by Joe Sullivan
The Knoxville Convention Center has become the black hole in the city’s budget in much the same way that TennCare costs have been bogging down the state.
The convention center’s $4.3 million operating deficit and $10.2 million in debt service on the $162 million borrowed to pay for the facility are hampering mayor Bill Haslam’s efforts to shape his initial city budget and will continue to shackle him until the drain can be curtailed.
“While it’s not as bad as TennCare since convention center costs aren’t going any higher, it is definitely our TennCare in the sense that it’s sucking up all of our discretionary dollars and making it hard for us to provide the kind of services people want without a drastically different tax rate,” Haslam says with consternation.
Just as Gov. Phil Bredesen turned to a consulting firm to make recommendations for TennCare cost containment, Haslam is looking for a consultant to address ways to deal with the convention center’s plight. The need for a headquarters hotel, parking needs, and how the convention center is being marketed and operated are on the list of issues he wants to see addressed.
“If we can find somebody we have trust in, we will commission a study that hopefully will say here are a few things you can do that will really make a difference,” Haslam says. While he hasn’t settled on a candidate yet, he hopes to start the study soon because “if it weren’t for our convention center problem, the city wouldn’t have a budget problem.”
Haslam believes that the lack of a headquarters hotel is a big part of the problem, “but I can’t tell for sure, and what I want to know is if we can figure out some way to make a hotel happen, it will really make a difference to the convention center.”
Cutting if not eliminating the convention center’s operating deficit is only part of the budgetary benefit that Haslam is seeking. The other part is generating more tax revenues that additional convention activity would beget toward covering the facility’s financing cost.
When the convention center was built, the city got a special dispensation from the state that allows it to recapture most of the growth in state sales tax revenues resulting from increased sales in the city’s central business district. The expectation going in was that a successful convention center would spur enough growth in downtown business activity to produce several million dollars a year in recapture revenue. But the recapture take this past year was only $1.3 million. A portion of Knox�County’s hotel/motel tax revenues and all of the city’s contribute $4.2 million toward convention center debt service, and this contribution could also grow substantially if convention activity were to flourish. Growth in all of the above would serve to reduce the $5.4 million in property tax revenues that are presently dedicated to cover the balance of the convention center’s debt service. And any such reductions would enable the city to apply these revenues to other uses.
In Haslam’s way of looking at it, the sum of this $5.4 million and the convention center’s $4.3 million operating deficit just about equals the city’s overall budget shortfall for the fiscal year ahead. The shortfall consists of obligatory increases in operating expenses above the $133 million budgeted for the current fiscal year. These include a mandatory 2.5 percent pay raise for city employees and increases in pension fund contributions, health insurance and workers’ compensation costs. To that list, Haslam adds the cost of putting a halt to drawing down the city’s reserve fund to cover outlays—a resort that has cut the city’s fund balance nearly in half, which Haslam frowns upon, over the past two fiscal years.
Revenue growth may cover about $2 million of the $9 million shortfall that Haslam projects. And over the next month, he will be working with city department heads on expense reductions to cover as much of the rest as possible without impairing city services. Yet while he believes there’s room for cuts in some areas (he won’t say how much), he also believes it is imperative to restore funding for others—especially street paving—that former Mayor Victor Ashe had almost eliminated from his budget.
To the extent that a property tax increase is needed to balance the budget, the blame for higher taxes can be placed squarely at the convention center’s doorstep. By hindsight, the convention center never should have been built without a top flight new hotel adjacent to that doorstep. But Haslam can only play the hand he’s been dealt.
The city’s existing downtown hotels, who don’t want the competition that a new hotel would bring, have managed to tie the mayor’s hand for the nonce by the effectiveness of their campaign against it. The campaign, which started with a call for a referendum on the issue, resulted in City Council adoption of a prohibition against any city backing of a new hotel, even including a garage that could also help solve the convention center’s serious parking problem.
The study Haslam has in mind would encompass whether it’s feasible to get a new headquarters hotel built under these constraints as well as whether renovation and expansion of an existing hotel could give the convention center the boost it needs. The impact of a new hotel on downtown’s existing hotels would also be considered. But Haslam says, “Our first acknowledgment is that we’ve got a convention center problem, and that’s got to be the priority because it’s taking $9 million out of our budget.”
To judge by competing proposals from which the city’s Industrial Development Board selected a new hotel developer last fall, some form of city backing will be needed to obtain financing for the $60 million, 400-room hotel that was contemplated. But that backing need not involve any upfront outlays on the city’s part at taxpayer expense. Rather, the entire cost of the project including a $15 million garage would be financed by revenue bonds on which the city’s only exposure would be a guarantee of a portion of the debt that would come into play only if the hotel’s performance fell far short of expectations.
It will, however, take an enormous expenditure of political capital on Haslam’s part to get City Council and probably the electorate to remove the prohibition that the existing hotel interests have managed to impose upon him. But if a study convincingly concludes that a new headquarters hotel is an essential element of an effort that can reduce the convention center’s budget drain, that expenditure will be worthwhile.
February 26, 2004 • Vol. 14, No. 9
© 2004 Metro Pulse
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