Trouble in RiverCentre

St. Paul built a new hockey arena for the Wild and a new convention center for the city. Guess which one is losing money?

[Editor's note: A correction ran concerning this story; see end of article.]

During the eight years that Norm Coleman reigned as mayor of St. Paul, he transformed the psychological state of his city's downtown core from an inferiority complex into a proud, corporate field of dreams. If you build it, they will come, Norm relentlessly intoned, as the crane operators and concrete pourers hopped from museum to hockey arena to office tower. Sure enough, figures compiled by the city's planning and economic development department claim that since Coleman first took office, as many as two million more people are visiting the capital city each year.

While former Minneapolis Mayor Sharon Sayles Belton was resoundingly defeated in her bid for reelection last November, in large measure owing to voter resentment over public subsidies for downtown projects such as the Target store and Block E, Coleman's boom-boom development philosophy has played to rave reviews in St. Paul, generating momentum for this year's U.S. senate race against incumbent Paul Wellstone. The man he endorsed to succeed him as mayor, Randy Kelly, triumphed in November by casting himself as a Coleman clone who would continue pursuing pet projects such as a new baseball stadium and expansion of the city's Union Depot.

For reasons as obvious as Sayles Belton's defeat, most politicians fear being perceived as blindly following the dictates of big business. Buoyed by the response to his performance as mayor, however, Coleman has been remarkably unabashed about his fealty to corporate interests. Last month, in a Star Tribune story reviewing his eight years in office, he told a reporter that "the agenda of the Chamber of Commerce is the agenda of the city."

Conventional wisdom says that Coleman's staunch pro-business philosophy is difficult to rebut. St. Paul is facing a budget shortfall in 2002 that will likely compel Kelly to lay off city workers and perhaps reduce services to libraries and recreation centers, but the situation can be blamed on a national recession and impending cuts in state aid to local governments. What's more, if there is a price to be paid for increasing the city's debt load by nearly 50 percent in the past eight years, to well over $400 million, it won't happen on Coleman's watch.

There is, however, one tangible example of where Coleman's willingness to sacrifice public dollars for the benefit of private enterprise constitutes both an immediate and long-term threat to the city's financial health: the situation at the downtown entertainment complex known as RiverCentre.

 

Until just a few years ago, the RiverCentre complex, located in the heart of downtown St. Paul, consisted of the Roy Wilkins Auditorium and the St. Paul Civic Center. Today the Civic Center is gone and Roy Wilkins has been connected by walkways with two other structures: the Xcel Energy Center, a hockey arena that opened in July of 2000, and Touchstone Energy Place, a convention center that began operations in January of 1998.

When the $80 million Touchstone convention center was approved in 1994, the tab was to be paid with revenues generated by a half-cent sales tax approved by the city council just before Coleman's first term. In 1997 Coleman convinced the National Hockey League to award a franchise to St. Paul, contingent on the construction of a new arena. Plans were made to tear down the Civic Center and build the Xcel Energy Center. The $130 million needed for construction came from the state, the city, and the hockey franchise, which was later named the Minnesota Wild.

The financial problems now confronting RiverCentre stem from changes in the control and management of the facilities. Up until the time the new hockey arena was completed, all the buildings on the site were managed by the RiverCentre Authority, a volunteer board made up of two St. Paul City Council members and seven citizens appointed by the mayor. The city council set the budget and monitored performance. The deal that brought pro hockey to St. Paul changed that management scheme. The Wild leases the Xcel Energy Center from the city for a nominal fee, and all of the franchise's expenses and revenues are handled by its management firm, the St. Paul Arena Company (SPAC).

Shortly before the arena opened in July of 2000, the city decided it could save money and expand profit margins by entering into a joint operating agreement with the Wild franchise. The city is paying SPAC to operate both the Touchstone convention center and Roy Wilkins Auditorium. City workers at the facilities negotiated new union contracts and became private-sector employees. Since then, SPAC has managed all three facilities on the RiverCentre site. The Wild absorbs whatever profits or losses are accrued at the Xcel arena. The city is responsible for the gains and losses at Touchstone and Roy Wilkins. The RiverCentre Authority still exists to monitor SPAC's performance; the city council keeps watch over the Authority.

The arrangement has worked out well for the Wild. In 2001, after its first season of operation, the franchise announced that it was one of only 16 teams in the 28-team NHL to turn a profit. Meanwhile, the city's side of the RiverCentre ledger is bleeding red. Last November, during the final weeks of the Coleman administration, Deputy Mayor Susan Kimberley told the city council that if RiverCentre were required to meet all of its debt obligations in 2002, it would run out of cash by year's end, which would violate its contractual agreement with SPAC. To remedy the problem, the Coleman administration proposed that the council write off $1.5 million in RiverCentre debt, defer $1.3 million in debt payments, and dip into the city's general fund for another million in hotel and motel taxes.

When Kimberley gave the council the bad news, some members were outraged. "Years ago we were painted this rosy picture about how successful this operation was going to be," complained council member Jay Benanav, who represents the city's Fourth Ward. "And we all fell for it like a bunch of saps. Now we are being told, 'Oh, guess what? We were way off base here.'"

There are a variety of reasons why the roses have gotten thorny. When the Touchstone convention center was being planned, its bottom line was to be supplemented by revenues from the Civic Center as well as Roy Wilkins. But just months after Touchstone opened, the Civic Center was suddenly being razed to make room for Xcel Energy Center; and now the Wild reaps whatever profits come from that space.

"Before we tore it down, the old Civic Center was limping along--fat, dumb, and happy," says Dan Bostrom, the St. Paul City Council president and a RiverCentre Authority board member. "There wasn't much debt or overhead on the place, and between the parking and concessions we made a nice chunk of dough on it."

"I'm not sure the metamorphosis at RiverCentre has ever been communicated to the community," says Jim Ibister, the vice president and general manager of RiverCentre, which makes him a SPAC employee. "If we still had the Civic Center, there would be another 70,000 square feet of trade-show and convention space, which would [nearly] double our existing space. Obviously, we could compete for more business, book more events, take the small stuff and the big stuff, too. The rack rate for that 70,000 square feet for a four-day trade show would be about $20,000, and that's just rent, not counting [additional revenues from] food and beverage."

Large, arena-size concerts are another significant revenue source lost to the city. "In the old arena, we would average twelve big concerts a year, which could easily be $600,000 net profit," says Dick Zehring, board chair of the RiverCentre Authority. "But listen, we knew we were going to have to make sacrifices in St. Paul to get a national-league hockey team, and that we were probably not going to be able to hold on to the arena."

It is easy to conclude that the City of St. Paul is better off having a brand-new arena instead of a decaying Civic Center in need of a new multimillion-dollar roof. It is also easy, however, to overestimate Xcel's benefits--to see people flocking downtown for events at Xcel without considering the public revenue that was lost in the Civic Center's rubble.

"The big events at the arena, like the concerts and the hockey tournaments, were always the cash cow, especially because of the parking and concessions they could bring in," says one veteran staffer at city hall. "The conventions always struggled to make money or break even. The way it is now, RiverCentre has been set up to fail."

 

When the joint operating agreement between the city and the Wild was first approved, the expectation was that it would save St. Paul about $500,000 a year. Even as that estimate was being thoroughly discredited, members of the Coleman administration steadfastly spoke of the deal in glowing terms. "The RiverCentre was well-run before entering into the joint operating agreement," Deputy Mayor Kimberley told the city council in November. "And it has been run even better since entering into that agreement."

But the numbers don't add up. In its final six months as a publicly managed entity, RiverCentre showed an operating profit of $886,995. During the first six months of joint operation at Roy Wilkins and Touchstone, revenues dropped nearly $300,000 and expenses increased more than $600,000, resulting in a net loss of $104,153 (included in those losses is $87,500 that the city paid to SPAC as a management fee).

SPAC's Jim Ibister says the city's facilities generated more revenue under public management in 2000 because of a particularly strong June (the last month before SPAC took over), when a wealth of conventions and sporting shows were booked into Touchstone and Roy Wilkins. He also points out that the sharp rise in expenses under SPAC are due in part to an agreement with the city that RiverCentre's union contracts would be renegotiated when the city employees were privatized. It is difficult to make direct, budget-line comparisons between the public and the private management of RiverCentre, Ibister explains, because SPAC doesn't classify its personnel under the same titles used by the city. As an example, many building maintenance workers have been reclassified as event managers or workers in event services, causing SPAC's budget line for building maintenance to drop while other budget lines go up.

It is true that the line item for salaries and fringe benefits for building maintenance employees plummeted from $311,000 under the city's management of RiverCentre to $96,000 under SPAC--a savings of $215,000. But that gain was eclipsed by a $429,000 rise in salary and fringe-benefit expenses for event services and event managers. In all, the city spent just $632,000 in 2000 on building maintenance, event services, and event management, while SPAC spent $846,000. And while union contracts were renegotiated, workers would have had to average a 34 percent raise in just six months' time to explain the discrepancy. They didn't.

Coleman supporters defend the poor performance of the joint operating agreement in 2000 by stating that there were bound to be some bumps and glitches in the transition from public to private management. RiverCentre's performance under SPAC in 2001, however, indicates that the problems can't be dismissed so easily. Put simply, revenues were down and expenses were up yet again compared with 2000.

Ibister says that SPAC has added more staff since taking over in July of 2000, in part to maintain the look and quality of the convention center. It's important to note, however, that the building is less than four years old and that over the last two years more than $750,000 has been budgeted by the city to account for amortization and depreciation expenses at its RiverCentre facilities. Ibister also allows that additional personnel, including four more full-time security workers, were hired "because there are a lot more people around the place." Still, a primary reason for this increased foot traffic is that people are walking through Touchstone on their way to hockey games or concerts at the Xcel Energy Center, where the money they spend on tickets, hot dogs, and beer goes to both SPAC and the Wild--not the City of St. Paul.

Given the physical proximity of the Xcel arena to the Touchstone convention center and Wilkins Auditorium, it is inevitable that conflicts of interest will arise. For example, as part of its management duties at RiverCentre, SPAC is charged with monitoring the performance of Wildside Catering, which is partly owned by the Wild, SPAC's corporate parent. (Fortunately for all concerned, Wildside has improved RiverCentre's bottom line during its 18 months on the job.)

Other conflicts could be fuzzier and less overt. What if a musical act could sell out the Roy Wilkins Auditorium but might also do a pretty good business at Xcel, which happens to have an open date? If electricians are working on a major project to upgrade the power capacity at both the Xcel arena and the Touchstone convention center, who pays the costs? How do you bill promotion expenses for a large event that takes place in the both facilities?

The best way for RiverCentre to get what First Ward council member Jerry Blakey refers to as "its share of the cut" is to assign someone to keep close tabs on SPAC's management operation. The RiverCentre Authority is the agency designated by the city to perform this oversight, but since the Authority's board is made up entirely of volunteers, the person most responsible is the RiverCentre Authority's executive director, who is paid $98,000 a year by the city.

"In my opinion, the executive director has to be somebody who knows budgeting, accounting, fiscal analysis, accounts receivable, accounts payable, tax reporting, financial management--am I making myself clear?" says city council president Bostrom. "We have to get a fair and accurate count of revenues going through that building, and for that we need a controller-type person."

But instead, days before SPAC took over the management of RiverCentre in June of 2000, Norm Coleman appointed Erich Mische.

 

With a blunt, take-no-prisoners style that he honed while serving as Coleman's campaign manager (twice) and spokesperson, Mische is simultaneously one of the most admired and disliked public figures in St. Paul. Even his most bitter detractors would admit he is a shrewd marketer and political operative; even his best friends would acknowledge that finance is not his strong suit. He filed for personal bankruptcy in 1996 (though, to his credit, he eventually paid off his debts), and he generated more buzz than profits as the point man for the high-profile Smithsonian exhibit at the Civic Center back in 1996. Between 1997 and 1999, Mische worked as the director of client services for the public-relations firm Media Rare, which produced the Titanic Exhibit at Union Depot, another extravaganza that made more headlines than money.

Mische left Media Rare in May of 1999 and returned to the city to work as Coleman's director of strategic initiatives at an annual salary of $72,500. It was his job to be Coleman's point man on whatever development schemes the mayor's office was concocting. Thirteen months later Coleman gave Mische a $25,000 raise and added the title of RiverCentre's executive director to his list of duties. Strategically, the move made sense: Coleman had just pushed the RiverCentre Authority to expand its mission into various marketing, promotion, and development projects around the city.

Before Mische's appointment, however, his ability to be an objective watchdog over SPAC's financial management was already hopelessly compromised. When he was at Media Rare, the Wild hired him to help lobby the state Legislature to secure funding for the Xcel arena. When he was working for the city and drumming up support for one of Coleman's earlier baseball stadium proposals, he was assisted by Wild CEO Jac Sperling. Finally, to call attention to any problems in the RiverCentre's joint operating agreement with SPAC would besmirch Coleman's "Chamber of Commerce agenda" for the city and potentially damage the political fortunes of Coleman and Randy Kelly. (After being elected, Kelly appointed Mische--who had left his RiverCentre post in October--to be the city's marketing director.)

In March of 2001, Mische, Deputy Mayor Kimberley, and nearly all the members of the RiverCentre Authority board went before the city council to push for approval of the agency's expanded mission statement. The presentation captured their simultaneous zeal for marketing and lack of interest in either divulging or paying attention to the signs of financial trouble at RiverCentre.

Mische's passionate address to the council spoke of his desire to be involved in everything from snow removal to directing traffic toward neighborhood business areas. He acknowledged that the RiverCentre Authority wanted to take over management of the entire downtown skyway system. He said that he should be involved in high-speed rail at Union Depot because it could help generate more convention business and that he should be in on plans for a baseball stadium because if one was built next to RiverCentre it would have a major impact on operations.

"Where do you draw the line?" asked Seventh Ward council member Kathy Lantry.

"I don't think there is a line," replied Mische.

Earlier in the meeting, the council asked the Authority about RiverCentre's finances and its monitoring of the joint operating agreement. Treasurer Rick Beeson happily reported that in addition to the state audit of the agency's budget that is conducted each year, the Authority had also reached an agreement to enlist the services of SPAC's auditor. When the council pointed out that it might be a good idea to hire an auditor independent of SPAC, Beeson conceded: "That could be done."

Beeson went on to say that according to the contractual terms of the joint operating agreement, SPAC was providing RiverCentre with interim financial statements on a monthly basis. But the council wanted to know why they hadn't seen the statements they had requested for January and February of 2001. Mische said that Martha Fuller, then-chief financial officer for the Wild, would explain why they weren't available. Fuller said that there had been problems with a new computer system.

Council member Blakey raised concerns about the status of the joint operating agreement's cost-allocation plan. "It's important, because we have a public entity and a private entity and we need to have that check and balance. And it isn't there, and that concerns me," he said. Blakey went on to note that the agency's retained earnings (its balance after lease and debt payments) had been in the red the previous year. Then he asked if RiverCentre was now profitable. Authority board chair Dick Zehring replied that they would have had enough excess revenues, somewhere in the range of $400,000 to $600,000, to start replenishing their budget reserve. Zehring added that he hoped to build up a six-month operating reserve because the board was asking the state Legislature to help fund a new, $110 million Roy Wilkins Auditorium. If that request is green-lighted, RiverCentre will need to compensate for lost revenues during construction.

"Are retained earnings in the black?" Blakey repeated.

"Yes," answered Zehring.

 

But what Zehring and the other RiverCentre representatives either didn't know or weren't telling that day was that the agency was in the midst of a huge increase in its debt load. In fact, even as Zehring was dreaming aloud about operating reserves and a fancy new auditorium, RiverCentre was operating with a 2001 budget that benefited from the Coleman administration's deferment of a $660,000 debt payment--a payment the agency owed to the city's Housing and Redevelopment Authority to pay off refinanced bonds on the Civic Center. When the 2001 budget was up for consideration, no one thought to bring this deferment to the attention of the council, which didn't spot the line-item change among the reams of figures when it signed off on the budget. In essence, the HRA paid off $660,000 of the RiverCentre's debt last year. Even so, RiverCentre had enough other debts and disappointments to finish with a projected net loss of $697,000 in 2001. (Final figures are unavailable.)

As recently as September of 2001, the minutes of the RiverCentre board meetings gave no indication that the agency was experiencing financial difficulties. But on November 14, eight days after Kelly was elected to succeed Coleman as mayor, Susan Kimberley went before the city council with the bad news: RiverCentre would need to double its revenues in 2002 to make good on all of its current debt. The fallout from September 11 and an intensely competitive convention market augured for 2002 being a very difficult year. Thus Coleman's final RiverCentre budget included a creative restructuring of RiverCentre debts and omitted funding for repair and maintenance.

While discussing the failure to adequately notify council of the $660,000 debt deferral the previous year, a sore point with Lantry and some other council members, Kimberley was conciliatory: "There was no intention by the administration to play 'hide the ball.' I honestly don't know why this didn't get attention last year. I don't accept that it reflects any kind of sinister plan on anyone's part. It just didn't come up."

The reason Kimberley had to broach the subject in the first place was that Coleman was proposing another $660,000 deferral to help RiverCentre out of a financial squeeze in 2002. In addition, the outgoing mayor wanted the council to write off $1.5 million in debt that RiverCentre owed the city for the dasher boards and seating it purchased in 1994 for the Minnesota Moose minor-league hockey franchise at the Civic Center. (With the Moose having relocated to Winnipeg just two years later, the city sold the boards and seating for a measly $75,000 when the Civic Center was being demolished, and threw that revenue into the pot to help pay for the Xcel arena. But the debt still remains.) The final pieces of Coleman's bailout proposal were that the city give RiverCentre the approximately one million dollars in annual revenues it receives from hotel/motel taxes, and that the RiverCentre Authority merge with the more financially stable Convention and Visitors Bureau.

Rather than defer or write off any debts, or implement a hotel/motel tax subsidy from the city, the council decided to extend RiverCentre's debts into the future, in the hope that the agency will eventually be profitable enough to honor all of its obligations, including the $660,000 that was deferred in 2001. Under this new debt structure, the agency will owe more than a million dollars annually through 2013, and nearly $500,000 a year from 2015 through 2030.

Those who defend the current management structure at RiverCentre point out that the agency has consistently run at an operating profit, that its red ink is the result of past debts, much of it incurred by two prior mayoral administrations. Certainly, the annual $660,000 payments on the refinanced Civic Center bonds and the debt on the Minnesota Moose dasher boards and seating predate Coleman's time in office. (Other debts, for parking-ramp improvements, leased kitchen equipment, and concourses now being built to connect the convention center with other public facilities such as the library, are more recent.)

But it's been known for years that RiverCentre's debt payments would go up sharply beginning in the year 2000, and little planning has been done to prepare for it. Perhaps RiverCentre officials were counting on the annual $500,000 savings that the joint operating agreement was supposed to create, or a groundswell in convention business brought about by the opening of the nearby hockey arena and the science museum. Whatever the case, for anyone from the Coleman administration to complain about dealing with debts created by his predecessors is ironic, given the hundreds of millions of dollars in debt he has generated to fuel his development boom, a debt that will be borne by his successors for decades to come.

The other argument offered up by RiverCentre's defenders is that, unlike the vast majority of convention centers across the nation, the facility is not provided with public subsidies to supplement its budget. This is not entirely true: $220,000 of hotel/motel taxes are used each year to help pay off the refinanced Civic Center bonds, and a portion of the half-cent sales tax is what is being used to finance the bonds on Touchstone (as well as part of the city's payments on the Xcel arena). But even if one were to grant the point, it is still worth noting that the old Civic Center complex operated profitably and paid off its debts for decades, with even less in city subsidies.

Even with its debt restructured and with no money being set aside for repairs and maintenance, RiverCentre is expected to post a net loss of $380,000 in 2002. Despite this, Kimberley told the city council two months ago, "We do not believe it is time to reduce marketing efforts. [SPAC] believes the focus should be on growth of revenues rather than cutting expenditures." Meanwhile, with the departure of Mische, RiverCentre currently does not have an executive director to oversee SPAC.

An ideal person for the job would be Martha Fuller, who negotiated the Xcel arena financing deal on behalf of the city, then jumped over to work as chief financial officer for the Wild, and has since been recruited back to serve in the Kelly administration. There is probably no one better versed in the details of RiverCentre's joint operating agreement with the Wild. But alas, Fuller has her hands full. She is working on ways for St. Paul to creatively finance proposals for transportation, a baseball stadium, and other development projects. The chamber of commerce will be pleased.

Correction published January 30, 2002:
In the version of this story that was originally published, writer Britt Robson misidentified Wildside Caterers. The above version reflects the corrected text. City Pages regrets the error.

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