February 26, 2020

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The Big Assumptions Behind Measure C

Feb 13, 2020 | ,

Original article can be found here.
Yes-on-C_02-10-20-4-800x533 The Big Assumptions Behind Measure C [your]NEWS
San Diego Regional Chamber of Commerce President Jerry Sanders speaks at a press conference touting the taxpayer protections in Measure C. / Photo by Adriana Heldiz

The campaign behind a March hotel-tax measure that would fund a Convention Center expansion plus homeless initiatives and road repairs is touting Measure C as a tourist-backed investment that will pay off for taxpayers and the local economy.

That promise rests on a series of assumptions that are uncertain at best and risky at worst. While Measure C would pull in new money for homelessness and street repairs, proponents’ bet that a Convention Center expansion will have a profound impact on the regional economy and the city budget is at the heart of the initiative.

There are also hurdles to cross before the project itself can move forward.

First, the measure aiming to increase taxes on visitors by 1.25 percent to 3.25 percent depending on their hotel’s proximity to the Convention Center all but certainly must cross a threshold the coalition behind it initially sought to avoid: securing the support of two-thirds of city voters, a high bar that has scuttled many past tax measures.

Then the Convention Center expansion must finally move forward. Before it can, the city will likely need to push through a series of other challenges. One of them: It will need to cut a deal to get control of the bayfront property where an expansion would likely go.

Here’s a breakdown of the other risks – and key economic assumptions – in the measure.

The assumption: The cost of the project is within reach.

The biggest question is: How much will the expansion cost?

The estimated sticker price of the Convention Center expansion has ballooned since the Coastal Commission gave the bayfront project the go-ahead more than six years ago. That could affect the project’s next steps if Measure C passes.

In 2013, contractor Clark Hunt Construction suggested the expansion could cost $518 million. By early 2017, that estimate had risen to $685 million and a former city official warned at the time that costs rise each month construction is put off.

Given the likelihood of cost increases, Measure C allows the City Council to seek up to $850 million in bond financing for the expansion – and to vote to increase that cap if necessary, a feature that has also drawn some criticism.

Christina Chadwick, a spokeswoman for Mayor Kevin Faulconer, has said the city is prepared to explore ways to reduce the cost of the expansion if necessary.

If the city ultimately decides against proceeding with the expansion within the next decade, Measure C would halt the hotel-tax increase unless the city has borrowed money for homeless services and road repairs that it must repay.

Rachel Laing, a spokeswoman for the campaign to pass Measure C, has described this as a taxpayer protection meant to ensure the city follows through on all the commitments laid out in the initiative – and that it has a way to back away out if it can’t.

“Our best information is that this is a buildable and financeable project; however, the initiative does have a contingency built in that ends the tax collection if that turns out not to be the case,” Laing wrote in a statement.

The assumption: The expansion will bring in dozens more events that generate more than 380,000 additional hotel room night stays annually – and deliver more hotel taxes to the city.

Measure C describes the Convention Center expansion as a major economic boon for the city.

The city will expand the Convention Center. That will bring in more conventions and events, the reasoning goes. That will bring in more visitors – and those visitors will pay more hotel and sales taxes.

Proponents estimate the increased business tied to the expansion will pull in $10 million to $15 million annually for the city’s general fund.

Those estimates stem from a 2017 Tourism Marketing District-funded analysis by HVS Convention, Sports & Entertainment Facilities Consulting. The report concluded that an expansion would net 383,000 additional room nights annually and $123 million in associated revenues – which amounts to a substantial 56 percent increase in both bookings and revenues each year following the expansion.

Measure C supporters have used those figures to estimate it will bring the city about $13 million in additional hotel-tax revenues each year.

Those estimates count on San Diego’s success in a market that critics say is flattening even as metros across the country have scrambled to expand their facilities.

Heywood Sanders, a University of Texas at San Antonio professor who has made a career of being the prime national researcher and critic of the convention center industry, is skeptical of boosters’ projections.

Over the past two decades, Sanders said convention centers across the country have increased their available space by about 40 percent and yet the industry has essentially seen flat growth – and even some declines.

He pointed to PricewaterhouseCoopers survey data on convention and trade show attendance in metros comparable to San Diego showing those centers reported almost identical average annual convention attendance in 1997 as in 2019 – and a 6 percent spike in the last decade.

Data from the Center for Exhibition Industry Research, which focuses on business-to-business trade shows, separately reveals an average 1 percent growth rate in attendees for those events between 2006 and 2018.

Sanders said expanded convention centers are competing for those meager increases in business.

“In my judgment, the national convention market is overbuilt,” Sanders said.

Local tourism leaders have long countered that San Diego is an outlier. They note that San Diego’s convention center already boasts an 83 percent exhibit hall occupancy rate that far exceeds the industry average. Indeed, PricewaterhouseCoopers’ 2019 annual report on the convention industry described an average 59 percent occupancy rate.

“The San Diego Convention Center is an especially competitive venue because of its location on a scenic bay in the heart of a vibrant entertainment district, in a city that is sunny and 70 degrees most days of the year,” Laing said. “We have natural advantages that cannot be replicated anywhere else in the United States.”

Tourism Authority COO Kerri Kapich and others have also warned that about a half dozen conventions have already canceled their events in San Diego due to the lack of available space for their attendees, and that more could bail without an expansion. They argue that San Diego must expand to keep up with its competitors in cities including Anaheim and San Francisco.

“Not expanding our Convention Center would be a disaster for our city and our regional economy,” Kapich said. “It will severely limit San Diego’s ability to compete with other markets for lucrative conventions and events that drive that increased attendance and that additional tourism revenue, that benefit that we all enjoy as citizens.”

The assumption: There will be enough money from the tax hike coming in to cover Convention Center debt payments plus help with other needs.

Measure C isn’t just about a Convention Center expansion. It’s also designed to help with two other major causes: homelessness and road repairs.

Two years ago, economist Skip Hull of CIC Research estimated that Measure C could pull in more than $6 billion over 42 years for those three things.

And Hull estimated $3.8 billion could support Convention Center initiatives alone.

Hull predicted that in addition to what the city already collects from visitors, the measure would pull in about $44 million annually in its first decade that could be used to cover expansion debt payments and after several years, begin to assist with other Convention Center needs.

If the city’s Convention Center debt ends up being higher than predicted, cash doesn’t flow as expected or the city doesn’t set aside reserves to prepare for a downturn, the need to cover the annual debt payment could threaten city services.

Hull has said he based his projections on the city’s historic tourism performance, which incorporates both the 2008 recession and a previous Convention Center expansion.

Among his assumptions: The city will add about 24,000 hotel rooms over the next four decades, room rates rise will from an average of $178 per night to $545 and bookings will increase an average of 1.2 percent annually.

A more recent analysis by the city’s debt management department that relied on five-year city financial projections and anticipated an average 4 percent growth in hotel tax hauls over the next 10 years predicted the city would pull in an additional $45 million annually for Convention Center initiatives in Measure C’s initial decade – close to Hull’s prediction.

Borrowing money for the Convention Center expansion and paying it off will be a long burden for the city. Measure C supporters are betting that the tax increase and the expansion itself will make this cost more than worthwhile – and that there will be enough money coming in to pay off the expansion.

In 2017, a conceptual financing plan created for a similar Convention Center measure assumed the bond market could deliver financing that would come with $5 million in interest for the first two-and-half years of project needs and then a roughly $41 million annual debt service payment for longer-term bonds needed to finance construction – close to the amounts projected to flow to the Convention Center in the current measure’s first decade.

Matt Fabian, who leads municipal bond market and research efforts at Massachusetts-based Municipal Market Analytics, said the bond market has gotten more favorable for cities since 2017 and that the city could take advantage of lower interest rates if it takes its pitch to the market sooner rather than later.

An updated Convention Center cost estimate and other changes to the city’s plans could also affect bond market scenarios – and the ability of those new tax hauls to cover the city’s annual debt payments for the expansion.

In 2017, city finance officials recommended that the city create a reserve fund that matched the city’s annual Convention Center debt payment to shield the city’s general fund if tax collections fall short.

Measure C allows the city to set up a reserve fund using hotel taxes collected for Convention Center purposes but doesn’t require that it create one.

Lakshmi Kommi, the city’s debt management director, said the city is awaiting the outcome of the March election before pressing ahead with new Convention Center financing plans but hinted that her office would propose a reserve fund if it passes.

“For financing measures relying on economic revenue such as (hotel-tax revenue) as a repayment source it is prudent to establish sound reserves,” Kommi wrote in an email to VOSD. “These would serve as buffer during an economic slowdown, in the event there isn’t sufficient revenue to pay for debt service.”

The city’s next mayor – and financial staffers he or she hires – may end up dictating exactly how that will work if Measure C passes.

The assumption: Measure C will help tackle other Convention Center needs.

Some Measure C proponents including former Convention Center Corp. Chairman Gil Cabrera have said the tax hike could help pay for efforts to support the facility’s success over the long haul and also allow the city to cut off subsidies it sends every year to support the facility’s operations. That would free up money for other city services. In recent years, the city has provided between $2.1 million and $3.4 million to support efforts to book conventions. It’s also handled a couple other annual bills.

But it’s not clear exactly when new tax hauls might relieve the city of those charges. Key city and Convention Center Corp. officials will need to wait to see if Measure C passes and then agree on what might come off the city’s books – and when.

What’s certain: The city must continue to make its existing $12.6 million annual debt payment for a previous Convention Center expansion until those bonds mature in 2028.

It is not clear that the tax increase will immediately cover the city’s longstanding subsidy for the facility. And we don’t know exactly how and when it could help the facility tackle existing capital needs beyond the expansion, including a roughly $840,000-a-year cost to clear groundwater from under the facility’s parking garage that’s now paid by the city.

Hull’s projections didn’t anticipate excess revenues for Convention Center operations until 2025 or assistance with the existing city subsidy or dewatering work until after 2030.

Convention Center Corp. CEO Rip Rippetoe anticipates the expansion project will include upgrades that will help chip away at the 30-year-old facility’s more than $60 million capital needs list but said more through discussions, building assessments and design reviews will be necessary to establish which projects can be tackled – and which city payments can stop thanks to new tax collections.

“Certainly, we have to sit down and have a conversation about the path we take,” Rippetoe said.

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