Wichita about to commit to more spending. Bigly.

This week the Wichita City Council considers hiring a consulting firm to develop plans for a new performing arts and convention center.

It’s no secret that many in Wichita want a new performing arts and convention center to replace Century II. Documents produced by the city sketch four possibilities ranging in price from $272 million to $492 million.^{1 2}

The two least expensive scenarios keep the existing Century II structure, while two call for completely new buildings, including the possibility of a performing arts center located a few blocks to the east of the present Century II and proposed convention center site.

Apart from the financial desirability of these projects is the question of how to pay. The traditional approach would be for a city to build, own, and operate the project, paying for it through long-term borrowing. (Governments, including Wichita, often speak of “bonding” projects, a word which seems less foreboding than “borrowing.”)

This week’s business for the city council foreshadows the city using a different method. The firm the city wants to hire, Arup Advisory, Inc., is an advocate of “P3” or public-private partnerships. A report Arup prepared for the City of Los Angeles³ recommended that the city use a method known as Design Build Finance Operate and Maintain (DBFOM), which Arup says is used interchangeably with P3.

In the DBFOM or P3 model as applied to Wichita, a third party — thought to be George Laham — would do all the work of designing, financing, building, and operating a convention center and possibly a performing arts center. Then, the city simply pays a fee each year to use the center. It’s called an “availability payment.” Most people call this rent or lease payments.

The Los Angeles document explains the potential benefits of using DBFOM or P3:

Here, the City as asset owner hires a developer team to take on the full project development responsibility (design, build, finance, operate, maintain) and pays them an annual service fee for the availability of the functioning capital asset (i.e. infrastructure as a service). The service fee is called an “availability payment” in the P3 industry; it is a contractually scheduled pay-for-performance arrangement where the private partner is paid to design, build, and finance a turnkey capital asset and then is responsible for the operation and maintenance of the asset according to performance standards set by the City. The availability payments are fixed at the time the P3 contract is signed and are only subject to indexation to an agreed inflation index (e.g., US or Los Angeles region CPI) and deductions for non-performance against the contractually defined performance standards. The availability payments, which are the only form of compensation by the owner to the P3 developer, start only when the P3 developer has satisfied all the conditions stipulated in the contract for successful completion of construction and start of operations. These features provide substantial incentives for the P3 developer to achieve on-schedule and on-budget construction, as well as optimized life-cycle maintenance over the long term that meets the owner’s needs.

A common strategy recommended by Arup is to “cross-subsidize” with real estate. This is vaguely defined as to “unlock significant land value” in city-owned real estate near the convention center. Specific to Wichita, the proposal from Arup to the city includes, “Assess potential revenue from the monetization of city’s owned land located in proximity to the Century II facility and determine the size of the cross subsidy to the project expansion design schemes 1 and 3.”⁴

What are the benefits to the city of pursuing the DBFOM/P3 path? The Los Angeles document gives these: “No impact on debt capacity; significantly reduced cost to the General Fund, structured as an obligation to pay a service fee (i.e. availability payment) to the private partner where the value of the service fee is less than the sum of all the relevant LACC costs [for other options].”

To emphasize, again from the Los Angeles document: “… the City’s budgetary obligation is in the form of a service fee (i.e. availability payment) to the private partner, recorded as a contractual liability on the City’s balance sheet, as opposed to a debt obligation, which does not impact the City’s debt capacity.”

In other words, the city can make a decades-long financial committment without appearing to take on debt. Yes, the city’s committment — the “availabity payments” — will be characterized as payments that need be made only if the convention center facility is kept up to certain standards. If, not, then the city can stop paying. But then Wichita would have no cenvention center, and no performing arts center. Instead, the city would have one or two big, hulking, empty buildings in downtown.

Should Wichita do this?

Convention business is on a long downward trend. The Arup report for Los Angeles recognizes this:

Over the last two decades, most large and medium size American cities have experienced a spur in convention center development. According to the Brookings Institution (2005), exhibit hall space in the US grew from 40 million square feet in 1990 to 85 million in 2014 distributed among 400+ facilities. There is a sense in the Convention business that the supply may be exceeding demand.

(For more on convention center trends, see Should Wichita expand its convention facilities? The Brookings report by Heywood Sanders is available at Space Available: The Realities of Convention Centers as Economic Development Strategy.)

A commitment of this size needs public input in the form of a vote. The “availability payments” the city may commit to will be characterized in various ways, but they represent a long-term commitment by the city that it can’t escape. If promised revenues from expanded convention trade don’t cover these payments, taxpayers will have to pay. The city, unfortunately, doesn’t have a good record of honesty with citizens:

• In 2014 the city told citizens that $250 million in new sales tax revenue was required to provide drought protection. After the vote on the tax failed, the city found less expensive ways to provide the same protection.⁵
• Subsidized city projects have not delivered promised benefits.⁶
• The city is not truthful in reporting the number of people working in downtown Wichita.⁷
• Despite much investment in downtown Wichita, both public and private, business activity is declining.⁸
• Despite much investment in downtown Wichita, both public and private, total property valuation is declining.⁹
• While touting transparency, the city fails in many basic ways, even though the city communications staff has been expanded.^{10 11 12}

Citizens and taxpayers should insist the city address these issues before committing to any new project, much less one the size of a renovated or new performing arts and convention center.

And — most importantly — the people need to vote up or down on this project.

Update: On May 9 the city council decided to hire this firm.

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Notes