Hotel tax remains key in convention center debate
Convention and visitors bureau opposes raising it, but are there alternatives?Tim Stuhldreher
For months, the various stakeholders in the $178 million convention center and hotel in downtown Lancaster have wrestled with the question of how best to shore up the convention center authority's finances.
Yet the discussion always seems to come back to raising the Lancaster County hotel tax.
In January, Lancaster County Convention Center Authority Executive Director Kevin Molloy called for raising the tax from 3.9 percent to the maximum 5 percent, saying it clearly was the best way to ensure the authority meets its debt obligations.
Last week, the Pennsylvania Dutch Convention and Visitors Bureau released a position paper opposing such a hike. But the bureau’s own task force report, released with the position paper, confirms Molloy’s and the consultant’s judgment, said the leader of the complex’s chief private backer.
“The visitors bureau analysis shows that the only way to address the situation is to increase the room tax to 5 percent,” Nevin Cooley said via email.
That analysis consisted of hypothetical scenarios, and the visitors bureau’s position against hiking the hotel tax is firm, bureau President Chris Barrett said.
Cooley is president of the High Cos. portion of Penn Square Partners, a private joint venture between the Lancaster County-based construction and property management consortium and Lancaster Newspapers Inc.
Penn Square Partners partnered with the convention center authority, a specially created public agency, to build the convention center and adjoining Marriott Hotel at Penn Square. Penn Square Partners owns the hotel’s franchise, leasing the property from the Redevelopment Authority of Lancaster County.
The convention center authority owes $64 million in construction debt. Its share of the hotel tax is supposed to cover the payments, but has proved insufficient.
The convention center can’t cut expenses or grow revenue enough to close the gap, both reports agreed. Nor do the trends of the past 12 years suggest that Lancaster’s hotel industry is about to grow rapidly and generate the additional revenue, according to the task force report.
The tax hike, Molloy said in January, “is needed urgently and unequivocally … to keep the convention center in a sustainable and strong position.”
A hike would require the vote of at least two of Lancaster County’s three commissioners.
A solution, at least a provisional one, is needed within months. In March, Wells Fargo is due to renegotiate the variable component of the bonds’ interest, which is set based on the bank’s assessment of the riskiness of the debt.
Without additional loan guarantees or revenue, Wells Fargo could set the variable interest rates sharply higher, making an already worrisome financial picture worse, said Al Duncan, chairman of the visitors bureau’s task force.
The authority already is technically in default because its bond reserves fell below required minimums earlier this year.
Because of that, the visitors bureau’s share of the hotel tax, about $900,000 annually, has begun going to the convention center instead.
The visitors bureau can manage without the money through the end of next year with only modest changes, Barrett said. If the funding loss continues beyond then, that would present a challenge.
A committee of former board members has been formed to study bureau operations in light of that possibility, he added.
It’s important to recognize that Wells Fargo, as the sole bondholder, has an interest in not jeopardizing the convention center’s viability, said Gary Gray, a professor of finance at Penn State University.
“I don’t think they can afford to be a glutton,” he said.
Given the risk and the length to maturity, the bank almost certainly could not unload the bonds in the open market, he said. On the other hand, including the variable interest rates, the bonds are paying Wells Fargo more than 5.4 percent interest, tax-free.
In today’s low interest rate environment, “that’s a very generous yield,” Gray said.
According to the visitors bureau’s report, it’s more generous than the convention center authority can afford. For financing to be sustainable, both the fixed and variable rates must not just be stabilized, but lowered, the report said.
It offered no specifics on how to achieve that, however, saying merely: “This may be accomplished in a variety of creative ways that will require the efforts of key stakeholders as well as new financial and/or nonfinancial entities.”
On the revenue side, raising the hotel tax to 5 percent would give the convention center authority an additional $100,000, and Wells Fargo would reduce the interest costs by $381,000, the report said. Imposing the hotel tax on bed-and-breakfast properties would bring in an additional $250,000 to $500,000 a year, the report said.
Though other measures should be pursued in a long-term plan, “the items listed above are clearly the only alternatives that will have an immediate and significant impact,” the report said.
A long-term solution, according to the bureau’s position statement, will require a multifaceted approach involving all the convention center’s stakeholders: the county, the city, the authority, Wells Fargo, Penn Square Partners, state legislators and the visitors bureau itself.
Renegotiating the food and beverage concession agreements between the convention center authority and Penn Square Partners could move $400,000 to $500,000 a year to the authority’s side of the balance sheet, suggested Stephen Sikking, a partner in the Eden Resort and Fulton Steamboat Hotel and a bureau board and task force member.
The existing agreements give the authority 5 percent of proceeds, whereas 20 percent to 30 percent would be more typical of industry practices, he said.
Sikking, like many county hoteliers, strongly opposes a hotel tax hike, saying the industry has already done enough to support the convention center.
The agreements are part of a package of contracts that Penn Square Partners believes is fair overall, Cooley responded.
Other ideas have included a county restaurant tax or a supplemental sales tax. Either would require the state Legislature to pass legislation.
Pittsburgh’s home county of Allegheny and Philadelphia both have 1 percent supplemental sales taxes that help fund their stadiums, libraries and other civic assets, said Lancaster state Rep. Mike Sturla. A similar 1 percent tax in Lancaster County could raise $66 million a year, he said.
Voters are willing to approve such a tax if it’s used for specific, well-defined purposes, and it can sunset after a period, he said. Such a tax could pay off the convention center’s entire debt in a few short years.
“One cent does a lot,” he said.
Lancaster’s convention center is a solvable problem, Gray said, contrasting it with Harrisburg’s $300-million-plus incinerator debt, which he said that city will never be able to repay.
“You don’t want to default on this project,” he said.
Commissioner to offer ‘global solution’
Lancaster County Commissioner Scott Martin said he’s working on a “global solution” to the Lancaster County Convention Center Authority’s financial problems.
He’ll unveil the solution in a couple weeks, he said, promising he would “definitely make sure there’s sacrifice on all sides.”
Martin and fellow commissioners Dennis Stuckey and Craig Lehman have the authority to raise the county hotel tax, which advocates say would help the authority meet its near-term obligations and avoid facing tougher finance terms on its $64 million in construction debt.
Though other solutions to the authority’s problems have been suggested, they would require legislative action at the state level or significant cooperation on the part of the convention center’s various stakeholders.
Martin declined to reveal specifics of his proposal or to say whether it would involve raising the hotel tax.
The tax “is not the only option that’s out there,” he said.
Bonds, taxes, rates and terms
A primer on the Lancaster County Convention Center Authority’s finances
The Lancaster County Convention Center and the adjacent 299-room hotel, the Lancaster Marriott at Penn Square, were built through a public-private partnership that involved the Lancaster County Convention Center Authority, the Redevelopment Authority of Lancaster County and Penn Square Partners, a joint venture between the High Cos., a construction and real estate management company, and Lancaster Newspapers Inc., publishers of the Lancaster Intelligencer Journal/New Era and Sunday News.
The $178 million complex opened in 2009.
The convention center authority owes $64 million in construction debt in the form of 30-year bonds issued in 2003 and 2007 with fixed interest rates of 3.67 percent and 3.75 percent, respectively. Wells Fargo is the bondholder. Lancaster County guarantees $20 million of the debt.
In addition, Wells Fargo charges a supplemental interest rate as compensation for assuming the risk on the bonds. That rate is variable and is due to be renegotiated in March.
At present, the rate is 1.75 percent for the 2003 bonds and 1.9 percent for the 2007 bonds, but those numbers could increase sharply if Wells Fargo determines its risk of nonpayment has increased. A “credit enhancement,” however, such as additional guarantees or revenue sources, could lead to a decrease.
The convention center is supposed to cover its debt service and operational losses with the hotel-room tax that Lancaster County imposed beginning in 2000. The hotel tax consists of a 3.9 percent hotel room tax, which combines with a 1.1 percent excise tax for a total of 5 percent. In 2011, the room tax brought in $4.6 million. The authority is supposed to receive 80 percent, with the remaining 20 percent going to the Pennsylvania Dutch Convention and Visitors Bureau for tourism marketing.
However, the authority’s share of the tax has proved insufficient, and its bond reserves fell below minimum required levels earlier this year. Therefore, under the terms of the hotel tax ordinance, the authority began receiving 100 percent of the hotel tax revenue — its share plus the visitors bureau’s. Technically, this puts the authority in default of the bond agreements.