How Roger Hedgecock got San Diego to shell out more for convention center

Who'll pay the piper? The room tax fraud

The cost of the new convention center, plagued by poor design and engineering mistakes, soared to $205 million.
  • The cost of the new convention center, plagued by poor design and engineering mistakes, soared to $205 million.
  • Image by Joe Klein

San Diego's convention center owes its existence to— more than anybody, alive or dead — Roger Hedgecock. As mayor, Hedgecock picked up the ravaged pieces of Pete Wilson’s 1981 convention-center-referendum defeat, found a tax-free source of funding, and convinced voters not to look a gift horse in the mouth. Though a subsequent scandal ran him out of office and ended any hopes he might have harbored that the building would someday be named after him, Hedgecock is inarguably the center’s fairy godfather.

Roger Hedgecock – the center’s fairy godfather

Roger Hedgecock – the center’s fairy godfather

Now, 15 years later, he’s back. No longer mayor, but a player in the convention-center debate by virtue of his radio talk-show status, Hedgecock is telling voters to do it again. “The existing San Diego Convention Center has made such a dramatic difference downtown that it must be considered the most successful public investment in the history of San Diego,” he crows in an editorial commentary he distributed to local newspapers. “Its expansion would bring more of the same.” Who can blame him for being enthusiastic? Those are heady memories for Hedgecock — the homegrown, gritty politician — a time when he moved municipal mountains that the legendary Pete Wilson, for all his Yale refinement, was never able to budge.

Pete Wilson – lost referendum on convention center in 1981.

Pete Wilson – lost referendum on convention center in 1981.

In 1983, the Port District — the many-tentacled state agency that controls the airport and much of the land around the bay, which it leases to commercial enterprises like hotels and yacht clubs — was flush with cash. Under pressure from Hedgecock’s city hall and his then-ally, the Union-Tribune, port commissioners agreed to pay for the entire cost of building the new center. City voters approved an advisory measure that made no mention of how much the project would cost. The charismatic young mayor told voters he thought it could be done for about $93 million.

City Manager Michael Uberuaga said the city would either have to cut programs, raise fees, or sell off the last remnants of land the city owns.

City Manager Michael Uberuaga said the city would either have to cut programs, raise fees, or sell off the last remnants of land the city owns.

In the end, taxpayers had special reason to celebrate the port’s agreement to pick up the tab. The cost of the new convention center, plagued by poor design and engineering mistakes, along with the discovery of a leaky basement that requires around-the-clock pumping to keep it dry, soared to $205 million by the time it finally opened its doors in 1989. The powerful port’s “surplus" was wiped out.

By 1994, when boosters claimed that the Hedgecock-era center, despite its cost, had been built too small in the first place and began talking about expanding it, the port district had learned its lesson. The seven-member board of commissioners, made up of three representatives from San Diego and one each from the cities of National City, Chula Vista, Coronado, and Imperial Beach, drove a hard bargain when San Diego city officials came calling for more money to expand the center.

Bruce Herring in a January interview: “We don’t know how much it’ll cost."

Bruce Herring in a January interview: “We don’t know how much it’ll cost."

In a 1995 editorial, the Union-Tribune argued that the port should put up half the money for the expansion. “Anything less than a 50 percent contribution by the commission would be unfair to the City of San Diego, which accounts for nearly 90 percent of the port district’s total revenues.” But the port would have none of that. Countered Port Commissioner Jesse Van Deventer, of National City, “Certainly, the expansion of the convention center will benefit the entire region. But let’s be candid: as one moves away from the downtown San Diego area, those benefits lessen and lessen. It does the entire bay region no good if the convention center is expanded and the port is unable to financially meet its obligations and is forced to return to the property-tax rolls.”

Scott Barnett: “The less openness and questioning there is, the poorer the contracts will be for the public.”

Scott Barnett: “The less openness and questioning there is, the poorer the contracts will be for the public.”

As for the demand that the port pay for at least half of the convention-center expansion, then-Port Tenants’ Association president Peter Litrenta concluded: “If the Port Commission accedes to the desires of the San Diego City Council by investing tens of millions more, it will not have enough money to carry out the responsibilities of its trust purpose.”

Thus the port shifted all of its risk to the city. After months of secret meetings between the port and the city, in February,1996, they announced a final agreement. Under the deal, all cost overruns would be shouldered solely by San Diego taxpayers, and the port would be left to contribute $4.5 million a year for 18 years toward paying off the estimated $210 million, 30-year mortgage that the city council proposes to take out to pay for the expansion. San Diego city taxpayers, in turn, would be obligated to fund the rest, which City Attorney Casey Gwynn, in his ballot analysis, says would range "approximately” between $9.5 and $11.5 million a year. Other city projections show the annual cost running closer to $13.4 million.

To put it another way, the port agreed to make a total of $81 million in payments, and city taxpayers would have to guarantee the balance, or approximately $399 million in principal and interest costs over the 30-year term of the deal. As for keeping a lid on costs, Gwynn notes, “The financing documents do not address or govern the cost of the project.”

The kicker, of course, is that if the project goes over budget, San Diego taxpayers would be left on the hook to pick up the tab. How likely is that? So far, at least, the record is not promising. Besides the 100 percent cost overrun that marred construction of the existing convention center, the port’s airport expansion cost soared from the $40 million estimate in 1992 to $238 million earlier this year, and the bills are still coming in.

An expansion of the trolley into Mission Valley was supposed to cost $150 million; it ended up at $220 million. The Qualcomm Stadium expansion started at $48 million, went to $60 million, and eventually hit $78 million. Sources say the project would have cost far more if substantial cuts to stadium improvements had not been made. The NFL is now said to be demanding that the cuts be restored as a condition of returning the Super Bowl here, at a cost of at least another $20 million. A downtown library proposal started at $62 million, then hit $118 million before being mothballed by a council vote earlier this year.

As for the presently proposed convention-center expansion, estimates have grown from $140 million when it was first proposed in 1994 to $216 million today. Why can’t the city get the cost right in the first place? Seasoned observers say that both the city and the port have a history of “low-balling” projects — underestimating their costs — in order to get them approved. Steve Erie, a UCSD political science professor, thinks the trend is clear. “We have the illusion of lean-and-mean government, and all we’re doing is backloading the costs,” Erie observed in a recent Union-Tribune interview. “And that winds up blowing up in the face of voters. It’s not a very effective or efficient way to run government.”

City bureaucrats readily acknowledge their mastery of the technique. “We try to identify as low a price tag as possible to get something financed,” San Diego deputy city manager Bruce Herring told the U-T in a January interview, “and we probably don’t put enough contingencies and buffers in early on because we don’t know how much it’ll cost. Through normal design changes and delays, as time goes on, the price goes up.”

Most observers agree that the city council itself must shoulder most of the blame for failing to police contractors and for giving in to their every demand for costly change orders. “They come up with an idea they want and then say, boy, while we’re doing it, put all the bells and whistles, like domes and nice materials, into it,” Scott Barnett, executive director of the San Diego Taxpayers Association, told the U-T. “You suddenly have projects which escalate in cost.” Barnett, a supporter of the convention-center project, added that “the less openness and questioning there is, the poorer the contracts will be for the public.”

Despite this well-documented history of cost increases in city projects, the council has done nothing to limit the city’s exposure to risk on the convention center and is not guaranteeing to voters what the final cost will be if they approve June’s Proposition A. Contractor Golden Turner, which was awarded the contract through a controversial “design-build” process that avoided open public bidding, has theoretically agreed to build the project for what is called a “guaranteed maximum price.” But so far, that price has not been set. According to internal documents — and consistent with Herring’s published remarks on how project costs escalate — city officials are co-operating with the contractor to raise the ultimate price.

City memos and letters obtained under the state public records act indicate that rather than trying to hold expenses down, city officials and their consultants are encouraging the contractor to tack on additional overhead costs, which can then be blamed on “delays” in the project occasioned by a lawsuit against the city council and subsequent referendum to gain a public vote on the project. In an internal city memorandum dated January 15 of this year, after the referendum had qualified for the ballot, interim project manager Rudolph A. Johnson III wrote deputy city manager Bruce Herring to recommend that a special “cost escalation” clause in the convention-center-expan-sion contract be changed to increase the cost of the project even further.

A city consultant by the name of Project and Cost Management, Johnson said, “recommends an ongoing construction escalation rate of five percent (be increased to] six percent annually for delays associated with litigation.” Another well-versed city source says, “We expect the total cost of the project to go to at least $250 million. Maybe $300 million, but that’ll be down the line, in a year or two. Don’t hold us to it. After all, think of all the delays there have been. That’s not our fault. The contractor loves it; he can pad his payroll and blame something other than greed and sloppy bidding.”

In justifying the additional cost, Project Cost and Management says in a report to the city dated January 13 of this year that “this cost-escalation rate is higher than in recent years and indicates that the market is growing. Many contractors are running at over 100 percent capacity and are experiencing labor shortages.”

Other city sources claim that the contractor selection for the project was “fixed” and that because the city council decided not to allow other contractors to bid on the work — an option city staff discarded earlier on — costs are unnecessarily high. “Because they have a blank check in the form of the city general fund and Prop. A doesn’t say anything about costs, there is no incentive for the city council to go back and bid out the project and try to get a better deal from the contractor. ‘That’s too much work,’ they say. Much easier to just keep the same old contractor on board and go forward with escalating costs.”

Whatever the truth, there is no argument that the June ballot measure provides no ceiling on the cost of the expansion. Most observers believe that sizable cost increases lie ahead, perhaps raising the annual mortgage payment on the expansion from $ 16 million to as much as $25 million. The debate centers around who will pay for it.

Proponents like radio talk-show host Hedgecock insist that the expansion will be virtually free to local taxpayers. The project, Hedgecock wrote in a recent editorial commentary, “is as close to self-financing as any public building in San Diego. Once the convention-center expansion begins, three new hotels start going up. Tourist taxes on these new hotel rooms will help pay off the bonds on the expansion.” Critics, however, point out that there are flaws in that scenario that sooner or later may require a taxpayer bailout. For one thing, the city council can use any tax source it wants to pay off the debt. As City Attorney Gwynn notes, “Payments each year to the investors will be made from the annual lease payments paid by the city. The financing documents do not identify the specific source of revenue to make the lease payments.” Second, there is no guarantee that the three hotels mentioned by Hedgecock will be built out as currently projected, and expectations for tax revenues vary. One of the hotels says business is so good, it will expand even without the expansion. Manchester Resorts, which owns the Hyatt Regency, says that the hotel will be built with or without an expanded center. “We have turned away 150,000-room nights in the past two years because we do not have enough rooms or meeting space to meet our business goals right now. So we intend to go forward,” Manchester spokesman Peter Litrenta said on a KPBS radio talk show last week. “The Hyatt expansion does not need the expansion of the convention center.”

The fate and size of the other two projects, though, are less certain. Developers of the Marriott Hotel expansion, between the Hyatt and the existing convention center, were pushing hard to build a massive new tower, which critics said would block public views and access to the bay. This week, the Port Commission rejected the 600-room Marriott plan, saying that the project should be redesigned. The third hotel project set for the old Campbell shipyard is well behind the others in arranging financing and design work. If the number of rooms is eventually cut, so will potential room-tax revenue.

Other worries center on whether, in an economic recession, the hotels will consistently maintain the occupancy believed necessary to generate sufficient room tax. Still, even if the new bayfront hotels don’t create as much room-tax revenue as expected, proponents say, the San Diego region as a whole is doing so well that the increased room tax will easily offset the additional expenses of running an expanded convention center and paying off its mortgage. “This is really a no-brainer,” Scott Barnett of the San Diego Taxpayers Association, a group of businesses which is supporting the measure, repeatedly says in talks to community groups.

Certainly, growth in the room-tax revenue, even without an expanded convention center, has been impressive, well exceeding the city’s conservative projections. Back in 1992, for instance, the city brought in about $44 million in room-tax revenue. By last year, that amount had jumped to $74 million. Thus, proponents argue, there will be plenty of extra room tax to pay off the expansion debt without new taxes on locals or cuts in fundamental city services like police, fire, and pothole filling. In fact, proponents say, there will actually be sort of a “supply side” effect if the convention center is built: room-tax revenue will grow so much that not only will it pay for the convention-center mortgage, there will be a “surplus” that can be used to pay for new city services.

As Hedgecock puts it, “If we don’t build the convention-center expansion, we don’t get the hotels. Without the hotels, and the tourists who fill them, there is no money for libraries or parks.” If the argument sounds vaguely familiar, that’s because it’s a variation on Hedgecock’s argument for the original convention center 15 years ago, back in June 1983, when he and his supporters promised a cornucopia of benefits.

But some critics beg to differ. First, this time the port is paying only a small part of the expansion cost, leaving it to the city to finance the rest out of its general fund, which in turn would depend on contributions from the room tax to cover the expense. If expansion costs spiral out of control, as they did with the original waterfront convention center paid for by the port, a $25 million annual mortgage payment might be required, which would quickly run through even the most optimistic projections for room-tax money.

Theoretically, the city council could walk away from making the mortgage payments, on a type of municipal bond called “certificates of participation.” But just as a homeowner who stops making his home mortgage payments loses not only his house, but his personal credit rating, so too would the city face a disastrous loss of credit. (The possibility is unlikely.)

Second, critics say, the much-heralded room-tax “surplus” or “cushion” — to be used to pay off the convention-center debt — has never been properly set aside for that purpose. When the tax was increased from 9.0 cents to its present 10.5 cents on the dollar in June of 1994, the council was careful to place no legal limits on the use of the money, designating it for “general purposes.”

Instead, the council adopted a “policy” promising to spend the money in certain ways. One cent of the increase was to be used to finance the convention-center expansion. The other one-half cent was promised to a downtown “sports arena complex,” which was never built. Instead, that money has been eyed by city staff and councilmembers and the taxpayers association either for a new library or a new baseball park.

In the meantime, most of it has been used to balance a precarious city budget. City hall insiders say there were once proposals to create a trust fund to hold an annual amount of the room tax to insure that construction of the convention-center expansion could be funded out of room tax alone, but the idea was rejected by the city manager’s office, which needed the cash to fill budget gaps elsewhere.

Yet even with this substantial contribution of room-tax money, the city says its budget is still way out of whack. Specifically, this year’s expenditures exceed income to the tune of at least $44 million. Last month. City Manager Michael Uberuaga told the city council rules committee that it would either have to cut programs, raise fees, or sell off the last remnants of land the city owns in order to balance the budget. Rising costs, including an overbudget fire department and library operations, were the culprit, according to Uberuaga. The $44 million deficit does not include so-called deferred maintenance items such as potholes and other neglected city facilities. The city has been so strapped that it’s raising average water and sewer rates 10 percent a year for the next decade, then passing some of that money back to the general fund to make ends meet.

If the room tax doesn’t grow as fast as convention-center proponents hope, or if it declines in a recession, or if the convention-center expansion goes over budget, or if the city’s deficit gets worse, the city council would be faced with an even greater budget problem, resulting in further cuts to programs and services — including the general fund — now partially paid for with room tax. Of course, the room tax could be increased to make up the difference, but that would require another public vote under Proposition 218, and local hotel owners have voiced strong opposition to such a move, even though the city’s current 10.5 percent tax rate is on the low end of the national scale. In the face of such strong political resistance, budget cuts would be needed. Sources inside city hall say that the city’s $5 million-plus annual subsidy to arts, cultural attractions, and museums would offer an alluring target.

Already, city financial figures show, even as the room tax has burgeoned, the subsidy the tax provides to arts and museums has fallen over the years, from about 55.4 million in 1992 to $4.3 in 1994, with a bounce to $5.23 in 1996. (The 1998 budget called for a return to $5.4 million.) By contrast, the Convention and Visitors Bureau, whose members give heavily to city council campaigns, has seen its subsidy rise from S6.8 million in 1992 to $9.4 million in 1996, with $9.7 million budgeted for 1997. The room-tax-funded subsidy for the Chamber of Commerce’s Film Bureau jumped from $373,000 to $683,000 during the same period.

Other new demands on the room tax have come from the controversial Chargers ticket guarantee, which the city council is paying for out of a $1.7 million “reserve” funded last year from room-tax money. If the convention-center expansion — with its $9.5 to $11.5 million annual payment made out of the room-tax fund — were approved by voters, the temptation to further cut the arts subsidy, as well as other “non-essentials,” would be substantial.

Not to worry, say city consultants. In a report to the city dated January 1997, the firm of Public Financial Management |PFM] concluded that room-tax collections were growing at a better-than-expected clip and predicted even greater growth in the future. But the Firm also observed that “in the event that revenues are below projection, the city will need to address that decline through the annual budget process through which (room-tax) receipts are allocated.

“As a result of these factors, PFM believes that difficult [room-tax] allocation decisions in the face of unexpectedly low [room-tax] collections could occur late in this decade or in 2000-2004. However, the City should be able to meet any difficult allocation decisions.”

The PFM study contradicted a recent brochure distributed by convention-center-expansion supporters, which says that “much (of the room tax] is used to pay for basic city services — including police and lifeguard protection, street and park maintenance — reducing the burden on local taxpayers.”

Instead, PFM concludes that few “essential services” are currently funded with the room tax. “Only a small portion of (room-tax) revenue is currently allocated to payment of debt service or for essential services. Thus, in the face of lower (room-tax] revenues, funding can be allocated to the convention center without jeopardizing essential services of the city.”

Where the Room Tax Goes Now

An analysis of room-tax revenue reported by the city from 1992 through 1996, the latest year for which figures are fully available to the public, shows that the biggest chunk of the room-tax money — about $54 million out of the $64 million collected in 1996 — was spent on a grab bag of so-called “promotional programs.”

They included $9.4 million a year to subsidize the San Diego Convention and Visitors Bureau and about $5.3 million of annual subsidies for museums and the arts. Also in the “promotional” budget was $6 million of the room-tax money set aside to pay for supplementing the police department and another $7 million used to cover “safety and maintenance of tourist facilities.” About $4.5 million paid for the annual operating deficit of the existing convention center. In 1996, an additional $7.5 million was spent on the “convention center complex fund” and a similar amount was spent in 1997. Four million dollars is used annually to repay bonds for expansion of the San Diego Trolley. About another $4 million was used to make payments on Balboa Park and Mission Bay improvement bonds.

The rest of the room tax, amounting to between $10 and $14 million a year between 1992 and 1996, went into the city’s general fund, where it joined sales and property taxes earmarked to pay for local taxpayer-funded services like police and fire.

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