|By Deborah Lohse, San Jose Mercury News,
Calif.McClatchy-Tribune Business News
Jan. 21, 2007 - In the summer of 2004, San Jose handed control of its multimillion-dollar convention facilities to a public/private group formed by the head of the city's Convention & Visitors Bureau, hoping a more entrepreneurial approach would revive San Jose's moribund hospitality industry.
The group won a five-year, $60 million contract by vowing to vastly increase convention-related revenue and eventually erase the multimillion-dollar subsidy needed to cover losses at city-owned facilities. By housing all of the city's convention and tourism manpower under one roof, they promised to provide "The Best Event Experience in the Nation" to visitors.
But so far, Team San Jose has brought in far less revenue and cost much more than it pledged. And a Mercury News review suggests the group has often over-promised and under-delivered to clients and taxpayers alike.
An October audit of Team San Jose's first year found that, although convention and hotel bookings had risen somewhat, the non-profit had increased revenue by just 13 percent over the city department that previously ran the facilities -- not the 38 percent called for in its contract.
City Auditor Gerald Silva also found that the financial shortfalls required the city to kick in a $4.6 million tax subsidy -- $900,000 more than Team San Jose had promised -- even though the financial targets in the contract already had been lowered from those in the group's initial bid.
And unaudited numbers for 2005-06 show that although Team San Jose increased revenue an additional 22 percent that year, it still needed a $3.86 million subsidy to cover its costs -- nearly $2 million more than its contract called for.
Team San Jose defenders point out that the tax subsidy is now much lower than when the city ran the facilities; in 2003-04, the year before the non-profit took over, those facilities required $7 million to cover their losses. Backers praise Team San Jose for increasing bookings through a "one-stop shopping" model they say is a key advantage in the cutthroat world of convention marketing.
But interviews with some clients, local hospitality executives and more than a half-dozen former employees portray an operation that has struggled to execute its promising vision. The most critical among them say Chairman and Chief Executive Daniel Fenton -- a former hotel executive who is paid out of hotel tax revenue and draws a larger salary than any city official -- is spread too thin and lacks the level of operational expertise needed.
Those critics -- almost all of whom asked for anonymity because they work in the close-knit convention business -- say the group's optimistic financial goals and lack of an effective strategy for achieving them have led to disruptively high turnover, overly ambitious promises and, sometimes, underwhelming service to clients.
Now, Team San Jose is asking the city to again scale back its economic targets and allow it to keep receiving the subsidy it once vowed to eliminate.
Team San Jose was born after the dot-com bust, when the city started losing technology conventions that used to pay top dollar and fill $250-a-night hotel rooms.
Fenton, who was named CEO of the taxpayer-funded Convention & Visitors Bureau in 2000 after four years as chief operating officer, became convinced that a new model and partial private management could improve the San Jose McEnery Convention Center's bottom line. In 2003, he commissioned a study that showed the center, which the city operated while sharing booking responsibilities with Fenton's bureau, was losing money six times faster than comparable facilities.
Alarmed, the city council put the business of operating the convention center and the other facilities out for bid.
Fenton's proposal was a private company overseeing dozens of city workers left over from the 93-employee department that used to run the facilities. Team San Jose took over that department's responsibility for booking events happening 18 months or fewer in the future.
Team San Jose also oversees the 36 employees of the non-profit Convention & Visitors Bureau, which continues to be responsible for booking events more than 18 months into the future.
Fenton's group won in part because it vowed to bring in at least 23 percent more revenue from facility rentals and services such as catering than the other bidders -- $58.7 million over five years. That, plus cutting costs, they pledged, would put the facilities in the black and free tax dollars for upgrades and maintenance instead of subsidies.
The plan also featured a novel business model.
"Our vision was when you book a group, that one person can handle everything in terms of knowledge," Fenton said. "So whether I need to close a street, or I want to talk about food and beverage, or I would like to talk about the layouts of my room, there would be one person who was of a breadth of knowledge that they could do that."
San Jose's pro-labor city council also liked that Team San Jose's board would feature a rare alliance of hospitality executives and labor leaders. As a bonus, Fenton said the alliance could keep down labor costs for clients.
But DeWayne Woodring of the Religious Conference Management Association said Team San Jose didn't live up to its promises to his group.
Three years ago -- before Team San Jose took over the convention center -- Fenton's Convention & Visitors Bureau beat three other cities bidding to host RCMA's January 2006 conference. As the winner, San Jose gained the opportunity to show itself off to hundreds of religious leaders who could steer hundreds of millions of dollars in business here in the future.
Woodring said the bureau promised to provide the convention facilities for free and to find sponsors for as many as 10 dinners and other events during the four-day show. Instead, Woodring said, Team San Jose billed him more than $47,000 for convention center facilities and other costs, and he ended up holding the convention's opening-night reception in Santa Clara. Woodring said the bill from San Jose was more than 15 times what Pittsburgh had charged for a similar event two years before.
As a result, Woodring said, RCMA's board did something it had never done in its 35-year history: It passed a resolution saying the board "cannot recommend San Jose as a site for RCMA members."
Fenton said he couldn't discuss what had happened with RCMA, other than that his team spent weeks trying to line up sponsors for the group's events but had a harder time than expected. He also said that, for budgetary reasons, he and other board members limited how much of RCMA's expenses Team San Jose could absorb. And he said he kept RCMA apprised before the event of the challenges Team San Jose was facing.
Fenton added that RCMA and a few other clients who complained to the Mercury News were rare exceptions.
Indeed, Sue Davis, project manager for San Jose's largest convention, Photonics West -- and a member of the Convention & Visitors Bureau board -- praised the group's approach. "It's a tool that saves me money and labor," she said.
Fenton acknowledges that the financial targets his team originally proposed were too optimistic. But he says he learned about many problems only after taking over the convention facilities, including high employee benefit and maintenance costs and a soft tourism market. And he says employees who have left usually found Team San Jose's new business model to be a bad fit.
"We have lofty goals," Fenton said. "It's not for everyone."
But many say strife is evident in the turnover among Team San Jose's 135 workers.
At one point just after Fenton's group took over, city employees reporting to Team San Jose ranked it the worst place to work among all city jobs. Several former workers describe a pressure-cooker atmosphere with little guidance.
Team San Jose and the Convention & Visitors Bureau have seen the departures of two chief executives, a chief financial officer, five of six event planners, two human resources directors, three sales directors and at least two sales vice presidents. Many of those were new recruits, not disgruntled holdovers from the former operation.
Many departed employees have been replaced. Fenton himself took over the CEO title at Team San Jose in 2005 but receives no additional pay. As head of the Convention & Visitors Bureau, he draws the same base salary and bonus structure that he did before the creation of Team San Jose.
Bureau Chairman Jan Sweetnam says Fenton's compensation was set with help from a consultant who noted Fenton has unusually heavy responsibilities. In fiscal 2004-05, his pay was $256,200 -- more than any city worker, including the city manager.
San Jose officials say turnover has slowed considerably in the past two years, and they expect Team San Jose to fare better in a new employee poll.
To be sure, some of the challenges facing Team San Jose are beyond its control. Then-Mayor Ron Gonzales noted in 2004 that the city had lost 40 major conferences to destinations like the newly opened Moscone West in San Francisco, because San Jose's convention center was too small.
But some critics say Fenton had to know his projections were overly optimistic.
David Bevans, who ran the facilities for the city before Fenton and unsuccessfully bid against Team San Jose, believes Fenton's group inflated its promises to win the bid. And he's outraged that, two years into its five-year contract, the group is seeking lower economic targets.
Bevans, now facilities director for the California Endowment in Los Angeles, says he also believes Fenton, who had built close ties to Gonzales, had an unfair advantage. "He got the ear of the mayor and the city council and sold them on the idea that there are problems and they were the solution," Bevans said.
He said the city manager's office dissuaded him from explaining to the council why Team San Jose's numbers were unrealistic. Gonzales did not return a call for comment.
Fenton denied using political pull or inflated projections, adding, "We had valid methodology behind our projections."
However, some longtime clients say they've gotten short shrift as Team San Jose stretches to lure the largest possible shows to meet its revenue goals.
Elisa Fisher of Modern Bridal Faire sued Team San Jose last year after signing a contract to put on a bridal fair. Although she has held the event for more than 17 years in downtown's Parkside Hall, with its parquet floors, a few months ago San Jose abruptly informed her she would have to move to the 80,000-square-foot Southside Hall, a new tent-like annex.
Fisher said the tent was too large and cold and lacked the intimacy befitting her event's soft music and upscale ambience. "It looks like a carnival tent," she said.
Fenton said Fisher's experience was an anomaly, and the two sides recently reached a confidential settlement that will allow Fisher to hold her event next month at Parkside Hall after all.
Other clients have found that Team San Jose isn't always able to make good on its promise that having labor representatives on its board would lead to more flexible or cheaper labor costs.
That's because many convention planners use national transportation and set-up contractors who have deals with the Teamsters union in San Francisco -- limiting the opportunity for private negotiating. "We're working on that," Fenton says.
In the meantime, whether Team San Jose gets a break in its management contract is up to the city manager's office and the city council.
New Mayor Chuck Reed -- an early fan of Team San Jose's concept -- said he's waiting to pass judgment.
So is Dan McFadden, the deputy city manager who recently inherited oversight of Team San Jose. He said the city is waiting until the group has three years under its belt -- mid-2007 -- before deciding whether to grant a new, easier-to-meet contract.
Alternatively, said City Auditor Silva, the city could put the work out for a new bid. Under its contract, if Team San Jose continues to miss its targets beyond this summer, the city can revoke the group's $150,000 annual management fee -- or rescind the deal.
Fenton and others on Team San Jose say the group is now on the right track and "aggressively" pursuing new revenue streams like security services for conference-goers. He expects revenue to grow to $9.4 million this fiscal year, nearly a 7 percent increase from 2005-06. Meanwhile, the estimated subsidy for 2006-07 is $3.7 million -- less than the prior year, but more than 2 1/2 times what the contract provides.
Said Fenton: "We're very pleased with where the revenue trends are going."
Contact Deborah Lohse at email@example.com or (408) 275-0140.
Copyright (c) 2007, San Jose Mercury News, Calif.
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