The Morning Report
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On May 17, Steve Cushman, the one-time port commissioner and current liaison for the mayor on the proposed Convention Center expansion, is supposed to give the City Council an update on how the deal he’s trying to put together is going.
In short, he’s supposed to make it rain (which is why we dubbed him “Make It Rain Man”).
Cushman has taken on the responsibility to come up with upward of $50 million a year or more to pay off new loans needed to expand the Convention Center.
Though the path to that kind of money is more clearly mapped than ever, it also has more potholes than the city’s notorious roads.
Here are the four biggest potholes in the way, each of them deep enough to crush Cushman’s car.
Pothole I: The Law There’s still no clarity on whether the prime source of funds for an expansion — an increased hotel-room tax — can be achieved without a vote of the people. Everyone is coming to the conclusion that only a court can provide this clarity. (And, in case you’re wondering: No, nobody wants to ask voters for a — gasp! — tax increase.)
Let’s review: The city has a 10.5 percent hotel room tax. It has twice in recent years tried to increase this tax, both times watching voters reject it. It’s called the city’s Transient Occupancy Tax, and it’s one of the lowest around except that …
… on top of it, hotels tack on another 2 percent. This 2 percent is collected by a still rather new, quasi governmental agency called the Tourism Marketing District, or TMD. This agency sends half of what it collects directly to the Convention and Visitor’s Bureau. That operation, once a city-funded and embattled mess, has never seen the riches it now bathes in.
The idea is to both renew the existing levy and then increase it to pay for the expansion. And increase it in levels. So, visitors to the hotels closest to the Convention Center will pay a higher fee than those farther away and so on in concentric circles throughout the city.
There are two problems: 1) The original 2 percent levy is scheduled to expire soon. 2) It’s unclear whether extending it and maybe adding to it would require a vote of the people, especially in light of a new law, Proposition 26, that requires that anything that looks like a tax be subject to the vote of the people.
Since the last time I wrote about this, we got a decidedly noncommittal memo from the city attorney. And I spoke to John Lambeth, an attorney in Sacramento who acts as the counsel for the TMD.
“I have little doubt that the TMD renewal can fit into one of the seven exceptions in Proposition 26,” he said. Most likely, he said, it’ll fit into the exception that says that a fee can be raised without a vote of the people as long as the payers of the fee are receiving a specific benefit that would not come otherwise.
The problem is, who is the payer of the fee in this case? Lambeth said it’s unquestionably the hotels who are paying the fee. And the benefit they’re getting is more promotion of their hotels. But the 2 percent is a line item on the customer’s bill, just like the tax. It’s the customer who’s paying it. Even the hotel lobby reminded the city that the TMD adds to the “effective” tax rate visitors pay.
At its heart, the question is an age-old one: When you buy a car, are you paying the sales tax on it or is the car dealer? On the one hand, the car dealer could make more money because they could charge you more without the levy. On the other hand, it’s a tax you pay in addition to the price you’ve agreed to pay for the car.
The fact is, until someone sues and a court decides, Convention Center boosters are paralyzed. They can’t take out hundreds of millions in debt without knowing that their plan for paying it off is, well, not going to get gutted.
Pothole II: The Governor It’s now clear that Cushman, Mayor Jerry Sanders and Councilman Kevin Faulconer believe that redevelopment funds will be needed to pay for part of the new Convention Center. The governor wants to kill redevelopment and has a killer argument: The construction subsidy is taking money needed for schools. Although the effort to eliminate redevelopment is on hold right now, it’s hardly abated.
It’s also a bit of a problem for Convention Center expansion supporters if it continues to be set up as Convention Center vs. Education. As much as San Diegans like the kids who come to Comic-Con, I’m guessing they like their own kids a bit more.
Pothole III: The Bond Market San Jose recently asked investors for loans for its own Convention Center expansion (everyone’s doing it) and found that the city had to pay 6.44 percent on the bonds. This is a bit of a problem because one of the ways Make It Rain Man was going to come up with the money needed for the Convention Center expansion was to refinance the debt on the last expansion.
Those 1998 bonds are already set at between 4.5 and 5 percent. Last year, the city saw interest rates go down and thought it might have a chance to go even lower.
“Two-thousand-and-ten would have been a historic opportunity,” said San Diego’s debt management director, Lakshmi Kommi. But the city was unable to take the opportunity because it couldn’t pull together 2010 Comprehensive Annual Financial Report and interest rates began rising before it could have finished the sale.
Kommi said it’s unlikely a window like that will open up again “but we’ll watch for it.”
Pothole IV: The Chargers Mark Fabiani, the special counsel to the Chargers and the point man on the team’s search for a new stadium, is trying to create the impression that there is momentum behind the idea to put a roof on a new stadium downtown and use that to host conventions.
“I think it’s an idea that’s starting to make a lot of sense to people,” Fabiani told XX Sports 1090.
I think this is clearly coming up as a rival to the Convention Center, not as a supplement to its plans. That was evidenced by the sharp rebuke Fabiani provoked from Steven Johnson, the VP of the Convention Center Corp. who wrote this on Twitter:
“I would like Mark Fabiani to stop trying to tie the Chargers stadium to a convention center complex. Not happening and doesn’t work,” he wrote.
Convention Center boosters may not like being pitted against schools, but they might hate being pitted against the Chargers even more.
Cushman, for his part, told me that hosting conventions in a new stadium downtown doesn’t do anything to solve the problem he and other supporters of expansion are trying to accomplish.
The Convention Center task force, commissioned by the mayor, reviewed plans to put some of the new convention space next to Petco Park, not far from where the new football stadium is envisioned. It’s separated from Convention Center by Harbor Drive (though now connected by that enormous pedestrian bridge). The task force, based on Convention Center CEO Carol Wallace’s testimony, deemed it unrealistic to think that meetings could utilize that as a continuous space. It would be a totally separate facility.
“It doesn’t help us get 25 conventions to San Diego who need more space. What this is all about is allowing us to compete for conventions that today we cannot attract due to our size,” he said.
But the Chargers keep pushing and with Los Angeles pushing a similar concept for its new stadium, it puts yet another obstacle in the way of the big Convention Center vision.
So, aside from all that, the project is right on track.