John Fieseler says government funding of hotels “the new norm” COMMENT

It is the new norm, says John Fieseler, Frederick’s director of tourism when speaking of government funding of conference centers. He’s not aware of any hotel conference centers being built with investor money. They are all public private partnerships. So he suggests: Frederick needs to get with it, and support the City’s plan to hustle up some $30 million (m) to put down on a $70m conference center hotel.

It is true, as Fieseler says, that most conference and convention centers get government support. But in suggesting that Frederick just copy the others he draws exactly the wrong conclusion. Fieseler thinks we should just follow the herd. But it is the herd behavior of local and state governments that is the nub of the problem. The herd behavior of governments subsidizing  conference and convention space around the country has produced a glut. because so many cities, large and small, have been subsidizing extra space the past 30 years.

Advocacy of government sponsorship of conference/convention centers follows similar lines of argument to those used for government sponsorship of sports stadiums, casinos, and downtown hotels. All these are unnatural as public works, natural as businesses because they all easily levy charges for their use since they control a door, a gate or a check-out at which an admission fee can be levied. And then the revenue stream from those charges can be used to fund operating expenses while providing an operating surplus to allow for depreciation of capital, service debt and provide a return on equity investment and risk. Governments traditional functions cover provision of facilities and services which cannot be funded by fees for use – such as police, trash collection, water and sewer, parks, local streets.

The extension of government into these business operations is justified with claims it represents ‘economic development’ because of the impacts it will supposedly have on local spending, the jobs it might create an the extra tax revenues it might raise. But the promoters of governmental ‘economic development’ have a peculiar notion of what represents development.

Economists think of economic development as consisting of innovation and investment that develops a productive enterprise that finds willing customers who pay enough in buying the product to generate a stream of revenue from those voluntary transactions that rewards the investors with a surplus over operating expenses sufficient to service their debt, allow them to pay wages sufficient to buy the equipment and supplies and to attract the skills they need from competing employers and add value to the business. In other words economic development is a successful, profitable business that can stand on its own feet financially. Government’s role in such economic development is limited to supporting a legal framework of law and order in which patent and other property rights are protected, contracts enforced, as well as traditional local government functions are performed like upkeep of streets and stormwater systems, and regulating utilities. The economist sees economic development as adding to productivity and thereby allowing better value for consumers, higher real wages and rewards to investors. The key issue in true economic development is: Will It Make Money? (WIMM)

But there’s a voodoo ‘economic development’ that sees the goal as generating impacts – impacts on spending, impacts on jobs, impacts on revenues of government. Its key issue in judging economic development is: How Big Are The Impacts? (HBATI) Unconcerned with consumer sales, productivity and profitability this kind of voodoo economic development needs government underwriting. Unable to generate revenue in sales to willing customers ‘impactic’ economic development enlists the power of government to generate some of the revenue via taxation. Taxation needs to be justified to the people forced to pay it, and ‘impacts’ are the way it is sold.

Impacts are a distraction from the much more important concern about whether the project is financially viable.  HBATI-talk distracts attention from WIMM!  Much of the HBATI-talk is gobbledegook anyway.

Consider the two consultant reports on Frederick’s proposed conference center hotel. The “Market Analysis, Cash Flow Projections, and Strategic Recommendations for a Proposed Downtown Hotel and Conference Center” report  dated January 21, 2010 for the Downtown Hotel and Conference Center Team by Pinnacle Advisory Group and OPX (Pinnacle 2010) projected what it called ‘direct economic impact’ in the hotel’s 4th year of $30.4m based on revenues of $20.8m, hotel payroll of $8.9m, and real estate taxes of $0.7m. They then applied a multiplier of 1.25 to obtain an estimate of ‘indirect/induced economic impact.’ $30.4m x 1.25 = $38m, making total ‘economic impact’ in the 4th year of operation $30.4m + $38m = $68.4m. (p76 to 77)

The second a “Critique/Update the Market and Economic Analysis…” report of July 2012 prepared for the Maryland Stadium Authority and the City of Frederick by Crossroads Consulting Services and Hospitality and Gaming Solutions (Crossroads 2012) says (p7) that  “The proposed increase in hotel rooms in downtown Frederick should benefit the City, County and the State in terms of both economic and fiscal benefits.” This put direct spending impact at $16.5m in the 4th or ‘stabilized’ year of operations and a multiplier of 0.57 to get indirect and induced or ‘trickle down’ spending of $9.4m for total spending ‘impact’ of $25.9m/year.

Project boosters constantly say it has been “validated” by the studies. Studies that can produce ‘impact’ numbers of $68.4m and $29.5m for the same project? There are other huge discrepancies that call into question whether the studies validate anything much at all. Prospective stabilized year revenues are reduced by $5.5m or 34% in the Crossroads report from the Pinnacle report – the main explanation being a food/beverage drop from $4.26m to $2.01m “the plethora of restaurant options in downtown Frederick.” But operating expenses are lowered without explanation from $11.7m to $6.4m, a 45% drop. Miraculously despite these discordant revisions of the key financial drivers the bottomline remains much the same: $3.12m for Crossroads, Pinnacle $3.04.

Neither study attempts to project a true bottom line (profit or loss) taking into account depreciation, debt service and nay return on capital, the key indicator on financial viability. Matt Seubert, an independent CPA with a career valuing hotel properties says the project is heavily in the red, that the projected  financials only justify about half the $70m proposed cost. A viable hotel downtown, he says, would be roughly a third the number of rooms (70 vs 207 proposed) and dispense with the frills of ‘full service’ — superfluous in a walkable downtown with plentiful eateries, drinking places and other services.

But the DHCC boosters have never been much interested in the bottom line. Since early on the project goals have been political and ‘impacts’ goals:

“ The four primary project goals established by the Downtown Hotel Advisory

Committee and endorsed by the Mayor and Board of Aldermen are as follows:

1) Service citizen and business needs;

2) Drive economic impact in terms of tax revenue generation and job creation;

3) Induce tourism, overnight stays, and new conference activity and

4) Be a catalyst for continued downtown revitalization and growth.

(Executive Summary of the MOU, Nov 2015, p3)

“Citizen and business needs” in Project Goal (1) are the ‘needs’ or wishes of the politically appointed people running the project. A good investor-owned business focusses rather on customer needs, on what paying customers need and are prepared to pay for – often very different from the politically appointed group of advisers.

Goals (2) thru (4) are impacts goals. They are hugely speculative, and in practice range between large through modest to negligible. As stated in the Frederick DHCC reports the impacts are so loosely defined as to be meaningless. What are the geographic bounds of the impact?  Is a forecast direct spending impact of $16.5m a forecast of spending at the site of the DHCC, or is it spending attributable to hotel guests and conference attendees at the hotel complex and at other businesses during their visit? We aren’t told. And we also aren’t told if it measures the offsetting negative impacts on spending at othert hotels and confertence spenders. The DHCC won’t attract visitors from outer space. Some will be local and their spending at the DHCC is likely to be largely offset by non-spending at other venues and businesses. People have finite incomes and spendin g power. The opening of a new lodging and restaurant business is likely to have little net impact on the amount spent at such establishments measured at the bounds of the city and its suburbs. If the impacts are to the state then the issue is how many people the existence of the new facility will attract new interstate visitors. Despite chauvinistic pronouncements about downtown Frederick as “attracting people from all over the world” and Frederick as “the envy of midsized cities across America” the overwhelming majority are day trip visitors from the Washington DC metro area, and locally from surrounding counties.

HISTORY: The battle against crony capitalism is as old as America. In Boston in 1773 the American colonists rebelled not only against British taxes but against British crony capitalism. Throwing boxes of East India Company tea into Boston Harbor was a protest against a Crown-conferred monopoly for that company in the tea trade – a special favor for a politically connected business intended to give it a monopoly on the tea trade.  20160405

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