional information, write
The Heartland Institute, 19 South LaSalle Street #903,
Chicago, IL 60603; or visit Heartland's Web site at www.heartland.org.
ENDNOTES
(1) According to Successful
Meetings magazine, 43 cities are building
convention centers or expanding existing facilities,
adding 24 million square feet of space. Paul Braus,
"Growing Pains," Successful Meetings,
September 1990, page 91. On the East Coast alone,
Philadelphia's new $523 million center is scheduled to
open in 1993 with 430,000 square feet of exhibit space,
Baltimore is expanding its center, and Atlanta will
increase its exhibit space to 1.4 million square feet by
August 1992. Anne Swardson, "Convention Center: The
Sequel; Calls for New Complex in D.C. Prompt
Overexpansion Concerns," The Washington Post,
July 2, 1990.
(2) Steve Huntley, "Convention
centers spark civic wars," U.S. News &
World Report, February 10, 1986.
(3) Results of a study conducted by
Market Probe International, Inc., reported in Elissa
Matulis Myers, "The Lion's Share of Meetings
Business," Association Management,
February 1989, page 35.
(4) Laventhol & Horwath, Executive
Summary of report, Table III-1, page III-7.
(5) Anne Ballen, "Form and
Function," Association Management,
February 1989, page 53.
(6) Jacob Weisberg, "Battle of
the barns: Convention center fever," The New
Republic, April 28, 1986.
(7) See John McCarron and Dean Baquet,
"McCormick Place fiasco," Chicago Tribune,
July 21, 1985.
(8) See, for example, Rob Karwath and
Rick Pearson, "Daley, Edgar take a pass on McDome,"
Chicago Tribune, November 21, 1990.
(9) Anne Swardson, "Convention
Center: The Sequel; Calls for New Complex in D.C. Prompt
Overexpansion Concerns," The Washington Post,
July 2, 1990.
(10) Capital costs, as just described,
are incurred as the center is built. Annualized capital
costs spread capital costs over the useful life of the
center. Annualized capital costs include depreciation of
the center, interest on debt incurred to finance the
center, and foregone return that the owners of the
center could have received had they invested their
equity in the center in some other project.
(11) Linda Paustian, "How Some
Cities Get LOOTed," The Wall Street Journal,
October 5, 1987.
(12) Taxpayers' Federation of
Illinois, "Illinois' civic centers program:
Expansion continues beyond need," Tax Facts,
Vol. 43, No. 6 (July 1990), page 4.
(13) Steve Huntley, supra note 2.
(14) Anne Swardson, supra note 1.
(15) A similar assessment has been
made of government-owned and -operated sports stadiums.
In a study of 14 stadiums across the country, every
municipally owned stadium was found to have generated a
net loss of wealth to the host city's taxpayers. The
stadiums were found to have an aggregate net accumulated
value of negative $139.3 million, indicating
that the projects did not earn a return equal to
similarly risky investments in other vehicles. The only
stadium in the study to achieve a positive net
accumulated value was privately built, owned, and
operated Dodger Stadium. See Dean V. Baim, "Sports
Stadiums as 'Wise Investments': An Evaluation," Heartland
Policy Study No. 32 (Chicago, IL: The Heartland
Institute, November 26, 1990).
(16) To economists, "C"
represents the "marginal propensity to
consume." There is, of course, no reason to believe
that consumers always will spend the same
fraction of their additional income. Any time somebody
in the expenditure chain simply pockets the additional
income derived from the sale of goods or services, the
multiple expansion of income and output comes to a
screeching halt. Moreover, people differ with respect to
their marginal propensities to consume, making the
multiplier calculation all the less useful for public
policy purposes.
(17) In a report prepared for The
Indianapolis Convention & Visitors Association,
analysts used a multiplier of 2.2 in estimating the
total economic impact of conventions in Indianapolis.
See SMC Company and Business Economics Affiliates
(Indiana University School of Business), "The
Economic Impact of Conventions on Indianapolis -
1985" (Indianapolis, IN: Indianapolis Convention
& Visitors Association, May 14, 1986). Laventhol
& Horwath appear to have used an unusually high
multiplier of 4.5 in their estimate of the indirect
economic benefits expected to accrue to the State of
Illinois from the construction of a convention center
for the Greater Woodfield area. See Laventhol &
Horwath, "Economic and Fiscal Impact Analysis for
the Proposed Convention Center in Greater Woodfield,
Illinois" (Schaumburg, IL: Schaumburg Metropolitan
Exposition and Office Building Authority, July 14,
1989), Table C.
(18) For example, Edgar K. Browning,
of Texas A&M University, has estimated that the
diversion of private resources to government use results
in a net social loss of one dollar for every
ten dollars diverted. Edgar K. Browning, "A Hidden
Welfare Cost of Taxation," National Tax Journal,
Volume 30, 1977, pages 88-90. A 10 percent loss may not
appear at first glance to be significant, but the
compound impact over a period of time can be staggering.
A 10 percent difference in return on investment (for
example, a 5 percent annual gain vs. a 5 percent annual
loss) over a 20-year period yields a sevenfold
difference in results. That is, a $1 million investment
could be turned into an asset valued at $2.65 million or
just $.36 million. See John Semmens, "Government
Business: A Capital Offense," The Free Market,
July 1985, pages 3-4.
(19) As noted earlier, government
convention centers typically do not generate fees
sufficient to cover operating costs, so tax dollars make
up the shortfall. And, although government convention
centers are typically financed at least in part by bonds
issued for the purpose, interest and principal payments
must be paid from tax revenues.
(20) Some may question whether private
spending has the same impact as government spending. In
fact, the construction multiplier theory assumes this to
be true. While the first "round" of spending
may find a private individual spending a
"government" dollar (say, a construction firm
paid directly by a government agency), later
"rounds" of spending -- assumed by the
multiplier theory to have the same impact as the first
-- are instances of private individuals spending
"private" dollars.
(21) This point is developed more
fully in William Hunter, "Economic Impact Studies:
Inaccurate, Misleading, and Unnecessary," Heartland
Policy Study No. 21 (Chicago, IL: The Heartland
Institute, June 22, 1988).
(22) Survey data on these issues are
found in trade magazines: Meetings & Conventions,
Successful Meetings, Association Management,
and Tradeshow Week among them.
(23) Ibid.
(24) See Convention Centers,
Stadiums and Arenas (Washington, DC: Urban Land
Institute, 1989) for multiplier values assumed in a
sample of projects.
(25) Available data do not allow for
the calculation of hotel, restaurant, or liquor taxes
paid by non-resident conventioneers, so it is not
possible to measure how successfully convention taxes
have been exported, or even how much has been generated
by them. However, the following exercise will fix
magnitudes.
Assume, optimistically, that a large
convention center attracts 200,000 attendees per year
and that all are from outside the jurisdiction. Assume
that each attendee spends $500 in the community and that
all $500 is spent on goods and services subject to a 3
percent tax levied to help defray the center's costs.
Total attendee spending is $100 million per year
(200,000 x $500) and total tax collections are $3
million ($100,000,000 x .03).
Assume that the center's total
construction cost was $500 million, financed by tax-free
bonds at a 7 percent annual interest rate. The bond
interest alone, ignoring principal payments, is $35
million per year, over 10 times the amount raised by the
tax.
(26) Chicago's McCormick Place, for
example, is notorious among trade show managers and
convention-goers for the severity of its union work
rules. Exhibitors complain of ". . . unreasonable
demands by the electricians, carpenters, decorators and
other unionized workers . . . [One] firm had to hire a
union worker to move an eight-inch-high pedestal.
Another exhibitor told of having to pay a member of the
decorators' union an hour's wages to spend two minutes
taking down cardboard signs that were put up with
tape." Thomas M. Burton, "McCormick exhibitors
vexed by thefts, unions," Chicago Tribune,
September 9, 1985.
(27) During the 1985 expansion of
Chicago's McCormick Place, for example, "Cost
overruns of $60 million inflated the bill to $312
million, required a bailout from the Illinois General
Assembly, and forced firings of all 12 members of the
facility's board of directors in November (1985)."
Steve Huntley, supra note 2.
(28) On the expansion of Chicago's
McCormick Place in the mid-1980s, see Metropolitan
Fair and Exposition Authority Cost Overruns on Expansion
Project (Springfield, IL: State of Illinois Office
of the Auditor General, September 1985).
(29) The city or state would benefit
in three ways. First, it would no longer be responsible
for a loss-generating facility. Second, it would likely
enjoy a slightly higher rate of economic growth than it
would otherwise achieve, since it would avoid having to
levy property or tourism-related taxes to subsidize the
convention center. Lower taxes tend to lead to increased
economic growth. See, for example, Joseph L. Bast and
John Beck, "Taxes and Economic Growth,"
Chapter 2 of Coming Out of the Ice: A Plan to Make
the 1990s Illinois' Decade (Chicago, IL: The
Heartland Institute, 1990). Finally, the city or state
would be a more attractive convention site, as private
convention centers tend to be bound less by restrictive
union work rules and thus have lower operating costs.
by Heartland
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