Minneapolis' convention bureau pitched a moneymaking plan to the City Council in 2004: If the city would lend it $2.5 million, it could develop and sell software for booking and managing conventions that would help pay for the costs of marketing the city.
A year later, however, the bureau was back asking for another $2.5 million loan to finish the project, and the council agreed. In 2006, the bureau persuaded the council to allow it to borrow up to $5 million more.
Now the loan for the project has grown to $9.1 million, and it still isn't making a profit. Meanwhile, the bureau's foray into software development is undermining its mission of selling the city to tourists and conventiongoers.
Meet Minneapolis, formerly known as the Greater Minneapolis Convention and Visitors Association, has been forced to make budget cuts for 2008 to meet a $954,000 loan payment due to the city.
"That's harmful -- that's the cost to the city," said Patrick Born, the city's chief financial officer.
Council members say they wouldn't have approved the loans had they known how long the venture would take to turn profitable.
"We went into this with our eyes wide open," said City Council Member Scott Benson, who in 2004 urged the council to approve the initial loan but says he later raised repeated questions. "The council was well- aware of the risk at the time.
"The customers who have the product are very pleased with it. As are we. From that standpoint, it's turned out to be a great product. Time will tell how the business model is going to work."
The software venture began as an attempt by the bureau to develop tools for managing convention sales accounts, hotel vacancies, convention registrations and similar data. Officials said they thought they could sell the software to other convention bureaus, and the revenue could supplement the city's annual $7 million subsidy of the agency.
The not-for-profit Meet Minneapolis formed a for-profit joint venture with a Singapore software writing firm. The partnership was named Internet Destination Sales System (IDSS).
Most City Council members were receptive early in 2004 when the bureau asked the city for the initial $2.5 million. The money was to come from the city's convention center fund, which is financed by city sales, entertainment, lodging, liquor and restaurant taxes. The fund also subsidizes nearly 80 percent of the bureau's budget, and it also covers annual operating losses incurred by the Minneapolis Convention Center.
The initial loan pitch came from Greg Ortale, president and chief executive officer of Meet Minneapolis until this fall, when he left for a similar post in Houston. "It can be very lucrative if we are successful," Ortale told the council's Budget Committee at the time.
Benson, who served on a Meet Minneapolis task force that shaped the proposal, endorsed the loan, saying the opportunity was "tremendous."
Ortale said he expected that IDDS would use only $1.5 million of the $2.5 million.
But Ortale returned the next year, asking for another $2.5 million loan to complete the development of the software and market it. "This is a premier product in the marketplace," he said.
The only misgivings were expressed by then-Council Member Paul Zerby: "We're clearly in a place we didn't expect to be. ... I think we should cut our losses and swallow the bitter pill."
More debt, more scrutiny
Ortale faced more scrutiny when he returned in early 2006 seeking $5 million more. Informed of a key committee meeting, Ortale e-mailed a city official: "I will be there complete with knee pads, chap stick and hat in hand."
As the committee approved the deal, Council Member Paul Ostrow declared: "We're quite confident that this is relatively low-risk."
Born agreed there was little risk that the city wouldn't be repaid, because loan payments could be deducted from the city's annual subsidy of more than $7 million to Meet Minneapolis.
But that posed another risk. "The city will have its money repaid but the price for that is a diminished capacity to market the city for conventions and tourism," Born said.
The council approved the third loan but directed that benchmarks be set before IDSS could draw funds. Only Council Member Diane Hofstede voted no.
The biggest problem for the company was a series of unexpected setbacks involving the technical work of developing the software, Ortale said in an interview.
Meanwhile, interest was accruing on the loans. But the agency kept borrowing money to pay off the interest. By early 2007, after advancing $9.1 million to IDSS of the $10 million authorized, the city refused to lend the agency any more money. "We simply had lost confidence," Born said.
Profit is coming, but when?
Meet Minneapolis interim President Melvin Tennant projects a $600,000 operating loss for IDSS this year, but that swells to $1.7 million with amortization, depreciation and interest expenses. He projects an operating profit next year, something Born doesn't foresee until 2009 at the earliest.
Council Member Lisa Goodman said IDSS has been both a distraction from and a financial drain on marketing efforts by Meet Minneapolis. Besides the loan payment, the $9.6 million Meet Minneapolis 2008 budget shows $185,000 in IDSS expenses.
Goodman said Meet Minneapolis should focus harder on filling the city-owned convention center, noting that the city's subsidy of the convention center's operating deficit has grown from $2.7 million in 1997 to an estimated $15.5 million this year.
What do those who favored the loan think now? "What happened here gives us a lot of reasons for extreme caution," Ostrow said.
Steve Brandt • 612-673-4438