NMIRI

Convention Center for Las Cruces: A Fairy Tale or Reality?

By
M. Gene Aldridge
Board of Directors NMIRI
Las Cruces, NM – The hype over the convention center has now reached epic proportions in creating the best economic fairy tale of all time for the citizens of Las Cruces. It has become so hostile at recent meetings of the site selection committee that its members tell the “public members” to quote, “shut up”, when tough questions were targeted to meeting planners from out of town, for example. Now the fairy tale gets better too. Recently held meetings with the hotel and motel properties personnel demonstrated (by letters in hand) that 28 out of 37 hotel properties in Las Cruces reject the proposed convention center due to the unfair tax structure that is being proposed. It seems that that convention committee propaganda, led by Jerry Harrell of the Advisory Board, had stated on several occasions that 80 percent of the hotel/motel properties agreed with the idea of the new convention center. “Not true”, says, Doug Travis, CFO of the Hampton Inn in Las Cruces. Travis blasted the City Council and the convention center committee at the June 19, 2003 work session of the Council.

Average Daily Room Rates and National Averages

Harrell’s ideas about taxation are even more mythical. He states, in a letter dated June 11, 2003 that it is just fine to raise taxes in our community so long as we are within national guidelines of average daily rates (ADR) for room charges in Las Cruces. What Harrell completely ignores is the fact that by virtue of living in NM we are already one of the highest taxed places to live in relation to our regional surrounding states as has been demonstrated by NMIRI (New Mexico Independence Research Institute) studies since 1997. Higher lodger’s taxes will make Las Cruces marginally less competitive with other places, not only in the region, but in the SW U.S. Governor Richardson and both houses of the state legislature refuse to deal with the awful compensatory taxes that small businesses have to pay when equipment is purchased from out of state, for example. This makes businesses less competitive compared to other cities of its size. Do higher taxes bring in more money or do they make Las Cruces less competitive? Evidence from many studies in economics and growth suggests that Las Cruces, with higher taxes, will become less competitive.

Businesses, for example, make note of high tax regions in the U.S. and will tell their employees not to stay in certain cities. On one hand, the Governor and the state legislators lower our income tax and then raise our gas taxes by not allowing further tax reductions that were put in place by previous administrations in NM. This is in addition to the gross receipts tax, high personal income tax in NM, and the onerous capital gains taxation in NM. Stupid is as stupid does. The state of NM hates small business as evidenced by its tax structure against small businesses which have the greatest number of employees in the NM, some 80 percent of all workers are employed by small business. All the while new businesses come to NM and get tax holidays. Is that fair to local businesses? We invite older persons to come and retire in NM and then tax their capital gains 100 percent! Does that make sense? Lower taxes mean more revenue for states and local governments, but NM continues to refuse to adopt this economic paradigm. The new Las Cruces convention center, as proposed, is more of the same onerous taxation policy. (See the studies by the Atlanta Federal Reserve on the New South).

Apples and Oranges Comparisons

Harrell also discusses the success of Salt Lake, Utah operations with convention centers and fails to mention St. George, Utah’s new “civic center” that was once a convention center now managed and funded by the city and county. St. George’s convention center failure is important because they are a market much like Las Cruces in size and climate. So the taxpayers of St. George are now funding a monument for failure in Utah. It didn’t work. Precisely what did happen in St. George, Utah could happen in Las Cruces, NM. The same is true of Bisbee, Arizona where the convention center is now the home for many shops that had to come in to fill the vacant convention facility.

Harrell and others who support the convention center have not yet discussed the fact that if the convention center fails to meet its bond obligations, it will be the GRT (Gross Receipts taxation) that will be at risk by the city. Bonding requires pledges from the City of Las Cruces to back up the bond in the event a bond is in default. Las Cruces will have to pledge GRT (1/8 percent of Gross Receipts (GRT) multiplied by 1.2 reserve coverage requirement) to keep the bond solvent. This is again taxpayer money. Is the City Council of Las Cruces prepared to put “at risk” future GRT as well? Any reasonable public policy thinking elected official on the City Council should not be prepared to risk future taxation revenues on the potential failure of the convention center as currently proposed. We will demonstrate later why the economic risks are huge as researched by NMIRI. This is why the risk must be made by the private sector where the bottom line is important to success, not some social “pie in the sky” rhetoric or ripping off tourists with “pass through” taxes that are very onerous to small businesses and their customers in our region.

Vested-Conflict of Interests…thus weakened credibility

What is not well articulated in the convention center debate is the potential and real conflict of interest that Mr. Harrell and Mr. Hutchinson have on this matter. They are from Mesilla, where their restaurants will not be affected by this new tax in Las Cruces! That’s correct, they stand to gain in their restaurant businesses from the convention center without being taxed themselves in the Las Cruces-Dona Ana County jurisdiction. Now that is really fairy tale material. Our saving princes have a vested interest and they want the motel and hotels to pay for it via the customer base of tourists. Where is the glass slipper Cinderella? Smart folks who care about public policy in Las Cruces and sit on the City Council have to take all this into consideration when they vote on the convention center or, better yet, when they table the idea. But what other public policy options might be more reasonable for a convention-civic center for Las Cruces? After all, if we critique an approach we should have options for policy in hand, right? Let’s not leave anyone in a soup of abstractions. Let’s serve up a clear matzo ball in the clear broth…first, the challenges associated with the current convention center proposal.

Cluster Method of Convention Development

Thesis: The current convention proposal calls for too much square footage, too large of a facility for our Las Cruces market or even markets like ours.

Analysis: Sizing of Convention Center for the Market

The proposed size of the convention center (80,000 sq ft) is too large for Las Cruces regional markets and will not sustain itself anymore than have other convention centers like it in the U.S. markets that are similar. Especially now, in this economy, convention centers around the country are in deep trouble for the most part. To be sure some will argue that it is the economy, but what is clear is that convention centers are designed to lose money and operate at a deficit. The proposed size will generate a negative flow for Las Cruces for over 25 years. There are exceptions here and there, but for the most part all convention centers are subsidized by millions of dollars per year. A market similar to Las Cruces, NM is St. George, Utah where their convention center is now a civic center and a monument to failure. They will be fortunate to recoup any of the taxpayer invested costs over the next several years. Is this what we want for Las Cruces? The St. George, Utah experience is a case of failed public policy and failed marketing strategy that did not key in on the segments most relevant to the region.

What is more in line with our regional markets is a facility, at least in the beginning, that will be about 15,000 sq.ft. with space for exhibits at about 5-10,000 sq ft. This would easily allow for banquets of 1000 persons and about 1400 persons in theater style seating for large events. Seating for civic events (symphony, artists), trade shows, consumer shows and conventions would be possible for our market size. As the City of Las Cruces grows, additional facilities can be developed that are located near existing hotels and motels where space and rooms are plentiful. For example, using the proposed NMIRI “cluster method” of convention facilities for Las Cruces, another facility of about 15-20,000 sq. ft. could be built near I-10 or on I -25 as needed over several years. These new facilities would be private sector driven by market demand, not by subsidization from the taxpayer over many years. The size for each new facility would be proportional to the markets that are being created over time. This requires better marketing tourism skill-sets than currently exist in Las Cruces at the present time.

Synthesis: What is needed for Las Cruces convention business is what we at NMIRI are calling the “cluster method” of financing and developing convention-civic center business for the city and county region. Smaller, 15-20,000 sq.ft. convention facilities, along with 5-10,000 sq ft for exhibitors, can be built around 150-200 bed operations one at a time as marketing creates demand. The private sector investment groups should provide this kind of development. Each facility could be located on some of the sites already provided by Tom Hutchinson’s committee for site development of the flawed proposal for a convention center. This rolling method of cluster development would help the city by offering more convention space that keeps in step with market demand. Eventually, if the market demand was high enough, the private development can continue in different locations in the community. This spreads economic development around the community and helps stabilize the costs to the community. The current proposal, for example, of the convention center is much too large for Las Cruces, now or in the near future. A series of small facilities will help modulate the market development over time.

Applying this convention center “cluster method” to our current debate can be made quite reasonable by selling the So-Lo building to area developers in return for a 15, 000 sq.ft. facility and 150 bed hotel in the old downtown center of Las Cruces. The Rainbow grocery store on Lohman will soon be available. Here is a perfect site for a small convention facility attached to a full service 150 bed hotel operation. This would be the first of many such cluster centers for our growing market. If the market grows, then the private sector can build more, but if the market is not there for Las Cruces, then we will still have a small facility for judicial education programs, higher education seminars, special small events and a home for artistic groups like the symphony and other concert and graphic artists.

Taxation Issues/Lodger’s Taxes

Thesis: The lodger’s tax is onerous for the hotels and motels of the region and should not be approved by the City Council.

Analysis: The City of Las Cruces is already collecting over $1 million dollars per year in revenue from tourists for a tax structure that is at maximum per state law. What do they do with the current 5 percent revenue now being levied? Now with the new proposed tax, the motels and hotels would be at total tax (GRT and TOT) rates of 15 to 27.1 percent depending upon the cost of the room! That is an onerous tax, in our opinion. All taxation is harmful economically, but this tax is onerous especially to small businesses and tourists in the region who can least afford the tax which they would have to pass on to the customer without any observable benefit to them for the taxation. This is outrageous taxation on a population of about 400,000 visitors per year. Another option for financial support is required. But other options have not been debated and many persons who challenge the current assumptions of the proposed convention center are told to “shut up”. What brilliance!

There are many activities of the City Council that often do not surface until after many years of study. For example, the City of Las Cruces is undergoing a space study at the moment and it would appear that the City of Las Cruces will need new facilities in the downtown area. This could serve as part of the downtown revitalization program. We understand that the Dona Ana County government is looking for new building options as well. They might build a new building on one of the city's existing sites. In addition, to the City and County in the process of doing space assessments, the State is also involved in analyzing their total current and projected space needs for consideration of locating a state facility in the downtown area either free standing or in conjunction with another prospective local government facility. They might locate within current city sites and become part of the downtown development process as well. The point is that there now seems to be a focused synergy on the downtown region and it ought to be promoted as a center of activity for local residents and for tourism. Our “cluster approach” to developing the region for tourism fits into this longer term scheme. This is often called political and economic synergy.

Synthesis: Private sector interests can provide the financing, construction and implementation management for a convention-civic center project. We understand that there are those persons in the community who do not want to discuss the civic center idea combined with the convention approach, but we think it is time to do so in Las Cruces. Multi-functionality for a convention-civic center will create real income producing local events side-by-side with “out of town” tourist events and conventions. Local benefits, thus, accrue to such a center that goes beyond, but includes the tourist revenue streams. The City of Las Cruces can offer tax incentives to private sector groups that will help them build and create the new convention-civic center. We understand that private groups have been discussing just such a plan for the So-Lo building downtown area for revitalization. This makes more sense than taxing local businesses and tourists with onerous new taxes in addition to the current 5 percent being levied at the present time. The city space study suggests the So-Lo building for new city administration building option as well, but what is important is the space is being freed up in the area and private developers could provide additional investment in a small convention and hotel. Using private money will also enhance the incentives for success. Additional revenue streams from local and imported tourism dollars can enhance the potential success on a much smaller scale than is currently proposed. Risks are less, especially for the taxpayer.

Fictional Budgeting for the Convention Center

Thesis: The proposed budgeting and financial projects provide continued deficits and “at risk” financing for the taxpayer that will reach out over 25 years or more. A convention and civic center should be made economically viable via the private sector, not the public sector.

Analysis: All budgeting and proforma financial work is fictional until the proposed entity comes to pass. For example, no one knows what the cash flow will be related to revenue for this new facility. The debt service is quite high for this facility… in the neighborhood of $1.3 million per year, plus operational fixed and variable costs that will be over $1 million, not the projected $ 600,000 in the convention center study proposal update. It is also estimated that the new center will not become fully operational for a few years, maybe three years. The bond analysis has reflected NO convention center operating revenues nor expenses for the first three years. The bond proposal suggests collecting hotel bed tax for the years 2004, 2005, and 2006 of $3.416 million total and paying debt service over the same three years of $3.859 million total or a total negative proforma of $443,000 during these years. Year four or the first year of operation shows a negative cashflow of $424,000 and an average of $321,000 annual negative operations for the next 20 years ($6.634 million over that 20 year period). The pledged 1/8 percent (GRT) Gross Receipts Tax multiplied by 1.2 reserve coverage is an effective .15 percent pledge on the solvency for the outstanding bonds.

The bond analysis work suggests that the net operating shortfall is from $251,000 in the first two years to $425,000 in the latter years as described by the investment underwriter. Our review of other convention facilities suggests that the shortfall may be as great as $1 million per year in subsidization. When the City of Las Cruces backs a bond, it means that the taxpayer is “at risk” via pledges from the GRT . Is this what we want for our city without assurances for success? The key is to ask yourself this question: “If I were investing in this for my community and myself, would I proceed with the project as currently financially configured? The answer should be “no” for prudent investors and reasonable-minded caretakers of the community dollars.

Even the marketing projection costs in the new study are fictional and way beyond professional standards by suggesting that the marketing costs will be $50,000 while we know that most convention facilities in the U.S. require a marketing director, and two sales staff on the road all year, just to keep the meeting planners engaged in the use of the facilities.

The proposal study does not reflect that the Convention and Visitors Bureau will be the marketing arm for the center and their marketing expenses are not included in the study. The costs for marketing are one of the biggest items for a convention center, why were these costs not clearly delineated in the study? Marketing costs alone will top $350,000 if the marketing is correctly applied to the convention center. Further, we are told that the Convention and Visitors Bureau will be “privatized”. Now, what does that mean?

It should be noted that that the bond analysis shows that the current practice of the CVB setting aside 10% of their annual lodger's tax income for a rainy day is "discontinued" in the bond analysis in order to insure coverage of the debt service. This amount currently is in the $700,000 -$800,000 range. Now isn’t that an interesting slight of hand? Just leave all these little facts out of the study and forget the details about how marketing will be financed.

How will the taxpayers be paid for this DVB asset that they will supposedly turn over to the private sector? It might be a good idea to move the Convention and Visitors Center to the Restaurant Association and the Hotel-Motel Association in Las Cruces and let them manage the marketing through their own profit structures. Why is the City of Las Cruces even involved in what should be a private sector function of activity (tourism marketing) for specialized vested interests? Why is it that taxpayers are asked to subsidize the marketing efforts for tourism? The industry “most affected” should do their own marketing/economic development and pay for it? Why are taxpayers involved in this activity at all? The private sector Chamber of Commerce will never grow up and become independent in Las Cruces if we keep placing rewards in their hands that create dependence on government.

Synthesis: The updated study is flawed in this respect and is also misleading the taxpayer and the city council that must make some important financial decisions for the future of Las Cruces. No correct thinking City Council should “sign on” to such study numbers when they are so flawed and full of marketing and management fantasies, not to mention the fact that they have just not including all the facts that place the taxpayer at risk.

Economics of the Current Convention Center Proposal

Thesis: The economic analysis and its underlying assumptions of convention centers are seriously flawed. The current updated study on the convention center reflects this kind of flawed thinking about the economics of convention centers that exist in the U.S. today.

Analysis: When economic development projects are “sold” to communities, they are sold on the basis of “multiplier effects”. This means that government will tell you that spending the taxpayer’s money is worth it because we will generate many new jobs which will create even more economic growth. This multiplier effect does work in some cases (e.g. manufacturing, larger cities), but in the case of convention centers it has been grossly oversold to the public at public expense.

For example, almost all convention centers lose money and require subsidization. They even use the subsidization to claim, in some cases, that the convention center “made money” for the taxpayer. Government spending does not have unique characteristics that generate prosperity. Studies support the idea in economics that government officials spend money less wisely and productively than do their private, taxpaying constituents.1,2 If it were true that governments can spend us into prosperity, we could turn over real estate projects to the government and have them produce the wonderful multiplier effects. It is an absurd idea generally. Why?

Many professionals in economic development use the magic number of “6 or 7 or 8” to evaluate projects for cities. What taxpayers are not told is that studies demonstrate the multiplier effects are larger for cities with huge populations. So the real multiplier for Las Cruces might be more like 1.5 to 2.0 rather than the mythical “7” times that is used to demonstrate increased business activity (economic impact) because of a project coming to town. The economic impact is much lower than is included in current calculus and assumptions.

So what the public is told is as follows: If you let us spend your money as taxes, then we will produce for you many new multiple economic benefits to our community. We will do this for you even after we assess the debt service, the operational costs, the cost of taxation that reduces private spending in the community, and then after all these have been accounted for, the net revenue to our community will still offset these “costs”. This is marching into folly with our eyes closed economically. It is a fairy tale told to elected officials. Many people believe that there are multiplier effects associated with convention centers that justify them. Not true. Evidence against these highly rated multiplier effects is overwhelming.3 This is not only true for construction multiplier effects, but imported effects often touted about people who come to the convention from out of town. The studies again reveal that the multiplier is much less than what is being advanced by “pro big spending” public sector convention professionals.4 Many factors make up the economics of growth, not just multiplier effects or a convention center coming to town.

Another important issue that is not discussed in the economics of the study is how the public and private sectors decide on what is a “cost”. Governments tend to count costs as a benefit in economic development while private sector development groups count them as a cost, not a benefit.1 Governments count locally paid wages and salaries on construction of a convention center as a benefit, while a contractor would count them as a cost. This is the key fallacy of most government projects.

Taxes collected by the current proposal from the motel and hotel association groups will not be enough to offset the bond capital costs. Generally, this is true for all convention centers. So why subsidize such a center? Because politicians are led to believe that by spending on a convention center it will create benefits to local residents. Since economic benefits to the residents have been demonstrated above to be grossly exaggerated or non existent, then it is foolhardy to move forward with the current convention center proposal. Both economics and the marketing assumptions are flawed and fictitious.

Synthesis: Building a convention center using public funds to create economic success is seriously flawed fictitious activity. The underpinnings of the convention center economics, as presented to date, simply cannot holdup under close economic scrutiny. Multiplier effects associated with convention economics, often touted as a mechanism toward economic growth for the future of a city, simply do not hold up empirically in studies as has been documented here.3, 4 When all is said and done, it is best to let the private sector accept the risk for the success or failure using private money rather than public money to move such a concept as a convention center. Private financing and competition tend to drive incentives behaviorally in economics. Previous administrations of the City Council have demonstrated that management of private entities like El Paso Electric ($ 8-10 million plus of taxpayer’s money or more) and the local hospital are not well managed by government. Do we want to make the same economic and management mistake again on a convention center? Reasonable citizens think not.

Positive Strategy Forward as Compared to the Existing Negative Proposed Strategy

Let it be clear, NMIRI and many others in the community want a convention policy focus for the future of tourism marketing in Las Cruces and Southern NM. What we don’t want is a tax gouging operation that takes the taxpayers money without strong benefits to the community. Can we do both, that is, provide benefit to the community while relying on the private sector to invigorate tourism markets in our region? We think it is possible given all the confluence of activity that seems to be emerging in 2003-2004. What, then, is a positive strategy that will provide a more hopeful economic outlook for the tourism markets and the convention business in our city? While our list is not exhaustive of all options, it is offered for consideration in moving forward positively.

Site Committee Work

1. The site work that has been developed and implemented this past three years leading toward the convention center should be completed and held for private developers who might want to build “cluster convention facilities” in Las Cruces to meet the market needs over time. This can be kept on file by the City Council for all to view and study as new convention facilities are evaluated.

Cluster Method of Convention Business Development

2. The NMIRI “Cluster Method” of convention development should be considered using the downtown So-Lo building and the area in the old downtown as both a civic center and as a convention facility. Clusters of new convention facilities can be developed using the existing work from the site committee or new sites that private developers will use to meet market demand in the future years. The university site by the golf course has many private investors for hotels salivating to build a facility. Another example is the current Rainbow store location on Lohman and I-25. This facility will soon be available for a small convention facility with a 150 bed operation located adjacent to the existing building. The Cluster Method offers existing motels and hotels the option to tap existing values, where sharing of rooms between hotels, is common practice when a convention comes to town as additional beds are required. The Cluster Method allows for measured growth so that new facilities for conventions are built based upon real market demand and sound economic-financial principles leading toward effective tourism for our region.

Short Term Tourism Economic Results: An Example of a Way Forward

3. As a means of solving the short-term challenge of tourism business, so often cited by advocates of the current convention center proposal, Las Cruces needs to re-think the marketing strategy it is using nationwide. Using an example for the private sector, not the public sector, the Restaurant Association and the Hotel-Motel Association might create a constructive campaign to lure tourism clients here from the northern cold climates especially in winter months. The theme of this effort could be called “The Otherside of Winter – Las Cruces, NM”™ . This campaign should foster Las Cruces as a place to come in the winter months and should clearly outline the wonderful tourism infrastructure that exists here while the northern climates are freezing. The economy of tourism has changed dramatically because of various events and economic conditions, but Las Cruces needs to sell itself to the world in a new way that will actually move people to come here. Providing new “tourism infrastructure” for attractions, events, concerts, tourism sites and smaller convention facilities would be quite attractive to the 100 – 500 member convention groups that could be enticed here by the lower costs, the warmer climate and the great hospitality that can be had in Las Cruces, NM and Dona Ana County. This effort will produce more tourism dollars immediately, create faster and better tourism infrastructure because entrepreneurs will see the needs develop, and provide more reasonable quick growth for bed usage than the current concept of a convention center. This is a free market effort that should be coordinated and paid for by those that benefit the most from such an activity, the restaurants and the hotels-motels in the region, including the Chamber of Commerce. The project should be bid privately.

Sometimes the Best Public Policy is to say “no”

4. The City Council can act to evaluate carefully the Cluster Method for convention development by tabling the existing convention effort while work is completed to create the new center of activity for both the taxpayers (civic center) and the tourism programs (smaller cluster convention facilities) in the downtown So-Lo building area. The city should consider selling the So-Lo asset to a private developer whose vision is compatible with the citizens of Las Cruces for this area. This work should be combined with the existing space studies and “work in progress” to house the city and county in this same downtown area. It would bring new life to the city center and foster small business development using the cluster method of convention growth. While this effort is underway, the private sector tourism groups in the City of Las Cruces can move immediately to solve the looming bed capacity issue for tourism, but implementing immediately the proposed campaign for selling Las Cruces to the markets identified above. (See # 3). In taking these bold steps the City Council will renew its commitment to private sector free market development and new life for the center of the city. This policy approach will truly be the best in public and private partnership for the citizens of our fair city especially when compared to current fantasy efforts and flawed studies.

References

1. Mills, Edwin, (1991) Should Governments Own Convention Centers?, #33, Heartland Institute, Chicago.
2. For example, Edgar K. Browning, of Texas A&M University, has estimated that the diversion of private resources to government use results in a net social loss of one dollar for every ten dollars diverted. Edgar K. Browning, "A Hidden Welfare Cost of Taxation," National Tax Journal, Volume 30, 1977, pages 88-90. A 10 percent loss may not appear at first glance to be significant, but the compound impact over a period of time can be staggering. A 10 percent difference in return on investment (for example, a 5 percent annual gain vs. a 5 percent annual loss) over a 20-year period yields a sevenfold difference in results. That is, a $1 million investment could be turned into an asset valued at $2.65 million or just $.36 million. See John Semmens, "Government Business: A Capital Offense," The Free Market, July 1985, pages 3-4.
3. In a report prepared for The Indianapolis Convention & Visitors Association, analysts used a multiplier of 2.2 in estimating the total economic impact of conventions in Indianapolis. See SMC Company and Business Economics Affiliates (Indiana University School of Business), "The Economic Impact of Conventions on Indianapolis - 1985" (Indianapolis, IN: Indianapolis Convention & Visitors Association, May 14, 1986). Laventhol & Horwath appear to have used an unusually high multiplier of 4.5 in their estimate of the indirect economic benefits expected to accrue to the State of Illinois from the construction of a convention center for the Greater Woodfield area. See Laventhol & Horwath, "Economic and Fiscal Impact Analysis for the Proposed Convention Center in Greater Woodfield, Illinois" (Schaumburg, IL: Schaumburg Metropolitan Exposition and Office Building Authority, July 14, 1989), Table C.
4. See Convention Centers, Stadiums and Arenas (Washington, DC: Urban Land Institute, 1989) for multiplier values assumed in a sample of projects.