Looks like Paton, Antenori and Melvin are going to have to stick their necks out to keep the TIF funding for Rio Nuevo. You can bet there will be many strings attached. The idea of rational, business owners, without a stake in the project is a critical part of the plan.

From today’s AZ Star,  discussion on Rio Nuevo:

“I don’t want to kill Rio Nuevo,” Antenori said. “As much I’d like to do it for spite to the City Council, the reality is the business impact is far more important. We have to save it.”

“The city government in Tucson is dysfunctional in almost every dimension,” said Sen. John Huppenthal, R-Chandler. “And the idea that we would trust them, even in some reconfigured state, with $500 million to advance the economic growth of Arizona, I would find astonishing.”

Waring told fellow Republicans that Rio Nuevo Director Greg Shelko didn’t further his cause at last month’s hearing.

“It was a really underwhelming performance; I can’t emphasize that enough,” Waring told a group that included Senate President Bob Burns and Appropriations Chairman Russell Pearce, who will be putting the budget together. “It was really, really ugly. … It was about as bad a performance as you’re going to see down here. They really didn’t articulate what it is that’s happening.”

Even local lawmakers were critical. Sen. Jonathan Paton, R-Tucson, said, “Quite, frankly, as a Tucsonan, I was embarrassed.”

But Paton also said the hearing was a wake-up call for city officials, who are now focusing on the plans for the Convention Center, hotel and arena as signs of progress.

“I had been telling them they had problems with the Legislature,” Paton said. “I don’t think they really took that seriously. I think they started talking it pretty seriously after that hearing.”

 Rio Nuevo’s future could rest in the ability of Tucson Republicans – Antenori, Paton and Sen. Al Melvin in particular – to convince their colleagues the project is worthy.

Melvin, vice chair of the Senate Appropriations Committee, has the ear of Pearce. Melvin indicated Tuesday he wants to keep the funding in place with Paton’s legislative changes.

“All these things, if we can incorporate them, hopefully we’ll get it on the right track,” Melvin said.

In what he himself calls a “twist of fate,” Antenori, a long-time critic of the project, has taken the lead defending Rio Nuevo to House leadership. He wants to retain all funding.

In a mad rush to stave off elimination of the Rio Nuevo pot of money, the Tucson City Council has announced a redirection of the priorities for spending the $80 million they cashed in just before the New Year from bonds they sold, desperately, at a premium. 

Now, rather than funding for more design of museums and for construction of the Convento (known by some as the mud hut), the city will spend what might be the last Rio Nuevo money it ever sees on an arena and convention hotel. 

Do it Right or Don’t Do It at All!

To fans of the much-needed hotel, this is a very late, only-barely-better, better-late-than-never situation.  It would be more persuasive if it weren’t such an obviously desperate maneuver to save the TIF and the Gem Shows at the same time. 

I have yet to meet a fan of the arena as the city has proposed it. 

From casual conversations with real people to reading the on-line comments and blogs, there seem to be two schools of thought on the arena that the city seems to want to build so desperately:  either build it bigger or don’t build it at all.

It’s puzzling that the city would spend $130 million on a new arena that only gives Tucson 2,000 more seats than the crappy “Madhouse on Main”, as the Icecats coach calls the Tucson Arena.  I know, I know;  it’s not just the number of seats that makes the crappy arena uncompetitive.  It’s the ceiling height, the lack of amenities, the lack of decent locker rooms and green rooms, the lack of luxury boxes for Rich Singer to feel important in, and the smell.  

Nonetheless, with a growing city (albeit economically under-performing its population), wouldn’t the 12,000-seat arena be obsolete the day it opens? 

Apparently the UA has made it clear that it is not moving the basketball Wildcats out of McKale Center, but even so, there are opportunities for national-level sporting events that would surely be out of reach of an arena so small.  There are AAU events, NCAA events, Olympic qualifying events. 

Sizing to the Sweet Spot

The city’s argument against a bigger arena is that it can’t afford the cost of construction.  But if the operating revenue of a bigger arena justified the cost, the cost wouldn’t matter, would it? If you were in the private sector, and were trying to decide how big of a plant to build, would you limit yourself to building a smaller factory that could only produce enough output to serve a limited area if you could cost-effectively produce enough to serve a much larger market and make larger profits by building a bigger factory?  Of course not.  You would find the sweet spot. 

There may be multiple equilibrium points here.  It’s conceivable that 12,000 seats is more cost-effective than 15,000 seats.  City officials seem to be making that argument, and they may be right.  The new revenue brought in by a 15,000-seat building may not be enough to justify the additional cost of the 3,000 seats. 

But, perhaps a 17,000-seat arena opens up a whole new set of revenue opportunities not available at 15,000 seats, and an arena of that size, while costing significantly more than $130 million, would pay the city back more handsomely than the Little 12,000-seat Arena That Couldn’t.   Perhaps the additional revenue would be enough to justify the additional cost.  Perhaps not.  I don’t know.  You probably don’t know.  The point is, the city had better know what its options are, and it had better be able to explain why it has selected the option that it has.

Explain it to Us-Who Knows, We May Even Support It!

This would be called Leadership.  Understanding the full implications of the various policy options open to you, evaluating the best deal for the current and future needs of the community, and then communicating to the citizens/taxpayers why the optimal option was selected over other alternatives. 

Let’s say you’re the mayor of such a city that was considering building an arena.  Go on TV.  Write guest opinions in the newspaper.  Hold a town hall meeting and televise it.  Tell John C. Scott and his listeners about it.  But don’t just do the cheerleading bit.  Explain the logic and the thought process and what the implications of the alternative scenarios were and why you reached the conclusion that this alternative was best for us.

What’s the Real Reason We’re Doing This?

Also, while you are at it, tell us what we are getting out of the arena you are building for us.  Minor-league hockey?  Arena football?  More and better concerts?  Monster truck rallies?  NCAA gymnastics championships?  Sweet 16 basketball?  Preventing the tribes from building an arena outside the city limits?  Or perhaps, just more exhibit space for the expanded convention center you also seem hell-bent on building.  Is the arena necessary in order to make the hotel work?  (If that’s the case, then you’d better extend your presentation to tell us how and why the 525-room hotel is necessary and whether it is truly feasible.)  Just tell us, we’re adults.

If the threat of losing the Gem Show will truly be abated by building the hotel, then tell us that.  I just want to know.   Use a flow chart if you have to.  And don’t have Greg Shelko, Rich Singer, or Glenn Lyons explain it.  You do it.  You’re the mayor.

Whatever you do, don’t spend $130 million of our money just to prove a point.  Or just to save a bunch of diverted state tax money you no longer seem entitled to spend based on your track record to this point.

The crazy meter is flashing again downtown Tucson. ArizonaEighth.com ran one of the best stories I’ve seen in a while – hilarious – HERE.

(Editor’s Note: This was veteran newsman Steve Emerine’s first column for Inside Tucson Business. It appeared in the June 20, 2005, issue and dealt with an idea at the time to build a 27-story high-raise in downtown Tucson called the Century Tower. Estimates were that it would cost $60 million to $70 million. That week, the Tucson City Council decided against giving Bob McMahon, owner of Metro Restaurants, and Don Martin, owner of Competitive Engineering, their requested exclusive negotiating rights to buy the city-owned property for the tower. As a result McMahon and Martin never pursued the idea.

We reprint the column in tribute to Steve Emerine and as an example of the knowledge and institutional memory he brought to local issues.)

So where in the world did restaurant owner Bob McMahon and manufacturer Don Martin get that idea of building a 27-story high-rise next to the Joel Valdez Library in the middle of downtown Tucson? Are they crazy? Well, it wasn’t their idea. And no, they’re not crazy.

For 40-plus years, experts have told officials in cities whose downtowns have crumbled because of outlying shopping centers with plenty of free parking to do exactly what McMahon and Martin are proposing.

They told Tucson to do it. I wrote stories mentioning buildings like the McMahon-Martin proposal when I covered City Hall in the 1960s for the Tucson Daily Citizen (the afternoon paper’s official name when it was owned by the William A. Small family.)

In those days, urban experts were urging cities to let the private sector build tall structures with underground parking, retail stores at street level, several floors of office space, upscale residential units above the offices, and a restaurant or night-club on the top floor.

The last idea was the only one Tucson adopted then. We had the Skyroom, which later became the Tucson Press Club, at the top of the nine-story Arizona Land Title Building at the northwest corner of Stone Avenue and Alameda Street, and the posh Old Pueblo Club later took over the top two floors of the Tucson Federal Savings Tower south of Pennington Street on the east side of Stone.

Buildings at those locations are now owned by Pima County. The title building was gutted and rebuilt to house development services. The former savings tower is mostly occupied by county lawyers. And the night-clubs and restaurants in both buildings are gone.

Tucson finally jumped on the national urban renewal bandwagon, but it followed advice from other urban planners to pursue the tourism and convention business. Once historial neighborhoods that had been taken over by sleazy bars, flop houses, prostitutes, drug dealers and other frowned-upon uses were condemned.

They were replaced by the Tucson Convention Center Arena, Music Hall and Leo Rich Theatre, the hotel currently known as the Radisson City Center (Editor’s note: now the Hotel Arizona), and the rambling multi-colored La Placita complex. Recommendations to build a building like McMahon and Martin have suggested were put on hold.

City officials were told that the Diamonds department store chain would anchor La Placita. When Diamonds decided to go to shopping centers and not downtown, the promoters swore La Placita would thrive anyway with restaurants and lots of small shops and offices on all levels.

That didn’t work. In hindsight, it might have if they had let people live on upper floors of La Placita so the ground-floor businesses could have some customers within walking distance. When that idea was proposed later, the cost of adding adequate plumbing for residential uses was too high.

So La Placita joined the title building and the savings tower building to house more offices for government workers to hang out in from 8 to 5, five days a week.

That brings us back to McMahon and Martin, who want a six-month option to buy land next to the library at its appraised market value so they can study the feasibility of their tower idea. If it will work, they would buy the land and go ahead. If not, the city would keep the land.

Some opponents decry the loss of a grassy patch next to the library and say the tower would block their views of the mountains and the old Pima County Courthouse.

But the grass is relatively new, replacing what was an old green-colored office building and a parking garage. And some of the views have already been blocked by other things.

At least the tower would help hide that ugly red cockroach statue at the library.

February 15, 2009, 8:15 p.m.

CARLI BROSSEAU
Tucson Citizen

The city will conduct an “internal review” of payments to the University of Arizona for UA’s planned Science Center complex downtown, Tucson City Manager Mike Hein said Thursday.

Hein said the review was prompted in part by political pressure from the state Legislature, which has threatened to revoke the tax-increment financing district Tucson has relied on to fund downtown and Rio Nuevo redevelopment.

But some city accountants have been questioning UA’s invoices for months. In October, Rio Nuevo Finance Manager Stacie Bird asked Hein to sign a memo that said Hein approved “expenditures the City does not allow on other District projects.” If he didn’t sign, she wanted a meeting with him and UA officials to talk about the spending.

Hein signed it.

Then on Jan. 29, Tucson Finance Director Frank Abeyta ordered an audit of city payments to UA and of the outstanding bills for the Science Center, Rio Nuevo’s flagship project.

Hein, through Bird and Assistant to the City Manager Jaret Barr, put a stop to the audit that day, saying it wasn’t the city’s role to question UA’s expenditures.

On Jan. 30, Abeyta ordered Bird to stop all payments to UA, then abruptly quit. He had been head of the city’s finance department for only four months.

Neither Abeyta nor city officials will say whether the dispute over the audit was the reason for Abeyta’s resignation, but Abeyta, in an exchange of e-mails with Bird Jan. 29, questioned the appropriateness of some UA bills.

In an interview Thursday, Hein cited staffing concerns, the cooperative ideals of public partnerships and the terms of the contract between the city and UA as reasons for resisting an audit and for paying the full amount billed by the university.

He said the city is bound to pay its share of project expenses even though invoices show spending that the city and the Rio Nuevo district normally wouldn’t cover.

But last week members of a state legislative committee criticized Rio Nuevo’s lack of transparency and money management and also complained about a lack of tangible results.

UA’s bills may not help the Rio Nuevo projects’ reputation with legislators.

The charges Bird labeled “questionable” included $161,585 for salaries, $2,155 for food, $14,374 for new computers and a $2,289 trip to Pisa, Italy. The items in doubt accounted for more than $186,000 of the $692,000 the university spent on the project in June and July.

The most recent invoices reviewed by the Tucson Citizen show that spending patterns haven’t changed much, and documents supporting much of the billed amounts were missing.

Receipts lumped with the January invoice show another trip to Pisa, costing $1,188 in June, and requests for reimbursement for a $3,927 trip for two to attend a planetarium conference in Chicago and $1,784 for a university employee to learn about data mining and information storage at a resort near Las Vegas.

The slips showed meals for two in June and July in Tucson at Sullivan’s Steakhouse ($127.98), Barrio Food & Drink ($73.51) and the Arizona Inn ($49.92), and a $165 charge from a HoneyBaked Ham Store that included a $30 delivery fee.

January’s invoice lists a charge of $77,025.42 for “other specialty & design consultant fees.”

Abeyta wrote in an e-mail sent to Bird at 7:54 a.m. the day he resigned that “The City Manager said he would rather not know what discrepancies we find in the payments to U of A. . . . Also he indicated what you said, that as long as U of A approves the expenditures, we don’t have to. I obviously don’t agree with that.”

Abeyta said he was concerned that unless the project was slowed, the city would be spending money on the Science Center that had been allocated to other projects. “Since we have only $2 million from this bond issue, someone has to slow this project down,” he wrote.

UA has billed the city for about $1.3 million of the $2 million Rio Nuevo bond allocation already. The city has not paid the university any of that amount.

Bird, who reports directly to Hein but earlier also to Abeyta in his role as Rio Nuevo treasurer, said Thursday the delay in payments was because of work on the city’s sale of $80 million in Rio Nuevo bonds, not questions about the UA’s spending.

The city has agreed to pay half the cost of the Science Center, up to $130 million. UA has spent and approved more than $13.3 million so far, according to its expenditure summary.

The contract states that Tucson must reimburse the university for “one-half of the total design phase amounts expended to date at the end of the month.” There is no clause clarifying procurement policies.

The contract does, however, give the UA an out if its funding is cut by legislators, allowing it to renegotiate terms or cancel the deal.

University of Arizona President Robert N. Shelton said Saturday that the Vice President of Business Affairs Joel Valdez and Hein have been discussing a revised construction plan for budgetary reasons.

Councilwoman Nina Trasoff, who presides over the Rio Nuevo council subcommittee and whose ward covers much of the Rio Nuevo district, said Thursday, “This has been very difficult. . . . We are bound by the terms of the agreement.”

Councilwoman Karin Uhlich, who called for a city audit commission in June after a dispute with Hein and questions over budget figures, said a review of the UA Science Center invoices could be the commission’s first work.

“It’s true that we have to watch all costs at this time, but transparency and accountability remain priorities,” Uhlich wrote in a statement. “Mayor and Council amended the outside auditing firm contract to allow for ‘spot audits’ costing less than $50,000. That may be a way to contain the cost of any review needed.”

UA’s Valdez, a former Tucson city manager, declined to comment on specifics of the university’s spending Thursday. He did say, however, that “I’m not opposed to an audit.”

I’m a new author to this blog and appreciate the outlet to set some facts straight. I’m concerned that the local media is missing the mark on some of the Rio Nuevo issues and thought I would take a moment and bring the readers another viewpoint. There was a meeting last week at the State Legislature Finance Committee on the future of Rio Nuevo TIF funding. You can catch the video HERE.

Want to see how a real city has used TIF as a professional economic development tool, to leverage enormous commercial growth in its downtown?  Let’s look to our nation’s capital, of all places, where Downtown D.C. has experienced a renaissance in recent years.  

Check out this Power Point presentation that explains how a TIF has been used to stimulate significant investment of hotels, retail, and a museum that is part of a mixed-use development, in the District of Columbia.

Click on “TIF Case Studies_Washington D.C.ppt“.

With the recent acceleration in criticism of Rio Nuevo and its possible termination at the hands of the state legislature, I have heard and read many misconceptions about how the Rio Nuevo TIF works and what the City did wrong in creating this mess.  The City did a lot of things wrong, strategically and tactically, with things done and not done, and unfortunately some of the things it did right have been too little, too late to save it from its likely fate at the state capital.  

But the trouble started with how the district was drawn back in 1999, four years before the City even started collecting TIF revenues from the State of Arizona.  Last week Rio Nuevo Director Greg Shelko was bothered that the Senate Finance Committee brought up how the district was drawn—again—but to bring this up is not just dredging up the past, or about revisiting outdated criticisms or old grudges.  The way the boundaries were drawn is more than an inconvenient truth about Rio Nuevo.  It is the fundamental truth about Rio Nuevo and why it hasn’t lived up to its enormous promise.  

Rio Nuevo was handicapped before it even began by decisions that were made several months before the voters approved the project in November 1999.  The City decided to draw up a district that included property from “A” Mountain all the way down Broadway to what was then called Park Mall.  

Some Tucsonans have defended a downtown development district that takes in all of the TIF generated at El Con and Park Place as Tucson’s way of achieving payback for the State revenue-sharing inequities that Pima County suffers relative to other areas of the state.  However satisfying this offset of a perceived injustice may be to Tucsonans, the reality is that the gerrymandered TIF district—drawn in the shape of a very long rifle—has been a hindrance to development, regardless of how much money it kicked back to Tucson.  

It has been a hindrance because it has skewed the City’s incentive structure for how to plan and finance revitalization.  The boundaries as they were drawn gave the City access to huge sums of state sales taxes from The Home Depot, Circuit City, Mervyns, Dillard’s, Macy’s, two Targets and many other stores and restaurants, but this largesse motivated the City to use TIF as a big piggy bank that replenished every month, rather than as an economic development tool that depended on their wise use of the opportunity to generate retail growth in Downtown.   With so much money coming in from existing and new sources along Broadway, and a large wish list that included an aquarium, several new museums, a re-creation of the Mission San Agustin complex, a restored Fox Theatre, and several other projects, the City chose to view all that free money from the east end of Broadway as a piggy bank.  It was as if any TIF generated in Downtown itself was a bonus.  When you don’t have to work for something, you don’t value it.  The TIF money was free, so Tucson didn’t make a commitment to generating more of TIF in the area that should have been producing it.  

The fact that Downtown business was moribund in 1999 was actually a great thing from the tax-increment standpoint.  The state sales taxes from any new development, any net new business activity, would have been 100% incremental compared to the base year of 1999.  If Hotel Congress increases its sales by 10% over 1999, the corresponding 10% increase in state sales tax is the tax-increment for that property.  But if the empty lot down the street (and some or all of the other 30 empty lots) gets filled in with new businesses (with offices, apartments or condos on top, of course), then whatever sales taxes are generated there are 100% “increment”.  So the fact that downtown is/was dead is an advantage with the TIF scheme;  it creates an opportunity to enjoy a huge windfall if you actually invest in projects that generate new sales tax in Downtown.  

When the City issued its 1999 RFP for Rio Nuevo, a California developer responded to it with a proposal to build lots of retail on the west side of I-10, on the south side of Congress.  It was this developer, NOT the City, that proposed using TIF to fund the construction of attractions and infrastructure.  The developer envisioned a master-planned area with the Sonoran Sea Aquarium, Museum of the American West, and the Universe of Discovery (I’m not making these up; these were the names of the museums that were proposed in 1999), and a Regional Visitor Center serving as the anchors of a mixed-use development that would include 500,000 square feet of outlet stores.  The new sales taxes from this retail center would have all come back to Tucson, as the 1999 sales tax base on the land where it would have been built was Zero.  

That particular developer didn’t have its act together, and probably couldn’t have pulled the project off, but the City could certainly have found one that did, let’s say Forest City or General Growth.  If the City had chosen to stand up to Menlo Park neighborhood, which didn’t want a lot of retail on that corner, OR, if the City had said, “okay, we’re not going to put the retail there where the neighborhood doesn’t want it, but we’ll put it on the east side of the freeway”, we could have created a TIF district that didn’t need to extend its boundaries beyond Downtown.  A TIF district that was limited geographically to Downtown would have allowed the City to invest in the infrastructure to support that retail center with a repayment plan based on the new sales taxes generated there and that would not have been generated otherwise.  Whatever sales taxes that retail center would have generated would have come back to Tucson, 100% OF IT.  

Instead, the City Manager’s office, led by city manager Luis Gutierrez and assistant city manager John Nachbar (who left Tucson shortly thereafter for Kansas) put together the rifle-shaped TIF district with no public input in the summer of 1999.  Nachbar knew that El Con and Park Mall were planning redevelopment and growth.  It seemed like a clever way to get funding to build the museums while not forcing retail development on an unwilling neighborhood.  Tucson had just a few months to get voter approval for a TIF district before the enabling legislation terminated. The City Council approved the plan 5-2, and then the voters of Tucson and South Tucson (the state law required a partner city to vote for the project, and Tucson promised South Tucson $1 million for its trouble) approved Proposition 400 in November 1999 with over 60% of the vote.

The City then spent $600,000 on a master plan that was subsequently revised at great cost; it created a governing board, a citizens advisory committee, and began essential environmental remediation work on the west side of the Santa Cruz.  The TIF revenue stream did not begin until 2003, when the City decided the time was right to maximize the flow of sales taxes being generated in the district.  Park Place’s renovation was nearly complete and El Con had opened a Home Depot store.  

In order to fund the planning, consultant fees, land acquisition, staff costs, and other expenses prior to the time when the TIF funds started coming in, Rio Nuevo borrowed over $14 million from the City of Tucson.  Unfortunately it did not pay any of this back, and now a significant part of the recent bond issue proceeds will be used to repay this loan to the City, which is reeling from huge shortfalls in projected sales tax revenue.  In order to initiate the district, state law required an investment in the “primary component”, which was the Tucson Convention Center.  Consequently, the first completed Rio Nuevo project was the new box office at the TCC, which cost about $700,000.

A TIF district is supposed to be revenue-neutral; in other words, the governmental entity that is losing the taxes should not miss them because it never would have received them anyway but for the project.  Funds are supposed to be invested in “but for” projects; those that would never have been built “but for” the investment.  The incremental sales taxes should come only from areas benefited by the public investments.  

But Tucson grabbed sales tax increment that was generated outside of Downtown, and that would have absolutely gone to and stayed with the State of Arizona.  The malls on Broadway were redeveloping regardless of what Tucson did with its downtown.  The motivation for that redevelopment was totally unrelated to the destination of the sales taxes that would be generated there, and it certainly had nothing to do with Downtown.  As such, the sales tax increment generated east of the Snake Bridge was 100% diversion of State money.  It was an increment, yes, and therefore it was diverted back to Tucson for Rio Nuevo, but it was an increment that was the fruit of other investments made by private developers, and it should have stayed with the State of Arizona.  Tucson did not invest TIF dollars earned at El Con back into infrastructure improvements at El Con Mall (and I’m not arguing that it should have);  it spent them on studies, consultants, and plans for projects Downtown.  (Some have seen this as a delicious irony as well, that the mall that signaled the demise of downtown’s department stores and retail base in the 1960s is now being used as an engine to restore Downtown.)

One can argue that that is a good thing because it helps balance out other revenue-sharing inequities that leave Tucson on the short end relative to Phoenix, but it cannot be argued with a straight face that it is a proper way to set up a TIF.  

If Tucson had drawn a TIF district that was self-contained in Downtown, there would have been no diversion of extraneous State sales tax-increment that it wasn’t really entitled to.  The City of Tucson has looked at the fairly predictable revenue stream coming down Broadway as a source of income that it is entitled to spend Downtown.   With a real TIF, you wouldn’t have a budget of anticipated revenue unless you sold bonds to leverage development that created the sales taxes.  In other words, you wouldn’t say, “we’ll have $600 million coming in over the next 20 years;  how can we spend it?”  

You would say, “what opportunities for development are out there that the City can invest infrastructure dollars to support?  What fair and understandable process can we create that lets developers and retailers know what the rules are for applying for a share of this public investment?”  Then, be ready for, or actively recruit, developers who see market potential to build projects that generate enough sales tax increment to cover the public investment.  And since there is no initial money coming in, you have to bond to get the money to build the infrastructure to make these projects work.  

Let’s say a developer wants to build 200,000 square feet of retail.  (I picked that number because one of the City’s many studies—the 1995 City Center Strategic Vision Plan—stated that Downtown should be able to absorb 200,000 square feet of retail, and the City should try to achieve that.)   The City evaluates the feasibility and risk of partnering on this deal, and if it decides to go forward, it might agree to pay for something like the construction of a public parking garage underground or above the street-level retail.  Without it, the project doesn’t happen because other costs of doing development in Downtown give the developers incentive to continue building strip centers in the suburbs or on raw desert.  With it, you generate jobs, sales taxes, vitality, and momentum for continued growth and investment.

200,000 square feet of retail kicks off a LOT of sales tax, and if Tucson had built such a center on an empty Downtown lot when the economy was growing, every penny of the new sales tax would have been increment that would have paid a large and ever-growing increment, year after year until the district expired.  All of these sales taxes would have been rebated to Tucson, and used to repay the bonds that would have been sold to finance that parking garage.  There would have been money left over to create a fund that you could use to stimulate new development.  Or build a “world-class” museum.  

More realistic than the notion that something so large as a 200,000 sq.ft. retail center would have been built in Downtown Tucson in, say, 2003, would be smaller mixed-use projects with 10,000 or 20,000 sq.ft. of retail, restaurant, or entertainment space.  Incremental and sustainable development, creating 100% incremental sales tax growth.  As an example, if Bourn Partners’ The Post had been built as planned, it would have created 10,000 square feet of new retail space. If you built several such projects with housing components and created some momentum, Downtown might be able to absorb a bigger retail project, especially one associated with an entertainment destination, hotel, and a thriving convention center.  A new hotel would generate an enormous TIF because of its high sales and the fact that the sales taxes would be 100% incremental over 1999.

The sooner such developments could be completed, the sooner they would start paying the City back for its investment of TIF, and the more TIF could be earned over the course of a finite period.  

Rather than giving public land away for free, which guarantees that there will not be comparable land values for banks and lenders to use to finance future projects, you would value the land appropriately and sell it at market value.  Then, if you want to offer incentives to stimulate development, you do that another way.  But you don’t give away land.  

By simply budgeting the expenditure of free money that was generated at Park Place and rebated to Tucson courtesy of the taxpayers of the entire State of Arizona, there was no incentive on the City’s part to actually use the power of TIF to create new commercial development and new sales taxes in downtown.  Since the money was going to flow in regardless, there wasn’t even any urgency about using it for the museums and other non-sales-tax generating projects.

The structure that the City created for the TIF district virtually GUARANTEED that little private investment or significant revitalization happened, or would do so in a timely manner.  Actually there was no structure.  There was no “program”.  Rio Nuevo officials wondered, in the early years why no developers showed up.  That was because there was no economic development program to respond to.  The City’s plan was simply to build attractions that would draw visitors to Downtown, and to hope that developers would invest in housing or other development in Downtown in response to the increase in visitation to the area.  Build a museum on the west side of the river, and hope that it would inspire a developer to build condos on Congress Street.  That was basically the plan.

These foundational mistakes only doomed Rio Nuevo to failure because the City never fixed them—there was nothing stopping the City from changing its initial approach.  In fact, had the City used the TIF generated at the malls as seed money for jump-starting its downtown TIF-generating plan, it would have been even more powerful.  Combining the free money from the east end of Broadway with new TIF generated in Downtown would have been a tremendous advantage for Tucson.  But the City chose to simply take the free money and spend it on projects that don’t generate sales tax in Downtown.

The Depot Plaza project is being developed in a manner that is close to the model that should have been used from the beginning.  TIF is being used to build an underground parking garage, below two planned residential buildings with retail space along 5^th Avenue and Congress Street.  The problem is that there is no program that would inform another developer that such a model might be used on another Downtown project.  The Rio Nuevo website gives no indication as to how a developer or investor might respond to the Rio Nuevo Economic Development Program, if there were such a thing.

Rio Nuevo has collected over $58.3 million in TIF between July 2003 and November 2008 (the last month for which Rio Nuevo has published its TIF revenue on its website), and it has spent much more than that.  

But soon it won’t have any money to spend, other than what it generated in its December bond sale—the repayment of which is in question because of the state legislature’s interest in stopping the TIF payments.  A February 15 article in the Arizona Daily Star claims that the bonds were backed by the General Fund, which if true, will certainly lead to more controversy.  Not only is the hard-fought TIF extension (2013 to 2025) likely to be wiped out, but so will the last four years of the original ten-year Rio Nuevo District, triggered in 2003 and projected to generate over $120 million.  

What A Pity!

Taxpayers lost big on Rio Nuevo bond sale

By not delaying it, as other US areas did, city may have to pay extra $10M or more

By Rob O’Dell

Arizona Daily Star

Tucson, Arizona | Published: 02.15.2009

When other communities across the country were pulling out of the bond market in December as the failing economy pushed interest rates higher, Tucson forged ahead with a Rio Nuevo bond issue.

The move potentially cost taxpayers more than $10 million in extra interest — money that could have gone into projects instead — because the municipal bond market recovered in January and February, experts interviewed by the Arizona Daily Star said.

One municipal bond expert put the potential loss at as much as $18 million.

The city’s bond adviser, Shawn Dralle of RBC Capital Markets, estimated the savings from delaying the bond sale would have been a much smaller $5.4 million over the life of the bonds, from 2011 to 2025.

Tucson issued $78 million in bonds for its Downtown redevelopment district Dec. 15-17, as state lawmakers were openly threatening to take back the state sales taxes that go to Rio Nuevo because of the project’s perceived lack of progress.

Several experts said interest rates now would be about 1.2 percentage points lower than the nearly 6.5 percent the city sold its bonds at in December. Dralle estimates the rate difference would be only 0.25 percent to 0.5 percentage points lower.

Several Tucson officials said no one could predict future interest rates, and added that the city sold the bonds to get Rio Nuevo projects moving. The legislative threats weren’t a factor, they said.

But numerous communities across the country delayed their bond sales in December. A January report from JP Morgan Asset Management said many issuers were postponing year-end bond sales because they were unwilling to pay the high yields required to attract buyers.

Just three days before Tucson’s sale, New-York based municipal bond adviser Freda Johnson told Bloomberg News it was recommending “borrowers delay their sales if at all possible” because of high yields and weak demands.

Mayor Bob Walkup said the bonds were sold to get Rio Nuevo moving in response to criticism from the public and the media about a lack of progress. He said the legislative threat to take the money back “wasn’t even a discussion.”

“I think we still did the right thing at that moment,” Walkup said, adding the city can’t predict interest rates. “If you find the guy with that crystal ball, let me know because we can make a lot of money.” Action delayed elsewhere

Deven Mitchell, executive director of the Alaska Municipal Bond Bank Authority, said the bank pulled back two bond issues in early to mid-December, one for a prison and the other for money that would be loaned to municipalities. The Alaskan bonds had similar ratings to Rio Nuevo’s, although Tucson spent $750,000 on bond insurance to boost its rating several levels.

The bond bank waited for the markets to calm down and then sold its bonds “as soon as possible” at rates under 6 percent just before Christmas and again in January.

It’s a difficult decision, Mitchell said, because if you need the money to start construction, it can be better to issue the bonds than wait.

But the amount of construction to be done with the $78 million in Rio Nuevo bonds is limited, with $58 million split between design and construction for 13 projects Downtown and on the West Side. One expert questioned the amount of “soft costs” for design in the bonds.

A total of $20 million went to pay back a loan to the city, into a reserve fund or for bond insurance.

Issuers as disparate as the state of Minnesota, the District of Columbia and Oklahoma City delayed bond sales at the end of 2008 because of market conditions.

In Florida, top state officials questioned the state bond director in January over a bond sale for universities on Dec. 14 with an interest rate of 6.16 percent, pointing out that another Florida issue a month later fetched a rate of 4.7 percent. The director blamed volatile credit markets. Higher interest costs

Michael Stanton, publisher of the Bond Buyer newspaper, looked at the difference in market rates — calculated from municipal market data or MMD — between December and the second week in February.

He said the average rates today are about 1.2 percentage points lower than rates were in December, resulting in roughly $10 million more in interest costs for the December bonds.

Stanton made a second calculation of only $4.3 million in savings using an index of revenue bonds — which are paid off with revenuelike sales taxes. But the Rio Nuevo bonds are backed not just by sales taxes, but by the city’s general fund as well.

Alvin Boutte Jr., managing director and head of the Midwest region for Chicago-based investment banking firm Grigsby & Associates Inc., estimated the difference in interest rates cost the city $18 million in interest over the life of the bonds. He estimated the city would pay 5.2 percent on the bond issue today.

In a larger issue by the city of Chicago on Jan. 20, Boutte said, the interest rate for 15-year bonds was 4.81 percent. By contrast, the yield for Tucson’s 15-year bonds is 6.79 percent.

The companies that underwrote Tucson’s bonds declined to estimate what the difference in interest rates cost Tucson. Stone & Youngberg said there were too many variables to calculate. Piper Jaffray referred calls to the city’s bond adviser, Dralle at RBC Capital Markets.

In a statement, Dralle said the rates did drop in January but that much of the drop was “on paper” because there were few sales, and many issuers had higher credit ratings — although the city paid $750,000 for bond insurance to boost its credit rating equivalent to AAA.

Dralle said the bonds got the best rates they could at the time they were sold, and estimated that Rio Nuevo bonds today would sell with interest rates between 6 percent and 6.25 percent because of “a worsening economy and with Legislative threats to the revenue.”

Jaret Barr, assistant to City Manager Mike Hein, said interest rates have dropped, but estimated the impact was more like $5 million.

He added the city talked about waiting but decided to move forward to keep projects going. He challenged those who criticize the city’s decision to tell him what the interest rates will be in March, since they think the city should have been able to see the future. Deliberately hurried

State Rep. Frank Antenori, R-Tucson, has railed against the city bond sale for months, contending the city knew it was getting a bad deal but went out to market anyway to commit the money so the Legislature wouldn’t be able to take it away.

“It was deliberately done in a hurry to use it as a bargaining chip,” Antenori said. “Because it was somebody else’s money, they just did it.”

Councilwoman Nina Trasoff countered that Tucson proceeded in order to jump-start important projects, acting on the advice of its bond attorney.

“You can always second-guess these things,” Trasoff said. “It’s always easy in 20/20 hindsight to say, ‘gee, if.’ ”

Contact reporter Rob O’Dell at 573-4346 or rodell@azstarnet.com.

161 Comments on this story

 Mayor tells it like it is, pushes job creation
I have finally come to the conclusion that the Mayor, City Council and local papers just don’t care what happens to greater Tucson. After listening to the drivel that Walkup spewed at the State of the City Address, I came to the realization that most of those in elected positions are just phoning it in. Either that or they are too inexperienced to make smart choices (Romero), too driven by political ambition (Glassman), or they simply have not been affected the way the rest of Tucson has (the papers). All of them see things from a liberal standpoint. Even Walkup during his address sounded more like a second-rate John Edwards than a quasi-conservative like John McCain. The latest attempt to show progress downtown and Rio Nuevo apparently all hinges on a new streetcar. Yes, a streetcar that will take people through four miles of downtown to visit all that downtown doesn’t have to offer. We found the below video last year.

 Thanks to friend of the show Glenn who added the Never Ending Parade of Stupid soundtrack. At the time we thought this was just someone’s lame vision of what Tucson could be. Sadly without any leadership to tackle the major problems with the downtown area of Tucson like crime, homeless, lack of business, tourism etc.. this streetcar would end up being nothing but transportation for the few people who are brave enough to venture downtown and the homeless. It turns out this video was created as part of a showcase to show what will happen to downtown Tucson. I was shocked to see it shown in the middle of the Mayors speech. Then I was saddened at the realization that its all a big smoke and mirrors fantasy. The Tucson government is so scared they will lose their funding that they are putting the cart before the horse for so many projects. So now along with the Trolley we have the “Streetcar named Disaster” as part of our Never Ending Parade of Stupid. It would seem the Parade is quickly turning into a train!

Rio Nuevo may lose funding on July 1
By Daniel Scarpinato
ARIZONA DAILY STAR
Tucson, Arizona | Published: 02.12.2009  

PHOENIX — Funding for Tucson’s Rio Nuevo Downtown redevelopment project could be gone by July 1.
Skeptical members of the Senate Finance Committee said they didn’t get the answers they wanted from Rio Nuevo’s project director at a hearing Wednesday.
Some said not only did Rio Nuevo Director Greg Shelko fail to outline how the city has spent $60 million in state money, but they said the project seems to have drifted from its original purpose.
As the state faces a $2.4 billion shortfall next year, several committee members said they are interested in possibly cutting off the state dollars to avoid deeper cuts to K-12 education and state agencies when the new fiscal year begins July 1. An estimated $600 million in state money would flow to Rio Nuevo over the 22-year life of the project.
“When you come down here, you better have your ‘A’ game, because we are doing a lot of things we don’t want to do,” said Sen. Jim Waring, R-Phoenix, the committee chairman. “I just think we had to pull teeth to get answers.
“I thought that presentation hurt them a little bit today — I really do,” Waring added.
Some members said they’d like to see the funding cut off next year to help balance the state budget, especially after renewed concerns about a lack of accountability.
Shelko said pulling the state dollars would spell disaster for Rio Nuevo.
“If they want to sink Tucson, I suppose that’s a choice,” Shelko said. “Where would we have the ability to do these kinds of things? We wouldn’t.”
In his testimony, Shelko painted a bright picture of Downtown and argued that it just needs more time, pointing to projects in other cities that have taken 30 years to succeed.
“Downtown is not going to grow in five years; it’s not going to grow overnight,” Shelko said. “It’s going to take a long time.”
But senators were not impressed by the city’s list of Downtown accomplishments, which included a planned city-court complex and a Burger King. And Shelko had trouble citing specific dollar figures the committee requested.
“What we’ve done is allowed this entity to take state dollars at their will, and of course the people of Tucson are going to vote for it because it’s not their money,” said Sen. Ken Cheuvront, D-Phoenix.
The committee took no action, but city officials could find themselves in a position of having to better defend Rio Nuevo. The GOP committee members, in a position to negotiate the budget, are likely to discuss their impressions with colleagues in a Republican caucus meeting today.
“My concern with Rio Nuevo has been that’s it’s very difficult to get a straight answer on anything,” said Sen. Barbara Leff, R-Paradise Valley. “If the city of Tucson wants to use its own sales-tax revenue and put it into Downtown projects, they should be able to do that, but I think the state general fund money should be returned.”
Rio Nuevo is funded through a tax incentive financing district that redirects state sales tax dollars to Tucson for use in the district. Originally approved by voters in 1999, lawmakers extended it in 2006.
But the project and its organizers have faced criticism over the years for what’s been perceived as a lack of progress.
A Star investigation last October, referenced by several committee members, found that of the $63 million in taxpayer dollars spent over the past 10 years, much of the money has gone to plan projects that stalled, including studies, consultants and public relations.
Shelko questioned the “motives” of the Star for running that story and said the city has made all its expenses public, even though it stalled releasing documents to the Star for months.
At times sarcastic, lawmakers grilled Shelko on projects that never developed. In particular, they questioned studying the construction of a Rainbow Bridge over Interstate 10 that would house the University of Arizona science center.
“So, you were going to build a building that was a bridge that sat on top of the freeway?” said Sen. Ron Gould, R-Lake Havasu.
“It was a very unique concept,” Shelko responded. “Unfortunately it costs somewhere well over $300 million and it was an infeasible project.”
Laughing, Waring asked: “So, Mr. Shelko, just to be clear, you spent $9 million and have built nothing? It’s a yes or no.”
“Right,” Shelko replied. In actuality, $13 million was spent studying the science center.
Glenn Lyons, CEO of the Downtown Tucson Partnership, testified he was pleased legislators extended the district in 2006 and that continuing it is important to private-sector growth.
“I’m pleased you’re pleased,” Warring said. “You may be the only one in the state.”
Shelko said after the meeting that the mistake the city made was in “managing the public’s expectations.” And he said he was “proud” of progress so far.
“We’d all like a do-over on some things,” he said. “I don’t think, in a general sense, that the city has mismanaged Rio Nuevo.”
Contact reporter Daniel Scarpinato at 307-4339 or dscarpinato@azstarnet.com.
56 Comments on this story

Tucson is debating a new convention center and high rise hotel. Who’s paying for the $150m hotel, well that’s a great question.

 Our current facility is old and apparently outdated. It’s too small for big events and there’s not enough small meeting facilities for big events or something like that.  

A study was commissioned in 2005 which showed a positive economic impact of a new arena – read the AZ Star article HERE. 

And the beat goes on…..new arena + new high rise hotel + government funding = huge economic impact – or will it? Is the facility needed? Is it big enough to fill a market niche? Can we ever host a NCAA Final 4?

Up north in Phoenix the new $600 million convention center just opened – HERE.

By tripling the convention space, the center opens Phoenix up to large conventions and events, which can bring tens of thousands of business tourists into the city at once.

Nearly 70 groups are expected in Phoenix for 2009, said Alexandria Van Haren-Pierce, spokeswoman for the center.

The NBA All-Star Game plans to use the convention center for several events in February including the basketball theme park NBA All-Star Jam Session.

Members of the National Rifle Association are expected to bring up to 60,000 attendees to Phoenix in May.

Phoenix began making over the Civic Plaza with the 155,400-square-foot West Building.

The $600 million price tag was split between city bonds and state funding. The tab doesn’t include $18 million in upgrades to the South Building, which Phoenix bankrolled.

The 1985 facility was renovated so that the interior matches the newer North and West buildings.

(More about the Tucson Convetion Center HERE).

Here’s another look at the convention center business from Antiplanner.com

Operating in the Black, Government-Style

posted in Regional planning |

The director of Metro, Portland’s regional dictator planning agency, offers some insight into how government planners view such concepts as profits, losses, and sales. It is not a lot different from the way soviet managers looked at the same ideas.

Phil Stanford, a columnist for the Portland Tribune, recently commented that Metro’s Oregon Convention Center “has been losing money by the bucketload.” Two years ago, this convention center was the centerpiece of a Forbes magazine article about how cities are losing millions overbuilding their convention centers.

The pretentiously named Oregon Convention Center.
Flickr photo by Premshree Pillai. 

Back in 1998, the convention center was losing money and Metro, which owned and operated it, was convinced that the solution was to lose more money by doubling its size. Portland-area voters were asked for the money to do this and they said no. So Metro did it anyway, spending $116 million on the addition.

By 2005, reported Forbes, the center was losing $5.5 million a year. But Metro was undaunted by Forbes‘ criticism, and proposed to build a new hotel next to it, saying that the city’s downtown hotels were too far away. (So what geniuses decided to build the convention center too far from hotels? Oh yes, it was urban planners.)

Anyway, Stanford is not enamored with the hotel proposal. But Metro’s executive, David Woolson, took offense at Stanford’s column and wrote a letter claiming there were some “inaccuracies” in Stanford’s article.

In particular, Woolson wrote Stanford, “you state the Oregon Convention Center ‘has been losing money by the bucketload.’ That’s not accurate. Actually, the OCC has operated in the black the last four years with its operating revenue and its share of the transient lodging tax.” (Notice that the “last four years” includes the year in which Forbes says the convention center lost $5.5 million.)

In other words, Metro doesn’t have to actually rent the convention center to fee-paying users. It is enough that someone increased the local hotel tax (at 11.5 percent, Portland’s is the highest in the state) and dedicated it to the convention center.

Now, I hope that even the planners who read this blog can spot the flaw in Woolson’s reasoning. If you have to count taxes to consider yourself “in the black,” you aren’t really in the black — even if those taxes are dedicated to your boondoggle convention center.

I suppose, for the benefit of some, I have to clarify the difference between taxes and user fees again. If a user pays a fee or tax and the money goes to whatever it is that the user is paying for, then it is a user fee no matter what you call it. But when a fee that is dedicated to a convention center is paid by motel or hotel users who aren’t going to the convention center, that is a tax.

Back in 1990, The Economist sent a reporter to the then-disintegrating Soviet Union to interview factory managers. The factories were going to have a hard time adjusting to markets, the reporter concluded, because their managers didn’t understand such basic concepts as “sales,” “profits,” or “costs.” (“Life in a Soviet Factory,” December 22, fee required.)

I’ve encoutered the same puzzlement from Forest Service officials when talking about the profitability of national forest timber sales. In the 1950s, the Forest Service was proud of being the only federal agency that actually made a profit, but by the 1980s, when it was losing $400 million a year from its timber program alone, its attitude was, “We’re the government. We don’t have to make money.”

When I would ask forest officials to calculate their profits, they would count tax dollars appropriated to them by Congress as revenues and timber sale receipts that they returned to the Treasury as costs (because they didn’t get to spend it on things they wanted to do). No wonder they lost money!

Anyone who thinks government is good needs to spend some time reading agency budgets. They may seem dry and boring, but that is deliberate: they don’t really want you to know where your money is going, so they overwhelm you with material. Just skip all the text and read the numbers. If you can’t read numbers, call up whatever school district ran your high school (another government agency) and ask for your money back (that is, the taxes your parents paid for you to go to school there) because they failed to teach you to understand and analyze numbers.

Mr. Woolson might be foolish enough to believe that taxes are “revenues” that can be counted when determining whether an operation is running in the black. It is too bad Metro was foolish enough to hire him and too bad that Portland-area taxpayers are saddled with an agency like Metro.

This entry was posted on Tuesday, August 28th, 2007 at 12:00 am and is filed under Regional planning. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Another analysis of the trade show industry from 2006.

The Brookings Institute study from 2005;

The data on the supply of exhibition space are clearer than the data on exhibition space utilization because it is much more easily tracked. On this point Sanders is more guilty of mischaracterizing the data rather than using it selectively. He claims that the last few years “have seen a remarkable boom in the volume of exhibit space in convention centers,” calling it a “building frenzy.”

By expressing the ratio of demand to supply, one can calculate a utilization factor for convention centers. This is similar to occupancy rates that are used to measure performance in the hotel industry. The utilization factor reflects the percent of gross exhibit space that is used each year by the events that are tracked by Tradeshow Week.

Utilization Index
.

Good Money after Bad?

A number of cities have chosen to improve their convention environment by investing in the development of headquarters hotels. Sander says, “Many cities wind up, as they say ‘throwing good money after bad’.” This assertion implies that the original investment in a convention center is a bad one (a claim that most cities that have made the investment would dispute) and that hotel investment is just adding more of the same type of public costs. But the rationale for, and expected financial outcomes of, convention center and hotel investments, are quite different.

The most commonly used rationale for investment in convention centers is to generate economic impacts from out of town visitation. Nearly all convention centers in the U.S. are built without any expectation that project income will repay capital costs and most are not even expected to cover operating expenses. This has long been a fact of life in convention center development, although Sanders implies that convention center financial losses are a new and growing problem. In contrast, the rationale for public investment in hotels is to maintain competitiveness (not necessarily to generate new economic impact) and they are usually expected to pay for their capital costs from project income. In fact, all publicly financed hotels are expected to provide a significant return on investment to the sponsoring municipality in the form of residual cash flows and potential sale of the asset.

Since 1996, sixteen communities have successfully financed hotels using tax-exempt municipal debt. All of them planned to repay that debt with project income. The choice to use public rather than private financing is driven by the lower costs of tax-exempt funds which makes projects more feasible with less financial commitment on the part of the sponsoring municipality. Three of the early projects in Chicago, Sacramento, and Miami Beach have already fulfilled their promise to generate a financial return. Others more recently financed such as in Austin, Overland Park, and Cambridge are on their way to providing a financial return despite opening under stressful market circumstances.

As an established industry, continued growth in demand will come not from latent sources, as occurred during the last few decades. Rather, industry growth will depend on new demand, which is affected by numerous factors such as the cost of travel, the importance of face-to-face interaction in certain industries, improvements in facility design, resources available to promote events, trend in how firms allocate their marketing budgets, and overall growth trends in the national economy.

In most industries that go through periods of overbuilding (e.g. hotels, residential, shopping malls, and office space), the ability to generate private return on investment eventually limits the expansion of supply. Since most convention facilities are publicly financed, this market discipline is not necessarily present. Instead limited resources of governments and the public decision making processes that consider the merits of capital investment place limits on supply growth. In our experience, most municipalities are not “willing to try almost any investment in their quest for more convention visitors.” Concern over the proper allocation of limited resources and historical experiences of success and failure play very important roles in the decision making process. Which brings us to a point of agreement with Sanders’ overall conclusions: careful and realistic consideration of the chances of success should inform the public decision making process about investment in convention centers.

The Convention Center Shell Game from City-Journal.com – HERE.

The Convention Center Shell Game Steven Malanga

EMAIL RESPOND PRINT

 

Although Boston’s gleaming new $800 million convention center is set to open in a few months, so far it has booked only a handful of conventions. So dire is the facility’s outlook that it will need a $12–15 million annual public subsidy in its first few years of operation and may not reach its full booking potential for a decade, say Boston officials. Even that may be too optimistic, judging by what’s going on in Baltimore. There, a vastly expanded convention center that reopened in 1997 is finding it so hard to lure business that city officials are now searching for ways to make the facility more attractive, including spending millions in public money to build a subsidized hotel next door.

What is happening in Boston and Baltimore is not an anomaly but merely the latest chapter in what is turning out to be one of America’s biggest civic boondoggles.For more than a decade now, cities and counties have been rushing, at enormous public cost, to build new convention centers or add space to old ones, including a $191 million expansion of San Francisco’s Moscone Center, a $291 million new facility in Omaha, and a $354 million center in Pittsburgh. The increase in space has vastly outpaced the growth of the convention industry and often failed to generate the kind of economic activity predicted by boosters. Rather than energizing local economies, in fact, some convention centers are emerging as a drag on civic finances, requiring taxpayer operating subsidies on top of their huge, publicly financed construction costs. What’s more, the situation is only likely to get worse. Another eight to ten million square feet of exhibition space is scheduled to come on line within five years, an increase of about 15 percent in an industry where demand is barely growing.

Although those numbers should be sobering to any city contemplating building yet more space, in New York officials are plunging ahead with plans for the most costly convention project to date—proposing to spend a staggering $1.5 billion nearly to double the size of the Jacob Javits Convention Center. The proposal comes despite the chronic fiscal problems of both the state and the city and the absolute lack of any credible evidence that the expanded center would pay back such a colossal public investment.

Indeed, to finance the expansion, the state and the city, both already heavily indebted, will likely have to float huge debt offerings and may even increase some taxes.

New York’s headlong plunge into this new project is evidence that local officials rarely let the facts get in the way of their love of big projects. Back in the early 1980s, when the state and city built the Javits Center, there were far fewer convention centers and little actual data on whether the business that these facilities generated helped a city’s economy enough to justify the investment. New York officials saw Chicago’s giant McCormick Place bringing visitors into the city to fuel the local hotel, restaurant, and entertainment industries, and figured Gotham could compete for that business.

But today, after a generation of frenetic building and with much better data available, the inescapable conclusion is that few of these new projects are worth doing. Boston, for instance, spent nearly $230 million to renovate its existing convention center in the 1980s, and the result was barely a blip upward in its hotel occupancy, says political scientist Heywood Sanders of the University of Texas at San Antonio, the foremost expert on publicly built convention centers. Yet Boston officials brushed that experience aside and went ahead and built its brand-new—and already troubled—center anyway. Similarly, a vast expansion of Chicago’s McCormick Place, costing $1 billion in the mid-1990s, didn’t prevent a drop in that city’s share of major conventions. Meanwhile, Atlanta’s huge expansion of its convention space has done little for the city’s struggling downtown: a major retail project there, Atlanta Underground, has struggled to survive even as the city’s convention business has grown. “The payoff is not there,” says Sanders.

But local politicians have typically argued that their projects will work better than those in other cities—on scant evidence for such conclusions. New York officials, for instance, justify expanding Javits on the grounds that the city is already a major trade-show destination and therefore won’t suffer like other cities from significant new competition. Yet Chicago was an even bigger force in the business when it expanded McCormick, but still saw its market share decline. And even if a bigger Javits were to attract some new business, it is highly unlikely to generate enough spin-off activity to justify its enormous public cost (including the eventual cost overruns likely with such a gigantic public project).

Gotham officials are relying on the optimistic predictions of government-sponsored economic studies that an expanded center would create thousands of temporary construction jobs and up to 16,000 permanent new jobs, mostly in the hospitality industry. But political scientist Sanders argues that such studies tend to be unrealistically optimistic. For instance, says Sanders, one study used to justify expanding Javits does not take into account that the center doesn’t generate nearly as much hotel business as other centers, because many convention attendees already come from the New York area, and because New York’s high hotel rates discourage some conventions from using the city. Another word of warning: city-commissioned studies almost always wind up recommending convention centers—meaning that the industry of consultants who churn out such studies has a pretty lousy track record, considering the long list of underperforming centers around the country.

But politicians ignore such inconvenient facts. For them, building big projects is often far more engrossing than building a strong economy, because giant construction projects directed by government agencies offer opportunities to reward friends and potential supporters with plum contracts.Thus the original construction of the Javits Center was perhaps the quintessential New York boondoggle, an effort rife with mob influence, bid rigging, and cost overruns that brought the ultimate bill to $486 million, 30 percent more than projected. And the center has never fulfilled all the promises. When it opened, a New York Times headline proclaimed the widely held belief that the new center “kindles dreams for West Side,” but in 18 years, the center has had almost no impact on its neighborhood.

New projects also enjoy the support of private-sector interests likely to benefit from them. In New York City, a perfect storm of private interests is raging to push forward the Javits expansion, including the construction industry that would build it, the Wall Street bankers who would underwrite the financing, and a hospitality industry hungry to benefit from even a marginal increase in its business no matter what the public cost. The hotel industry has even signed on to a possible hotel tax increase to pay for the Javits expansion, when a decade ago the same hoteliers vociferously protested a rise in the tax, producing studies showing that the increase hurt the local economy. Small wonder that politicians often doubt the claims of executives that taxes kill jobs when an industry reverses itself as cavalierly as the city’s hotels are now doing. In fact, of course, the innkeepers were right the first time: after New York cut its hotel tax by six percentage points, hotel occupancy rates jumped to 84 percent from under 76 percent in just three years.

The Javits expansion, as expensive as it is, only partially encompasses New York’s grand design for the Far West Side of Manhattan. Hoping to lure the 2012 Olympics to Gotham, the Bloomberg administration also wants to build a domed sports stadium adjacent to the convention center, which boosters argue could provide hundreds of thousands of square feet of extra convention space when needed.

With a $600 million taxpayer contribution, the stadium would be an even worse investment than the convention facility. Numerous studies have already documented that publicly financed sports facilities don’t return anywhere near their investment. One study by economists from Stanford University and Smith College, for instance, estimated that Baltimore was receiving only $3 million a year in additional tax revenues or new job benefits from its $200 million investment in the Camden Yards sports complex. Even projects generally touted as successful often don’t turn out to be, under careful economic scrutiny. A mid-1990s study by urban economist Mark Rosentraub of Cleveland’s arena and baseball stadium, often held up as a model of how to build downtown sports facilities, found the projects created only 2,000 jobs at an average public investment of $160,000 for each job—an improvident use of public money.

The real role of government in stimulating development should be more limited than what New York is attempting with its Javits expansion and its stadium. Government’s role on the Far West Side should be only to develop the infrastructure necessary to encourage private development: to extend public transportation into the area and to change zoning codes to allow privately financed office and residential construction there as the need develops. To do any more would place far too much taxpayer money at risk and would put government officials in the role of trying to predict what the market wants—a task government is ill-suited to carry out. But New York State is contemplating the exact opposite—balking at extending the Number 7 subway and, presuming to know better than the market, threatening to use eminent domain to take the land for the Javits expansion away from developer Larry Silverstein, who has other plans in mind for it. The state’s vast, monolithic scheme could well repel rather than attract high-value commercial development.

Meanwhile, the hospitality industry has learned that it can sit and wait for local government to finance its dreams these days. The Javits expansion, for instance, was originally tagged at a “mere” $1 billion but grew costlier when the center’s board stuck in a publicly subsidized hotel as part of the building frenzy. The hotel supposedly needs to be built with public money, because so far no private hotel company has been willing to pay to put up a property on the Far West Side.

The Javits hotel scheme is not unique by any means. Publicly financed hotels have now become the latest craze in the municipal convention-center wars. Cities like Dallas, Baltimore, and Knoxville are all contemplating building them, on the theory that these properties will help boost sagging convention-center business. Though hotel companies won’t finance these properties themselves, because they know they are unlikely to repay their investment, they are more than willing to move in and operate them after government has built them. The result is a version of the rat and cat farm: we use tax money to build a convention center that supposedly will stimulate the hotel industry, and then use tax dollars to build a hotel that supposedly will stimulate the convention industry.

The nationwide convention-center fiasco is striking testimony that much government-centered economic development these days is a “me-too” affair that involves spending public money on what others are doing, regardless of market dynamics—perhaps because politicians who benefit from these projects can avoid blame by claiming that they were only doing what other cities were doing. New York State seems especially infected with this disease right now. With its huge public complexes in Albany and its vast string of publicly constructed state universities, the state has always specialized in state capitalism, and it is not to be outdone in the area of convention centers. In his state of the state address, Governor Pataki advocated not only the Javits project but a new $185 million convention center in Albany to replace its existing facility and the modernizing of another facility in Lake Placid. Soon after, officials in Erie County renewed their lobbying for a publicly financed center in Buffalo, while in Syracuse, a group that has put forward a far-reaching plan to remake that city added a convention-center proposal to its agenda, too. These proposals would join an estimated 40 or so convention projects already under way in cities throughout convention-center-glutted America.

While politicians and private businesses push such efforts, resistance from taxpayer groups is growing. The Texas chapter of Citizens for a Sound Economy, the national taxpayer group headed by former House Majority leader Dick Armey, is opposing a publicly financed convention hotel in Dallas. Knoxville citizens will soon get to vote on whether to spend tax dollars on a new convention hotel, after opponents of the effort collected thousands of signatures to get the issue on a ballot. In Raleigh, North Carolina, government supporters of a new convention center are trying to avoid a vote on public financing for the project—which they are sure to lose—by proposing alternate but even more costly financing that doesn’t require a referendum.

The mounting opposition shows that the public understands what a fiasco the convention-center business has turned into all around America. If only urban leaders could figure that out, too.

 The Tucson Citizen weighs in with ‘Construction Starting in 2008′ – HERE.