Many questions have been asked regarding the wisdom of the the mayor's Large Venue Entertainment Centre task force's recommendations for an LVEC. However, it should be recognized that all of those questions are a consequence of the one overarching question addressed by the task force: Under what conditions could Kingston afford a first-class large venue entertainment centre?
The recommendations we made are, in effect, answers to that question. If the city's response is that those conditions cannot or should not be met, then we cannot afford an LVEC. If a means can be found to bring those conditions about, then perhaps we're willing to afford such a venue.
In that regard, and as a matter of business judgment, our findings should be interpreted in this way: The LVEC should not be built if it cannot be located downtown and financed by some means other than a significant increase in taxes.
The rationale for this conclusion follows:
1) The estimated cost of an LVEC doesn't vary significantly depending on its location unless on-site parking is provided.
This means that locating an LVEC anywhere that isn't accessible by walking, public transportation or existing parking adds some $6 million to its cost - 15 per cent more than the estimated building cost of $40 million. While it's possible to build a "hockey rink" for less, it's anticipated that more than 50 per cent of the LVEC's usage will be for non-hockey events that require a calibre of acoustic, electronic and logistical considerations above those necessitated by a simple rink.
Reducing the cost of the project can only be accommodated by reducing either the seating capacity of the facility or by lowering the quality of its fit and finish, or by building something with inadequate facilities to meet the needs of performers. Doing this reduces the drawing power of the facility and its ability to operate on a break-even or profitable basis.
2) The operating revenues from the LVEC will not be sufficient to cover the cost of construction. This is true whether the LVEC is costed at $20 million (half the current estimate), $28 million (the original guesstimate), $40 million (the current estimate) or $46 million (the current estimate plus on-site parking). It's true even after taking into account naming rights and other sponsorship opportunities and it remains true regardless of whether a private- public partnership is entered into.
This doesn't mean the facility cannot cover its operating costs. It does mean that the only way to generate operating profits large enough to carry the capital debt would be to increase ticket prices for those attending or sponsoring events, an act that would be self- defeating if the goal is to enhance quality of life for all Kingstonians.
Financing the LVEC will require some combination of (a) grants from the federal or provincial governments; (b) a capital - i.e. fundraising - campaign; (c) the sale of some public asset; and (d) increased taxes. Since (a) and (b) can't be guaranteed beyond the Business Improvement Area's pledge of $3 million, the only certain way of having an LVEC is to raise taxes substantially or sell off some other asset. In order to maximize the capital contribution of any sale of a public asset, it should be designated for development in order to create incremental tax revenues.
- Raising taxes makes the community less attractive as a destination for personal or business relocation, especially in light of the need to eventually finance future anticipated infrastructure needs.
If the LVEC cannot generate some form of non-operating revenues for the city - economic development, tourism, employment or incremental taxes - then any deficit must be considered an operating expense and its priority should be considered alongside other expense items like sewers, road repair and social programs. However, if the LVEC can be situated and built in such a way as to generate non-operating revenues or benefits for the city, then the LVEC could legitimately be seen as an investment and shouldn't be made to compete for priority against other expense items.
The precedent for different treatment of expenses versus investments is one made by private citizens every day. For example, many would be willing to spend money, or even incur debt, for educational tuition, even though there are monthly bills to pay for food and shelter. We do this because we feel an education will enhance future income potential and thereby improve our ability to pay those monthly bills. Of course, we may prefer not to incur any debt, but if we have to choose, most would agree with the wisdom of such an investment.
3) Accepting (1) and (2), the question then becomes: If a Kingston LVEC is an investment in the future, how do we maximize the return on that investment? Certain returns, like the boost to local construction and employment - wherever the LVEC is located, it still has to be built - and its potential to serve as a home for major junior hockey, don't vary significantly with location. However, there are other types of return that are location-specific.
The experience in other municipalities has been that maximum economic value is derived from a downtown location. Downtown facilities have prospered. More remote facilities have had mixed experiences, implying a higher level of financial risk. Even the operators of the successful remote facilities believe they would have done even better if they had located downtown.
In the competition for performers, which must be "won" to secure attractions with drawing power, downtown locations are uniformly preferred.
In the case of Kingston, several factors suggest the experiences of other centres would be found here, and possibly even more so owing to the proximity of Queen's University, which represents a substantial portion of the non-hockey, entertainment audience, and an audience that is largely without personal vehicular transportation.
Based on anecdotal evidence, there's a belief that a downtown location enhances the LVEC's appeal as a locale for major events such as the Memorial Cup hockey tournament or curling's Scott Tournament of Hearts. Any such event has the capacity to inject tens of millions of dollars into the local economy.
4) A downtown location minimizes the costs of the LVEC and maximizes the returns on investment relative to other locations. However, as stated earlier, even in this best-case scenario, it's unlikely that the LVEC - even if profitable on an operating basis - can be sufficiently profitable to cover its capital costs. This means the city must find some way of reducing the size of the initial debt, just as reducing the size of your mortgage reduces the amount you have to pay each year, or lets you repay it faster.
It's estimated that every $1 million of debt would require an additional $2 per year per household in taxes. This means that:
If we assume the sale of a municipal asset like the Memorial Centre generates $5 million from the sale plus $9 million in incremental taxes, the per-capita tax increase would be reduced by roughly $28 per year to $36 (an approximate one-per-cent increase) for a facility with on-site parking, and to $22 (an approximately 0.5-per-cent increase) for a facility using existing parking facilities.
These are the numbers we work with and the tradeoffs Kingstonians must make. No amount of business expertise can make magic happen or build a building out of thin air. To build at a non-downtown location with on-site parking while we retain the Memorial Centre as green space means the LVEC will cost us all about two per cent more in taxes each year, with minimal opportunities to offset that increase with economic development.
A downtown location using existing parking, and the development of the Memorial Centre, reduces this tax increase to about half of one per cent and, significantly, would foster sufficient new tax revenues from economic development to more than offset that increase.
We can do either, provided we're prepared for these economics, or we can decide not to build an LVEC anywhere.
The need for such a facility, however, is clear. Kingstonians must decide how the cost of satisfying that need will be paid.
Ken Wong, a business professor at Queen's University, was a member of the mayor's Large Venue Entertainment Centre task force.