Don’t feed the white elephant

Joel Kotkin, an Irvine senior fellow at the New America Foundation, is the author of "The City: A Global History."

AIDED BY MAYOR Antonio Villaraigosa, downtown Los Angeles’ boosters are poised to dip again into the pockets of taxpayers to help finance a splashy new project. The cost this time is up to $300 million in loans, tax breaks and fee waivers for a $750-million, 54-story complex -- including a 876-room Marriott Marquis, a posh 124-room Ritz-Carlton and 216 luxury condos -- across from the Convention Center.

The argument used to justify the handout is well-traveled in development circles: The project would create new jobs, higher tax revenues, more convention business, and it would further brighten the image of the city’s central core. Taxpayers and L.A. business owners should be wary of such promises, however, particularly when it comes to the Convention Center.

Let’s look at the record. The Convention Center has been a consistent money loser for years, costing the city $30 million annually in debt service. Even Villaraigosa calls it a “white elephant.”

And this pachyderm has been to the public trough before. In 1988, the city financed a $500-million expansion of the center based on promises that a bigger and more modern facility would catapult L.A. into that elite circle of cities that thrive on the convention business.

More than 15 years later, the center continues to lose money -- debt service outstrips convention revenue -- and L.A. is still not on the list of the nation’s top 10 convention cities and has little prospect of competing successfully against Las Vegas, New York and Orlando, which have far more attractions. According to one trade publication, L.A. hosted fewer major conventions last year than Indianapolis and Rosemont, Ill. But there’s a bigger problem here.


The simple truth is that convention centers are rarely a good public investment. A definitive national study by the Brookings Institution, released last year, found that they frequently operate at a loss, including the recently expanded centers in Washington and St. Louis. In most cases, their much-ballyhooed effect on the local economy -- new private investment, more jobs and increased levels of tourism -- “has simply not occurred,” reported Heywood Sanders, the study’s author.

One problem is the convention business itself, Sanders noted. Overall attendance at the 200 largest trade shows -- the critical market for large convention centers -- has not grown measurably since 1993. Yet 44 cities -- including Boston, Houston, Atlanta, Phoenix, Philadelphia, Washington and San Diego -- were building or expanding convention centers, some by subsidizing the construction of a convention hotel, a development Sanders compared to an “arms race” among cities.

Stagnant trade-show business coupled with a convention center glut translates into more white elephants subsidized by taxpayers. Some cities such as Washington are already offering deep discounts to conventioneers to keep their buildings occupied. The L.A. Convention Center faces ever more cutthroat competition in such an environment. Unfortunately, the evidence suggests that a flashy hotel nearby may not increase the center’s allure, especially because other cities, including Denver and Phoenix, are planning similar investments.

The Brookings report concludes that many of the cities that have invested heavily in convention-related projects, such as Baltimore and New Orleans, have not gained the expected new jobs. One problem is that tourism is generally notorious for creating low-wage employment, which does little to dent a region’s deep-seated poverty.

Finally, Sanders contends that there are also “opportunity costs” associated with funneling scarce city resources into convention-center developments rather than into projects with a better record of adding economic wealth, such as business-improvement districts. Building upscale hotels in Central L.A., an area with chronic underemployment, doesn’t seem a promising economic strategy to upgrade worker skills there and foster industries that have a competitive advantage downtown.

So if the hotel subsidy doesn’t make economic sense, who benefits from the largesse? The biggest winner from the new public investment stands to be billionaire Phil Anschutz, whose $2.5-billion, 27-acre L.A. Live project -- billed as “Times Square West” -- is slated to be built adjacent to Staples Center. The refracted prestige of a new Ritz Carlton and luxury condos in the neighborhood would add luster to Anschutz’s project, the proposed home of the West Coast headquarters of ESPN and a Grammy Award museum.

For the rest of Los Angeles, however, the payoff is far less obvious. For the last three decades, public investment downtown has been in the form of numerous loans and subsidies to developers, lavish office buildings for state and city workers and, perhaps most expensively, the still largely underused, downtown-centered subway system.

These efforts are the latest chapters in a continuing attempt to reengineer the city’s history. Los Angeles was among the first historic downtowns in the nation to lose its economic preeminence to areas to its west, as well as to the San Fernando and San Gabriel valleys, according to historian Robert Fogelson. As architect Frank Gehry and others have noted, L.A.'s “true downtown” long ago relocated along the expanse of Wilshire Boulevard.

Nevertheless, there have been numerous publicly backed attempts to reestablish downtown’s primacy as a business center. The largest of these was the transformation of the declining residential neighborhood of Bunker Hill into a sea of high-rise structures in the 1980s, under the direction of the Community Redevelopment Agency. The agency also helped finance the first rush of residential and retail development downtown.

For a while, downtown appeared to be a thriving financial and business center, with a proud array of Fortune 500 companies headquartered here, among them Arco, Occidental Petroleum, First Interstate Bancorp, Security Pacific and Union Oil. Japanese investors financed much of the development.

Then came the 1990s. The Japanese economy fell into a decade-long recession, and the city suffered riots, earthquakes, fires and floods. The central business district today is a relative also-ran among U.S. downtowns, largely a domicile for lawyers, accountants and the branch offices of companies headquartered elsewhere.

What has kept downtown economically distinct are industries least dependent on public largesse -- the garment industry, the jewelry makers, the toy distributors, the operators of immigrant-oriented shops along Broadway. “What worked in downtown was not the self-imposed ideas of the planners,” said Jerry Sullivan, editor and publisher of Los Angeles Garment & Citizen, a weekly paper based downtown. “It was the stuff that happened organically like Santee Alley. Downtown was remade not by the suits or the planners, but by the immigrants.”

Still, the suits and the planners haven’t given up, as witnessed by the proposed Convention Center hotel complex and L.A. Live, as well as the Grand Avenue Project. Before new development subsidies are approved, however, there should be a discussion of the public’s interest, especially because residents already face escalating trash-collection fees to pay for more police officers. At the same time, the city’s finances are already fragile, and should the real estate bubble rapidly deflate, the economic consequences could be severe.

Unfortunately, there are no Ernani Bernardis or Joel Wachses on the City Council to stand up for the average taxpayer, neighborhood resident or small-business owner. Perhaps too eager to be team players under a popular mayor, the city’s political elites appear willing to go on subsidizing the speculations of the well-connected and the ultra-wealthy at the expense of the rest of us.