Stick It to 'Em!

The Phoenix City Council can't sanction the $350 million, city-owned convention center hotel. By law, a referendum must be held.

Yet Mayor Phil Gordon says he doesn't believe the hotel project is subject to voter approval. Gordon points to a 1999 Maricopa County Superior Court ruling that said a proposal by the city to enter into a joint venture with developers to build two downtown hotels was not subject to voter approval under Chapter 27.

That ruling took place four years, however, before the city and state approved construction of the $600 million convention center -- and long before city officials and their consultants publicly proclaimed that the success of the convention center hinges on construction of the 1,000-room hotel.

Satya Thallam, a fiscal policy analyst with the Goldwater Institute, a Phoenix conservative think tank, is strongly opposed to the construction of the convention center and the city-owned hotel. Thallam didn't know about Chapter 27 of the city charter until I told him, and he was thrilled at the news.

Mayor Phil Gordon's hoping voters have forgotten about 
Proposition 200. Click Here for PDF
Jackie Mercandetti
Mayor Phil Gordon's hoping voters have forgotten about Proposition 200. Click Here for PDF

"I am going to be looking at this very closely," he vows.

Thallam became immediately convinced that the hotel is indeed a convention facility under the spirit of Chapter 27, but that doesn't mean a court will agree.

"Now, the question is whether legally a hotel of any kind is a convention facility," Thallam says.

It's time to find out if the city's latest foray into the private marketplace must first be approved by voters. A lawsuit seeking to enforce Chapter 27 would trigger a tumultuous public debate over the merits of a city-owned hotel and stymie civic center construction.

Talk about bringing the city to its knees.

The current convention center has long been a catastrophe for taxpayers, losing more than $35 million a year. The convention center sharply discounts its booking fees to lure conventioneers, who have long complained about the bleakness of downtown Phoenix.

Even with the sharp discounting, the existing center has barely been able to keep one of the two major downtown hotels in the black. The Wyndham emerged from bankruptcy in 2002 and has had six different operators in last two decades.

Despite the massive operating losses of the current facility, the city is taking the absurd position that, by tripling its size, the operating losses will somehow disappear. This is nothing more than wishful thinking based on rosy economic projections that have repeatedly failed to materialize in convention center expansion projects in other cities across the nation.

Indeed, the nation is awash in convention space at a time when business travel is stagnant, partially because the Internet has seriously reduced the need for big conferences.

Of course, voters didn't know how much money the convention center was losing during the 2001 campaign led by former Mayor Skip Rimsza, who claimed that a bigger convention center would somehow be better. The Republic never bothered to report that significant fact.

During the propaganda campaign staged by the city and the Republic, there also was never any public discussion about the city getting into the hotel business. In fact, it was assumed that, once the convention center expansion was approved, hotel operators from across the country would be banging on doors of city hall to build a luxury hotel in downtown Phoenix.

Whoops! The private market came back with bad news. No private developer on the planet was willing to build a 1,000-room convention hotel in Phoenix -- even with construction of the new convention center -- unless the city kicked in $60 million to $70 million in cash.

Why? Because downtown convention hotels don't make friggin' money!

"The hotel projections do not provide sufficient cash flow to meet the return requirements of private debt and equity investors," concludes a report prepared by the city last winter.

At that point, a prudent investor would have said the hell with it. But not city leaders, who have no problem putting your money at risk.

Rather than coughing up millions in cash that would have triggered a taxpayer rebellion, the city began looking at other ways to build the hotel. The solution: Take advantage of a change in the federal tax code that allows municipalities to own hotels and issue tax-free debt.

The city could claim to the public that it could build and own the hotel, and it wouldn't cost voters a dime. By last December, city staff, led by Assistant City Manager Sheryl Sculley, began touting a plan that would require the city to sell $300 million in tax-exempt bonds that would supposedly be repaid by revenue generated by the hotel.

But the fine print revealed that taxpayers would be liable for up to 40 percent of the projected $21 million a year in debt service if, for some reason, the hotel failed to generate enough revenue to repay the bonds.

Over the first six months of 2004, the city met on a regular basis with prospective hotel operators and owners of downtown real estate. The city refused to provide public records related to these meetings, despite my repeated requests under the Arizona Public Records Law. Then, less than a week before the City Council voted to approve the hotel project, the cost jumped from $300 million to $350 million.

City-owned hotels across the country are finding real world finances a lot more difficult than the numbers projected on paper by economists aiming to please the municipal officials who pay their fat consulting fees. The city-owned hotel project in Myrtle Beach, South Carolina, defaulted on its bond. Projects in St. Louis; Overland Park, Kansas; and Sacramento have performed far below expectations.

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