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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