Thursday, April 24, 2008

Call the Cops, Robbery in Progress

April 24, 2008, 7:15 a.m.

The Iowa City Mayor, Regenia Bailey, writes:
"As many of you know, the new owners of the Sheraton have approached the economic development committee to talk about support for their efforts to revitalize the property. I have heard from many of you already and I know that many are simply philosophically opposed to city’s providing financial support to corporations.

"I’d be interested in hearing from you about how we should approach our dropping market share in visitors in downtown Iowa City, which I would contend is linked to the poor condition of the hotel. As you may have read in the downtown market study, visitors are significant to the retail businesses in our downtown. I see a City interest here in capturing more of the conference and visitor market. I know from my work on the Iowa City/Coralville Convention and Visitors Bureau board that we are bringing fewer conferences to downtown Iowa City. I am interested in your thoughts about how we should approach this challenge."
Regenia Bailey, "Economic Development and the Sheraton downtown," Update From Regenia Bailey (e-mail list), April 23, 2008.

How insulting! "[M]any are simply philosophically opposed to city’s providing financial support to corporations," indeed! How dismissive! How presumptuous that the only possible position of right-thinking citizens and officials is to assume that there is, of course, "a City interest here in capturing more of the conference and visitor market" -- or any other market. A "city" interest, yes; but a "City" (i.e., a governmental) interest? No.

Having made her assumptions, she moves immediately to "how we should approach this challenge" -- that is, what would be the best way for City government to get involved, the most effective way to turn taxpayers' money over to for-profit businesses.

Since she says she is "interested in your thoughts," here are mine:

I don't see the "challenge" as one of how we can get more taxpayer money transferred to for-profit enterprises, or how the City can best go about improving their "markets." No, the "challenge," in my view, is how we can get elected officials to concentrate on doing well those things that are within the appropriate role of government -- when it is so much more fun and prestigious for them to be able to play "business" with our money and their corporate playmates.

You want to know how best to expand "markets"? Leave the "challenge" to the free market -- individual local businesses, the Downtown Merchants Association, the Chamber of Commerce, the Iowa City/Coralville Convention and Visitors Bureau (on whose board you've served).

As for the philosophical opposition, it is you, Madam Mayor, who ought to be philosophically opposed, not I. The philosophical opposition, the ideological opposition, ought to come from those who champion the virtues of business, competition, and the free private enterprise system; those who want to "cut taxes" for the rich and then the programs for the poor; those who want to "privatize" everything from schools to prisons. Those are the folks who ought to rise up in righteous ideological indignation and philosophical opposition at the first whisper of "corporate welfare."

My objections are far more practical than philosophical.

In my open letter to the Iowa City City Council the last time a whiff of a TIF was in the air, I listed 11 categories of reasons (each of which could contain many examples) why corporate welfare in general, and TIFs in particular, simply don't make practical, good business, sense -- both anywhere at any time, and especially in Iowa City, Iowa. Nicholas Johnson, "Courage, Councilors," Iowa City Press-Citizen, October 3, 2007, p. A12.

Those categories included such things as opportunity costs, numerous past failures of various kinds, inability to verify "need," lack of transparency, officials' poor business judgment, better alternatives -- read the column if you're interested in more.

Ironically -- because I never anticipated a proposal as totally bonkers and corrupt as the Sheraton proposal to come along so quickly -- I've just concluded an 8-part series about the role of money and lobbyists in politics and government generally (which, if you're interested in this stuff, you might also enjoy taking a look at). See Nicholas Johnson, "Golden Rules & Revolutions: A Series - VIII," April 19, 2008 (the last in the series, but with links to the prior seven).

Looks like I'm going to have to get back into the subject, for this scandalous Sheraton proposal is only one of many current corporate welfare disasters -- as recent reports are documenting.

But for today, as a concession to the limits on the time you have to read and I have to write, I'm going to let a local business person speak for me.

One of my categories of concern about corporate welfare in that Press-Citizen column, but that I did not itemize above, read as follows:

"Corporate welfare tilts the playing field. It’s fundamentally unfair to ask businesses to compete against a favored few funded by government. It upsets a smoothly working free market to no one’s benefit – except the lucky recipient."
It's always been a mystery to me why more members of the business community don't speak up about this -- especially when their own business is dealt a blow as a result of the corporate welfare that keeps dropping to their competitors' bottom line.

The Press-Citizen ran a story about this potential theft on Wednesday. Kathryn Fiegen, "Sheraton's case presented to city; Economic committee asks for more information on TIF," Iowa City Press-Citizen, April 23, 2008.

As of this morning [April 24] that story had 23 posted comments from readers -- virtually all very negative (regarding the proposal, not Ms. Fiegen's story).

State29, with his usual insight, has contributed a blog entry of his own to the dialog which you will want to read. State29, "Er, Then Why Did You Buy It?" April 23, 2008. It is that blog entry which brought the following comment to my attention.

Indeed, State29 raises an issue that deserves much more media attention. Why did the new corporation buy this property? Sadly, I can only see two possibilities.

(1) The principals are really dumb business people (unlikely, given their very successful multi-billion-dollar operation), who bought a property they knew would lose money without taxpayers' contributions, without getting an assurance from the City in advance that the money would be forthcoming -- in which case they have assumed potential liability in a shareholders' suit.

Or, (2) They did get prior assurances from the pro-TIF wing of the City Council that TIFs and other benefits could be delivered, before those applications had run through channels -- in which case Iowa City voters have equally serious complaints about their City Council.

Here, then, is the take of a real, honest-to-God, successful and unsubsidized business person on the subject of corporate welfare:


Please, not again!

Posted by: jjhoneck on Wed Apr 23, 2008 6:23 pm

In 2002 my wife and I bought the old Alexis Park Inn next to Iowa City's airport. It was in bad shape, with a checkered reputation, but we knew a diamond in the rough when we saw it.

Since then we have spent these last six years remodeling and refining our service, until we now have the top-rated hotel in Iowa City. We have seen double-digit increases in both revenue and occupancy throughout that period -- a result few would have predicted.

The lesson? Offer a great lodging experience at a fair price, and you will prosper.

During those six years we never applied for nor accepted government assistance. We did not incur any debt, choosing to fund the renovations with the cash flow from the business. This is MUCH harder to do, and takes much longer -- but, in the end, it's the only way to assure success in a business with razor-thin margins.

Also during those six years we have sat idly by as our own Gummint became our #1 competitor in the market. You probably don't know it, but since 2002 YOU, the taxpayer, have funded the addition of over 500 hotel rooms to this already saturated hotel market, including:

- The Marriott, built with $60+ million in taxpayer dollars
- The Riverside Casino, built by an unholy alliance of gummint and organized crime
- The Hotel Vetro, built with yet another TIF

Despite this, we have prospered, while the Sheraton has declined. Why?

The Sheraton is a bloated, top-heavy chain that provides little value for what it charges. Most of the rate they charge goes to national advertising campaigns, with little devoted to the local property.

And what IS spent locally is spent in the wrong ways. When the original Sheraton franchisee bought the property (which was then a ramshackle Holiday Inn) their main focus was on remodeling the lobby, gobbing marble and brass everywhere. The end result was that Sheraton guests paid $179/night for a tiny Holiday Inn room, and a really nice lobby. In addition, sleep was optional, because for that absurd rate they were forced to listen to the ped mall cacophony all night long.

In contrast, our smallest suite is bigger than their largest suite, costs just $70 bucks a night -- and includes a delivered breakfast in the morning.

There is no mystery behind their failure. If you don't provide good value for the dollar, you will fail. It's "Economics 101".

Now we're supposed to believe that the Sheraton's new owners need corporate welfare to survive? The purchase price has already been adjusted dramatically downward to take into account the diminished value of this property. There is NO WAY they (or any other private business, for that matter) should receive city aid.

I suggest that the Sheraton owners follow our example. Roll up their sleeves, get to work, one floor at a time, one room at a time, and fix up their OWN business. Who knows, in 5 or 6 years they might have a nice place down there.
Comment entered on Kathryn Fiegen, "Sheraton's case presented to city; Economic committee asks for more information on TIF," Iowa City Press-Citizen, April 23, 2008.

Watch this space -- there will, undoubtedly, be more to come on this story.

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Anonymous said...

What is your stance on the other two Sheraton requests? Namely, the parking ramp re-negotiation and the city vacating it's easement on the lobby?

Anonymous said...

An excellent post!
Your comment regarding opportunity costs is spot on. TIF funding that is used to finance a project that is likely going to happen anyway is a real cost to the taxpayer, very different from financing that enables a project to take place that otherwise wouldn't. I have nothing against corporations, but I have nothing against taxpayers either. Why should taxpayers be forced to line the pockets of national real estate investors?

As to the Mayor's comments regarding market share, that is a specious argument for a number of reasons. For one thing, if a new, large conference center is built in a neighboring town, one would expect (hope?) that it gets used. By its very nature, that will reduce market 'share'. What is more important to consider is not market share (i.e., percentage Iowa City v. Coralville and surroundings) but actual real numbers of guests and conferences. If the Mayor's goal in financing this project is to still business from Coralville, that is irresponsible. Money spent in Coralville still fills local and state coffers. Money given away to investors with no connection to the area does not.

I welcome outside investment, but these folks knew what they were getting into. They can pay their own way--after all, the previous owners sold this property at a hefty loss, presumably because RockBridge/Davidson were well aware of the high cost of renovations.