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by Joe Sullivan

Ever since Mayor Victor Ashe announced plans for a new convention center three years ago, a big unanswered question has been: How is the city going to pay the $160 million tab?

At long last, the mayor's budget for the fiscal year beginning July 1 provides some answers. A 19 cent increase in the city's present $2.85 property tax rate, coupled with a new 3 percent city tax on hotel/motel room rates, would be dedicated to convention center financing. Together, these proposed levies would raise $6.4 million toward covering the $11.1 in annual debt service needed to repay $160 million in borrowings over 30 years. Most of the balance would be met by shifting another 19 cents in property tax revenues out of the city's operating budget (general fund) and dedicating it to debt service also. In effect, this shift reallocates most of the 27 cent property tax increase that the city imposed two years ago largely in anticipation of convention center needs.

If such heavy reliance on hitting up property owners at large for the bulk ($8.4 million) of this convention center tab were the last word on the subject, then a lot of taxpayer squawking would be in order. After all, the new facility, while contributing to the city's overall economic vitality, stands to primarily benefit a fairly narrow set of businesses. So it stands to reason that these businesses and/or their customers ought to be paying a big part of the freight.

In the fullness of time, that's exactly what is supposed to happen. Under a 1998 act of the state legislature, the city is entitled to retain incremental state sales tax revenues in the Central Business Improvement District for the purpose of paying off convention center debt. If the $380 million downtown development plan recently approved in concept by the Public Building Authority comes to fruition, PBA projects state sales tax retention starting at more than $8 million in 2004 and doubling over the life span of the debt. Anything approaching these amounts would, of course, go a long way toward paying for the convention center perhaps in lieu of the property taxes that Ashe is now proposing.

The rub is that the sales taxes and other downtown development revenue streams won't start kicking in for several years whereas the city is already well on its way toward running up the $160 million debt. City Finance Director Randy Vineyard had well-laid plans for lessening the impact of this time gap by deferring principal repayments until 2005 and years thereafter. By then the city will have paid off more then half of its presently outstanding debt of $103 million (exclusive of the convention center) thus freeing up yet another source of funds to go toward paying for the convention center and other new capital outlays.

But the state has thrown a wrench into the city's works. Under the 1998 sales tax retention law, the state commissioner of finance must approve the city's plan for making use of it. Commissioner John Ferguson has indicated that he will only approve a plan that calls for level payments (like a mortgage) on the city's convention center debt, thwarting Vineyard's approach that would have achieved more nearly level payments on the city's entire indebtedness over the next 30 years while reducing the city's need to increase taxes in the short run.

To cement approval of the sales tax retention, Vineyard is resigned to proceeding very shortly with a $128 million level payment bond issue. Of this, $115 million would go for the convention center and the balance for a First Creek flood control project, Chilhowee Park and Caswell Park improvement plans and creation of a new city park in Northwest Knoxville. (The initial $45 million in convention center outlays that City Council approved last year are already the subject of a separate financing arrangement.)

All of these convention center strains are compounded when it comes to financing the additional $130 in city outlays for public infrastructure that's contemplated to support $250 million in private investment under the PBA's downtown development plan. Once again, there's a timing gap between incurrence of these outlays, mostly for garages and a shop-lined pedestrian mall over Henley Street, and the commencement of the revenue streams that the development plan is supposed to generate.

It's not uncommon in projects of this nature for a city to resort to what's termed capitalization of interest expense incurred during the project's construction phase. This entails borrowing to cover interest expenses on a construction loan and then adding these expenses to the principal amount to be financed via a long-term bond issue upon completion of the project. Taxpayers are thus spared having to foot the bill for the interest expense in the meantime.

But this approach runs afoul of the state's strictures on making downtown development debt service eligible for state sales tax retention. Under the terms of the 1998 act, much of the $130 million would appear to qualify. However, this is subject to negotiation with the finance commissioner, and Ferguson is almost sure to insist on level payment debt service from the outset.

Perhaps because the downtown development plan is still in a formative stage, Ashe was totally silent on the subject of how to pay for it in his budget presentation on Tuesday. His silence stands in sharp contrast to the enthusiasm with which he greeted the plan when it was unveiled in January. He termed it potentially the most significant development for Knoxville "since Franklin Delano Roosevelt proposed TVA" and also stressed the need for it to go forward concurrently with and complementary to the convention center.

But how to cover its $10 million a year debt service in the short run? The fiscally conservative Vineyard is himself averse to capitalizing construction interest expense because "I feel strongly that we've got to have a funding mechanism for every expenditure." So what are the alternatives? Vineyard's first out-of-the-box response is a 1/2 percent increase in the city's own 2 1/4 percent sales tax, which would require voter approval in a referendum. "I think we ought to consider another sales tax referendum," he says in one breath. But in the next breath he acknowledges that, "We know its [chances for approval are] dead in the water for now."

On June 30, Ferguson is due to take his leave as finance commissioner and is to be succeeded by the long-time dean of UT's Business School, Warren Neel. Give us a break, Old Buddy.