Commentary on Sunday News “Convention Center is coming up short on money.”

Whether it is partially in the spirit of responsible journalism, or putting a horrid situation in the best possible light in anticipation of future taxes, or conceivably even a bit of back handed  ‘mea culpa’, the Sunday News published a responsible article concerning the financial woes of the Convention Center.   Nevertheless, much remains unsaid and unexplained.

Therefore below is a commentary on “Convention center is coming up short” in the order that subjects are broached.  The Lancaster County Convention Center and Marriott Lancaster, as seen from Penn Square.

“The Lancaster County Convention Center Authority is running low on money.”

This was predicted by the PKF Feasibility Report:

“Although we are not thoroughly familiar with the background of this project, and we have not performed an economic impact analysis, our findings lead us to conclude that the potential economic benefits are not likely to be sufficient to justify the risks involved, including the potential need to raise the hotel tax to fund operating deficits after several years should the reserves become depleted. We therefore recommend that, prior to proceeding further with this project, the parties involved consider exploring a downsizing of the project or an alternate use for the site.”

“Stung by higher-than-expected utility bills and especially by lower-than-expected hotel tax revenues, the authority soon could see the amount it holds in reserve fall below what it is required to keep in its rainy-day funds.”

Investor-Builder Robert Field (NewsLanc’s publisher) was stunned the first time he visited the completed facility to see that the vast and half of the time idle ‘break out area’ of the convention center was continuous with the lobby of the hotel, thus requiring the multi story space to be heated and air conditioned to the same level as the lobby throughout the year.  NewsLanc wrote about it at the time.  It was sheer stupid and irresponsible design.  Moreover, the ‘last minute’ contracts which were never reviewed and properly discussed before approval by the then ‘Darcus’ LCCCA Board called for the Convention Center to be responsible for the payment of the utility bills for the entire combined areas.

According to what the lead architect and the managing partner of the architectural firm told Robert Field of NewsLanc (and later reversed their position), not separately metering the convention center from the hotel was a decision made by project sponsors who were led by Tom Smithgall, Project Manager for the managing High Group.

“The problem is that authority officials, in their 2011 budget, anticipated a 5.5 percent rise in hotel tax revenue for the year.”

For the past half century, Lancaster’s relative prosperity has been in part due to a thriving tourist business.   The 5% hotel room sales tax had the same effect on the consumer as if the hoteliers had raised their prices by 5%.   In addition to making visits to Lancaster less attractive pricewise, it drained off or in some cases eliminated hotel profits.  Without profits, hoteliers cannot afford the ongoing renovation required to remain competitive with other tourist destinations.  Thus the hotel room sales tax was a blight on the tourist industry, not only impacting the hotels but also restaurants, attractions, and employment.

Furthermore, the suburban and exurban hotels received no benefits from the downtown Convention Center or the largely publicly subsidized Marriott Hotel.  Instead, they lost essential Rt. 30 East Host Resort and Convention Center  business to downtown, thus further injuring the industry.

“If that happens for two consecutive quarters, the portion of the hotel tax revenue that now goes to the tourism bureau will be automatically redirected to the convention center authority to stabilize its finances.”

Promotion money from the hotel room sales tax for the tourist industry and the Convention Center will cease to exist.  Alternatively, the room sales tax will be increased to the maximum 7% permitted by law, further hamstringing tourism.   Do we recall the warnings from Dick Shellenberger and Molly Henderson?

“When [projections] were done, people didn’t anticipate the worst recession since the Great Depression,” Fry said.

With all due respect to LCCCA Chair Kevin Fry, his statement is inaccurate.  The recession has discouraged more expensive foreign travel and should have made Lancaster a more attractive destination for the 20 million people who live in the greater New York, Philadelphia, Baltimore and Washington, DC areas.

“Late last month the authority voted to refinance $63.9 million in debt — in part, because the authority was unable to make a $545,000 principal payment on that debt.

“At the same meeting, the authority voted to borrow another $750,000 — partially to pay the costs associated with the refinancing, but also to help it pay its bills through the rest of the year.”

2.1%is the current rate for a AA guaranteed, tax exempt, weekly term note such as was floated by the CC.  So with the approximate 1% payment for the guarantee, the financing expense would come to 3.1%.

However, in order to entice Wachovia to guarantee the bond issue, the LCCCA committed to paying the current national bank prime currently 3.25%  plus 3% for a total of  6.25% if, in the absence of other  bidders, Wachovia acquired the bonds after the initial five years.  (Wachovia Bank was subsequently acquired when on the verge of bankruptcy by Wells-Fargo.)  No one ever told the LCCCA board members about this when they were approving the last minute loan documents….unread by most and perhaps stacked  four inches high.

Yes, this year the LCCCA faced interest rates under the terms of the original bond  financing and SWAP agreement that will soon be twice as high as current  market rates for interest and fees!   And this will again likely be the case after the recently negotiated 18 month extension.

(To further maximize borrowing capacity, a SWAP arrangement was entered into which stabilized interest rates but turned out to have been a bad bet due to the current record low cost of borrowing money.)
“But after March 2012, the new rate on the bonds kicks in. It’s higher, about 5.45 percent in total (compared to the 4.83 percent the authority would have paid on its debt as of last Thursday).”

As we see above, the “5.45%” is higher than the 3.1% for interest and the bank fee that would be the case had the project merited a guarantee from another financial institution and the SWAP deal not been made.  That is half again as much, or around $900,000 more than needed to be for a truly credit worthy project.

“The new deal is also in place for just 18 months; when it expires, the authority will have to renegotiate with the bank. At the Aug. 25 meeting at which the authority board voted for the new agreement, Beckett acknowledged that ‘yes, this isn’t the greatest deal in the world, and yes, we’re going to have to go out and renegotiate in 18 months, but that is the nature of the beast.’”
In fact it is a lousy deal forced onto a public against its opposition by an almost 80% consensus, according to a Fox 43 survey in reference to county guarantee of hotel bonds.


The responsibility for heating, cooling and other utilities in the ‘integrated facility’ — the convention center and hotel — is governed by agreements between the authority, the Redevelopment Authority of the City of Lancaster — which owns the hotel tower — and Penn Square Partners, the developers of the hotel who lease the tower from the redevelopment authority.”

The agreements are the most egregiously one-sided arrangements the Watchdog has ever encountered.   This includes the  Convention Center paying many costs that should be borne by the hotel, revenue that should go to the convention center going to the hotel instead,  receiving minimal concession fees, and ranging to such absurdities as any further state grants for the convention center being share with Penn Square Partners and, to top everything off, S. Dale High as an individual receiving special privileges for purchasing the naming rights!

“Molloy and Fry say electric bills in particular have been expensive; the authority has hired an ‘energy allocation specialist’ who may be able to recommend ways it can cut its utility costs.”

Major savings can’t be realized due to the open design of the common areas of the facilities, short of building a multi-story glass wall to separate the areas and making very expensive modification to the heating and air conditioning systems.

The full impact of the hotel room sales tax and re-location of convention business from Rt. 30 East will be felt over many years as properties cut services and postpone  refurbishments in order to preserve cash flow.   It is a downward spiral.  For a report, visit:  “Consequences of Hotel Room Rental Tax on industry.”
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Updated: August 4, 2016 — 4:52 pm

4 Comments

  1. This is probably the most astute article I have read on this website. The article reflects deep understanding the convention center issue, hotel finance, and the tourism industry. Most bothersome, is that years ago there were voices, including the writer of this article, who were raising the very issues that are now coming to pass.

    I agree that the Lancaster Newspaper article was well done, but the fact that “responsible journalism” is being practiced in this case does not make up for the one-sided bias of Lancaster Newspapers when it counted. Had they done their jobs “responsibly” ten years ago, the center and taxpayers wouldn’t be in the mess they’re in.

    A small nit is that the writer consistently refers to the “room sales tax.” It is a room “rental” tax, as named in all the enabling legislation and other articles on the topic.

  2. I wonder what the chances are of LNP printing this analysis of their artricle as a separate story. (Yeah, right!!)

    Excellent job of uncovering and relaying ‘the rest of the story’. Too bad so many taxpayers will not know of the ‘whole picture’ due to the way LNP chooses to disclose ‘the truth’ (or better said…their view of the truth).

    Three wags of the tail to The Watchdog!!!

  3. What do projects as diverse as the Lancaster Convention Center, the Harrisburg Incinerator, and New Jersey’s Giants Stadium have in common? These projects have encumbered hundreds of millions in bond debt and have left the public holding the bag.

    While Lancaster now tries to weigh the anchor tightened around its fiscal neck by the growing Convention Center debt, it would be good for citizens of the Red Rose City to consider the serious plight now face by its neighbors in Harrisburg.

    Beginning in the early 1980s, former mayor of Harrisburg floated a series of bond issues that today threaten the very independence of Pennsylvania’s capital city, and could very likely soon cause its citizens to lose its rights to self-governance at the hands of the bond industry and its hand maiden politicians.

    As some of you know, Harrisburg ran up nearly $300 million in bond debt attempting to fix a broken trash incinerator. While these bonds were nominally floated by the incinerator’s public owner, the Harrisburg Authority, they were gauranteed by full faith and backing of the city of Harrisburg and Dauphin County. Ultimately every taxpayer in the county is on the hook.

    Not discussed much at all is the genesis of these bonding deals. Believe it or not, our country was not built the last two hundred years by bond issues. The bond industry instead began to flourish only in the 1980s, when politicians discovered they could float large public bonds using their own selected bond underwriters and bond solicitors, and receive lucrative streams of political contributions from same.

    An added benefit to the politicians was that they’d seemingly tapped a vast capital market without the necessity of raising taxes to pay for projects or services. These costs would then be kicked 30 years down the road, inflated by interest and arbitrage fees. Decades down the road, however, the weight of these obligations is enormous and crippling, while the politicians who floated the bonds often are long retired.

    In Harrisburg, whose bond service obligations now far outweigh its operating budget, the state is threatening to install a board that would remove all governing authority from the mayor and city council to ensure that the bond stake holders are paid. Priceless public assets — public parks and water supplies — doubtless will be sold to feed the monkey.

    In an article published last year in The New York Times, “As Stadiums Vanish, Their Debt Lives On,” writer Ken Belson relates, “It’s the gift that keeps on taking. The old Giants Stadium, demolished to make way for New Meadowlands Stadium, still carries about $110 million in debt, or nearly $13 for every New Jersey resident, even though it is now a parking lot. The financial hole was dug over decades by politicians who passed along the cost of building and fixing the stadium, and it is getting deeper.”

    http://www.nytimes.com/2010/09/08/sports/08stadium.html

    In other words, long after these projects have failed and have been demolished, the debt lives on, threatening the public and its institutions.

    Even while these bonded sports stadiums fail, creating crippling public debt, sports players continue to receive ridiculous salaries in the tens of millions, subsidized by these bond deals gone bad. Suggestions that sports players be taxed to pay off the stadia bond debts have fallen on deaf ears.

    I happened to be at a social function in Harrisburg this weekend, where people were openly critical of Harrisburg’s incinerator bond fiasco. When I suggested that over-paid athletes be taxes to pay off stadia sports debt, one football fan erupted and yelled, “Athletes or team owners no way should ever have to pay for this!” This same hot head then went on to complain about America’s “socialists.” Yet, for some reason, in his mind, athletes and team owners, and bond stakeholders, receiving vast public largesse, aren’t “socialist,” and should be left off the hook, he passionately yelled.

    At the end of the day, this complicated subject is about easy front-end money that balloons into a nightmare decades down the road. Yes, it’s a complicated subject.

    Yet Shakespear, more than five hundred years ago, summed things up succinctly: “Neither a borrower nor a lender be.”

  4. [Sunday News] stated there is a 5% holel tax and a separate 1.1% excise tax. There is actually a 3.9% hotel tax and a separate 1.1% excise tax. Of the 3.9% hotel tax, 20% goes to the CVB and 80% goes to the convention center. The entire 1.1% excise tax goes to the CVB.

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