No. 33 Should Governments Own Convention Centers? (summary html)

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1. Government-subsidized convention centers are chronic money losers.

Convention centers have become increasingly popular “investments” of state and local tax dollars. Between 1975 and 1985, construction began or was completed on some 250 convention centers, sports arenas, and similar facilities at a cost of more than $10 billion. Forty-three cities nationwide — including Chicago, St. Louis, and Kansas City in the Midwest — are currently building or expanding convention facilities.

Unlike private investors, taxpayers can expect to receive no direct return on their investments in convention centers. Government convention centers rarely cover even their operating costs. One survey found that annual operating losses at large government convention centers averaged 42 percent of revenue. (That is, a facility whose operating revenues were $3 million had operating costs of $4.26 million.) In 1989, the Washington, D.C. Convention Center — 98 percent booked and routinely turning away business — had operating revenues of $7.4 million and operating costs of $12.8 million. D.C. taxpayers made up the $5.4 million difference from the general treasury.

More disturbing is the fact that operating expenses account for only 25 to 30 percent of a center’s total annual cost, which includes debt service and other capital costs. D.C. taxpayers, for example, paid about $9 million in interest and principal payments in 1989, in addition to the $5.4 million operating subsidy.

2. Government authorities exaggerate the benefits of convention center subsidies.

Because their convention centers are chronic money-losers, government officials claim that indirect benefits justify the large tax subsidies. They rely on fundamentally flawed “multiplier theory” to project such benefits. Their feasibility studies count labor costs as benefits and assume that all convention center workers would be unemployed if the facility were not built.

Proper economic analysis indicates that “multiplier effects” are grossly exaggerated by governments and their consultants. Moreover, any indirect economic benefits that are generated by government convention centers would be generated by private centers as well. Government funding of these facilities only ensures that taxpayers will continue to bear the burden for operating losses and capital costs.

3. Inefficiency characterizes convention centers managed by governments.

Governments are influenced by special interest groups more than by voters. Government convention centers rarely serve taxpayers, but rather their customers, the unions, and the government managers themselves. Inefficiency benefits each of these special interest groups: customers benefit by underpricing of service, government managers by increasing budgets, and unions by over-employment, higher-than-market wages, and favorable work rules.

Government managers have few incentives to run their convention centers efficiently. Competition, which in the private sector lowers costs and improves quality and efficiency, affects the government sector in just the opposite way. In the “competition” among government agencies for tax dollars, an agency that provides a high level of service within its budget is likely to be “rewarded” with a smaller budget increase than an agency unable to live within its means. In the government sector, it pays to run deficits; losses are bankrolled by the taxpayers.

4. Government should get out of the convention center business.

Convention centers are simply large real estate developments, and they do not justify government ownership and management. Government spending on these facilities cannot generate prosperity in any way that private spending does not. Government involvement in convention center development promotes mismanagement and distorted incentives that ultimately cost taxpayers millions of dollars.

The private sector has broad expertise in real estate development and management; it should be permitted to supply convention centers on a competitive basis. Governments should declare moratoria on new government-owned or -financed convention centers; allow private developers to build centers as they obtain financing and assemble land; de-politicize the process of determining when, where, or by whom a new facility can be built; and sell existing government-owned centers to private investors.

Based on Edwin S. Mills, “Should Governments Own Convention Centers?” Heartland Policy Study #33 (Chicago, IL: The Heartland Institute, January 1991). Printed copies of the 17-page study are available from The Heartland Institute for $10 each; the full text is also available on The Heartland Institute’s Web site in HTML and Adobe Acrobat PDF formats.

Questions? Contact The Heartland Institute, 19 South LaSalle Street #903, Chicago, IL 60603; phone 312/377-4000; fax 312/377-5000; email [email protected]; Web http://heartland.org.