An Eye on Sacramento Report On History of Sacramento s Hotel Tax & Convention Center Subsidy: A Tsunami of Red Ink

An Eye on Sacramento Report On History of Sacramento s Hotel Tax & Convention Center Subsidy: A Tsunami of Red Ink October 13, 2016 The reality of forecasts of economic impact... is that they are an amalgam of guesses, estimates, and assumptions, only a portion of which have any real grounding in the reality of convention and tradeshow attendance and visitor activity. 1 For further information on this Report, please contact: Dennis Neufeld, Vice-President - Research 1620 35 th Avenue, Suite K, Sacramento, CA 95822 Phone: (916) 539-1054; Phone Message: (916) 403-0592 E-mail: dennis@eyeonsacramento.org For further information about Eye on Sacramento, a 501c (3) non-profit organization, please contact: Lisa Garcia, Vice-President - Community Outreach 1620 35 th Avenue, Suite K, Sacramento, CA 95822 Phone: (916) 403-0592 E-mail: lisa@eyeonsacramento.org Or visit the Eye on Sacramento website: www.eyeonsacramento.org 1

Table of Contents Executive Summary... 3 Message from the President of Eye on Sacramento... 5 Introduction... 7 1996 Convention Center Expansion: Immediate Financial Disaster... 8 Financial Integrity of Community Center Fund Saved by City Loan... 8 Loan Payoff: Years in Future:... 8 History of Sacramento s Convention Center Projects: Not Kind.... 8 Convention Center Economics, Fiscal years 2014, 2015, 2016, & 2017... 9 Convention Center Fund Operational Revenues, Expenses and Losses... 9 Comparison of Competing Cities, Including Cal Expo... 11 Sacramento s Exhibit Hall & Meeting Rooms Footages... 11 Exhibit Hall:... 11 Meeting Rooms:... 12 Ballroom:... 12 Cal Expo: Strong Local Competitor:... 13 Convention Cities & Their Competing Tourist Attractions & Negatives... 14 Comparison of Hotel Tax Spending by Competing Cities... 15 Hotel Room Night Bookings & Questionable Economic Impacts... 19 Sacramento s Convention Attendance, Hotel Room Bookings, & Economic Impact... 22 Promises vs. Results: City after City... 23 Bad News: Competing Cities Expansions, Completed, Underway & Planned... 25 Sheraton Grand: Under-performing Convention Headquarters Hotel... 25 Combining Projects: Center Expansion & Theater Renovation... 26 Why Expansion Now?... 26 Environmental Considerations of Expansion: When?... 26 Ploy by Sacramento Convention & Visitors Bureau?... 27 Summary... 27 Where s The Money?... 28 Eye on Sacramento Recommendations... 28 Sources... 31 2

Executive Summary In March 2016, the City of Sacramento and the Sacramento Convention & Visitors Bureau jointly released a White Paper entitled: The future of the Sacramento Convention Center/Theater District. 2 This Eye on Sacramento Report is a critical examination of that document and is a sequel to EOS s 2013 report: Sacramento s Hotel Tax and Convention Center Subsidy: A River of Red Ink. 3 Our latest report finds grave concerns about moving forward with the city s Convention Center expansion proposal. Those concerns are buttressed by these findings: The convention booking business, nationwide, is a fiercely cutthroat, arms race competition between cities. Such bare-knuckle competition can lead to continuous rivers of red ink attributable to faulty cost-benefit analyses of consultants recommendations. Such mistaken decisions, for many cities, have ruthlessly drained public treasuries of funds that could have been spent on higher prioritized municipal expenditures and investments. Over the past 17 years, through budgeted FY17, Sacramento s Convention Center has lost $268 million, with losses in the last three years amounting to over $51 million in red ink, continuing the Center s negative economic momentum. Sacramento spends 87% of its Hotel Tax on its Convention Center Complex, considerably higher than all of its ten competing cities, with the second highest percentage being Reno at 63%. San Francisco uses just 11% of its Transient Occupancy Tax to fund its Moscone Center. The average for the ten competing cities: 45 percent. Sacramento spends almost twice as much of its Hotel Tax on its Convention Center as its competition does, on average. Even with a proposed 70,000 square-foot Exhibit Hall expansion, Sacramento will remain at 10 th position among competing centers, with 207,000 square feet, gaining no advantage over its key competitors, Long Beach and San Jose, which have 270,000 and 215,000 square-foot Exhibit Halls, respectively. The Bureau s economic impact calculations are flawed because the attendance numbers for Convention Center events are inaccurate and likely inflated. They are inaccurate, in part, because the attendance numbers are mere estimates provided by meeting planners who book events. Why isn t the Bureau using the actual attendee numbers carefully collected by event users? Further, the Bureau s economic impact numbers are calculated to the penny (!), creating a suspicion that they may be manipulated and inflated. Finally, reported attendance numbers are refuted by statistics on other major cities convention center attendance as outlined in the 2014 book, Convention Center Follies, by University of Texas professor, Heywood Sanders: But the pervasive reality is that actual performance, indexed by convention and tradeshow attendance on hotel room nights generation, is often half or less that in feasibility report predictions. 4 3

Both the original 1974 Convention Center and the 1996 expansion were economic failures. At the time of the 1974 project, the Hotel Tax rate was 5%, with 100% of it consumed by the Convention Center Fund. By 1978, the Hotel Tax had been increased to 10%. Reason: to generate extra cash to cover the unexpected operational red ink bleeding from the new Convention Center. Within months after the expanded Convention Center opened its doors in 1996, the City loaned the Convention Center Fund $7.5 million to, again, cover operational negative cash flows. That loan received no payments until FY2005/06 and still has a balance due of over $6 million. Payments are now scheduled at $250,000 per year. Even without interest, that loan will not be paid off until 2040, taking 43 years. Such documented under-performance from consultants projections are obvious red flags for the proposed Convention Center expansion. Convention bookings are highly sensitive to local economic activity, national recessions, high-profile tragic events, such as 9-11, and natural disasters (Hurricane Katrina). The Great Recession of 2009-2011 had a huge impact on the number of conventions held nationwide. Consultants economic projections on proposed expansions regularly ignore negative the impacts of future recessions, thereby skewing their forecasts. The expansion site is too small, hemmed in by three nearby office buildings, an historic church and thriving retail buildings. For expansion purposes, this site entails architectural challenges beyond reasonable economic boundaries. The Convention Center expansion funding proposal can be fairly compared to a Ponzi Scheme. With convention attendance virtually always coming in below consultant projections, the shortfalls are repeatedly corrected by spending more hotel taxes, first, to cover unexpected operating red ink and, then, on further convention expansions. The chronic under-performance of convention centers is always blamed on being too small, thus requiring an expansion and resulting in ever larger, more burdensome construction bonds. Performance shortcomings, caused by weak local tourist attractions, reduced demand for holding conventions, cautious marketing, greater use of internet group communications, or even weather extremes, are downplayed or even ignored. The cost of renovating the Theater is estimated to be $80-85 million, with 150 fewer seats. This will result in either pricier ticket prices or a decline in revenue if pricing remains the same, which would lead to larger operating deficits. Should it, too, be judged on its economic impact like the Convention Center? With hardly any Theater patrons booking hotel rooms, the question not asked is: how big should the subsidy be for the Theater? At $85 million (plus bond interest, plus the likelihood of larger operating deficits) that question deserves a thorough discussion by our City Council. 4

Message from the President of Eye on Sacramento This report is an update of an Eye on Sacramento report issued in September 2013. New data emerging since then reveals that the City s Convention Center is still bleeding oceans of red ink unabated. Fresh analysis has also revealed a matter that we find deeply troubling. City staff, in its May 3, 2016 report to the Council seeking approval of the Convention Center expansion proposal, relied heavily on a 2012 study prepared by the City s convention center consultant, the firm of Conventions, Sports & Leisure International. That study, entitled Preliminary Findings Associated with the Current and Future Market Potential for the Sacramento Convention Center, contains critical comments against the Center s expansion that are suspiciously and inexcusably absent from staff s May 3 rd report to the City Council. In short, City staff cherry-picked data and findings from the CS&L study that mildly support expansion, but failed miserably to provide Council members with crucial counterpoints in that same study that clearly state that an expansion of the Convention Center is not needed. It was on the basis of that May 3 rd staff report that the Sacramento Council City Council made the policy decision to move forward with a proposed expansion of the Convention Center. We ve now determined that the Council was misled by its staff into believing that its principal convention center consultant, CS&L, was solidly in favor of the proposed expansion when, in fact, it was largely opposed to it. The City Council depends on the accuracy and integrity of City staff reports in making critical decisions. Staff reports are commonly Councilmembers sole source of information and analysis, and are considered their only source of supposedly impartial information/analysis on matters that come before the Council for action. When City staff manipulates its reports to Council and presents a grossly biased, incomplete and clearly misleading characterization of the recommendations of a paid city consultant, the council-manager system of government breaks down and the Council can be misled into making decisions that harm the City, taxpayers and the general public. Here are key statements in CSL s 2012 study that were omitted from City staff s May 3 rd report to Council: 1) Substantial development of convention quality hotels (1,000 to 2,000 rooms) would have to take place to support any new center development. (pg. 1) 2) These statistics indicate that large room supply increases may be difficult to sustain from a broader market perspective. (pg. 4) 5

3) At the SCC, occupancy percentages have ranged between 57 and 63%, well within the range of desired occupancy, but not indicative of significant pressure for increased exhibit space at this point... (pg. 10) 4) The majority of exhibit space events require approximately 80,000 sq. ft. or less. (pg. 11) 5) Any significant increase in SCC space would likely require a corresponding increase in hotel inventory in order to attract added convention and tradeshow activity. (pg. 18) 6) Approximately 43% of event planners surveyed would consider SCC for a future event. This modest positive response rate is comparable to survey results we have seen in markets such as St. Paul, Milwaukee and Boise... (pg. 37) 7) These data indicate that there is not a large base of existing unmet event demand to support a near-term significant expansion of convention space. (pg. 37) 8) To reach 95% capture, a total of 200,000 sq. ft. of exhibit space would be needed. This is a significant space increase required to generate only a 5 to 10% increase in capture. (pg. 42) 9) Demand research specific to Sacramento did not identify an immediate or short term need for significant additions of space, however it is typically prudent to conduct site area planning that allows for some element of future, long-term center expansion. (pg. 48) We also note that the CS&L study contains data through only January 2012. Why has this study not been updated? How can the Council approve an $85 million facility expansion project based on data that is now nearly five years old? There is not a responsible business enterprise in the world that would base major investment decisions on market demand data that is nearly five years old. We wish to thank, specifically, Steve Hammond at Visit Sacramento for his courtesy and full cooperation in providing our research staff the extensive attendance and economic impact data included in this report. Sincerely, Craig Powell, President Eye on Sacramento October 13, 2016 E-mail: Craig@eyeonsacramento.org 6

Introduction The trial balloon to expand the Sacramento Convention Center has again leapfrogged to the front burner of high-visibility City projects. On May 3, 2016 the City Council approved $1,340,825 in contracts to three firms to proceed with the project development phase of an integrated project to renovate the Community Center Theater and expand the Sacramento Convention Center. 5 Was this substantial spending commitment a prudent council decision? This report will answer that question. Back in September of 2013, Eye on Sacramento released its first report on the City s Convention Center operational history. 6 That report found massive red ink for the previous 14 years, from FY01 through FY14, requiring, on average, an annual $16 million subsidy from its Hotel Tax to keep its Convention Center Complex s doors open. This Transit Occupancy Tax (TOT) subsidy totaled a staggering $218.7 million, a veritable River of Red Ink. That report is available at: www.eyeonsacramento.org. Many of the findings of EOS s 2013 Report still apply today. But facts recently gathered indicate that, financially, Sacramento s Convention Center is in even worse shape than in 2013, with projected losses averaging over $17 million for Fiscal Years 2015, 2016 & 2017. Meanwhile, several of Sacramento s competing cities in the convention center business have recently expanded their venues. In 2013, San Jose, Sacramento s chief competitor, expanded its center to 550,000 square feet, including its exhibit hall, meeting rooms and ballroom. 7 Anaheim also expanded its facilities recently. 8 Seattle and Los Angeles are also planning major expansions. The battle between convention cities, as noted in Professor Heywood s Convention Center Follies, is a never-ending, expansion arms race, with more city losers than winners: The consultant study, filled with data and charts, would describe how other cities were building new centers, presumably demonstrating the need to compete with something bigger and more up-to-date. 9 With this history of chronic and expanding city subsidy, should Sacramento s latest expansion proposal move forward, generating red ink for future decades, or should it end up in the dust bin of rejected white-elephant projects? $1.3 Million was recently approved by our City Council for possible Convention Center expansion &Theater renovation. Was it a wise decision? 7

1996 Convention Center Expansion: Immediate Financial Disaster Financial Integrity of Community Center Fund Saved by City Loan The Convention Center revenue projections, relied upon by the City Council for approval of the 1995 expansion, almost immediately fell short. The projections of the Center s future rental projections, as provided by the accounting firm of Coopers & Lybrand in 1990, never materialized. Consequently, the projections of economically-valuable hotel bookings never materialized. 10 These false projections, causing almost immediate cash shortfalls, forced the City Council into approving an emergency loan on June 11, 1997 that ultimately ballooned to $10.4 million, including interest, from the City s Risk Management Fund. 11 The loan was needed to cover burdensome day-to-day operating expenses and construction debt payments. The approval Council Resolution 97-348, Item #3 stated: Approve an inter-fund advance from the Rick Management Fund to the Community Center Fund of up to $12.0 million over the next six years to be advanced based on the requirements of the Fund. The interest would accrue at the City s Pool A interest rate. The loan would be repaid with available Fund balance. 12 The first payment to repay the City s inter-fund loan was delayed until FY 2005/06. 13 Payments were delayed eight years because of meager Convention Center revenues provided no cash flow to make any payments on the City s emergency loan. Loan Payoff: Years in Future: A balance of $6 million still remains on the City s loan, 19-years later, with annual payments of $250,000. 14 With no interest, the loan will not be paid off until year 2040. With interest, at $250,000 per year, the final payoff will take until 2046-50 years after the last expansion was completed. Will such a cash flow shortfall crisis repeat itself with the proposed expansion? History predicts a Yes answer. The City s $7.5 million 1997 loan to the Convention Center still has a balance of over $6 million. It will not be paid off until year 2040 at the earliest. History of Sacramento s Convention Center Projects: Not Kind. Back in the early 1970 s when the Convention Center was first proposed, the Hotel Tax rate was just 5 percent. The Center opened in 1974, the same year the TOT was raised to 6 percent, then to 7 percent in 1976. Back then, 100 percent of the TOT was funneled into the Convention Center Fund. But negative cash flows continued and the TOT rate took a 43 percent jump to 10 percent in 1978 to help cover the negative cash flows. In just four years, from 1974 to 1978, the TOT doubled from 5 percent to 10 percent. 15 8

City Council had to Increase the Hotel Tax From 5% to 10% in the four years following construction of the Convention Center to cover growing operational losses. The financial history of Sacramento s Convention Center projects has not been kind. Both the original project and the 1996 expansion created such significant construction debt and major operating deficits that the two rescue efforts, above, had to be instituted to balance the books and whitewash flawed consultant projections. With another expansion being proposed today, also based upon optimistic revenue projections by supposed experts, it is imperative the City Council heed the above history of the emergency loan and multiple TOT increases and proceed with fiduciary caution before granting approval for the latest expansion proposal. The Council also should be mindful that, due to subsequent changes in state law, the Council no longer has the legislative power to increase the TOT further. That power now rests exclusively with Sacramento voters, who would have to approve any hike by a 2/3rds majority vote. Because the Council now lacks the power to bail out future Center deficits by increasing the TOT, the City s general fund will imperiled by future Center deficits. Convention Center Economics, Fiscal years 2014, 2015, 2016, & 2017 Convention Center Fund Operational Revenues, Expenses and Losses The following chart identifies Convention Center s revenues, expenses and annual losses from FY14 thru FY17, as well as the cumulative loss during those years. Our 2013 Report noted only budgeted revenue for FY14. Actual numbers are now available for FY 14 and FY15, as reported by the City s CAFR (Comprehensive Annual Financial Report). 16 FY16 and FY17 revenue are budgeted numbers. 17 Revenue includes all sources, including: (1) theater ticket sales (which include a $3 facilities fee); (2) facility use fees (e.g., high school graduations, conventions, conferences); (3) real property rentals; (4) concessions; and (5) catering fees. The cumulative four-year operating costs (excluding depreciation) for the Convention Center Fund, including labor, utilities, concessionaires, bond/debt payments and capital improvement projects are also in the below chart. These expenses for FY14 and FY15 are taken from the City s CAFRs, which are audited numbers. The expenses for FY16 and FY17 are budgeted numbers. The second chart reports the Center s growing annual losses and cumulative losses in FY01 through FY17. By subtracting revenues from expenses, we derive the net annual operating subsidies that Hotel Taxes have provided to the Community Center Fund. 9

Total Convention Center Fund Losses, FYs 2000/17: ($267,919,000) Fiscal Year Revenue Expenses Losses FYs 2000/14 ($216,128,000) FY 2013/14 $7,718,000 $21,209,000 ($13,491,000) FY 2014/15 $8,748,000 $23,907,000 ($15,159,000) FY 2015/16 $7,885,000B $25,623,000B ($17,738,000B) FY 2016/17 $8,116,000B $27,010,000B ($18,894,000B) FYs 2000/17 ($267,919,000) B= budget $millions cumulative $millions Annual Losses 86.5 171.8 155.7 136.4 118.8 102.1 188.0 249.1 268.0 231.4 216.2 202.7 71.6 56.6 42.0 27.9 14.0 13.9 14.1 14.6 15.0 14.9 15.6 16.7 17.6 19.3 16.1 16.2 14.7 13.5 15.2 17.7 18.9 In just the most recent 3 years, including the current year, the Convention Center will Lose Over $51 million, continuing a Tsunami of Red Ink. 10

Sacramento s Convention Center red ink last 17 years combined: $268 million! Comparison of Competing Cities, Including Cal Expo Sacramento s Exhibit Hall & Meeting Room Footages Exhibit Hall: In the Sacramento Convention & Visitors Bureau s (*) March 2016 White Paper, there is a significant comparison of exhibit hall footages for eleven cities that provide key competition to Sacramento s convention bookings. 17 Sacramento is listed as the 10 th city with 137,000 square feet. Examine the chart after our proposed 70,000 foot expansion, increasing the Exhibit Hall to 207,000 square feet. Even if our exhibit hall is expanded by 70,000 feet, as currently proposed, Sacramento s exhibit hall would still be in 10 th position compared to its competitors. The obvious question: If the exhibit hall expansion does not even move Sacramento up the ladder in terms exhibit space, where is the competitive improvement that could justify the high cost of expansion? (* now renamed Visit Sacramento) 11

Meeting Rooms: The Bureau s white paper recommends the meeting room footage be doubled to 50,000 sq. ft. 18 However, the White Paper shows the existing meeting room footage of 20,700 is only 2,900 feet smaller than the median meeting space demand for National Conventions and trade shows, which does not include our 15,000 square foot ballroom, which can also be used for meetings. Again, why spend multi-millions to expand meeting room space when the current footage is only 16 percent smaller than the median footage desired for conventions and trade shows? The Bureau s White Paper also states the existing meeting rooms only accommodate 40-45 percent of event demand specific to Sacramento. 19 But how was this low-demand percentage determined? At the bottom of the page was this telling footnote: Data includes all organizations with a potential interest in the Sacramento Convention Center (italics added). 20 Thus, if expanded to that size, where are the firm commitments from meeting planners to book their conventions in Sacramento? None are identified. To spend millions of dollars on doubling meeting room space based upon possible potential business appears fiscally high risk. Ballroom: The proposed 40,000sf ballroom will be located either above the western portion of the exhibit hall or as an extension south towards the Theater. The southern extension will intrude upon the Theater s northern greenbelt, currently used for a fresh air/smoking during intermissions. This ballroom encroachment into Theater outside areas is caused by the Center s overall footprint being too small. 12

The footprint is the actual size of the land parcel available for the expanded Center complex. That parcel is hemmed in by L and J Streets on the south and north, and by 13 th and 14 th Streets on the west and east, with further hindrances by the three midrise office buildings on K & L Streets and the historic Episcopal Church at J & 15 th Streets. The Bureau s white paper also notes that Sacramento s 25,000 square foot ballroom only meets 65 percent of meeting planner s potential interest, discouraging booking their conventions here. 21 However, in the same report, the average ballroom footage used in the industry is just 21,400 square foot, smaller than our current ballroom. So a 40,000 square foot ballroom may attract a few more conferences or conventions, but enough to justify the multi-million dollar expenditure? One final architectural observation about the proposed glass-dominated Ballroom. With a much greater use of expansive windows, what is the danger to birds? Do we tolerate a high bird-kill count because our feathered friends try flying through massive windows to access Capital Park? Cal Expo: Strong Local Competitor: On 350 acres, Cal Expo is a multi-faceted facility that is an under-appreciated local competitor for conventions and related events. It has 18 distinct venues, 15,000 lighted parking spaces, and an experienced staff, including catering. Past events include the Governor s Inaugural Ball, the International Sportsman s Exposition, and the Sacramento International Auto Show, to name just a few. 22 To accommodate out-of-town visitors, Cal Expo maintains partnerships with area hotels, offering special rates for groups attending or hosting Cal Expo events. A sampling of its venues: Bldgs. A & B, mirror images, each has 27,700 sq. ft. main floors, with 8,600 sq. ft. mezzanines. Buildings C & D together have 28,000 sq. ft. for banquets & dances. But Cal Expo s key competing facility is The Pavilion, with nearly 100,000 sq. ft., including an 18-foot ceiling and eight roll up doors for quick set-ups and tear-downs. 23 Make no mistake, Cal Expo is much more than just our State Fair site. Its budget is state-funded. Its venues are varied and flexible for a wide variety of uses. It has practically limitless parking. In short, it is a formidable local convention competitor that should not be ignored when Sacramento s City Council debates expansion funding. Cal Expo is a formidable local competitor for conventions with its several attractive venues. 13

Convention Cities & Their Competing Tourist Attractions & Negatives Sacramento s competition for convention bookings, especially San Francisco, Anaheim and San Diego, have superior tourist attractions. As meeting planners are well aware, choosing a convention city is more than exhibit hall configuration, meeting room footage and ballroom views. A city s after hours enticements, such as museums, parks, restaurants, scenic views, historic sites, geographic distinctions, and sporting events all contribute to the final choice for holding a convention. Here are two of Sacramento s major amenities and a key limitation: California Railroad Museum: This is the tourist gem of the city. The C.P. Huntington, the 1863 steam locomotive, California Railroad Museum The Museum s building, on the northern edge of Old Sacramento, covers over five acres, includes most of the nation s vintage railroad engines and cars, and has annual attendance over 600,000. 24 If visiting Sacramento, this is a must see museum of national history. Crocker Art Museum: There is also the recently expanded Crocker Museum, costing over $100 million. 25 With its modern addition, joining the historic Crocker residence, it has become one of the premier West Coast museums, with attendance increasing each year as its reputation grows. Weather: With peak temperatures in late afternoon, when meetings adjourn and attendees exit the Exhibit Hall and meeting rooms, one can only imagine the negative conversations when the summer heat envelopes exiting visitors. Cities with less summer heat - Portland, San Francisco, Anaheim, San Diego, Long Beach, Seattle, San Jose, and even Santa Clara - have a significant booking advantage over hotter cities, such as Sacramento and Phoenix. And what happens to Sacramento s tree canopy around the current Convention Center? It will likely be reduced for the expanded Exhibit Hall and larger Ballroom, creating sun-baked sidewalks for attendees. To expect conventioneers visiting Sacramento, after experiencing such scorching heat, to look forward to returning in future years is unrealistic. And we must not ignore Climate Change s future impact on increased temperatures in Sacramento. Recent average temperatures over the past decade have reached new highs. The number of Dark Days, meaning no bookings, may increase above current levels 14

because of Climate Change s creeping impact on lengthening heat waves in Sacramento, as well as more dramatic winter storms. Fewer bookings can only lead to more red ink. Do we want our City to become financially anchored to a huge 30-year Convention Center construction bond when future demand for the exhibit hall becomes meteorologically obsolete? With Climate Change impacting Sacramento, does expanding the Convention Center make sense when it could be meteorologically obsolete? Comparison of Hotel Tax Spending by Competing Cities Sacramento allocated 100% of its Hotel Tax to its Convention Center Fund from the 1970s to 1990, which is rare for West Coast cities. Below is noted the percentage of TOT committed to supporting convention centers by our 10 top competing cities identified in the Bureau s 2016 White Paper. Note, Sacramento has the highest percentage of TOT going to its Center s operations, at 87%. We have calculated each city s percentage TOT spending allocations, lowest to highest, with the most current FY numbers available, actual or budgeted. Key Point: The percentage of Hotel Tax not spent by competing cities on their convention centers remains in their general funds. 15

COMPARISON of HOTEL TAX % SPENDING on CONVENTION CENTERS (Average: 45% - Sacramento: 87%) 90.0% 80.0% 70.0% TOT % 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Rate % Applied to Convention Center Figure 1 COMPARISON of HOTEL TAX % SPENDING on CONVENTION CENTERS, by CITY San Francisco: TOT: 14%. SF s hotel tax revenues go directly into their General Fund. Allocations are then made to a variety of uses per their budgeting process. SF also has an extra 2% hotel tax above the 14% specifically for debt servicing of the Moscone Convention Center construction bonds. There is also a 1.5% added hotel tax for a Tourism District, which focuses spending on tourism marketing. According to a senior budget analyst in the S.F. s Controller s office, the estimated hotel tax revenue for FY 2016/17 is $415 million, with $45.4 million allocated specifically to the Moscone Center and its old construction debt payments, for an 11% Rate. Anaheim: TOT: 15%. Anaheim also has a 2% Tourism Improvement District hotel tax add-on to their TOT, for separate debt-servicing of their latest convention center expansion. Their earlier expansion s debt is paid from the General Fund. With $149.8 million in TOT projected for FY 2016/17, $56.4 million is estimated for their center from the General Fund, a 37.6% Rate. 16

Los Angeles: TOT: 14%. LA collected $ 216 million in TOT this fiscal year. TOT allocations: 8.5% to General Fund, 3.5% for convention center, 1% for LA Tourist & Convention Bureau and 1% for the Cultural Affairs Department, for a 39.3% rate. Seattle: TOT: 15.6%. Opening in 1988, the Washington State Convention Center is owned and operated by the state. While located in Seattle, it does receive 7% state funding from lodging tax receipts to defray for the cost of building the center & marketing Seattle & King County as a convention destination. Seattle collects 7% of 15.6% for its Center, or a 44.9% Rate. Portland: TOT: 12.5%, split: 5.5% to Multnomah County; 6% to Portland; 1% to State; Portland s split: 5% to General Fund; 1% to Tourism promotion. County s split: 5.225% to its Center;.275% to hotel/motel operators. Although its Center is located within Portland, it is owned & operated by the County. Combining the TOT numbers for both jurisdictions, the 11.5% spent on the Center = 5.225%, or a 45.4% Rate. San Diego: TOT: 10.5%. San Diego also has two TOT Tourist Market Districts, 1.45% for all lodging businesses with 30 or more units, and a Category B rate of.55% for all lodging businesses. Of the citywide 10.5% TOT, 5.5% is allotted to the General Fund, 4.0% to promoting city tourism, and 1.0% for any purposes approved by the City Council. For this year, the 1% has been transferred over to the General Fund for tourism related expenditures. FY16 TOT revenues budgeted at $195 million. Assumption here is 100% of the 1% and 4% tourism promotions is spent on marketing & debt servicing of the convention center. Thus, 5% of 10.5% of TOT revenues are spent on the convention center, for a 47.6% rate. Long Beach: TOT: 12%. TOT split 6% to General Fund & 6% to Special Advertising & Promotion Fund, which is assumed to be spent on their Center. 50% Rate. Santa Clara: TOT: 9.5%. FY 2016/17 TOT revenue budgeted at $ 20 million, with $10.1 million to its Center, a 50.4 Rate. San Jose: TOT: 10%. TOT split: 4% to G. Fund; 6% to TOT Fund. TOT Fund split into: 25% to Convention & Visitors Bureau; 25% to cultural & arts grants; 50% to its Center & cultural facilities. 4% + 1.5% + 1.5% = 60% Rate. Reno: TOT: 13.5%. Reno has a regional convention center, the Reno-Sparks Convention & Visitors Authority. The TOT is 13.5% in Reno downtown & City of Sparks. Suburban Reno and Washoe County: 13%. All TOT is collected by the RSCVA and allocated to a variety of uses, with 6.625% to RSCVA s operations and 2% to Convention Center construction debt. 4% goes to Reno and.375% to Nevada Commission on Tourism. Of the 6.625% to RSCVA s operations, virtually 100% is used for the Convention Center, including any debt payments not currently covered with the 2%, for a 64% Rate. 17

Sacramento: 12%. The vast majority of Sacramento s TOT, 10% ($21.8 million), is channeled into the Convention Center Community Fund. (FY 2016/17B). The other 2% ($ 4.4 million) goes to the General Fund. Sacramento, as do many of the survey cities, has additional hotel tax districts, called Tourism Marketing Districts. There are four zones, each with different taxing percentages: Zone 1: Downtown (3%); Zone 2: Point West Area (2.5%); Zone 3: Natomas (2%); Zone 4: Unincorporated County (1%). Over 70% of the hotel/motel rooms are in Zone 1, which generates the majority of extra hotel tax revenues, which are 100%, minus a small administration fee, added to the Sacramento Convention & Visitors Bureau s annual budget, for hotel marketing. The Bureau also gets funding from Sacramento s General Fund, $1.72 million for FY 2016/17, with 50% used to market the Convention Center. With 83.33 of TOT going to the Center Fund, plus the 3.3 % added via the Bureau s General Fund stipend, Sacramento has an 87% Rate. (Note: All hotel tax data for the above cities were gathered from each city s website, specifically their FY 2015/2016 budgets. Additional information provided by cities staff members via emails and telephone calls. Where cities had posted their approved FY 2016/2017 budgets, those data were used for calculating hotel tax spending percentages on their convention centers.) Competing cities spend 55% of their Hotel Taxes on general fund expenditures. Sacramento spends 13%. There is a trend: weaker-demand cities provide higher subsidies to their Convention Center operations, such as Sacramento and Reno. Conclusion: If your city does not have the demand amenities to coax conventions to your center, then subsidies will continue, as noted with Sacramento s 17-years of significant subsidization. An obvious reason to designate a significant percentage of Hotel Taxes to a city s General Fund: Citywide hotel room-night-bookings are not 100% caused by convention attendees. More than 90% are likely booked by tourists, business people, government workers, I-5 and I-80 travelers, and citizens visiting relatives. These non-convention center attendees, however, require other basic city services, such as police and fire protection, parks operations, road repairs, and a host of other general fund services. A thorough audit by the City s Auditor - an EOS recommendation - would likely verify that most hotel bookings are for non-convention attendees. For example, in Greater Boston, their convention center bookings have been responsible for just 2.1% hotel room bookings. 26 As the above research reveals, on average, all competing cities use 55% of their TOT on general fund allocations. 18

Sacramento s Convention Center likely generates less than 6% of total hotel room bookings, but receives 87% of our Hotel Taxes. Is that Fair? Flo, got a question for you. Why does the Convention Center get all that money from the Hotel Tax, yet still overflows with red ink? Here at the Zoo, the City can t even spend enough to fill our pond and we have similar attendance! Hotel Room Night Bookings & Questionable Economic Impacts One of the touted benefits of expanding the Convention Center is that more hotel and motel rooms will be booked by convention attendees, leading to higher TOT revenues, as well as increased local retail spending. Such convention attendee spending has become the over-riding reason for supporting the Center s expansion. Key Question: Are the dollars spent by attendees accurately calculated? According to Steve Hammond, CEO of the Sacramento Convention & Visitors Bureau, each attendee at Convention Center events spends an estimated amount of money locally, creating economic impact. Such spending includes hotel room costs, meals, Uber/taxi rides, and other retail spending. 27 The Bureau uses hospitality industry formulas for calculating the economic impact of each Convention Center event. 28 The Destination Marketing Association International (DMAI) is the industry leader providing those formulas. It invented the Event Impact Calculator used by almost all convention center managements nationwide. By going to the DMAI s website, the EI Calculator is explained, or attempted to be explained. Its Data Sources are: Eight different sources combining multiple surveys and government statistics. The Calculator also includes: Geographic Focus, Quantified 29, 30 Output, Event Types, Platform (for testing different event parameters ) Without a doubt, the Economic Impact Calculator is an amalgam of undecipherable economic & mathematical interactions that defy understanding. The Bureau s Hammond provided two simplified DMAI economic impact formulas, one for State/Local events another for International/National events. Each formula uses the number of event attendees, classifying them as either Out of Town or Local. For state/local events, out-of-town attendees spend $698, while local attendees $75. 19

For International/National events, out-of-town convention attendees are estimated to spend $985, locals $102. After the total attendance and number of peak night bookings are determined for an event, plus other inputs, the Bureau staff calculates the economic impact of the event by using the DMAI s Calculator. Once each dollar number for each event is calculated, an annual sum is tabulated. For example, the Bureau s 2015 numbers: Room Nights: 110,322; Attendance: 255,630; Economic Impact: $71,745,670.10. Notice economic impact is calculated to the penny! 31 But do the DMAI s complex economic impact formulas accurately reflect such precise convention attendee spending? What about the particular spending nuances of each city s populace? For example, in January 3-5, 2014, the winter SacAnime convention was held. The attendance was listed as 15,000, with 1,175 rooms booked for the 3 days. 32 Most the attendees were young day-trippers, those attendees who do not use hotels. But did these day-trippers spend $75 each day? Likely not, since most even hand-crafted their own costumes to save costs. The DMAI s Economic Impact Calculator is an amalgam of undecipherable economic & mathematical interactions that defy understanding. Also, is this local spending new dollars added to the local economy, or is it just spending shifted from other discretionary uses, thereby adding little, if any, economic impact? Thus, the DMAI s formula for local events spending is highly suspect. And are the attendance numbers believable or just pre-event booking estimates? The Bureau s Hammond, when asked about accuracy of attendance numbers, said his list of events for years 2010 through 2015 included meeting planner attendance estimates. 33 Again, take the SacAnime event of January 2014. The Sacramento Press article on the event: The winter SacAnime convention started off with a bang this year breaking the 10,000 attendee mark. The official attendance for the Jan. 3-5-14 SacAnime Con was 10,132... 34 Obviously, the Bureau s 15,000 attendance number is highly inflated, clearly skewing the economic impact calculations. Examining just the 2015 Convention Center events list, there are 24 events with attendance amount rounded to thousands, such as the June Comic Con convention s 15,000 attendance number. Of the 84 events in 2015, only four had exact attendance numbers; all the others ended with at least one zero, most with at least two zeros. 35 With such a high amount of rounded attendance numbers in the Bureau s Economic Impact calculations sheets, likely significantly above actual events headcounts, their calculations become, at best, seriously inflated, at worse, unbelievable. And an obvious question arises: Why doesn t the City s Convention Center management and the Bureau utilize a more accurate attendance protocol, such as retrieving precise attendance headcounts from the groups that rent the Center after their events have ended? 20

As noted, the SacAnime convention team, for accounting purposes, had more accurate attendance tabulations than those estimates provided to the Bureau by their meeting planner. See Table 1, below, reveals that most attendance numbers are just rounded estimates. Table 1 Convention Center Show Attendees inflated estimates?? Professor Heywood Sanders commented on this one-size-fits-all approach to economic impact calculations: Almost invariably, the consultant would rely on the convention delegate spending and stay estimates produced by the DMAI with little or no alteration for local circumstances and realities. 36 Make no mistake, the economic impact calculations for each event at the Convention Center, when added together, become the dominant argument by the proponents for the Center s expansion. But when the calculations use inflated attendance numbers, the economic impact numbers are, likewise, inflated and thus not credible, driving a dagger into the heart of the expansion argument. With inflated event attendance numbers, the economic impact numbers are also inflated, therefore unbelievable, driving a dagger into the heart of the Convention Center expansion argument. 21

Sacramento s Convention Attendance, Hotel Room Bookings, & Economic Impact To find out Sacramento s booking statistics, Jody Ulich, the City s Convention & Cultural Services Director, was asked to provide convention attendance and hotel night booking data for the past two fiscal years. The data from Ms. Ulich, whose department oversees the Convention Center Complex (Memorial Auditorium, Exhibit Hall, meeting Fiscal Yr. Number of Conventions Attendees Hotel Bookings Room-Night Ratio, or Avg. Room Bookings/Attendee 1999/2000 60 136,085 86,980.64 2000/2001* 53 212,651 82,609.39 2001/2002 68 172,215 103,584.60 2002/2003 60 220,321 80,836.37 2003/2004 56 171,350 67,585.40 2004/2005 77 199,512 68,812.34 2005/2006 70 180,074 69,851.39 2006/2007 75 145,665 99,312.68 2007/2008 78 181,865 78,291.43 Recent Data: 2014/2015 56 207,965 86,190.41 2015/2016 64 224,660 81,342.36 Averages 186,578 82,333.44 * Convention Center Headquarters Hotel, Sheraton Grand, opened on 4-25-2001 rooms, & Theater), provided the Center s data. 37 The timeline booking responsibilities between the two City convention marketing entities: Mr. Hammond s Bureau staff focuses on future bookings 18-months and out, while Ms. Ulich s staff handles future bookings 18-months out or less. The Convention Center s data for FY15 and FY16 and 38, 39 historical statistics are noted in the following charts for comparison purposes. Analyzing the recent data, each convention had an average of 3,714 attendees in FY15 and an average of 3,510 in FY16. First, for FY 16, the number of conventions, 64, averaged 5.33/month. Most conventions last at least 4 days, including setup and teardown days, using 21 days of a month, leaving few days for trade and consumer shows. Granted, the conventions could take half or less of the exhibit hall, but averaging over 3,600 attendees, it is assumed almost all exhibit hall footage is utilized. Second, take a serious look at the 3,600+ average attendance per convention. That s a lot of conventioneers, even for a 134,000 square foot Exhibit Hall. With so many attendees, 22

why such low hotel bookings? The average bookings per attendee, called the Room- Night Ratio, is less than 1.0 a night, substantially below the expected ratio. A likely possibility: many of the attendees took double occupancy at the hotels, doubling up with a fellow attendee. The DMAI formulas do assume 1.6 attendees per room. Even this 1.6 multiplier adjustment leaves the room-night-ratio below 1.0. Are Day-Trippers the main reason? Most likely. A Day-Tripper is a convention, conference, or trade show attendee who doesn t rent a hotel room. These attendees either drive from home each day, stay with friends in town, rent a cheaper motel out of town (e.g., in West Sacramento), or even use Airbnb for domiciling. Thus, as the ratios noted in the table clearly indicate, Day-Trippers are a significant percentage of events attendance at the Convention Center. Day-Trippers are a significant percentage of attendees to Sacramento s Convention Center events. They do not book hotel rooms, but likely drive from home. The key conclusion: The Sacramento Convention Center s events are dominated by attendees who do not book rooms, significantly restraining economic impact calculations. Promises vs. Results: City after City Professor Sanders, throughout his research of major convention cities, also found a huge chasm between attendance projections and actual headcounts: In city after city, from Anaheim and Atlanta to Seattle and Washington D. C., the consultant forecasts simply are not realized, the actual center performance in terms of new conventions and tradeshow attendees and hotel room nights often half or a third of what the consultants promised. 40 A sampling of Sanders troubling statistical discoveries: (1) Chicago: in 1965 its McCormick Place had 3,444,859 attendees. 30-years later in 1995 it had 3,217,434. In 2011 it had 2,050,000, despite an exhibit hall nine time larger than its 1960 opening. 41 (2) Las Vegas: In 2011, their expanded center had 1,279,383 convention and tradeshow attendees and 1,212,038 in 2012 fewer than in year 2000 with a 50% smaller center. 42 (3) Seattle: In 1997, before its major expansion, its Washington State Convention & Trade Center hosted 183,875 out-of-state attendees. In 2007, after expansion, its attendance was 182,406. In 2011, just 147,345. 43 (4) Philadelphia: The Pennsylvania Convention Center expansion in the 1990s was forecasted to generate 664,800 room night bookings by 2001. But 2002 had only 336,000 bookings. In 2011, after another expansion, it had just 311,810. 44 23

(5) St. Louis: It s America s Center was predicted by consultants to triple its convention delegates after the mid-1990s expansion. It didn t even double. 201,100 attendees in 2000 and 208,400 in 2001, only slightly better than 15-years earlier. 45 Consultants: You build it, they will come. Facts: Not Happening. (6) San Francisco: Its 2003 Moscone expansion produced disturbing attendance results. In the late 1990s, attendance averaged 694,000. After the expansion: just 540,660 in 2004 and 482,035 in 2005. There was a modest jump to 588,735 in FY 2008, but still far below the 1 million attendance forecast from consultants. 46 (7) Orlando: Its 2007 attendance figure was only an 18 % increase from the 2000 attendance, far below the 1.7 million expected based on an Ernst & Young s forecast. 47 (8) Washington D.C.: its new 2003 Center produced no increase in convention business than its smaller predecessor, and a fraction of forecasts by several consultants reports. 48 (9) Boston: Its Boston Convention & Exhibition Center was born on a sea of consultant studies. The Consultant forecasts were commonly twice the actual results a few years later. 49 Some of these guys (consultants) ought to be taken out and shot. - James Rooney (Note: The above quote was by James Rooney, executive director of the Massachusetts Convention Center Authority, after poor attendance results from Boston s 2004 expansion. His full quote: When I talk to people from other cities about making a public investment in a convention center, I m equally blunt about the feasibility studies these consultants use to justify (such) investments some of these guys ought to be taken out and shot. ) 50 From the above samplings of major national convention cities, it is an undeniable fact that most attendance forecasts by convention center consultants are, at best, overly optimistic, at worse, pure fiction. Professor Sanders: The story of consultant misestimates and flawed forecasts is not limited to these larger centers in major cities. It is effectively the norm. 51 There are lies, damn lies, then there are consultant forecasts.... anonymous 24

Bad News: Competing Cities Expansions, Completed, Underway & Planned Of the ten cities competing directly with Sacramento, as noted in the Bureau s White Paper, most have expansions recently completed, currently under construction, or planned. They are: (1) Seattle: A $1.6 Billion expansion, with estimated opening 2020. 52 (2) San Francisco s Moscone Center: A $500 million expansion, adding 305,000 square feet of functional area for exhibitions, meetings, and ballroom. Estimated completion: 2018. 53 (3) Anaheim: A $180 million expansion, adding 200,000 square feet of flexible space, estimated opening in 2017. 54 (4) San Jose: Completed in October, 2013, the expansion added 125,000 square feet of flexible ballroom & meeting room space at cost of $130 million. 55 (5) Los Angeles: Adding 220,000sf, including a new 78,000sf ballroom, 80,000sf meeting room additions, and updating and expanding pre-function areas, lobbies, etc. Financing not settled, with a public-private approach considered. No date noted for completion. 56 (6) San Diego: This expansion plans are on hold after a recent appeals court decision, but most of the local politicians support an expansion, which means a future expansion is a strong possibility. 57 (7) Long Beach: They have recently completed a $40 million modernization of the design and functionality of its event space. 58 What is obvious: The convention center expansion arms race has pushed Sacramento s modest expansion proposal farther behind its competition. With little room for a future expansion at the existing site, does it make sense to expand now and burden the Convention Center Fund with added debt that will likely increase the annual negative cash flows as attendance wanes? Sheraton Grand: Under-Performing Convention Headquarters Hotel As noted in the hotel room night bookings data earlier (Sacramento s Convention Attendance, Hotel Room Bookings, & Economic Impact), the Sheraton Grand Hotel opened for business in April, 2001. It was heralded as the key missing link needed to make Sacramento s recently expanded Convention Center a viable venue choice for meeting planners with 503 new hotel rooms just a half-block away. The $104 million project, supported by a $92,800,000 in Senior Revenue Bonds, issued April 1, 1999, as well as the City s contribution of its J Street parking garage across the street, ran into a highly competitive environment significantly affected by the events of Sept 11. 59 Attendance at the Center, clearly, took a hit in FY 2001/2002, coming in at 172,215 from 212,651 the year earlier. But FY 2002/2003 rebounded to 220,321 in attendance and 80,836 bookings. 25

But did the Sheraton s arrival significantly improve the Convention Center s attendance and room night bookings in the near term and after the Great Recession? Ms. Ulich s numbers for FY15 and FY16 clearly say No. The average attendance for these two years: 216,313; the average room night bookings: 83,766. Both numbers are just about the same as FY01, some 15 years earlier. A key number: the room night bookings in FY00, before the Sheraton, was 86,980, above the bookings in FY16. In short, the Sheraton has, at best, provided a stabilizing influence on convention attendance and hotel room bookings. Nothing more. Sheraton Grand Hotel: A stabilizing influence on Convention Center attendance. Nothing more. Combining Projects: Center Expansion & Theater Renovation Why Expansion Now? The 1996 expansion was financed with 25-year certificates of participation, with annual payments of $8.2 million. Those certificates will not be paid off until FY21, mainly with Hotel Taxes. The City has penciled in $20 million of private funds for construction, mainly naming rights, but those monies are not yet committed. The City has also identified $8.5 million coming from closeouts of an assortment of assessment districts. If the assessment districts have surplus funds, should they not, first, be refunded to the assessed property owners, or at least routed to the General Fund for future annual budgeting decisions? With no other realistic significant funding yet identified until FY21, why consider this expansion four years before TOT revenues become available for construction debt? One possible answer: the lawsuit filed against the City for violating the American with Disabilities Act in regards to accessibility issues for the Theater. But that project can proceed on its own without a concurrent Convention Center construction project. Environmental Considerations of Expansion: When? The City s May 3, 2016 staff report states: The environmental work will be done during the future design phase. 5 But didn t the City Council s approval on May 3 rd finalize the contracts to move forward with the designs of the Theater and Center expansion? And are not these designs going to be up for approval by the Council in October, 2016? So, why hasn t the environmental work already been contracted? Is this one of those projects where so much up front money gets spent, creating overwhelming project momentum, that even an EIR with serious mitigation issues will get swept under the proverbial rug? 26

Back in the mid-1990s, when the first expansion was considered, an Environmental Impact Report was completed, which also included several proposed office towers. A lawsuit was filed to prevent the expansion for one main reason: lack of adequate parking to handle the anticipated attendance increases. The lawsuit went to the state Supreme Court and was ultimately defeated. Today, the parking issue appears to again be an obvious environmental issue. Where are the additional parking spaces going to be built? If none are included in the expansion s design, is a new parking garage nearby in the works? Or, will this be the first convention center expansion in the nation that will have a state-of-the-art bicycle corral? Where is the EIR? Shouldn t it be drafted right now, studying obvious parking issues? Ploy by Sacramento Convention & Visitors Bureau? In the past, the SCVB has campaigned alone for the Center s expansion (i.e. in 2013), letting the City and arts establishment push for the Theater renovation. Why, now, has the Bureau taken on the combined project approach? After reviewing the above-noted shaky economic impact projections, one can surmise that the Bureau is coat-tailing on the ADA-mandated Theater renovation in order to gain fiscal support for its Convention Center expansion efforts. This is a time-honored approach to coaxing cash from city councils, as noted by Professor Sanders: The solution for Atlanta, as it would for any number of other cities, was a combination of multiple public projects in a single deal that could serve distinct parts of the downtown core. 60 Shortly after our first report in 2013, the city s independent auditor, Jorge Oseguera, included on his recommended new audit list to the City Council that an audit of the Bureau s finances be completed. It was scratched from his recommended list. One wonders which Council members squelched such a valued recommendation. Perhaps the size and collective political strength of the Bureau s 29-member board, comprised of influential business and tourism industry members, had something to do with the Council s decision to reject the cit. Did the Bureau and its board discourage the City Council from accepting the city auditor s recommendation that the Bureau s finances be audited? Summary With its latest strategy of expanding the Convention Center, the City has proposed merging the Community Theater renovation with the Convention Center project, thereby camouflaging its chronic economic weaknesses with a dual-purpose project. But does this make for prudent fiscal policy? This report answers that question by providing considerable reasons for declaring the Convention Center project a high risk financial undertaking. 27

Where s The Money? The extra $8.2 million Hotel Tax revenues, available after the 25-year Convention Center construction bonds are paid off in FY21, should be returned to the City s general fund and subject to its annual budgeting process. Of course, the Theater s ADA renovation needs to be paid from the $8.2 million, as well as other funds accumulated for that renovation. The Theater revovation is an estimated $80 million project. If financed via bonds that are amortized over 30 years at approximately four percent interest, the annual payment would be about $4.6 million, and likely somewhat less when the accumulated $3 ticket surcharge revenues are rolled into the annual payments. Thus, there is approximately $4 million available in late 2020 for other General Fund spending priorities, not nearly enough to service debt on $140-$150 million for the Center s estimated expansion. A $140 million bond issuance, with the same amortization and interest rate parameters, would require annual payments of $8 million. Thus the Big Question: How is that $4 million gap going to be made up? Also, remember, the Convention Center Fund has been tapped the past three years for $2 million a year as a reserve source for arena debt payments. Is everyone confident such future raiding of TOT for arena bond red ink will never happen? Granted, there are now at least 3 new hotels coming out of the ground, including (1) the Marshall Hotel, (2) the King s 250-room hotel at 5 th & J Streets, and (3) the 65 th Street hotel near Sacramento State, that will generate additional TOT income. But will those hotels fill immediately to 70-80 percent occupancy when their doors open? And if they do, will their occupancies simply raid those from existing hotels as did the Sheraton Grand when it opened in 2001? 34 There are many higher priority needs in the City that can use the $8.2 million annual debt payment coming available in year FY21, which are noted in our recommendations. Hear Ye, Hear Ye, Beware the Convention Center Expansion Boosters. Reason: Bad Math. Eye on Sacramento Recommendations Like our 2013 Report, EOS s recommendations focus on changing the City s narrow use of its Hotel Tax revenues on big-dollar legacy projects, such as the proposed Convention Center expansion and the downtown arena. Rather, it should shift TOT revenues to the City s general fund to soften the impact of the expiration of the Measure U sales tax in March 2019 or, at the very least, use the revenues to provide public services that would benefit the vast majority of Sacramento residents, such as improving 28

our City s neglected park system or hiring additional police officers to reduce crime and keep us safe. EOS recommends that the City Council: 1. Require an audit of the Sacramento Convention & Visitors Bureau by the City Auditor. Where is the Bureau spending the extra $5 million received from the Marketing District hotel tax? Are its Convention Center events attendance numbers inflated estimates, thereby over-estimating the economic impact of booked events? Is the use of economic impact formulas from Destination Marketing Association International (DMAI) applicable to Sacramento s economy? 2. Require an audit of the Convention Center Complex operations, including marketing strategy and coordination of such efforts with the SCVB. The focus of this audit would be on the accuracy of how many delegates attend all events at the Center, as well as how many of these delegates actually book hotel rooms and for how many consecutive days before departure. Include in this audit an analysis of convention booking volume during high-temperature months, mid-may through mid-september to determine if Sacramento s hot weather negatively impacts convention business. Also, include a calculation of the percentage of hotel/motel bookings generated by Convention Center attendees versus the total number of rooms booked by non-convention visitors to Sacramento. 3. Obtain a bid from AEG Facilities, which manages the Los Angeles Convention Center, to manage, market and operated the Convention Center. According to a recent White Paper by LA s Department of Convention & Tourism Development, AEG helped generate the first ever operating profit, two years in a row, at the L.A. Convention Center, with a $2.6 million profit for FY 2014/15. 61 4. As mentioned in our 2013 report, if the negative cash flows cannot be reduced, now may be the time to cut losses and convert the Center, at least the exhibit hall into alternate uses. One idea that should be considered is to turn over the hall to one of the local universities or colleges as a Downtown campus. 5. Require an audit of the discounts that both the Convention Center and SCVB offer to meeting planners and potential big ticket clients to coax them into booking conventions here. 62 The obvious question arises: How often were these discount options used and did they evolve into discount mission creep, where almost all bookings were discounted? This audit would answer those questions. This is not a list of recommendations that is designed to point fingers, but an effort to identify additional research and possible routes of action that may lead to better use of the City s Hotel Tax. After 17 straight years of over $16 million in losses each year, it s overdue to admit that Sacramento s Convention Center may never become a strong choice for convention and conference meeting planners, regardless of expansions. 29

Guys, this Convention Center expansion idea looks too financially risky. It s just not worth us sticking our necks out for it. 30