Cost Benefit Analysis on the

David Lawrence Convention Center

Presented by: Jie Hu, Dontai Johnson, Mike Niemeyer, Jin Wang

Major Sources of Data for the Project

Contact

Organization

Information Contributed

Kim Augustine Amey

Pittsburgh Sports and Exhibition Authority

Basic Cost Information

Ralph Bangs, Ph.D.

Center for Social and Urban Research

University of Pittsburgh

Feasibility Study on the Original Regional Renaissance Initiative Plan; Analyses of Benefits for the Convention Center itself

Eric Montarti

Allegheny Institute for Public Policy

Study of the national convention market; Analysis of operating costs of current and former center

Allegheny County Controller’s Office Hotel tax, projected operating deficits, and bond debt service figures

Greater Pittsburgh Convention and Visitor’s Bureau

Data on bookings within next 10 years, but not much help

Assumptions Guiding Entire Analysis

Costs and benefits are different from that of the former Convention Center

Impact of new hotel not included Estimating 19 year life span for new center (old

center: 1981-2000) Started analysis in 1999 when funding secured

and ended in 2020 Debt service costs extended to 2035

Use of the Construction Funds

Construction: $318,809,298 Acquisition/Relocation/Demolition:

$24,206,186 Consultant/Permitting/Legal: $2,894,608 Admin/Financing: $19,603,497

Source: Correspondence with Kim Amey, Sports and Exhibition Authority

Cost Markup History

1997: $262 million before design selected

2000: $330 million after Rafael Vinoly design selected

2002: $365 million after “bells and whistles” added

Source: Franken, Stephanie. “Convention Center Costs Mounting” Pittsburgh Tribune Review. Jan. 10, 2003

“Bells and Whistles” Crank Up Costs

Amenity Cost

Riverfront Park $8 million

Waterfall and Pedestrian Walkway

$4 million

Glass Elevator $800,000

Fabric Ceiling $4.8 million

Bridge to connect center to nonexistent hotel

$500,000

Source: Franken, Stephanie. “Convention Center Costs Mounting” Pittsburgh Tribune Review. Jan. 10, 2003

Assumptions Guiding Cost Portion of Analysis

Assumption Methodology

Social Cost of Tax Collection claimed as .25 of taxed amount by Noll and Zimbalist. BUT, assume full employment and collection cost

.25 becomes .15

Controller’s office predicts a 3% increase in yearly convention center operating deficit

New Operating Deficit =

Predicted Operating deficit - $3,000,000 (old center’s average deficit)

Hotel taxes are collected for all those liable. However, county has had delays in collecting revenues from this tax.

N/A

Debt service on bonds from a combination of 2% hotel tax increase and a portion of the original 5% tax increase

Took the projected number for debt service at face value from the Controller’s office

Initial Cost

Item 1999 2000 2001 2002 2003 2004 2005 2006

State Contributions 149300000 0 0 0 0 0 0 0

Additional State Contribution 25000000 0 0 0 0 0 0 0

Auction Proceeds 150995 0 0 0 0 0 0 0

Insurance Proceeds 2075740 0 0 0 0 0 0 0

Pittsburgh Philanthropic Support 5204000 0 0 0 0 0 0 0

Interest Earnings 3351042 0 0 0 0 0 0 0

Social Costs of Taxation from State Contribution 26145000 0 0 0 0 0 0 0

Bond-Related Costs

Debt Service on Bonds for Construction 0 8300556 8550000 8864583 9183333 9526250 10040833 10401250

Principal Repaid on Bonds for Construction 0 0 0 0 0 0 0 0

Excess Operating Deficit Costs

Excess Convention Center Operating Deficit Beyond Old Center 0 -2930757

-1888857

-1237292 -402298 -256951 54137 204953

Social Costs of Taxes to Offset New Operating Deficit 0 0 0 0 0 0 8120.55 30742.95

Initial Cost (cont.)

Item 2019 2020 2021 2033 2034 2035

State Contributions 0 0 0 0 0 0

Additional State Contribution 0 0 0 0 0 0

Auction Proceeds 0 0 0 0 0 0

Insurance Proceeds 0 0 0 0 0 0

Pittsburgh Philanthropic Support 0 0 0 0 0 0

Interest Earnings 0 0 0 0 0 0

Social Costs of Taxation from State Contribution 0 0 0 0 0 0

Bond-Related Costs

Debt Service on Bonds for Construction 13780000 13780000 13780000 12729167 12750000 1062500

Principal Repaid on Bonds for Construction 0 0 0 0 0 193400000

Excess Operating Deficit Costs

Excess Convention Center Operating Deficit Beyond Old Center 211996 -105043 0 0 0 0

Social Costs of Taxes to Offset New Operating Deficit 31799.4 0 0 0 0 0

Sensitivity Analysis Parameters

Used the OMB discount rate of 7% Used a Time Declining rate as follows:

1999-2004: 4%

2005-2023: 3%

2024-2035: 2%

Present Value of Costs Discounted 7%

Item 1999 2000 2001 2002 2003 2004 2005 2006

Column Totals 211226777 5369799 6661143 7627291 8781035 9269299 10103090.6 10636946

Divisor for 7% OMB discount rate 0 1.07 1.1449 1.225043 1.310796 1.40255173 1.50073035 1.60578148

Present Value for Each Year 211226777 5018503.74 5818100 6226141 6699009.6 6608882.08 6732115.82 6624155.34

Present Value of Costs Discounted 7% (cont)

Item 2019 2020 2021 2033 2034 2035

Column Totals 14023795.4 13674957 13780000 12729167 12750000 194462500

Divisor for 7% OMB discount rate 3.86968446 4.14056237 4.43040174 9.97811354 10.6765815 11.42394219

Present Value for Each Year 3624015.22 3302681.08 3110327.42 1275708.78 1194202.47 17022363.8

Present Value of Costs => $372,926,556.10

Present Value of Costs By Time Declining Method

Item 1999 2000 2001 2002 2003 2004 2005 2006

Divisor for Time Declining Rate 0 1.04 1.0816 1.124864 1.1698586 1.2166529 1.1940523 1.22987387

Present Value for Each Year 211226777 5163268.27 6158601 6780634 7506065.5 7618688.11 8461179.28 8648810.46

Present Value of Costs By Declining Method (cont.)

Item 2019 2020 2021 2033 2034 2035

Divisor for Time Declining Rate 1.80611123 1.86029457 1.91610341 1.96067603 1.99988955 2.039887344

Present Value for Each Year 7764635.49 7350963.23 7191678.66 6492233.69 6375352.07 95330019.38

Present Value of Costs => $577,401,589.9

Assumptions of Benefit Analysis

1. The elasticity of hotel demand to derive social cost of hotel tax is 0.9. Because of tax increase of 2% from 5% to 7%, there should be a 1.8% decrease in occupancy.

So hotel spending is 98.2% of the original data.

2. Because nationwide convention market is not increasing, and there is a 31.16% total increase of available space in the top 50 convention centers nationwide, we assume that there will be 31.16% fewer conventions coming to Pittsburgh than in 1990s. So hotel spending is discounted by 68.84% then.

3.All items besides hotel spending are discounted by 68.84% too.

Construction Job Benefits

Construction worker’s annual salary => $43,981.60

Number of workers from 2000 to 2003 => 200

Total benefits at 7% Rate => $24,761,991.31

Source: http://ci.ftlaud.fl.us/jobs/01_positions/67-559-07.pdf

Total benefits at Time Declining Rate => $26,290,371.56

Convention Center Non-Construction Benefits

YEAR 1999 2000 2001 2002 2003 2004 2005

Hotel 0 0 5148375 6800054 8649222 10300900 10300900

Restaurant 0 0 5490369 7254738 9259772 11024106 11024106

Entertainment 0 0 822741.3 1086639 1381584 1645483 1645483

Retail 0 0 2767402 3655060 4647147 5534805 5534805

Local transit 0 0 388932.2 513684.1 653112.6 777864.5 777864.5

Other 0 0 3296772 4358019 5582549 6643797 6643797

Total New Spending 0 0 17914591 23668194 30173387 35926955 35926955

Convention Center Non-Construction Benefits (cont.)

YEAR 2014 2015 2016 2017 2018 2019 2020

Hotel 10300900 10300900 10300900 10300900 10300900 10300900 10300900

Restaurant 11024106 11024106 11024106 11024106 11024106 11024106 11024106

Entertainment 1645483 1645483 1645483 1645483 1645483 1645483 1645483

Retail 5534805 5534805 5534805 5534805 5534805 5534805 5534805

Local transit 777864.5 777864.5 777864.5 777864.5 777864.5 777864.5 777864.5

Other 6643797 6643797 6643797 6643797 6643797 6643797 6643797

Total New Spending 35926955 35926955 35926955 35926955 35926955 35926955 35926955

Benefits Using Net Present Value Methods Discounted to 1999

Using OMB Rate at 7% => $350,344,036.20

Using Time Decline Rate => $500,502,843.10

Grand Total with OMB Rate Discounting

Benefits: 350,344,036

Costs: 372,926,556

-22,582,520

-

Grand Total with Time Decline Rate Discounting

Benefits: 500,502,843

Costs: 577,401,589

-76,898,746

-

How Does a City Save Face?

“Often there’s additional public investment to try to save the convention center that was supposed to save downtown. The quest to redeem a non-functioning convention center often ends up putting the public sector into the hotel business.”

-Heywood Sanders, Ph.D., University of Texas-San Antonio

Source: Bromley, Hank. “Convention Center Follies: An Interview with Heywood Sanders.” ARTVoice. 03/23/00.

THANK YOU