By: James Ylisela Jr. November 23, 2009
The chief executive officer won his post after raising campaign cash for disgraced Gov. Rod Blagojevich. The just-departed human resources director owed her job to a powerful state senator. Other top executives have long ties to Mayor Richard M. Daley’s political machine.
That’s what clout looks like at the Metropolitan Pier and Exposition Authority, known as McPier, a little-understood government entity that operates the city’s primary convention venue, the vast McCormick Place complex; the adjacent McCormick Hyatt Regency Hotel, and the lakefront tourist center Navy Pier.
But the defection of two major trade shows this month and a deepening financial crisis raise questions about how well an agency run the Chicago Way can compete with more-efficient, warm-weather convention centers such as Orlando, Fla., and Las Vegas.
Despite the high prices it charges trade groups to stage conventions at McCormick Place, McPier doesn’t make enough money to cover its operating expenses or payments on its debt. Agency officials project operating losses will grow eightfold to $28.8 million in the fiscal year that started July 1. And the state of Illinois will have to fork over hundreds of millions of dollars in the years ahead to make up shortfalls in tourism taxes that were supposed to cover McPier bond payments.
These financial woes are particularly striking in view of McPier’s extraordinary fiscal powers and valuable assets. It has direct access to taxpayers’ wallets, collecting more than $100 million in taxes annually and borrowing $2.5 billion on the state’s credit. McPier generated $211 million in revenue in fiscal 2009, mostly from trade shows, tourist spending and hotel bookings. Some 2.3 million people attended conventions at McCormick Place, while 8 million visited Navy Pier.
“We expected to lose money this year,” says McPier Board Chairman John Gates Jr., a former real estate executive appointed to the post last month by Mr. Daley. “We just didn’t expect to lose this much.”
A slumping economy contributed to the expanding losses. And it’s widely acknowledged that labor costs at McCormick Place exceed those of competing venues. But a Crain’s investigation shows McPier has deeper problems all its own.
Compounding the operating losses is a mountain of debt brought on by its massive and, some say, overly aggressive financing of the McCormick Place West Building, which opened in 2007. McPier expected money from taxes on hotels, restaurants, taxis and car rentals to cover annual debt service, which totaled $130 million in 2009. But those taxes never covered the bond payments — even during banner convention years in the middle of this decade — forcing the agency to drain a reserve fund and dip into the state’s general sales tax fund for the first time in 2009.
McPier tapped $18.8 million, and officials say they’ll need $34 million in sales taxes next year. The cumulative funding gap is expected to exceed $500 million by 2021, a sign the financing model for the $882-million expansion was fundamentally flawed.
Chicago’s chief convention rivals carry far less debt. Annual debt payments for convention centers in Orlando and Las Vegas are $74 million and $37 million, respectively.
The way out is uncertain. McPier’s credit is tapped out, which means it can’t restructure its debt and lower the payments without approval from the Illinois General Assembly. But refinancing legislation is caught up in Springfield’s political squabbles.
Without refinancing, the agency can’t stay competitive by building desperately needed hotel rooms or modernizing the oldest McCormick Place building, the Lakeside Center, which has become a financial drain.
Last week, Mr. Gates and his fellow board members took a step toward keeping their business competitive — and returning to profitability — by announcing a 20% cut in its 500 administrative staff positions through early retirements and layoffs. The cuts won’t take full effect for at least a year, and officials won’t say which positions will be eliminated.
McPier’s salaried positions, which include politically connected senior directors and managers, have actually increased in the past three years. But CEO Juan Ochoa says the cuts have everything to do with “right-sizing” during a recession and nothing to do with politics.
“Our payroll isn’t bloated,” he says. “I can’t speak to what happened before I got here. But we don’t hire that way today.”
McPier officials say the convention business is cyclical and that they will show a profit in 2011 and 2012, when major trade shows return to McCormick Place, producing more sales, hotel bookings and tourist dollars — and tax revenue.
They are considering improvements at Navy Pier to generate more revenue and are negotiating with labor unions to change restrictive work rules and high costs. And they’ll be lobbying the Legislature to give them some room to maneuver. Last week, they formed a task force to find ways to keep McPier competitive.
“We obviously have some problems,” Mr. Gates says. “We’re not saying we don’t. Everything is on the table, but we have to get our own house in order first.”
Can McPier stay viable without changing the way it funds itself? Can Chicago, a cold-weather city with a reputation for being difficult, still compete? And can the agency really kick its addiction to political clout for the sake of its own future?
All of this makes McPier a maddening contradiction, says Rob Hunden, president of Chicago-based Hunden Strategic Partners, a real estate consultancy that specializes in large convention, sports and entertainment facilities.
“It’s a matter of extremes. McCormick Place is big — the biggest convention center in the country — and it’s beautiful,” Mr. Hunden says. “Chicago is a fantastic destination. But then there’s the other extreme: onerous work rules, problems of running the place, political issues. Chicago is an all-pro city, but it has a team with problems.”
FROM BARTENDER TO $130,000 JOB
Tanya Navratil was looking for part-time work in 1994 when she dropped by the Bella Luna Café on North Dearborn Street, near her home, and asked owner Danny Alberga if he needed a bartender a few nights a week. A couple of introductions later, she met state Sen. James DeLeo, D-Elmwood Park, an influential legislator who has placed dozens in state jobs.
It’s not clear what role he may have played in Ms. Navratil’s hiring at McPier in 1996. But in 2003, he placed her name on Mr. Blagojevich’s infamous “clout list” to be the agency’s human resources director. She was making $130,435 before resigning last summer.
Ms. Navratil could not be reached for comment; Mr. DeLeo did not return calls.
A McPier spokeswoman won’t discuss Ms. Navratil’s qualifications. That’s part of the problem: McPier’s salaried workforce is really two payrolls — professionals with years of experience in the convention and tourism business and politically connected staffers with murkier credentials.
It remains to be seen which group will absorb more of the staff cuts McPier announced last week.
Crain’s examined three years of payroll lists supplied by McPier. The 2009 payroll lists 1,832 people. Of those, 1,510 are hourly workers, mostly plumbers, electricians and other union members who work the trade shows at McCormick Place. That leaves 322 salaried employees, about 17.5% of the workforce, who consume 30% of McPier’s personnel costs.
In all, the agency spent $96 million on salaries and benefits in 2008 — about 44% of its revenue. That’s far more than its chief competitors. Convention centers in Las Vegas and Orlando spend less than 20% of revenue on personnel.
McPier’s payroll has fluctuated in recent years, but the changes have come mostly from hourly and temporary workers: It employed 1,902 hourly workers in 2007. Those numbers climbed to 2,230 in 2008, when the West Building opened, and fell to 1,510 in 2009.
But in the same period, the number of salaried positions grew, to 322 from 301. The number of employees earning more than $100,000 also increased, to 54 from 48.
The two men at the top of the organizational chart reflect the professional and political sides of McPier’s payroll. General Manager David Causton, who earns $197,380, is a convention-industry executive with 20 years of experience in Chicago and Baltimore. CEO Mr. Ochoa, at $195,000, owes his post to his close ties to Mr. Blagojevich.
Mr. Ochoa, a former Marine and unsuccessful aldermanic candidate, was already well-known to Mr. Blagojevich when the then-governor appointed him in January 2007. As head of the Illinois Hispanic Chamber of Commerce and its earlier incarnation, the Mexican-American Chamber of Commerce, Mr. Ochoa generated $87,850 in contributions for Mr. Blagojevich’s campaigns from the organization, its board of directors and their companies, Illinois Board of Elections records show.
Mr. Blagojevich, in turn, awarded the chamber $1.7 million in state grants, including $400,000 in 2004 to improve the competitiveness of minority contractors. Mr. Ochoa even had his own entry on Mr. Blagojevich’s clout list, placing some 24 job-seekers at various state agencies between 2003 and 2004.
Mr. Ochoa says he turned down Mr. Blagojevich twice before finally accepting the McPier post. “It’s important to have good relationships with the governor, the mayor and other elected officials,” he says. “My career has been about empowering the Latino community. I make no apology for that.”
No one gets hired at McPier because of politics, Mr. Ochoa says, but two of McPier’s three assistant general managers hail from the patronage-heavy 19th Ward on the city’s Southwest Side. James “Skinny” Sheahan is the brother of former Cook County Sheriff Michael Sheahan, whose service to Mr. Daley dates to 1981. James Sheahan served as the city’s director of special events from 1992 to 1998 before moving over to a $165,470 post at McPier.
The assistant general manager at Navy Pier is another 19th Warder with a familiar Chicago surname. Michael Degnan, son of longtime mayoral confidante and former state Sen. Timothy Degnan Jr., has worked at McPier since 1985 and earns $141,606.
McPier employs 32 senior directors of various departments, including Nonda Harris, the brother of former Blagojevich chief of staff John Harris, who draws a salary of $153,359 as senior director of development.
Nonda Harris, a former city aviation worker, shows up on the clout list of former Blagojevich fundraiser Chris Kelly, who committed suicide in September after being indicted on corruption charges. John Harris pleaded guilty to one count of wire fraud earlier this year after agreeing to testify against Mr. Blagojevich at the former governor’s trial next year.
The salaried workforce is rife with supervisory titles. There are, for example, 47 managers and 10 assistant managers, 34 directors and 14 assistant directors, and 40 people who have the word “coordinator” attached to their job descriptions.
Among the assistant directors is Kevin Lavin, who makes $90,408. In 2003, convicted fundraiser Antoin “Tony” Rezko included Mr. Lavin’s name on the Blagojevich clout list, urging that Mr. Lavin be named an assistant general manager of McPier.
Messrs. Lavin, Harris and Degnan didn’t return calls to comment.
Citing his long service to the city and McPier, James Sheahan says, “I make no apologies for who I am. If there’s a penalty for being a Sheahan, I can’t do anything about that.”
The McPier spokeswoman declines to discuss specific employees but says the agency is committed to “building and maintaining a highly skilled workforce.”
PAYING AND PLAYING AT McPIER
Midwest Environmental Service Group used to dust Mr. Blagojevich’s office as part of its three-year cleaning services contract at the James R. Thompson Center. But the Chicago-based company didn’t pad the ex-governor’s wallet, and now Vice-president Gregory Heath wonders if it may have cost him a contract at McPier.
In March, Midwest lost out to Chicago-based Globetrotters Engineering Corp. and Philadelphia’s Aramark Corp. for a five-year, $78-million housekeeping contract, even though Midwest’s bid was $20 million lower.
“I worked on that proposal for a year,” Mr. Heath says. “Why would you pay someone $20 million more when you have someone else qualified to do the work?”
Did campaign contributions make the difference? Mr. Heath doesn’t know, but says that’s one area where he can’t compete.
Globetrotters, which specializes in architectural and engineering services, has donated about $375,000 to various political candidates over the past 15 years, board of elections records show. The company gave $54,000 to Mr. Blagojevich alone. President Niranjan Shah kicked in another $16,000 to various candidates.
Globetrotters referred calls to Aramark. A spokesman for Aramark didn’t provide a response by press time.
Midwest, for its part, made a $1,000 contribution to the 26th Ward Democratic Organization in 2008.
McPier CEO Mr. Ochoa says the agency does not award contracts based on campaign contributions. Yet McPier contractors continue to pump out donations to state and local officials.
“We’ve certainly heard from Illinois businesses that feel if they want to compete for state contracts, they have to play in the campaign contributions arena,” says David Morrison, assistant director of the Illinois Campaign for Political Reform. “When you see someone make a huge donation and then get a tangible benefit, it sure looks bad.”
McPier has more than $1 billion in contracts outstanding. Vendors include big national corporations that distribute campaign contributions liberally. AT&T Inc., for example, gave $5.6 million to Illinois politicians in the past decade. The Texas company has McPier contracts worth $2.7 million.
Globetrotters’ partner, Aramark, is no stranger to the donation game either; the company has given more than $110,000 to Illinois candidates, including $7,000 to James Sheahan’s brother, former Sheriff Michael Sheahan.
Local companies big and small also contribute. AMS Mechanical Systems Inc. in Burr Ridge makes $150,000 a year providing refrigeration and other mechanical contracting services at McPier. State records show the company has donated $70,000 in the past decade — with $31,000 going to Mr. Blagojevich. Libertyville-based Aldridge Electric, recently awarded a McPier contract, has given $129,000, including $11,000 to Mr. Blagojevich.
AT&T and Aldridge didn’t return calls.
Thomas Kelleher, a vice-president at AMS Mechanical, says campaign contributions are a way to stay in the loop about upcoming projects. “Everything we’ve done has been bid competitively,” he says. “(Donating) is a way of getting to know people.”
Even would-be McPier contractors make campaign donations. McPier maintains a pool of 141 “qualified” vendors deemed capable of responding quickly to the authority’s needs. The vendors’ qualifications are approved in advance, but they still must submit bids to win contracts; deals worth more than $10,000 require approval by the McPier board.
Shah Engineering Inc. (which isn’t connected to Niranjan Shah) is qualified as a McPier vendor, even though the Chicago company pleaded guilty in 2007 to overcharging state and municipal entities about $5.5 million. After the conviction, McPier took work away from Shah Engineering but kept it on the qualified list. Vidyadhar Mohnalkar, McPier’s director of construction management, worked for Shah until 2006, and joined the authority in 2008.
Despite the recession, McPier’s spending on outside vendors is relatively unchanged. It spent $96.4 million on direct expenses in 2008 and $96.3 million in 2009 — $15 million more than it budgeted. Even the trimmed-down 2010 budget calls for $89.4 million in spending.
Mr. Gates called McPier’s procurement process “incredibly transparent” — so much so, he says, that “we’re often a difficult entity to bid for.”
The McPier spokeswoman says agency leaders are examining the contracting process to make it more open and easier to do business with McPier. “We encourage anyone and everyone to bid on (McPier’s) contracts.”
Midwest’s Mr. Heath still wonders what happened with his bid. “I guess it’s a cost of doing business,” he says of the campaign contributions. “Now everything’s turned upside down (at McPier) and they have to lay people off. We could have saved them a bundle.”
The International Plastics Showcase, held every three years, is one of McCormick Place’s oldest and biggest trade shows. In June, the convention of the Plastics Industry Trade Organization drew 2,000 companies to exhibit in about 1 million square feet of McCormick Place’s West and South halls. About 75,000 people attended from 120 countries.
Afterward, Crain’s sister publication Plastics News polled readers about whether the industry group should hold its 2012 convention in Chicago or Orlando. The Florida locale took an early lead in the online poll, but then hundreds of votes began pouring in for Chicago. After one week, 2,912 votes had been cast, and McCormick Place was the runaway winner.
Meghan Risch, public relations director for the Chicago Convention and Tourism Bureau, McPier’s marketing arm, told Plastics News she had urged member companies, bureau staffers and McCormick Place employees to vote in the poll.
Stuffing the ballot box may be a Chicago tradition, but it didn’t save the convention for McPier. Organizers of the plastics show, which has been in Chicago since 1971, last week chose Orlando for their 2012 event, after some exhibitors complained about high costs and burdensome work rules at McCormick Place.
Exhibitor Ron Kirscht of Minnesota-based Donnelly Custom Manufacturing Co. says in a blog post that he was angered by McPier’s online stunt, even though he voted for Chicago “with reservations about the shakedown and price gouging that is manifest for the exhibitors and conventioneers.”
McPier officials say they are addressing these issues. In September, they dismissed 100 of the 150 electricians who are under the authority’s control. Their message to the remaining 50 foremen: Whoever shows up to work at McPier had better have the right attitude.
“We need to improve the way we do business and focus on the customer experience,” McPier Board Chairman Mr. Gates says. “This will send a message to everyone else who works with us.”
Those changes didn’t come in time to save another major convention: the Healthcare Information and Management Systems Society. HIMSS is based here, and its owners feel a certain loyalty to their city after putting Chicago in their three-city convention rotation after Hurricane Katrina left New Orleans without a venue.
The medical trade show, which attracted 28,000 people this year and generates about $50 million in local spending, uses 1 million square feet of exhibit space, numerous meeting rooms for breakout sessions and pre-conference workshops and the entire Hyatt Hotel, HIMSS Executive Vice-president R. Norris Orms says.
But the group announced this month that it will leave for Las Vegas in 2012 after stops in Atlanta next year and Orlando in 2011.
The reason: a $200,000 bill from McCormick Place electricians.
Mr. Orms says his convention may return if McPier can get its prices in line with other venues: “Chicago is a wonderful town. We like the people. We just disliked the price.”
High prices have another big Chicago convention mulling over a move, the Chicago Tribune reported last week. A spokesman for the National Restaurant Assn., which brings more than 50,000 people and $86 million in spending to the city every year, told the Tribune its exhibitors “continue to be concerned about the costs of doing business in Chicago and at McCormick Place.”
BIG THREE FIGHT FOR BUSINESS
Chicago is losing ground to its two biggest convention rivals, Las Vegas and Orlando. While McCormick Place still holds the top spot for the largest exhibit space, the convention centers in Las Vegas and Orlando are hosting more events. McPier also carries more than six times the debt of its two rivals. McPier officials say their rivals can strike better deals with trade show organizations because their convention operations are subsidized by tax dollars.
Hotel accommodations are another weakness for McCormick Place. Orlando and Las Vegas have many more hotel rooms near their convention venues than Chicago, says Thomas Hazinski, an analyst at New York-based HVS Capital Corp. who has advised McPier on hotel expansion.
A lack of rooms near the convention center makes it harder to attract both mega-conventions and the smaller shows and meetings that are becoming the lifeblood of the industry.
“It’s a disadvantage for McPier, particularly for the smaller shows that would fit into the (new) West Building,” Mr. Hazinski says. “We’re competing with second-tier cities because they get (connected hotel rooms) in those cities. Even Milwaukee has more connected rooms than Chicago.”
Towns such as San Antonio, Indianapolis and Denver each have 4,000 hotel rooms connected to or very near their convention centers, says Mr. Hunden of Hunden Partners. The Hyatt has 800.
Mr. Gates doesn’t buy that notion.
“We don’t need more hotel rooms onsite. We need more hotel rooms in general,” he says. “With our dedicated bus lane, you can be downtown in seven minutes.”
Despite all the issues before them, Messrs. Gates and Ochoa strike an optimistic tone about McPier’s future. Mr. Ochoa points to a $10-million incentive fund passed by the Legislature that the authority can use to offer better deals to potential trade show customers.
Mr. Gates promises a stronger promotional effort from McPier.
“We’re not very good at marketing ourselves,” he says. “We’re going to demonstrate that we’ve made some big changes.”
(Correction: This story reflects a correction of an error in the original version, which incorrectly reported that Kevin Lavin is the brother of Jack Lavin.)
©2009 by Crain Communications Inc.