City’s loans to computer firm aren’t good fits

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From tried-and-true (profitable) municipal liquor stores to untested wireless Internet proposals, there’s no shortage of requests to invest tax dollars in enterprises that have little or nothing to do with government. Some such enterprises can boast financial success, some are losers, many are never tried. Almost all, however, are bad ideas when they divert a government or organization’s money and energy from its primary purposes (even though they generally have the good intention of making more money to spend on those primary purposes). Such is the case with the City of Minneapolis, the Greater Minneapolis Convention and Visitors Association (GMCVA) and the association’s wholly-owned for-profit enterprise called internet Destination Sales System (iDSS). The City of Minneapolis, using tax money earmarked for Convention Center activities, has $5 million invested in iDSS and extended its line of credit to $10 million Feb. 24.

Smart, committed people who have common, altruistic goals and marketable ideas are a plus in almost any situation, and the City of Minneapolis, GMCVA and iDSS seem to have such people. Throw in hard times, overlapping directorships and a pot of tax dollars that not many other people can use, however, and even the aforementioned types of people might be tempted to hold back on the intense scrutiny that should accompany any plan to use those tax dollars.

A few years ago, when city money was very tight, GMCVA people were told to find other ways to make money; that the city could not fund GMCVA activities at its current levels (about $7 million a year) forever. GMCVA isn’t part of city government, but with that much city funding and with the mayor and six city council members on GMCVA’s 43-member board of directors, the two organizations have a very close relationship. And they’re both involved in directing the tens of millions of dollars that come into the Convention Center accounts, mostly through city sales taxes. A venture such as iDSS probably seemed to be a good fit. But it isn’t.

The city had good reasons to give iDSS a thumbs down when the first loan request arrived in early 2004. The company grew out of GMCVA’s frustration in trying to find top-of-the-line computer software for its operations. GMCVA decided it could make its own software package, and make its money back, and then some, selling the service to other organizations like itself all over the world. Even assuming instant and total success, we think it’s a bad idea for GMCVA because GMCVA is largely in business to sell Minneapolis to convention planners, not to sell computer services to other organizations. We think it’s a bad idea for the City of Minneapolis to lend money to iDSS because it’s a less-than-conservative investment (computer-service enterprises are particularly risky in today’s economy) and because the city is in business to provide municipal services and to govern, not to invest in computer businesses.

And, to add to the problems, iDSS hasn’t experienced instant and total success. Losses exceed $4 million so far, and are expected to continue at least into next year. Early losses, slower-than-anticipated sales and unforeseen product-development glitches are common in businesses such as iDSS. The fact that they happened here doesn’t reflect poorly on the people involved. The fact that such situations are so common in the industry does, however, reflect poorly on such a company’s suitability for a multi-million-dollar city line of credit.

The city has some security for its loan money, but the taste of recovery, if needed, would be bittersweet. The city has first dibs on iDSS’s assets and profits as long as loan money is outstanding. It’s security, yes, but it’s also likely to scare off private investors who want some of those “up side” benefits. The city can also take the loan money out of its appropriation to GMCVA. That’s security, yes, but why would the city want to financially cripple the people who are out there selling Minneapolis to convention planners and others?

On its face, the iDSS situation has too much risk, too many layers, too many players, and relationships that look too cozy. We hope iDSS and GMCVA have great success; then we hope iDSS gets sold for a high price to a private concern; then we hope GMCVA and the City of Minneapolis will take the money and run to projects that are more consistent with their respective missions.

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