1st posted at Crime & Federalism (Jan. 29, 2005)
One very good thing about our “let fifty labs operate” federalist system is that states get to see what works in other places and take advantage of the experience. One very strange part of the system, however, is that states never seem to learn from the mistakes that happen elsewhere. And, one very weak part of the system is that so many of the labs are operated by local governments.
Some political theorists and ideologues wax rhapsodic about decisions being made and problems being solved at the level closest to the people. But, when I think “local government” I tend to think — based mostly on the seven or eight cities of various sizes I’ve lived in over the past half century — “un-professional,” “sinecures,” “patronage,” “pay-back,” and “party hacks.” I do not think “knowledgeable people likely to solve complicated problems.” [of course, see my Implied Disclaimers]
That was an admittedly lengthy introduction to the topic of this post: Economic Development Authorities and the failure of local pols to learn from their own mistakes and those of others. [subplot: consultants who’ll gladly give you a rosy scenario.] Earlier this month The Brookings Institution released “Space Available: The Realities of Convention Centers as Economic Development Strategy” (Jan. 2005), by Heywood Sanders. In its Executive Summary, the author notes:
The overall convention marketplace is declining in a manner that suggests that a recovery or turnaround is unlikely to yield much increased business for any given community, contrary to repeated industry projections.
Nonetheless, localities, sometimes with state assistance, have continued a type of arms race with competing cities to host these events, investing massive amounts of capital in new convention center construction and expansion of existing facilities.
After pages of explanation of causes and effects, the Report has this Conclusion (emphases added):
“The boom in convention center development over the last decade has been a triumph of public sector entrepreneurship and fiscal innovation, marrying the creation of new public authorities, an increased fiscal role for state government, and a host of new tax and revenue sources to the development of enormous new facilities. That success in spending has in turn spurred even more public investment, by cities large and small, in companion facilities including new publicly-owned and financed hotels.
“But if taxing, spending, and building have been successful, the performance and results of that investment have been decidedly less so. Existing convention centers have seen their business evaporate, while new centers and expansions are delivering remarkably little in terms of attendance and activity.
“What is even more striking, in city after city, is that the new private investment and development that these centers were supposed to spur—and the associated thousands of new visitors—has simply not occurred. Rather, city and convention bureau officials now argue that cities need more space, and more convenience, to lure those promised conventions.
“And so underperforming convention centers now must be redeemed by public investment and ownership of big new hotels. When those hotels fail to deliver the promises, then the excuse is that more attractions, or more retail shops, or even more convention center space will be needed to achieve the goal of thousands of new visitors. . . .
“Nationwide, however, it is abundantly clear that a new or ever-bigger convention center cannot in and of itself revitalize or redeem a downtown core. It is also distressingly apparent that convention centers and massive public commitments to visitors and tourism can do little to address the large problems of poverty, decay, population loss, and housing abandonment that plague our older core cities.
“By understanding these limitations, local leaders will be better positioned to make more informed policy choices and develop more holistic economic development strategies.”
With popular and obvious tourist destinations like San Francisco, Boston and Washington seeing a slump in convention center activity, it’s no surprise that centers in secondary cities are faring poorly. Nonetheless, business and government leaders in places like Pittsburgh are still cheerleaders for more government funding for added convention and hotel space (see Pittsburgh Post-Gazette article, Jan. 24, 2005). And, dozens of third-level cities are also hearing the siren call of similar economic development panaceas from their community leaders.
Let me tell you about economic development follies in three Upstate New York cities that I know well: Schenectady, NY, where I now live; Albany, the state capital, which is only a dozen miles from Schenectady; and Rochester, NY, two hundred miles to the west, where I lived my entire childhood and where many relatives still reside.
First, Albany: The Brookings Report decries the fact that consultants are still producing optimistic studies about increased convention and hotel space. It notes:
In similar fashion, a May 2004 updated analysis for a proposed new convention center in Albany, New York was able to present a graph showing regular annual growth in convention and tradeshow attendance of two percent a year from 2003 through 2008 (following a modest downturn), coupled with the conclusion that “For the meetings industry, things have generally returned to pre-9-11 condition… Travel to meetings and large tradeshows has resumed and will continue.”46 The penultimate conclusion for Albany was that “the research still indicates strong support for the [convention center] project as recommended… a significant demand generator in the local economy.”
What was the response of local politicians to the Brookings study? The Albany Times Union reports (Jan. 17, 2005):
- Sanders’ analysis was dismissed Friday by [Albany Mayor Jerry] Jennings, who has been pushing the convention center project since 1996. “I’m not getting too excited over this report,” the mayor said. “As a state capital, this is a very unique market. I think it was unfair to group us in with the other cities.”
- Last summer, the state Legislature approved creating a nine-member authority that will study where Albany’s project should be built and how to pay for it. Albany Assemblyman Jack McEneny, who sponsored the legislation, said it would be wrong to judge a convention center on profit or loss. But he acknowledged that projections touting billions in economic benefits might be “unrealistic.” “This is a public service, something that the city needs,” McEneny said. “It’s not supposed to make money, unless you judge it with tunnel vision.”
- Gov. George Pataki, who agreed to create the convention center authority, is expected to determine how much state support to provide for the $185 million project. Pataki spokesman Todd Alhart appeared untroubled by the report . .
- Jennings expressed confidence in the projections contained in Albany’s feasibility study, which was done in 2001 by the Duluth, Ga.-based Strategic Advisory Group and updated last spring. The study envisions a convention center that would draw more than a quarter-million visitors and generate 100,000 hotel room stays each year. That would support more than 1,700 new jobs and $3.2 billion in new spending over three decades. . . . Consultant Jerry McClendon “told us that the city’s market was one of the strongest he had ever seen,” Jennings said. . . . McClendon could not be reached for comment Friday.
It looks like the $185 million Albany convention center project is still a “go.” But, if you want to see an even shakier public investment (sunken costs), take the Thruway west to Rochester, a city with dwindling population (now around 210,000, but 330,000 when I was a kid) and tax base, situated on Lake Ontario, across from Toronto, which is Canada’s largest city.
The Spirit of Ontario: Fast Ferry [pix]: In Rochester, NY, they’ve been talking for years about having a “fast ferry” connecting the City to cosmopolitan Toronto. Thanks to $60 million dollars of government assistance, and a lot of civic leadership and arm-twisting, the dream came true in May 2004 — “The Spirit of Ontario”, nicknamed The Breeze (see wikipedia entry). “This is a great victory for Rochester,” said Mayor William A. Johnson Jr., who has been pushing the ferry service for years as a potential economic boon for the region. And, we’re not talking your Staten Island kinda ferry; as described at its website:
“The Breeze Canadian American Transportation Systems, LLC is establishing a Fast Ferry service between Rochester, NY and Toronto, Ontario. The service will be “high speed”, operating at over 50+ MPH, accommodating approximately 750 walk-on passengers, up to 220 cars and up to 10 trucks and buses. More than just a method of transportation, the Fast Ferry is truly a unique travel experience, offering amenities and ambience worthy of a mini cruise ship. Importantly, the two and a quarter hour “port to port” trip will act as a “virtual” bridge, connecting the national highway systems of Canada and the United States, and acting a catalyst for two regions coming together, economic development, tourism activity and job growth on both sides of the border. “
Rochesterians were bursting with pride and enthusiasm. In August alone, there were 73,000 passengers on the Ferry. And, in the first week of September, without notice, the operator closed down completely. (Democrat & Chronicle, “Hope for ferry amid dismay,” Sept. 9, 2004):
“Canadian American Transportation Systems, the Rochester company operating the new ferry, announced Tuesday that it was suspending service indefinitely because of $1.7 million in debt, high daily expenses and an inability to carry commercial trucks.”
Well, the indefinite suspension of service continues. In fact, on February, 28, 2005, you can purchase The Breeze at auction under maritime law, for a minimum bid of $22 million (it is valued at $42 million). Guess who wants to buy it? The City of Rochester! That’s despite the fact that such services never make money and are poorly run by municipalities. (“Ferry’s bucking tide of history”, D&C, Jan. 23, 2005) In fact, it has lined up a $40 million loan from Australian lenders.
But, don’t worry, business and civic leaders, calling themselves “The Rump Group” [really], wrote an op/ed piece on Dec. 21, 2004, insisting that “The Ferry would give a big lift to our region’s economy, image,” and saying they stood “ready to help.” And (Walter will like this), CATS, the failed operator, is suing Rochester for ruining its reputation and stealing its business plan (D&C, Jan. 26, 2005).
Of course, economic development failures don’t have to be quite so large — even small, poor, rust-belt cities like Schenectady can get into the act, repeatedly. And, while some folk worry a lot about takings, the good businessmen of dreary downtown Schenectady just love their little “friendly condemnation” windfalls, which come through the kindnesses of the Schenectady Metroplex Development Authority, “a unique economic development mechanism created by State legislation in 1998.Primary funding comes from 0.5% of county sales tax revenue dedicated to economic development, of which 70% goes to Metroplex.“
“The mission of the Schenectady Metroplex Development Authority is to enhance the long-term economic vitality and quality of life in Schenectady County by cooperative, purposeful actions and investments within the Metroplex corridor with particular emphasis on downtown.”
“Metroplex has many tools to revitalize Schenectady. It can design, plan, finance, site, construct, administer, operate, manage and maintain facilities within its service district.”
Kinda thrilling. However, Metroplex has hasn’t been completely successful. Indeed, it’s made too many mistakes to describe here, but let me tell you about three that have occured in the past few years:
First, the Parker Inn: Under its usual guidelines that require the private developer to make 50% of the investment, Metroplex awarded a $1,800,000 loan/grant as part of the $3,700,000 project, which entailed an eight-story renovation and conversion of the Parker Building to a 23-room extended stay hotel. That’s right, an upscale hotel smack in the middle of a block that was virtually entirely empty storefronts, and overlooked a similar block, where the Dollar Store folded for lack of business. Metroplex counts this as one of its Success Stories, although it has had to consistently loan additional money to the Inn to meet its mortage payments. In one slick public relations document, Christopher Meyers, owner of the Inn, praised Metroplex, saying that it was willing to asssist him, while financial institutions would only look at the bottom line.
Diamond Cinema: Metroplex (whose board consists mostly of city and county politicians or their appointees, plus business leaders) decided that the best way to bring people back to downtown Schenectady at night was to have a movie theatre. Although there had been no first-run theater in all of Schenectady for a couple decades, and downtown is considered dangerous at night, the wise men decided to pay for half of a $10 million project to install a state-of-the-art, 14-screen cinema complex down the block from the Parker Inn (that should bring business executives overnight!). (“Site work begins,” Bus. Rev, Nov, 21, 2003) Metroplex purchased half a block and cleared it for the Diamond Cinema. All the owners had to do was come up with their half of the total cost — $5 million. But, they couldn’t get more than $3.5 million in financing, and the entire project collapsed. (“Cinema project dead, happy ending eludes developer,” Bus. Rev., March 19, 2004) At that point, the Parker Inn’s few guests had a very nice empty lot to look at from their suites.
So, Metroplex had a large hole on the premier block of downtown Schenectady, on which it had already spent $3.5 million. What was it to do? To wind down this post, and come full circle on the Brookings Report, it decided to invest more funds to attract a Hampton Inn, offering about $2 million more in financial aid. You can guess what the local leaders have to say, but I’ll give you a few quotes from Metroplex’s press release any way:
Susan E. Savage, Chair of the Schenectady County Legislature said, “This project represents the first major hotel to be built in Schenectady in over 30 years. It is another sign of the growing confidence that the business community places in our efforts to revitalize Schenectady. This exciting new investment, the latest in a series of job and investment announcements in Schenectady, fills a key corner in downtown and brings to $73 million the total amount of new investment attracted to our community since the County Legislature put in place a new unified, proactive, and professional economic development initiative just seven months ago.”
Mayor Brian U. Stratton said, “Wokring closely with the County Legislature, the City Council, and Metroplex, we have brought home another major investment deal to fill a key site in downtown Schenectady. This new hotel downtown will not only be an anchor project in the revival of downtown, but a great asset to our ongoing efforts to make the Proctor’s Entertainment District an exciting destination for the Capital Region.
State Senator Hugh T. Farley said, “This is an exciting development for Schenectady – attracting a multi-million dollar private sector investment as well as ongoing tax revenues, constructing an important new building on State Street, and confirming Schenectady as a destination for business and recreational travelers. It is heartening to see top-name national firms investing in our city.”
Assemblyman Paul D. Tonko said, “Today’s announcement is another concrete example of Schenectady’s comprehensive strategy for downtown revitalization. I welcome the management and workforce of Hampton Inn to downtown and applaud the ongoing efforts of Schenectady’s economic development team to make the City an even better place to live, work and visit.”
The nasty old cynics in the media were a little less enthusiastic, and the Albany Times Union noted “Also unknown is what impact the new hotel will have on the neighboring Parker Inn, an upscale hotel that has had financial trouble since opening years ago. Metroplex has given the hotel more than $1 million in financial assistance.” (Sept. 28, 2004)
Metroplex itself is still optimistic: “Economic development is a momentum business. Right now, Schenectady has the momentum, the desire and the resources to get the job done. No community wants a new downtown look and feel more than Schenectady. Thanks to the new unifed approach to economic development, Schenectady is now leading the way for Upstate cities looking for a brighter future.”
That kind of optimism is contagious. We can surely solve the problems of dying, impoverished cities — not to mention growing, dynamic ones — at the level of government closest to the people. Look around at the success stories across the nation. Let’s keep our chins up and our pocketbooks open.
In his Brookings Report, Heywood Sanders makes several suggestions for improving the outcome of economic development decisions. His main proposals:
- Better Review of consultant feasibility studies and marketing surveys — independent auditing of projections.
- Far More Public Involvement and Transparency
- Tighter federal oversight and regulation: there is no reason why federal tax breaks and assistance — especially if meant to help battle poverty and unemployment in inner cities — should be handed out without much more focus on likely benefits.
update: for further reading, see schmittle Italy (Feb. 28, 2005)
update (July 5, 2005): Don’t miss John Tierney’s NYT op/ed piece, “Your Land is My Land,” asking the next Supreme Court nominee to tour Pittsburgh to see the results of decades of eminent domain aimed at creating “better uses.” (July 5, 2005)