By Chris Parker
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By John Baichtal
By Olivia LaVecchia
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By Judy Keen
Last month, Minneapolis Mayor R.T. Rybak submitted his proposed 2004 budget for the City Council's scrutiny. It was the second such go-round for Rybak, who has made it a point of pride to submit his proposals two months earlier than his predecessors usually did. A financial crisis greeted Rybak when he took office nearly two years ago, and the mayor has struggled to plug several drains on the city's bottom line.
While jumping on the fiscal woes early made for good politics, it also reflected the magnitude of the city's financial troubles, which have been deferred and generally mismanaged for a decade or so now. A recent overview of next year's $1.24 billion budget revealed a few surprises for the council's Ways and Means/Budget Committee. Case in point: The Minneapolis Convention Center will lose $4.8 million this year alone, even though the projected loss in last year's budget was $1.1 million. In fact, the city's finance office projects that the downtown facility will lose $1.5 to $4.5 million a year through 2007.
This news drew the ire of most council members, who have become accustomed to bad financial news in the last 18 months. But budget hawks have long understood that a self-sustaining convention center in Minneapolis is a dicey prospect at best. In fact, it's not unusual for most cities to recognize convention centers as "loss leaders," amenities designed to attract visitors on the cheap in hopes of spurring economic activity for nearby businesses.
But that's just a theory. In reality, the convention center's financial swoon is cause for concern. And as Minneapolis faces the toughest budget crunch anyone can remember, city leaders are less inclined to tolerate debt in any city fund. "The convention center never made any money," claims former council member Steve Minn. "But now, the gap is glaring."
Simply put, the Minneapolis Convention Center is a deal gone bad. Back in 1987, when Minneapolis was searching for funds to build the center, the state legislature and then-Governor Rudy Perpich had refused to pony up state money for the cause. Instead, they struck a deal: The city could add a half-percent to the state's 6.5 percent sales tax, and that extra revenue would go specifically toward paying off the debt on the project. (The city issued $200 million in bonds to build the facility.) Additionally, Minneapolis could draw from a citywide tax on hotel rooms, and a food and drink tax for downtown businesses.
A year after the Convention Center opened for business in 1990, the special taxes had raised $116.5 million to pay off the debt. City leaders predicted a surplus of $2 million by 1995, sure to balloon to a heady $13 million by 2006.
So what happened? For starters, the facility lost $20 million due to cancellations immediately following 9/11, and it's no secret what the prolonged recession has done to the service and hospitality industries. It will cost $67 million to run the facility next year. Of the $63.7 million in revenue and funds the city believes will go to the convention center, only 22 percent is coming from the facility itself. The rest, some $50 million, is projected to come from what finance director Patrick Born calls "a basket of taxes." But those numbers are nothing if not volatile. Money from the citywide sales tax dipped more than $2 million from 2001 to 2002; these revenues, Born concedes, are "highly sensitive to the economy."
The fiscal problems run deeper still. In 1999 the city approved a $210 million expansion and upgrade for the center, eventually completed just before the economy turned sour in 2001. In rosier economic times, Minneapolis again assumed debt to fund the project. The total outstanding debt for the facility now stands at $323 million; nearly a third, or $19.5 million, of the Convention Center's expenses in 2004 consist of debt service.
In 1997, the state agreed to pitch in $87 million for the renovations, but that, too, came with a price. Then-Governor Arne Carlson agreed to the deal, but many on the council, including Minn, felt that the city was snookered in the process. "There's a feeling that the state contributed 15 percent of the cost and receives 85 percent of the taxes," Born says, "while the city shouldered 85 percent of the debt and gets 15 percent of the tax bases."
Exactly how much money the convention center makes for the state is hard to say. But there seems little doubt that the state makes money from the deal. One remedy would be for Minneapolis to restructure its tax-revenue agreement with the state, but that certainly won't happen anytime soon. The state is grappling with its own $5 billion deficit, and many conservatives at the Capitol, including Governor Tim Pawlenty, are openly hostile toward the notion of forking over cash to Minneapolis.
In other words, the city will be left to struggle with its past sins and errors of judgment. "Minneapolis was willingly screwed by a Democrat in Perpich, then by a moderate Republican in Arne Carlson," Minn concludes. "I have no reason to believe the ultra-conservative Pawlenty will do anything but continue to screw us."
For the next five years, Born figures the convention center can break even by taking from a reserve fund with nearly $20 million earmarked to cover operating losses.