Pre-DAC thoughts

I was working on the following as an op-ed submission to the Herald. As it turns out, however, the city came through in a big way with DAC funding.

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I am in favor of the South Okanagan Events Centre (SOEC). After all, I have young children in hockey, lacrosse, and figure skating. The whole family enjoys a good Vees game. And, since we live on the West Bench, I will not have to subsidize the facility by paying higher property taxes. All benefit and no cost (other than user fees and hotdogs, which I suspect will suddenly be more expensive).

Unfortunately, the taxpayers of Penticton are being told a similar story and I think this lack of precision by City Hall may ultimately jeopardize the referendum on the project. In particular, I am alarmed that the city keeps presenting it $4.5M “direct spending” figure without ever addressing the cost of generating that spending. I have spent more than a month sending emails to City Hall requesting a standard cost-benefit analysis for the project. I was told that such information was “confidential”. This reluctance to provide such information surprised me since the Mayor’s Review Panel, a group of local heavy-hitters who reviewed all aspects of the proposals, specifically recommended (Recommendation 8) that the city make a detailed cost-benefit analysis available to the public. I finally resorted to a request under the Freedom of Information act and received something like a detailed cost-benefit analysis. Oddly, this document pertaining to the SOEC, a publicly owned facility, was accompanied by an email disclaimer warning me that “dissemination, disclosure, distribution or copying of this email (including attachments) is strictly prohibited and unlawful.” To avoid gratuitous threats of litigation, I have posted a completed Freedom of Information request on my website (http://michaelbrydon.blogspot.com); you may fill in your own name and address and fax it to City Hall if you want to see for yourself what is so secret. (Update: a version of the report was posted to the City's web site on 11 September, 2006—five days before the referendum.)

In case you are too busy, I will give you the punch line: The cost of generating the oft-cited $4.5M per year of direct spending attributable to the SOEC comes at a cost of roughly $7M per year. Normally, it is not a good idea to spend $7M to create something for which consumers are only willing to pay $4.5M. The technical term for this practice is wealth destruction. However, subsidies may be warranted if the project creates “externalities”—benefits to others in the form of spillovers. Many have argued, for example, that it is important to stem the flow of concert goers to Kelowna because it is preferable for the money they spend at the concert to recirculate within our own economy. The problem is: concerts are expensive. Good data is hard to come by, but the newspaper in Youngstown, OH, is doing a good job of documenting the woes of the Chevrolet Centre, a SOEC-like complex built and operated by ICC in 2005. It seems that after almost a year of operation, profits at the Chevy Centre are about one-third of ICC’s “conservative” projections. A recent concert by Clay Aiken illustrates the issue: The concerts, which were well attended, generated $126,490 in ticket sales and $14,413 in concession and other revenue. However, the cost to mount the concert was $143,421. This left -$2,517 to circulate around the local economy and generate spillovers. Herein lies the importance of a detailed cost-benefit analysis: $4.6 of direct spending is not nearly impressive when the bulk of it leaves town on a tour bus.

This perhaps accounts for the city’s recent emphasis on conventions and out of town visitors in its promotion of the SOEC. Forming a strong association between the SOEC and the Penticton Trade and Convention Centre [ depends on DAC]

However, we can drop the charade now. Harry Chesher, who managed the PTCC for nearly 23 years (and who has retired and therefore does not stand to lose his job when Global Spectrum takes over) stated the following in the Penticton Herald “I don't believe our city has lost many, if any, conventions because of the size of our facility," he said. "The only reason we may have lost conventions is the (small) number of adequate, quality rooms adjacent to the convention centre." Maybe I am missing something, but to me this says the following: No one wants a convention in an arena. And even if they did, Penticton does not have enough hotels to lodge the conventioneers. And even if private developers fill the void by building new hotels, we will have to bring the thousands of conventioneers to town 35 at a time on Jazz flights.

It is almost as if the Penticton City Hall learned its economics from a multiplex salesman. A better source of information, and some light summer reading for anyone toying with the idea of spending $50M of other people’s money, is a collection of papers entitled “Sports, Jobs, & Taxes”, available free of charge from the Brookings Institution’s web site. Although the emphasis of the book is on American professional sports teams, much of the basic economic reasoning applies to any publicly-funded facility. Brookings is a prestigious, explicitly pro-business think tank. If their economist conclude that public sports facilities are bad business, I am inclined to take note.

But just because City Hall’s claims of SOEC self-sufficiency are mostly nonsense does not mean that the SOEC is a bad idea. It is just a luxury. We buy it not because it pays for itself, but because we get pleasure from it. This particular luxury will cost each Penticton taxpayer, on average, $100 per year. It may cost more than this if, like the Chevy Centre in Youngstown, the initial revenue projects turn out to be absurdly optimistic. But still, a small town can do amazing things when its pools its resources and commits to a vision. The SOEC would get my vote (if I had one to give).