The Anaheim City Council is scheduled Tuesday night to approve a massive convention center expansion, a gamble that industry experts say puts the city’s general fund at tremendous risk because flawed revenue assumptions are all but certain to fall short.
The proposal up for consideration, according to a city staff report made public late Friday, calls for adding over $200 million to the general fund debt — more than double the current city facilities debt — to finance the addition of 200,000 square feet to the convention center, among other costs.
City officials assume the expansion will more than pay for itself mostly through added hotel room tax revenue and cite a report by Tampa-based Crossroads Consulting Services that claims the expansion will bring in between 292,400 and 350,200 additional guest stays annually.
However, experts in the economics of convention centers say the city is making this bet during an era in which convention center space nationwide is rapidly increasing while demand remains stagnant.
Across the western United States, cities are either planning or have completed such expansions in recent years, spending hundreds of millions of dollars along the way in order to remain competitive for trade shows, corporate meetings and other events.
The problem with this approach is attendance has been trending downward everywhere and for decades, experts said. One Harvard researcher compared proposals like Anaheim’s to investing in the typewriter business.
But rather than exit a business on the decline, they said the solution pushed by most cities is to double a bad bet by expanding the space and throwing in expensive amenities. Anaheim is essentially joining a race to the bottom in which most cities, if not all, end up losing, they said.
“Historically, these kinds of things have not worked out very well,” said Heywood Sanders, professor of public policy at the University of Texas at San Antonio and considered the ranking expert on the economics of convention centers.
“If every other major competitive center in the country is doing the same thing, you are not likely to see the same business,” he said.
Sanders added that Anaheim's last convention center expansion — an addition of 100,000 square feet in 2000 — is a perfect example of how projects don't pencil out.
And it isn’t just academics who make these arguments. Even those in the industry acknowledge a glut in convention center space.
“In the current buyer’s market, unrealistic concessions are being made to book business,” states the forward from a 2012 study on convention centers by the Center for Exhibition Research. “The current excess supply is more likely to come into balance through a reduction in inventory than an increase in demand.”
Meanwhile, Mayor Tom Tait said city officials are trying to have things both ways by projecting increased revenue in hotel room taxes that they've already promised to a partnership involving hotelier Bill O'Connell when they granted him a $158-million room tax subsidy to luxury hotels in the GardenWalk development.
“You can’t sell the same horse twice,” Tait said.
O’Connell, who is counting on convention center business to fill his proposed hotels, is among many in the city’s elite business community who have contributed heavily to the campaigns of the four-member council majority — Lucille Kring, Kris Murray, Jordan Brandman and Gail Eastman.
A Big Jump in General Fund Debt
Anaheim’s gamble puts at risk a sizeable chunk of the general fund, the part of the budget that pays for core services such as police, firefighters and parks.
The city’s current debt on past convention center expansions and other facilities — not including the Disneyland Resort district improvement bonds, which are guaranteed by Disney — is $84.8 million, according to the staff report by Finance Director Deborah A. Moreno.
As of now, the debt is close to being paid off. Starting this year, the annual payment obligations drop substantially, and by 2023 the general fund will be off the hook for $16.8 million in annual debt service, according to figures in the report.
Under the expansion plan, the general fund would remain on the hook for annual debt service — which according to the staff report will be les than $17 million — probably for decades. All told, the projected debt service payments will total $409.6 million, the report states.
The staff report predicts that the additional room tax will not only pay that bill but also produce between $135.3 million and $231.6 million in extra revenue over 30 years that will benefit the general fund.
Yet this is the point where Sanders and others say the underlying projections for the gamble are shaky, even delusional.
One Bad Deal After Another
Experts cited example after example around the country where consultants’ rosy projections regarding increased convention center business never materialized.
Anaheim's previous expansion is example No. 1.
In the 1990s, a consultant’s study commissioned by Anaheim stated the expansion would boost total events and increase the direct spending by tens of millions of dollars, Sanders said.
However, in the period before the 2000 expansion – 1996 through 2000 – the center averaged 667,771 annual convention and trade show attendees, according to data Sanders collected from Anaheim. The best year of that period, 1997, drew 748,000.
Attendance after the expansion fell because of the 9/11 attacks but began to rebound in 2004. During the next five years, the best year's convention attendance was 615,620 in 2007 — less than the average annual attendance before the expansion.
The average annual convention and trade show attendance for the post-expansion period was 595,467, according to Sanders.
Fast-forward nearly 20 years and Sanders says Anaheim’s current consulting study is also problematic.
These types of studies tend to be boilerplate and based on faulty assumptions, economists have said. Consider that parts of the study by Crossroads Consulting on which Anaheim officials are basing their decision has identical wording to a report the firm did for Baltimore officials, who are also considering a convention center expansion.
The consultants would have one believe that Anaheim and Baltimore — two cities on opposite ends of the country with far different climate and local amenities — have experienced the exact same percentage of “lost business” because their convention centers are too small.
From Crossroads’ Anaheim report:
Several performance measures and industry indicators suggest market demand has equaled and potentially exceeded the ACC [Anaheim Convention Center] current supply of space. According to lost business reports, date availability and inadequate space at the ACC accounted for 20% of lost events while inadequate hotel meeting/ballroom space and hotel date availability accounted for an additional 11% of lost events. As a result, Anaheim is losing convention/tradeshow business to its competitors.
From Crossroads’ Baltimore report:
Several performance measures and industry indicators suggest that market demand has equaled and potentially exceeded the BCC [Baltimore Convention Center] current supply of space. According to lost business reports, date availability and inadequate space at the BCC accounted for 20% of lost events while inadequate hotel meeting/ballroom space and hotel date availability accounted for an additional 11% of lost events. As a result, Baltimore is losing convention/tradeshow business to its competitors.
For reasons like these, experts balk at these reports. The numbers consistently fall woefully short of consultants’ projected returns, experts have said.
“I literally have never seen a study that says anything other than build it, expand it,” said Charles Chieppo, research fellow at the Harvard Kennedy School. “Given the realities of the market, it’s astonishing to me, to say the least, that there isn’t a feasibility study that says demand is down, supply is up — don’t built it.”
Atlanta’s convention center, the Georgia World Congress Center, underwent a major expansion in 2002. According to Atlanta’s reports, in fiscal year 2000 there were 716,000 convention trade show attendees. By fiscal year 2013, that number had dropped to 471,244, Sanders said.
Even in Las Vegas, the mecca of conventions, attendance at the convention center had dropped in the decade after a major expansion in 2002, according to Sanders.
Taking Money From Libraries and Parks
Tait says that even if the staff report's rosy projections hold up — with some 300,000 additional room nights each year — there would still be an annual debt service shortfall of $6.66 million.
And if the demand remains flat or continues to drop — which the experts say is the more likely scenario — then for a generation the general fund will be down as much as $13.6 million annually and possibly more.
“If the project doesn’t pay for itself, then of course we shouldn’t do it,” Tait said. “Because any shortfall will have to be taken away from traditional community services, like public safety, libraries and parks.”
Jay Burress, president and CEO of the Anaheim/Orange County Visitor & Convention Bureau, said the added convention center space will allow Anaheim to better adapt to the changing corporate environment.
But he said that the expansion will add “flex” space, which would allow multiple trade show events at one time. And Burress said that the industry has shifted to rely more on meetings than shows.
“We’re trying to catch up on the meeting space that other competing destinations have,” Burress said. “It’s to retain our share, grow our share, and be able to operate simultaneous events.”
Sanders said that meetings in addition to trade shows are on the decline. “Flat demand is demand for all types of center space, meeting, ballroom, and exhibit hall,” he wrote in an email.
Trying to Keep Big Conventions
Members of the City Council majority have said that the expansion is also needed to keep the conventions Anaheim attracts, because they are growing and have reached capacity at the facility. As other cities’ centers expand, the convention might be enticed to move, they contend.
The most commonly cited example is the NAMM show, a music merchandise convention that had 96,000 registrants this year, according to the Orange County Register.
“We had the last expansion because NAMM said they would not come back and were not able to come back unless we expanded it,” said Kring, a mayoral candidate who was also on the council when the 1990s expansion was approved.
“I’m going to side with them and say there is a need. … I know what I see anecdotally. I live around the corner from the convention center. It is so crowded there are people parking at the stadium.”
In a chamber of commerce mailer, Murray — who starts her article with “jobs and tax revenue for Anaheim – I’m voting yes” — writes that “Anaheim could very well lose such key events like the NAMM show, and end up losing on the jobs economic benefits that Anaheim has been able to enjoy.”
Sanders said keeping one or two shows is hardly a good enough return for a $200-million investment.
“If you ask the narrow question, what do we need to compete in the convention center business, then the answer is, you need to do something that may get you more conventions,” Sanders said.
“If you ask what should we be doing as a community if we want to create more jobs, if we want to build a community of higher quality and greater competitiveness, then I would venture to say you are likely to get a different answer.”