Why the convention centre sucks, part 5: Trade Centre Limited's hidden subsidies

Before councillors agree to sign the agreement for a new convention centre, they should study how the existing one runs.

* deficits after city subsidy and before depreciation and amortization. Provincial payments do not include the $5 million subsidy payment made in 2011.
* deficits after city subsidy and before depreciation and amortization. Provincial payments do not include the $5 million subsidy payment made in 2011.
City council will vote Tuesday to give final approval for the convention centre, so I spent the weekend revisiting financial reports for the existing convention centre. They are extremely relevant, and councillors should pause and consider them before casting their votes.

I created the above chart using numbers collected from audited financial statements found on the provincial public accounts page**. The numbers reflect operations of Trade Centre Limited, the provincial crown corporation that owns and operates the convention centre, the office tower above it, Windows restaurant, Exhibition Park and Ticket Atlantic. TCL also operates the city-owned Metro Centre. Each fiscal year ends on March 31 of the designated year---for example, the 2005/06 fiscal year ends on March 31, 2006, but is marked 2006 on the chart.

The financial statements show that from 1996 through 2001, TCL had a negative deficit—that is, a surplus. In 2002 TCL had a deficit of just $5,632, but then in 2003 and 2004 went back into surplus. But in 2006 TCL began a streak of huge deficits, all the way up to $2,236,305 in 2008, albeit it has come down somewhat since.

The deficits are covered by the province. That doesn't have to happen every yea—in 2011, the province transferred $5 million to TCL to cover the losses for every year back to 2005. But those back-filling payments are always labelled "subsidy," so everyone knows what they are.

The green bars do not include the 2011 $5 million payment, but does include all other payments made by every provincial government department to TCL. These payments reflect rents for office space in TCL's tower and costs of renting meeting rooms and the convention hall. Importantly, the green bars don't include payments to TCL from other crown corporations, including Nova Scotia Business, Inc, which rents office space from TCL, and they don't include payments under the $5,000 reporting threshold---very likely, there are hundreds of these lower dollar amounts not included, for smaller meetings and for meals at Windows.

I've broken down the dollars spent by department, here.

As you can see, total government payments to TCL track closely with TCL's deficits. So what's going on?

There are several possibilities. It could just be happenstance. Or there could be "meeting creep,' where since 2004 government departments have simply decided to have an ever-increasing number of meetings, for which they need to rent space. Both these seem unlikely.

Another possibility is that the province is moving office space over to the TCL building. In fact this accounts for about a third of the increase. In 2002, all provincial departments and NSBI together made $1,697,953 in rent payments to TCL; in 2011 the number was $2,294,507. While rent payments to TCL increased $875,000, total provincial payments to TCL increased more than $2 million by 2008.

A fuller explanation for the close tracking of TCL deficits with provincial payments to TCL is that as TCL's losses skyrocket, the province is both moving more office space over to the TCL tower AND hosting meetings that normally were held elsewhere to the convention centre—that is, the province is has the same number of offices and meetings it's always had, just that more of those offices and meetings are in TCL's facilities. This of course would be the smart thing to do—the province has to pay for TCL's losses, there's an empty convention centre, so why not hold the meetings we're holding anyway at the convention centre, instead of at a hotel or at the Cunard Centre?

Still, it's impossible not to see this as a back-door subsidy: provincial taxpayers are paying for a much larger deficit than those shown on audited financial reports, it's just that the money is running through provincial departments as payment for meeting space, and not labelled as "subsidy."

Admittedly, the province would spend some money on these meetings anyway, but there's little doubt that the cost is higher at the convention centre. TCL is not known for giving government agencies a cost break---due to construction work at City Hall, this fall 11 city council meetings will have to be held at the convention centre, for which TCL is charging the city $82,500. And if convention centre meeting space was priced competitively, why weren't government departments renting it before 2002?

Even more insulting to the city is the financial arrangements etched out for running the new convention centre. See, up to now, the existing convention centre has been pretty much the province's responsibility. The city pays a nominal annual subsidy that was worked out in the 1980s, with an inflator---in 1996, that subsidy was $430,290, which rose to $571,899 in 2011. But that's it. Everything else--all cost overruns, all TCL deficits, all liabilities related to lawsuits should there be a horrific PowerPoint maiming incident, all additional TCL costs are the province's responsibility. That's why the province is shifting so much business over to the convention centre, agreeing to the back-door subsidy the financial statements show in the above chart.

The financing arrangement for the new convention centre--which council is being asked to give final approval to Tuesday---changes everything.

To begin with, those measly $500K subsidies are a thing of the past. Starting the day the new convention centre opens, the city will have to pay half of all the amortized capital costs, plus half the operating costs and half the costs of "facility upgrades"—replacing the carpets, painting the walls, fixing the toilets that drunk conventioneers shoved explosives down. Under the terms of the agreement, these city costs will be over $6 million, each and every year for 25 years. That's over 10 times higher than what the city is paying for the existing convention centre.

But, you ask, what about all the additional tax revenue the new convention centre will bring the city? Psssssh, I answer. To sell this thing, TCL hired Gardner Pinfold to run not one, but two economic impact studies of the proposed convention centre (TCL execs didn't like the results of the first study, so they arbitrarily doubled the expected delegate counts and handed those "revised" delegate counts back to Gardner Pinfold to run the numbers a second time). But even that absurdly fictional economic impact study, which is used by TCL itself to sell the supposed value of a new convention centre, shows that in the absolutely rosiest, best-case scenario, the increases in tax revenue the city can expect from the new convention centre are as follows (pages 4 and 5):

Hotel: $1.2 million
Office Tower: $1.5 million
Convention Centre: $600,000
Nearby increases in taxes due to higher assessments: $350,000
Total: $3.65 million/per year
That's right: if you believe the numbers provided by the consultant hired by TCL, the city is going to spend over $6 million a year in order to get an increase of just $3.65 million a year in taxes. That is, the city will go from paying a $500-600,000 subsidy, to losing $2.5 million or so, each and every year, for a quarter of a century.

Wait, it gets worse.

Remember those back-door subsidies represented in my chart? That's the money the province now pays to host events at the convention centre in order to make TCL's deficits look less bad than they would otherwise. The province does this because ultimately it has to cover those the full costs of those deficits one way or another anyway.

But with the new agreement, the city will assume half the liability for TCL's deficits, with no limit. The province has lots of departments and, compared to the city, a gigantic workforce that has needs for lots of meetings. The province also hosts any number of mini-conferences and shindigs that can be housed in the convention centre. The city, not so much.

So, if contrary to all the bumper sticker sloganeering in support of the thing (Halifax is different!), what happens if the new convention centre is a colossal failure? Or even just a minor failure? The city really isn't in a position to find much in the way of legitimate-sounding back-door subsidies; probably what we'll see is what happens in other cities with failed convention centres---even though there are perfectly functional meeting rooms at City Hall, the local government holds its planning commission meetings, its audit committee meetings, its employee appreciation lunches, any two-bit excuse it can find, in the chandelier-laden splendour of the white elephant the hucksters convinced the rubes to sign onto. Anything and everything that can be held at convention centre will be, and the city will be charged top dollar for the privilege---whatever it takes to bring those deficits even slightly down.

I expect that when our convention centre is up and running, TCL will regard the performance of the place as a state secret, and it'll be like pulling teeth to get honest numbers for delegate counts. But sooner or later the failure will pop up in meaningful ways, including fewer city services and higher taxes. You'll know for sure the thing's a bust when the subcommittee to study the organization of the board charged with recommendations to the subcommittee meets there.

**I should note that the figures found on Trade Centre Limited's annual reports don't exactly correspond with the audited reports, and the audited reports themselves are not consistent with each other. For you finance geeks, I'll have another blog post detailing those problems, but the discrepancies are relatively small, so they don't materially affect the issues raised in this post.

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