The County Executive’s Ball: Turning Down a No-Lose Deal

Last week, we reported that the County Executive’s Ball will no longer be held at the Marriott Conference Center in North Bethesda, but instead will be held at the Hilton in Rockville. We noted that Marriott is one of the county’s largest employers while Hilton spurned relocation incentives from Montgomery County and moved to Virginia instead. Nevertheless, the County Executive moved his ball from the Marriott facility to the Hilton. All of that is true, but there is another wrinkle to this issue.

The county actually owns part of the Marriott Conference Center and in the past has used it for the County Executive’s Ball without paying rental fees. So why is the Executive moving the event to a private facility when the county is facing a $608 million budget deficit?

The Montgomery County Conference Center at the North Bethesda Marriott was completed in 2004. The state and the county each issued $20 million in bonds to finance the facility and jointly own it. When the state’s bonds are paid off, the county will assume sole ownership of the Conference Center. The attached hotel is owned by Quadrangle Development Corporation of Washington, DC. Both facilities are managed by Marriott International, a company headquartered in Bethesda, under a 20-year agreement.

The county’s FY 2010 budget includes $617,400 for “a full-time position to manage the operational and fiscal oversight of the Conference Center complex; non-routine or major repairs, alterations, improvements, renewals, and replacements; and the designated reserve required by the management agreement with Marriott International, Inc.” The budget also assumes that the county will earn a net $1,220,415 from the Conference Center in FY 2010. The budget states:

Revenues consisting of net operating income from the Conference Center and land rent from the hotel are also reflected in the NDA [non-departmental accounts]. Twenty percent of the County's net proceeds from Conference Center operations will be retained for investment in marketing and facility improvements that will increase Conference Center usage.

It is important for the county to promote usage of the Conference Center since it is responsible for paying off $20 million in bonds issued to finance it. In fact, according to the Department of Economic Development, the center was “constructed as a profit-making enterprise that would contribute revenues to the County General Fund.” If the Conference Center is not sufficiently utilized, it will not generate positive cash flow for the county, it will not be able to pay for its own costs and the county will have to locate other sources of money with which to pay off its bonds.

The Conference Center’s pricing has been controversial. Both the Montgomery County Democratic Party and the Montgomery County Chamber of Commerce have complained about the high prices charged by the facility, which is the biggest in the county and has an effective monopoly on very large events. Marriott, which manages the facility, establishes its rates. And the more it charges, the more the county makes. An Office of Legislative Oversight report states:

The County has a Management Agreement with Marriott International Inc. to run the Conference Center. (Marriott also runs the hotel attached to the Conference Center.) Under the agreement, Marriott establishes prices at the Center. The agreement also allows six days each year for County use without incurring meeting facility rental fees.

The County provides funds each year through the Conference Center NDA for major repairs and the DED staff position. Marriott receives a base management fee of 3% of gross revenue. Once the net operating income reaches $500K in a Marriott fiscal year, Marriott receives an incentive management fee of 25% of any additional net operating income. Marriott distributes the remaining net operating income to the County, projected to be $1.4 million in FY09. The County will also receive $319K in land rent from the hotel attached to Conference Center.

So if the County Executive moved his ball out of the facility for cost reasons, that makes no sense since a significant portion of those costs would be returned to the county in profits.

But there is another reason why the move is illogical: the county has used the facility in the past without paying a rental fee.

Under its agreement with Marriott, the county is entitled to hold events at the Conference Center for six days a year without paying rental fees. The county is still responsible for other costs including food and beverages, equipment rental and parking. For three straight years, the county selected the Executive Ball as one of the events to be held rent-free and presumably saved a bundle of up-front money by doing so.

When the county holds events at its Conference Center, it accomplishes several important purposes. First, it promotes one of its prized assets. Second, it rewards a local company (Marriott) which holds the management contract. And third, it can save up-front expenditures by escaping rent. Even if it pays rent, part of that money comes back to the county as profit on the Conference Center, so use of the facility is a no-lose deal. When the county moves the Executive Ball to the Hilton, it loses all of these advantages, makes its own Conference Center look bad and steers money to a company that thumbed its nose at the county’s relocation incentive and moved to Virginia instead.

How does this make any sense for county taxpayers? How does this fit with the County Executive’s self-proclaimed fiscal conservatism? And how much will be added to the county’s colossal budget deficit as a result of this decision?