Bigger Minneapolis Convention Center does not pay off

Eight years ago, the Minneapolis Convention Center opened its long-awaited expansion and waited to welcome a wave of new visitors.

Today the center books just about half its space, a far cry from the 70 percent occupancy operators of such facilities like to see. The center hasn't hit that mark in any year since the expansion.

Meanwhile, its revenues covered only 49 percent of its costs in 2009, compared with as much as 84 percent before the $211 million expansion. Consequently, the center is gobbling soaring amounts of special taxes that the city collects to pay off the building and subsidize its operation.

That's one reason city leaders oppose diverting to a new Vikings stadium the half-cent city sales tax that supplies about half of the Convention Center's outside revenue.

An examination of the center's failure to meet expectations shows that while some underlying reasons, such as a severe recession, couldn't be foreseen, the city and its consultants failed to understand that megaconventions were going out of style, even as Minneapolis and dozens of other cities competed in a kind of convention center arms race that sapped budgets and overbuilt the nation's capacity.

Proponents predicted that by expanding its Convention Center, Minneapolis could attract more of the top 200 trade shows. But according to Meet Minneapolis, the city-funded nonprofit that books the center, it still can't attract two-thirds of them. Minnesota weather, conflicts with local consumer shows and other drawbacks rule out all but about a dozen.

Trying to lure groups such as Future Farmers of America, Rotary International and the American Public Works Association proved fruitless.

Seventy-seven percent of the center's visitors in 2009 lived within the metro area. The center hosted Minnesota Republicans recently but hasn't helped the city to land the Republican or Democratic national conventions, though it played a backup role when national Republicans came to St. Paul's Xcel Energy Center.

The Minneapolis center's deficit has swelled far beyond numbers originally pitched to the public and the Legislature when the city sought state backing for the expansion.

A key consultant in 1994 said the expanded center would lose $3.4 million annually, which inflates to no more than $5 million today. But the facility's operating deficit went as high as $15.6 million in 2008 and consistently has been several million dollars more than projected.

The subsidy that taxpayers and visitors pay comes from special taxes on sales, hotels, downtown restaurants and on-sale liquor. Those taxes were imposed primarily to pay construction and expansion debt, but also to cover the center's deficit. But expenses have outpaced income in the city's Convention Center fund, drawing down its balance.

Minneapolis not alone

"Operating losses have just seriously mushroomed in the last few years ... in a lot of places," said University of Texas political scientist Heywood Sanders, a leading critic of public subsidies of such expansions and the author of a forthcoming book that includes a case study of what happened in Minneapolis.

Jeff Johnson, the center's interim director, agrees with Sanders that convention business has been bad nationally. The Minneapolis center filled just 56.5 percent of its rentable space last year, a far cry from the 83 percent occupancy it had just before the expansion.

Projections couldn't predict the dot.com stock slump, the Sept. 11, 2001, attacks and the recent recession, all of which slowed convention demand and collections from the special taxes that subsidize the center. Johnson hopes that an economic recovery and aggressive cost-cutting can improve the center's bottom line.

Sanders argues that big conventions already were going out of vogue as construction on the expansion began in 1999. Minneapolis expanded its gross exhibit space 71 percent and added a divisible 3,433-seat auditorium. "The expansion allowed us to be a national player," Johnson said. Trouble was, many other players were going national too.

Since consultant Coopers & Lybrand urged expansion in 1994, noting that Minneapolis ranked 32nd nationally for exhibit space, the national supply of such space has grown by 45 percent. "That does impact the playing field," Johnson said. "It is a little bit of an arms race."

City Council President Barbara Johnson wants the city to consider a city-backed Convention Center hotel, but that's opposed by Lisa Goodman, the council's community development chairwoman. She supported the expansion but thinks convention hotels are the private sector's job.

"This is so similar to the sports facilities conversation, and the way cities go after expanding those facilities," Goodman said. "We cannot be part of the escalation."

The 1994 study didn't project the impact of all of the other expansions. Minneapolis was forced to discount rents up to 20 percent earlier this year.

Expensive upkeep needed

As it became clear how far off the consultants were, the city's Convention Center fund was projected to plunge from a 2007 year-end balance of $45 million to $5.5 million in 2013. However city officials now say that by eliminating 11 jobs and saving energy, they can keep the fund solvent until bonds are retired.

But they expect the building, portions of which will be 30 years old then, to need work. Already, its three copper domes leak and could cost as much as $15 million to fix. The center budgets $5 million to $7 million annually on improvements and equipment.

Johnson acknowledged that frequent leadership turnovers may have hampered planning. One new director died shortly after taking the job in 2006, and his successor left after less than two years. The center has had interim directors three times since 2006, and the city is not currently looking to replace Johnson as interim leader.

Johnson estimates that non-local visitors to the center pumped $173 million into the local economy last year, with the center and its vendors spending another $40 million.

That's not the $300 million (in today's dollars) projected by the 1994 study. But Johnson says it's still a formidable economic impact.

"We aren't the Vikings," he said. "We aren't the Twins. But if you look at what this building has done for the city, it's been a great investment."

Steve Brandt • 612-673-4438