Study of convention hotels has lesson for Los Angeles.

IF you' re thinking about getting into the convention center hotel business, better think gain.

This is the conclusion of Heywood Sanders, professor of public administration at the University of Texas at San Antonio, a longtime critic of municipalities going where the private sector fears to tread, using tax-exempt bonds and tax dollars.

"The failure of optimistic hotel performance forecasts carries a number of risks for cities and their balance sheets," Sanders writes in the June issue of Government Finance Review, the magazine of the Government Finance Officers Association.

Those risks include having to come up with more cash for money-losing hotels and the prospect of creating a glut of new hotel rooms, pushing down occupancy rates and the tax revenue tied to such rates.

"Local governments need to understand these risks before buying into the promises of publicly financed convention center hotels," writes Sanders.

Sanders looks at how four convention center hotels, in Sacramento; Myrtle Beach, S.C.; St. Louis; and Overland Park, Kan., have fared since they were built. The hotels are either owned in whole or in part by the cities, the debt used to build them secured by combinations of operating income, taxes and city appropriations. If there is a shortfall between projections and results, who pays? The taxpayer does.

It didn't start out that way, of course. The hotels were all supposed to be self-supporting.

"The consultant studies employed to justify the publicly financed convention center hotels show both serious analytical errors and overly optimistic forecasts," writes Sanders.

In Myrtle Beach, for example, consultants projected that the hotel would have a 65 percent occupancy rate during its first year in operation. It was 46.6 percent. The occupancy rate for the hotel in St. Louis, projected at 63 percent, came in at 50 percent.

The new hotels were supposed to make the cities' convention centers big successes. The idea was that if only you put together the right package of amenities, then everyone would come to your town and spend lots of money eating and shopping when they weren't attending their conventions.

It sparked an ambitious municipal competition that began back in the 1980s and hasn't run out of steam yet. States and localities spend $2 billion a year on such construction, and exhibit space has increased from 40.4 million square feet in 1990 to 60.9 million in 2003, writes Sanders.

It all began innocently enough. First, you needed a new convention center to attract the convention business. After a while, that was no longer good enough; you needed to expand or build a larger center, to attract the really big shows.

It became apparent that if you really wanted this thing to work, what you needed was a big, first-class hotel, and not one a few blocks away, either--the hotel had to be attached right to the convention center.

(Los Angeles elected officials, aware of public opposition to such funding, have consistently refused to provide financial incentives for a downtown convention hotel, although Anschutz Entertainment Group, which wants to develop a site adjacent to Staples Center, is pushing for a convention hotel that would require at least some public participation.)

But in each case Sanders cites, the hotels failed to bring in appreciable amounts of new convention business. To the extent that the hotels have managed to make money at all, they have done so by focusing on business or vacation travelers and groups that need a few rooms for their shows, rather than arenas designed to accommodate demolition derbies or tractor-pulls.

Are public officials squirming about any of this? Not a bit of it. There are apparently lots more who are very eager to join this weird arms race.

Joe Mysak is a columnist for Bloomberg News.