Kerry Kincaid – President, Eau Claire City Council
Members of the City Council
Don Huebscher – Eau Claire LeaderTelegram
Lisa Patrow – WQOW
Dear President Kincaid,
I had the opportunity to review the recent consultant report regarding the Confluence Project that I found on the web site, http://www.eauclairearts.com/confluence.
The headline on this website promotes a 1st year operating surplus of $100,000 and when I first saw this, it prompted me to dig just a little deeper. Particularly when I read the in the details of this report on page 98 the following – “The preliminary annual budget represents a year of mature operation of the venue with a schedule that has been built up with several years of marketing and sales initiatives.”
In other words, (and this is my interpretation) should all the stars align, and should we have been in operation fully for several years – our results “could look like this”. THAT is a big assumption.
As you may know, I work in Business Transformation with some of the largest organizations in this country. Our work includes thought leadership and I have members on my team who develop business plans, and detailed business case models as a part of the overall practice. As such, when our teams have deep conversations with customers, we are careful to call out assumptions – as they are the central point of any model. The mathematics will always work, it is the assumptions that are suspect and must be agreed to.
To that end, I dug deep into this report and I have some observations which I would like to share with you. I list my observations below – and I call special attention to point 1d.
1) As with any consultant’s report, I look for conflict of interest, (is it commissioned by people who stand to gain, is the consultant angling for more work?) and I look for statements which qualify their findings. I found a few things of interest here.
a. The study was commissioned by two groups with highly vested interests. Haymarket Concepts (LLC) and The Eau Claire Regional Arts Council. As such, it means that the development of the report and the various interim steps by which it was finalized may have placed a “spin” on the final product.
i. As a simple yet concerning example, note the following from page 9 – “At the request of the Project Committee, a modified and more conservative Pro Forma was developed for discussion.
purposes only and is not a part of this Plan. Modifications to the ProForma assumptions included a reduction of the projected attendance at events and rehearsals in the Mid-sized theatre and a reduction of non-performance days in the Black Box Theatre. These revisions resulted in an annual attendance figure of 131,925 with 551 event days. The Arts Center 1st year financial return, with these revised figures, would reflect an annual operating surplus of $61,366.”
b. Venuworks “operates” many other venues. They take an operators perspective in their report (a plus) and they make a pitch to be the operator here (a distinct minus).
c. The report itself however is extremely conservative and they authors are careful to note deficiencies in their language. This is the sign of care in a report and I commend the authors for their solid advice which needs to be listened to. I suspect though that this may not occur as it is often hard to dig out as it is buried in the verbiage. Examples include:
i. Page 2, Executive summary – Project organizers have proposed that the Board/Council would consist of seven members rather than the nine members recommended in the Plan. Representatives on the Board/Council would consist of representatives of UW-Eau Claire, the local arts community, including ECRAC, Visit Eau Claire and the developer.
ii. Page 2, Executive summary (Why was Roger’s and Associates commissioned to override the Venuworks analysis?)- The development and operation of the Community Arts Center is projected to have a significant positive economic impact in the Eau Claire market. Building on the economic impact information contained in the Business Plan, the Rogers & Associates analysis projects the immediate and likely long term effects on job creation and certain impacts to property tax and sales tax for the City of Eau Claire and Eau Claire County.
d. Buried in the bottom of Pg 8…in the report I find this bit of language.
i. “Very few performing arts centers of the type described in this Plan are profitable without operational allocations from various funding sources. In most cases, annual earned revenues are less than annual operating expenses. The Pro Forma Budget set out in the Plan reflects conservative revenues based on aggressive sales and marketing efforts.”
2) As with any analysis, the math will always work, what matters is the assumptions that are given, and whether or not you can accept the nature of the projections. Here, for me is where the basics break down into speculation at best. You can read these assumptions on your own starting on page 97 of the final report; however I call your attention to the following.
a. There’s no mention of construction costs or means to finance. This is this project’s greatest concern, because according to the 2010 Eau Claire city budget, bonded debt held by the city increased 85% from $660 / capita in 2001 to $1,223 / capita in 2010. Eau Claire County also ranks in the top seven percent nationwide on property taxes according to http://www.tax-rates.org.
b. A pre-opening budget is not contemplated, the report suggests that this not be part of the operating budget (obviously) but it does recommend staffing before construction is complete. Again, sketchy from an accounting perspective in terms of booking a capital expenditure to an operations expense (hiring staff before you open).
c. Operating expense is estimated to be $1.1 to $1.2 million annually. Year one profit/loss does not account for staff start-up costs prior to opening, a point which is CLEARLY called out by the report on page
d. An assumption of 646 event days in the first year, attracting 176,400 patrons and generating $572,000 revenue. The baseline for this estimate includes surrounding area destination venues such as Countryfest, CountryJam and Rockfest. These should not be included as they are not a comparable to what an events center would try to garner support for.
e. Even if these sales goals are reached, the report depends on UWEC for 33% of essential revenue and on hotel room tax revenue increasing 61% in ten years.
f. Further, the report assumes that 50% of the operations expense will be shouldered by UWEC (Page 97).
g. With scant explanation how, an assumption that this project will create 141 new FTE’s in the surrounding business area.
h. An assumption that the tax assessment base would rise by %30 in the “projected impact area”
i. An assumption that the city would increase their property tax levy by 1%.
I could go on in the details of this report, and I offer my services to the council to go through it point by point as I believe, although it is conservative in nature, and the consultants have called out every area where they may be aggressive, such language is being overlooked by enthusiastic supporters of this project.
3) Finally, I draw your attention to the fact that the consultants recommend very strongly for a certain type of governance structure which appears to be ignored moving forward by the report’s sponsors. I find that fairly disturbing as well “Project organizers have proposed that the Board/Council would consist of seven members rather than the nine members recommended in the Plan.” – Page 2, executive summary.
In conclusion, I ask you, President Kincaid to slow this process down. To understand in detail the results of this report, its dependencies and its assumptions which unless tended to carefully, could be disastrous to this community, and the debt burden and operating budget we already carry.
I offer my professional services to evaluate this report in depth, and to facilitate a conversation with Council to ferret out the pivot points by which a decision can be made – as community service of course.
It is only through criteria that are clear to the community can such a far reaching decision by thought of as a positive outcome by all of its affected citizens. Creating an environment of sunshine on the process and of public discourse in this major change to our community seems prudent.