by Joe Sullivan
After declining markedly during Mayor Victor Ashe's first decade in office, the city of Knoxville's debt has more than doubled over the past four years. From a low of around $120 million in 1998, the city's debt has risen to $258 million, primarily reflecting the costs of its new convention center.
In the fiscal year beginning July 1, debt service (i.e. principal and interest payments) is due to rise to $24.8 million. But the city budget that Mayor Victor Ashe will unveil on April 23 is expected to show that these payments will be covered by existing revenue streams. Continued dedication of 81 cents of the city's $2.70 property tax rate (as adjusted for last year's reassessments) covers $21 million of the total. The balance is accounted for by hotel/motel and admissions taxes that are also dedicated to debt service.
So the question facing the city now is whether it can take on more debt for downtown redevelopment projects, parks, roads and other capital outlays without resort to raising taxes. At first blush, it would appear that contemplated outlays totaling on the order of $85 million over the next few years would require an increase in debt-service taxes. But appearances can be deceiving, for reasons we will come to.
The list of projects for which city funding is being considered is a lengthy and imposing one. In the downtown area alone it includes:
 $18.8 to support a Market Square redevelopment plan, including a Gay Street cineplex, which City Council is being asked to bless in concept next week.
$20 million or more for a garage and other infrastructure to support a new convention center headquarters hotel. The city is retaining a hotel consultant to advise on the feasibility of such a hotel and the city's role in a public/private partnership that would build it.
$7 million for a garage on or near Jackson Avenue to support all the residential renovations of older buildings that are underway or contemplated in the vicinity of Gay and Jackson.
A $5 million commitment to Universe Knoxville if developers of the proposed digital-age planetarium can secure $65 million in private financing.
A $4 million pledge toward the planned $20 million renovation of the Tennessee Theatre.
Beyond that, the city's capital improvement program includes $4 million for completion of the new Northwest Park and renovation of Caswell Park. Then there's $2.3 million for a permanent new animal shelter, $15 million for replacement of the Jacob Building at Chilhowee Park and $9.4 million for phases two and three of a First Creek flood control plan. However, the city's finance director, Randy Vineyard, notes that with phase one completed, "First Creek held up pretty well during last month's heavy storms." And he says a new exhibition building at Chilhowee Park "won't happen in the next two years."
Yet even if all of the above comes to fruition over, say, the next five years, the city appears capable of covering the $85 million tab without having to raise taxes. The reasons it's got the wherewithal to do so are three-fold:
1. Debt service requirements on existing borrowing decline by an average of a $1 million annually over the next five years (to a total of $19.7 million in fiscal 2008). That frees up, in stages, $5 million a year in dedicated debt service revenues to be applied to new projects. A rule of thumb in municipal finance is that $1 can service about $15 in outstanding debt. Hence, the $5 million that will be freed up can support on the order of $75 million in new borrowings.
2. Recapture of state sales taxes on incremental sales in the central business district is also earmarked for debt services. Under the redevelopment plan for Market Square that's now before City Council, developers Kinsey Probasco project additional sales on the Square of $16 million in the first year, rising to $27 million in the third year. Under the recapture law, the city would be entitled to 5.5 percent in sales taxes that would otherwise go to the state. That produces $880,000 to $1,485,000 in sales tax revenues that are technically dedicated to convention center debt service but, as a practical matter, can cover any city debt.
These figures don't include any revenues from the proposed Gay Street cineplex for which Kinsey Probasco has so far declined to make any projections. Under earlier estimates made for the Public Building Authority by Economic Research Associates, a 10-screen cineplex could be expected to generate annual revenues of $4.6 million. With sales tax recapture, that's another $250,000 in debt service revenue to the city.
A combination of more downtown residents and more visitors (to the convention center, Universe Knoxville, etc.) should beget yet more sales tax recapture revenues. So it seems safe to predict that these revenues together with funds freed up from existing debt service should be more than enough to cover all new financing commitments.
3. There's a good chance that much of the cost of the cineplex and an accompanying garage could be covered by a federal grant. As proposed by Kinsey Probasco, the city would pick up the tab for the $6 million facility. But city officials are reliably reported to be looking at relocation to that site of a bus and trolley transfer center previously pointed toward another Gay Street location. The city has already received $1.8 million from the Federal Transit Administration for design and engineering of the facility that could include a garage and even the shell for a cinema, leaving only its interior build-out to be funded locally. That's exactly how Chattanooga's downtown cinema and its garage got built—with an FTA grant (subject to a 20 percent state/local-matching requirement.)
For all these reasons, it's clear that downtown redevelopment starting with the Market Square plan can proceed without adding any burden on taxpayers.
April 11, 2002 * Vol. 12, No. 15
© 2002 Metro Pulse
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