Fix The Streets Or Build A $500 Million Hotel. Seems Like A No-Brainer
Wait a minute. Can we just talk here? I don't get the thing about how the city has a $50 million budget shortfall, but we can afford to build a $500 million hotel.
Can we be so poor that we can't fix our streets, but we can still afford to take a half-billion dollar gamble in the hotel business? And we're not in the hotel business?
Last week the Dallas City Council voted to go ahead with building a $500 million city-owned convention center hotel. At the same meeting they found out that falling tax revenues may force the council to: defer more than $8 million in needed maintenance of city buildings, slash library hours by 13 percent, cut street and traffic signal maintenance by $15 million, cut back legal staff, reduce park and rec youth programs, cut budgets for the zoo and aquarium, take the water out of neighborhood swimming pools and reduce park maintenance.
Reduce park maintenance? You mean reduce it more? The parks already look like The Grapes of Wrath.
Cut back on traffic signals? Yikes! Crash bam boom!!!
So how in the hell can we afford to build a 1,200-room hotel? Oh, I know, I know. It's free or something. Forget about the $500 million. A pittance, a piffle, a peck on the cheek. That mere $500 million! Skies are gonna be blue. It's all gonna come true. Don't let it worry you.
Mayor Tom Leppert has assured everybody that the city will turn the whole thing over to a good hotel management company, and everything will work out fine. Not to worry.
But you know what? I do worry. Personally I do not like the argument: "We'll own the hotel, but we promise not to pay any attention to it."
Why does that bother me? Because I believe it. Come with me on a journey to the place on the Internet that I call the "Street of Broken Dreams," otherwise known as the official Web site of the Dallas City Auditor's Office. There we shall find a sampling of reports.
Dip into the first one, called "Audit of Monthly Bank Reconciliations." Not too far down, we read the following: "Monthly bank reconciliations are neither accurate nor timely. The City Controller's Office and other departments' inability to prepare accurate and timely monthly bank reconciliations has been a longstanding issue and remains unresolved."
They can't balance the checkbook.
Dip into another one, "Audit of Smirnoff Music Centre's Lease Payments" about the venue at Fair Park where they put on rock concerts. That one says the city has been shorted $843,000 because the main tenant hasn't been making the payments. It also suggests broadly that city employees or elected officials have been accepting free tickets to events.
So here's the system: Do not collect the rent. Do collect free tickets.
One of my favorite audits is called "Fair Park Administration's Monitoring Controls Over Parking Contract Revenue." It's about how Fair Park handles parking fees for events at Fair Park.
Sometimes parking is free. Sometimes not. The city can't say how it decides. The city doesn't count the tickets. The city doesn't count the cars. The city doesn't count the parking spaces.
If I'm a hotel management company, I look at things like this and see a big neon sign over City Hall that says, "COME AND GET IT."
Do you have any idea how much money $500 million is? I didn't. I looked at the city's 2007 list of deferred maintenance. This is stuff they already can't afford to take care of, even before the additional cuts they're going to make to cover next year's shortfall.
According to the city's "2007 Needs Inventory," there are 114 local streets in Dallas that need to be rebuilt from scratch—dug up, carted off, built back from the dirt up—but there is no money. It would take $49 million to rebuild all 114 of them.
The money for this hotel is 10 times what it would cost to completely rebuild every bad residential street in the city that needs it.
We have to borrow the $500 million. Do you realize how much debt that is? The total "general obligation" debt of the City of Dallas right now is $1.7 billion, according to the city's "Debt Services" declaration on its Web site. The hotel represents 30 percent of that amount.
Stop right there, the city will say. The hotel debt won't be "general obligation" debt. That means the bonds to pay for the hotel will be "revenue bonds" paid for by income generated by the hotel itself. Taxpayers won't have to pay off those bonds. The hotel will pay for itself, the mayor has said. No skin off the taxpayer's nose.
But my nose keeps twitching. The city is basing all of its promises on an analysis done by HVS, a hotel consulting company. HVS calculates that strong occupancy rates and a very favorable mix of tax rebates from the hotel will produce an annual income to the city in the neighborhood of $35 million to $40 million a year.
I corresponded last week with A.C. Gonzalez, the assistant city manager who has shotgunned this deal. We were working on the question of what the annual payment will be on a $500 million mortgage.
He said in an e-mail, "On my trusty HP calculator, I get about $34.4 million for $500 million at 5.5%."
So that would put us at the razor's edge or close to it. We get something like $35 million a year—$40 million if things get better—from the hotel. We pay something like $34.4 million on the bonds. That's with everything going along smooth as silk—strong occupancy, strong room rents, no big unforeseen costs.
But I have a couple room reservations. First of all, I take the room rents and the occupancy rates that the city is promising for this thing, and I get a much lower annual income per room than HVS does.
And what about this? Houston's very successful city-owned Hilton Americas convention hotel, with the same number of rooms we are planning, has been paying the city an average of $22 million a year over the last five years. Peter McStravick, COO and treasurer of the Houston Convention Center Hotel Corp., explained to me that the hotel there generates revenue to the city according to a formula of hotel revenue and tax rebates similar to what is planned here.
Same size hotel. Bigger market. About two-thirds the payout they're claiming we'll see here.
Plus, I can't stop worrying about Gonzalez's calculation of the payment. I looked at three city entities that make payments every year on revenue bonds. If the hotel bonds have to be paid back at the same rate that the American Airlines Arena is paying on its debt, the annual payment on the hotel is going to be $42 million a year, not $34.4.
At the same rate the Convention Center pays on its revenue bonds, the annual payment for the hotel bonds will be $47 million. At the rate the Dallas Water Utilities pays, the hotel bonds will cost $50 million a year.
So why are we not concerned that the calculation of the revenue from the hotel may be too high and the calculation of the cost of the debt too low?
If something slips—if anything goes south with the revenue bonds on this hotel—it's not merely a matter of the city making up some incremental difference. Say they're short a couple mil. We front two mil for them? Nope. Doesn't work that way.
In 2003 in Myrtle Beach, South Carolina, the city financed a convention hotel with revenue bonds. The projections proved a tad optimistic—not wildly, but just enough that the hotel couldn't quite make its bond payments. Guess what? They had to ditch the revenue bonds entirely and refinance the whole thing, backing it with property tax money and putting the taxpayer on the hook.
Here's the thing. Money is money. I know it may be tax money or bond money or revenue bond money or something. But it's money. Somewhere ultimately there are limits.
I find that a surprising number of people think of bond money as free money, for example. They say to me, "Jim, it's not coming out of taxes." Oh, but it is. With interest. Next year while City Hall is emptying the kids' swimming pools, the city will also have to make payments amounting to more than a quarter billion dollars on general obligation debt.
The city is like a person. It doesn't have an unlimited ability to borrow. We have a credit rating to maintain.
The lenders watch closely to see how much the city owes compared with the ability of the taxpayers to pay it back. That's how they decide how much interest to charge us on bonds.
That number, called the "per capita general obligation debt," has been moving in the wrong direction for the last three years. The city has run up significantly higher debts in our names than it was carrying three years ago—an increase of 23 percent, as a matter of fact.
Now think what happens if something goes a little wobbly with those hotel bonds. All of a sudden $500 million in debt has to be refinanced as general obligation debt. The debt of the city increases 30 percent in one day.
Why did they rush this whole thing through so fast? Did you get it? Did you understand it? What does it mean when somebody has a deal for you, and they talk so fast you can't understand them, and they're all in a rush to get you to sign?
If I were in the rug market in Istanbul, I could tell you exactly what it means. Put your hands in your pockets and return to the boat.
But City Hall? You hate to feel that way about your own City Hall. For one thing, there's no boat.
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