Breaking Down a Billion-Dollar Expansion

Wednesday, Aug. 26, 2009 | Last September, San Diego Mayor Jerry Sanders stood next to a representative from Comic-Con at a press conference dressed in a suit and tie, as the mayor usually does for such occasions. Given the crusade Sanders was about to undertake, a cape would have been appropriate.

Sanders’ charge was one that even a superhero might have found difficult: to make a case for spending up to $1 billion to expand a Convention Center at a time of national economic recession and severe city budget deficits.

After a speech in which he called the Convention Center, “the goose that lays the golden eggs,” Sanders turned the press conference over to Comic-Con, one such egg. A Comic-Con representative warned that without an expansion one of the world’s largest pop culture extravaganzas could take its $62.5 million a year contribution to San Diego’s economy elsewhere after 2012.

Four months later, Sanders appointed a 17-member task force to examine the demand from groups like Comic-Con for more space in the city’s Convention Center, and evaluate how the city might pay for it.

With The Mayor’s Citizen Task Force On The San Diego Convention Center Project scheduled to produce a recommendation at a Monday meeting, it’s time for a primer on the project and an update on where the city stands.

Questions about the expansion’s impact on waterfront access, environmental concerns and even whether the city should prioritize boosting the visitor and tourism industry are all relevant. But I’m going to focus on the two issues on which the debate has centered: demand for an expanded center and how the city would finance it.

Demand

There’s an argument that the Convention Center is the biggest single economic driver the city has. Since it opened in 1989, the center has had more than an $18.3 billion economic impact, including $364.4 million in tax revenues to the city, according to Convention Center Corp. data. Despite a rough beginning, an expansion in 2001 has proved to be successful as well. At 615,701 square feet in exhibition space, San Diego ranks as the 24th largest convention center in the country, but it’s seventh in major event booking, according to industry publication Tradeshow Week.

A second expansion would increase San Diego’s exhibition square footage by almost 40 percent to more than 800,000. This bump could launch San Diego into the top five of major event bookings, Tradeshow Week says.

The primary argument expansion proponents have made is that San Diego will begin losing out on growing, high-revenue conventions unless it keeps up with centers that are expanding across the nation.

More precisely, the Convention Center officials have produced a document stating that the city could lose or miss out on the annual events of 28 organizations — with a combined economic impact of $2.7 billion — unless the Convention Center expands.

But that number assumes that every organization in the list would have a convention in San Diego. And Convention Center convention officials acknowledge that that won’t happen. For example, I spoke to a representative from the Radiological Society of North America, which accounts for $236 million of that figure. He said the organization could not come to an expanded Convention Center because it would be still too small.

The report by the task force’s primary consultant lists five organizations, not counting Comic-Con, that plan to hold their events between 2016 and 2019 at the Convention Center contingent on the center’s expansion. And at least 30 percent of the Convention Center’s business expects to outgrow its current space from 2012 to 2016.

The benefits of expansion, according to the San Francisco-based consultant Economics Research Associates, include $372 million in annual direct economic impact, 6,885 permanent new jobs and $17.1 million in annual increased sales and hotel taxes.

Critics contend that these figures are overly optimistic. The country’s largest conventions require more than 1 million square feet of exhibition space, meaning San Diego still couldn’t compete for their business, even if the proposed expansion happened. Attendance at San Diego’s Convention Center is down seven percent from last year, reflecting a national trend. Some conventions are opting for smaller regional shows instead of larger national ones.

The proliferation of cities expanding their convention centers has led to what Economics Research Associates calls, “an era of competitive oversupply.” University of Texas at San Antonio Professor Heywood Sanders is the country’s foremost critic on convention center expansions. His data shows that convention centers rarely, if ever, perform at the levels consultants say they will after expansion. Expansions in Boston and Atlanta produced less than half of their projections in terms of hotel stays and attendance.

But proponents of the expansion say these trends overlook San Diego’s reputation and advantages in the convention center industry. In short, an expansion in San Diego cannot be judged by the same terms as an expansion in say, Toledo, Ohio.

One of Economics Research Associates’ most consistent findings was that San Diego’s location, facility, hotel space and proximity to the airport make it one of the most desirable destinations nationwide for conventions. Organizations with annual conventions that I called verified that assertion.

Just looking at the West Coast, among the 168 top conventions in 2009, San Diego holds 33 percent of the market share of rented exhibition space, despite only having nine percent of the available space, according to Tradeshow Week. San Francisco is the only other city where its rented square footage outperforms its available square footage.

Financing

One does not have to know much about the economic situation of the city, the county, the state or the nation to understand now isn’t the most auspicious time to embark on a $1 billion construction project. Some context about funding:

• In the past year, two cities decided they can’t afford to expand despite plans to do so. New Orleans cancelled a planned $315 million expansion and Seattle put a $766 million expansion on hold.
• Of 12 recently completed expansions studied by the task force, eight received funding from the state or county in which they are located. For San Diego, neither appears to be an option, though there’s some indication the county might be approached.
• The city’s general fund has been eliminated as a funding source.

These constraints have led the task force to adopt a favorite buzzword when it comes to financing: “Nexus.” What this means is organizations that will benefit from the expansion should pony up for the expansion.

The most recent cost estimates put the expansion at $752.7 million, which increases to $917.4 million if a 500-room hotel is included.

It’s worth noting that the final cost of the previous expansion effort was 35 percent higher than the original estimate because of increases due to environmental concerns and a protracted court battle over financing. The Convention Center Corp. CEO said in a recent interview she is confident the Center has learned from the last expansion.

According to the most recent report from the task force’s financing consultant, annual debt service on construction would range from $44 million to $57 million, and could be tens of millions more depending on the project’s bond rating and the construction and possible revenue generated by the related hotel and retail parts of the project.

So how does the city pay?

In previous expansion efforts, the city and the Port have combined to foot the bill. The Port paid $164 million in cash to build the original Convention Center. The city and the Port issued bonds to pay for a $216 million expansion finished in Sept. 2001.

The city and Port divide the $13.7 million on-going annual debt service payment with the city responsible for $9.2 million and the Port contributing $4.5 million until 2014 when the city assumes the full payment. The city also now pays $4.3 million annually to subsidize Convention Center operations.

This time, the Port, through Task Force Co-Chairman and Port Commission Chairman Steve Cushman, repeatedly has said it cannot help finance the expansion.

So the task force has compiled an array of possible revenue sources ranging from an increase in the citywide hotel room tax, to a special entertainment or business improvement district, to a tax on taxis, rental cars and event tickets. All these ideas require various degrees of approval including up to a two-thirds majority of city voters for certain tax increases.

Task force members contend that it’s not their job to decide which financing options are best. That, they say, is in the hands of the mayor and city council. But the task force has hedged on the financing question.

Despite everything that’s on the table, and statements from the Convention Center Corp.’s CEO that no organization can say “I don’t want to play,” no one has stepped up to shoulder any financial burden.

Instead, at the task force’s last meeting, members fled so frequently from any suggestion their organization could finance the project that the discussion devolved into challenges of each other’s “manliness.”

This hostility from potential funding sources and a lack of more financial data, has led one task force member, San Diego County Taxpayer’s Association President and CEO Lani Lutar, to decide to vote “no” on expansion when the task force meets on Monday. She doesn’t believe the task force can present an accurate picture of the project’s tradeoffs.

Next steps

Later this week, task force members will receive a draft report of their recommendation to the mayor. The nut of that report will say that the task force recommends expanding the Convention Center with a big “but” attached: that the mayor find a way to pay for it. That brings Sanders back to where he was last September and why he might need that cape.

Please contact Liam Dillon directly at liam.dillon@voiceofsandiego.org and follow him on Twitter: twitter.com/dillonliam. And set the tone of the debate with a letter to the editor.