Economics of an Ann Arbor Conference Center II

As we explained in the first of this series, this blog discussion is slightly modified from a white paper prepared by a subcommittee of Public Land – Public Process. The authors are Vivienne Armentrout, Nancy Kaplan, Eric Lipson, and Leslie Morris.

Editor’s note:   In many of these discussions, there is some conflation of conference centers and convention centers.  There is probably a good numerical definition out there somewhere, but basically it is a matter of scale.  Convention centers (think McCormick Place in Chicago) are able to handle many thousands of participants and are typically the site of trade shows and political conventions, for example.  What is being contemplated for Ann Arbor’s Library Lot is much smaller, intended for small specialty conferences and meetings.  But many of the points under discussion are similar.

II. Experiences of Other Cities

There have been numerous studies of publicly subsidized conference centers over the last decade, and most of them carry an unambiguous message: these facilities are a financial drain on the governmental units that sponsored them.  A 2005 study by the Brookings Institute notes that localities have been in an “arms race” to build convention centers (44 in construction as of that year) and that most were losing money at that time despite dedicated taxes.  Testimony before the US Congress (Domestic Policy Subcommittee) in 2007 stated that localities were being forced to offer special discounts and incentives in order to compete in an expanding supply at a time that travel is actually declining.  (Note that these reports predate the economic slowdown that began in 2008.)

The 2007 study also noted that localities rely most often on revenue bonds paid for by hotel guest taxes.  (This funding option is not available to Ann Arbor; the Accommodations Tax is paid to the CVB and Washtenaw County.)  It has a number of examples in which rosy market studies were based on “quite simple models…more craft than science…While consultant market and feasibility studies for these hotel projects indicate little public risk, with hotel operation forecast to generate sufficient net income to pay for debt service, those forecasts have almost invariably proven incorrect.”  Not only do the centers lose money and fail to make their debt payments, the jobs promised often fail to materialize.  And the study makes a point that is familiar in that it describes the Valiant proposal: “some communities used tax-exempt municipal bonds to build a hotel, most often through a non-profit corporate ownership arrangement. These hotels bear the name of a major national brand under a long term management agreement, but the equity investment and ownership risk is largely or entirely public.

Clearly, cities like Ann Arbor need a careful analysis before gambling on public subsidy of a conference center. Steven Spickard’s 1998 summary (titled “If you build it, will they come?”) is to the point.  He offers a number of cautionary notes about the business of conference centers.

  • Public investing for economic impacts is like any other leveraged investment. There is the possibility of negative leverage as well. Economic impacts can be less than zero.
  • It takes more than a meeting facility to get conventions and conferences to come to your city.
  • Contrary to a popular misconception, convention and conference centers are designed to lose money.

Spickard goes on to say that communities may legitimately decide to build a conference facility, but should be clear-eyed about their abilities to attract this business and should understand what their expectations can realistically be.  Otherwise, the city may be burdened with debt service for many years to come, and a facility that loses money.

Some points especially relevant to Ann Arbor in its ability to attract conference business:

  • Is it a retreat, to get away from where they normally are?
  • Is it to get together in a convenient place, centrally located?
  • Is there any unique draw to your community?

In other words, will events be scheduled in Ann Arbor because it is a destination in its own right?  Or is it especially convenient from a geographical and travel nexus viewpoint? A recent article (2009,  in Governing Magazine) makes this point with contrasting tales of a Denver convention center (successful) and a St. Louis facility (failure).  The existence of a center alone does not draw business.

Ann Arbor has several negatives as a destination. One is the relative difficulty of getting here by air. The travel from Detroit Metro is relatively lengthy and inconvenient, and winter weather can affect both the airport and travel on I-94.   Another is the lack of any particular attraction other than the UM. Are there any special reasons that travelers from, say, Indianapolis or Ithaca would especially seek to come here?  There are seasonal problems.  An Ann Arbor facility would doubtless be hampered by certain “blackout dates” including the significant fall football weekends and Art Fair, when crowding and competition for hotel rooms would make it difficult to schedule a meeting.  Winter months would be problematic because of the weather, which is cold, gray and unpleasant at times, unpredictable, and can make travel difficult.  An Ann Arbor conference center/hotel might be unused (for conferences) for significant periods.

Editor’s note:  Our recent blog post mentions that feasibility studies have been mentioned in several contexts.  This post also has some information about the city’s bond indebtedness that is relevant to the discussion of public/private partnerships for the purpose of building a conference center/hotel.

Coming soon: discussion of possible economic benefits to Ann Arbor’s downtown and economic status.

Explore posts in the same categories: Business, civic finance

2 Comments on “Economics of an Ann Arbor Conference Center II”

  1. Peter Eckstein Says:

    The two reports on the economics of a conference center were excellent, and I say this from the standpoint of a trained economist.

    A few points:

    1) Thursday evening’s presentation by Dan Gilmartin and the panel heavily stressed the importance of making cities more attractive places to live for recent college graduates. Some of the changes needed may or may not suit older residents like me. While a convention center may be good for downtown restaurants, would it really do anything to make the area more attractive to the young professionals?

    2) From following the hotel-conference center issue from a distance, I get the distinct impression that the City Administrator is acting primarily as an advocate for the Valiant proposal, not as a neutral judge. If an outside consultant is being hired,I do not think that he is the person who should be selecting that person or firm. I doubt that you would disagree.

    3) The graph on the city’s skyrocketing indebtedness supported my worst fears, but the comments about it being oversimplified make it harder to understand. I would hope that you and other members of your team could do an analysis in greater depth, to cover all the various forms of indebtedness, to be sure that each apple is being compared to another apple over time, and to calculate the annual cost of debt service.

    • varmentrout Says:

      Thanks, Peter, I really appreciate your comments. There will be a third installment in the Economics series in the next day or so. I should consider your first point in updating my current draft.

      Regarding point (3), my academic training made me put that in about oversimplified data, etc. I said it because I only showed data relating to governmental activities. That is where we have had the growth in indebtedness due to issuance of bonds for major projects. Other categories involve business-type activities (shown on the CAFR sample I provided); these relate to such things as water mains and are (we hope) covered by user fees. Also, we mortgaged the first 10 years or so of the Greenbelt millage by bonding with those millage proceeds dedicated to paying the bonds. A side trip to see how that is working out might be instructive. But that type of analysis is beyond the scope of this post, and probably beyond my training and skills in accounting and financial analysis.

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