SHORTFALL SURPRISE
There is a $2 million to $3 million shortfall in the hotel/motel tax that funds Memphis tourism promotion and pays debt service on the Cook Convention Center and guarantees a piece of the financing on the new $250 million FedExForum.
The shortfall doesn’t mean the new arena has money problems, because the complicated financing package drawn up two years ago takes revenue from several sources to back the bonds. But it shows how projections can be disrupted by changes in technology and consumer spending habits. And if the trend continues, it could spell trouble for the arena, the convention center, and the Memphis Convention & Visitors Bureau down the road.
In this case, one of the main culprits is the Internet.
John Oros of the CVB told convention board members at their meeting last week that roughly 12 to 15 percent of hotel rooms are now booked via the Internet, which results in lower rates and introduces various middlemen into the equation. He said that trend could account for $1 million of the shortfall.
“It’s a nationwide issue,” Oros said. “It’s a real problem.”
Savvy travelers are now their own travel agents. Instead of booking a room directly with a hotel, they go to Travelocity or Expedia and book their room and rental car at a discount of 10 to 40 percent. The 5 percent county hotel/motel tax winds up being paid on the discounted price. Tax collections are down, even though hotel occupancy, revenue, and demand are up, Oros said.
Mike Swift, administrator of finance for Shelby County, told board members the shortfall “may go as high as $3 million.” The tax brings in about $11 million a year. It funds the CVB and pays operating costs and debt service on the convention center, including the recent $92 million expansion.
The shortfall is the first indication that financing projections for the FedExForum could be overly optimistic, as widely scorned “naysayers” suggested when it was approved by the City Council and County Commission in 2002. Politicians insisted that the arena be off-limits to property tax revenues. So financial consultants cobbled together a mix of tourism taxes, rental car taxes, arena fees, special downtown taxing zones, and MLGW water division payments.
The surprise comes at a time of mixed reports from downtown. On one hand, the Grizzlies are in the NBA playoffs sooner than expected, boding well for future attendance in the FedExForum. On the other hand, the Church of God in Christ (COGIC) is again threatening to move its annual convention from Memphis, and other conventions are negotiating to cut costs. Downtown is battling a crime-problem image in the wake of last week’s rape and murder of a young woman at the Gayoso Apartments on Front Street. And the city and county are weighing a settlement of convention center construction cost overruns that could cost $17.8 million.
Convention center board members were supposed to get a briefing last week on the tax shortfall from Jim Huntzicker, the county’s director of finance and administration. But he canceled just before the meeting. He later told the Flyer that the hotel/motel tax shortfall is “just one piece of a large pie” and that general revenues in the county are up for the year.
“It impacts the convention center because we are going to have to provide more of the operating funds that would have come from the hotel tax,” he said.
In the arena financing plan, the county hotel tax guarantees bonds that are actually repaid by taxes from the downtown tourism development zone, which had no track record at the time the arena was approved. The city of Memphis levies its own hotel tax of 1.7 percent, which is applied to arena debt beginning in 2017.
So should taxpayers be concerned? This naysayer thinks so. Internet bookings of hotels and rental cars are going to become more commonplace, not less. Convention booking agents are just as ruthless. Kevin Kane, head of the CVB, said it’s now a routine opening offer for agents to ask that building rent be waived.
Projections can never account for unexpected events. The big wind storm of 2003 wrecked MLGW’s budget and contributed to a rate increase. The utility’s charter clearly states that surplus revenues are supposed to be used to reduce rates. It says nothing about basketball arenas.
Everybody wants to tax the food and drink and merchandise sold at Peabody Place and on Beale Street. When that money is diverted to an arena, somebody else has to scramble. And I seem to recall a mall closing last year.
Rental cars depend on airport traffic. The Pyramid is vacant. The convention center is over budget. Oh, and the people who negotiated the arena deal for the city and county three years ago are all out of government today. Think positive!
