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
Policy Studies
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