Thursday, September 18, 2008

Paying For Big Projects Is Taxing Experience

Nothing is quite as confusing as government financing, and that’s never been truer than now.

There seems to be big numbers every where - the $30 million for The Pyramid, there’s the idea of a new convention center likely to cost at least $500 million, there’s the tens of millions of dollars for Liberty Bowl Stadium improvements, and then, there’s the $66 million cut in funding for Memphis City Schools.

There are times when even insiders in government get confused by the blizzard of numbers, funding sources, legal restrictions and potential uses. That’s why it’s easy to understand why the Letters to the Editor use these numbers as if they are interchangeable.

Of course, they can’t be.

Here A Tax, There A Tax

There are property taxes that are paid by all Memphians who own property. Memphis has the highest cumulative city-county tax burden in the state, and both city and county governments have heavy dependency on property taxes, which fund the majority of city and county services (half of the county's property taxes go to schools).

There are sales taxes collected every time we make a purchase in Memphis – 7% of it goes directly to Nashville and the 2.25% local option sales tax stays here. Half of the local option sales tax goes to the general fund of city government and the other half goes to public education.

There are the hotel-motel taxes that are added to the bills for rooms in Memphis hotels. Shelby County Government has a hotel-motel tax of 5% and City of Memphis has a hotel-motel tax of 1.7%. They are used to fund the Memphis Convention and Visitors Bureau and to pay off the bonds on the Memphis Cook Convention Center.

Alphabet Soup

There’s the Tourism Development Zone (TDZ) which takes in most of downtown. In this district, the incremental increase in sales taxes created by a tourism-oriented project is collected and used to pay off bonds issued for that project. Some TDZ’s collect all of the sales tax while others can only collect 45% (excluding the portion for public education). Another TDZ is likely to be created to fund infrastructure improvements for the Fairgrounds mixed-use development.

There’s Tax Increment Financing (TIF) which collects increases in city and county property taxes that take place following infrastructure improvements in a specified area. A baseline is set and anything above that baseline can be captured to pay for public improvements. Uptown is largely funded by a TIF district.

There’s the Payment-in-lieu-of-taxes (PILOT) program that freezes property taxes at the amount of the unimproved property, and as the property is improved and its value increases, additional taxes are waived for a certain number of years. Memphis and Shelby County have handed out more tax freezes than all metropolitan areas of Tennessee combined. PILOT’s are granted by the Industrial Development Board for new businesses and expansions and the Center City Revenue Finance Corporation for downtown projects.

And There’s More

There’s the Center City Commission’s PILOT extension fund that pays for bonds issued for parking facilities.

There’s the state sales tax rebate that collects the sales taxes from the sale of tickets, concessions and merchandise at the games of professional sports teams. This funding was used at FedEx Forum and Autozone Park.

And these are just a few of the taxes collected and spent by our governments. Some taxes can only be spent for certain things – such as a convention center, an arena or street improvements. As a result, they are not interchangeable, but they often allow projects to proceed without property taxes.

Pyramid Scheme

As a result, we pity the average citizen as they try to sort through all of this and argue that the $30 million being spent on new parking garages and street improvements at The Pyramid should be given to Memphis City Schools to make up part of the $66 million cut.

The same sort of argument was heard when the FedEx Forum was approved, but the truth is that the taxes being used to pay for both of these projects can’t be spent on education. By law, they can only be spent for specific projects like a facility for a professional sports team.

To complicate things even more, the money being spent at The Pyramid is capital improvement program funds. The yearly payments for bonds are about $70,000 for each $1 million of debt. In other words, the $30 million for street and parking improvements at The Pyramid would require yearly payments of roughly $2.1 million.

Even if they wanted, city and county governments could not redirect these revenues to schools, whose capital funding normally comes from property taxes.

Confusion Reigns

Or said another way, if the state law did allow this money to be redirected, it would not be $30 million sent to schools. It would be $2.1 million, hardly making a dent in the reduction in school funding. That’s because the annual payment on the bonds is about $2 million. That’s the amount that could be moved, not the $30 million in infrastructure improvements.

Are you totally confused?

Well, what about the suggestion about a new convention center.

It’s estimated to cost at least $500 million, and it could easily be more. Some ardent opponents of the cut in school funding immediately said that if city government could spend that much money on a convention center, it should give Memphis City Schools the $66 million that was cut.

Hurdles Galore

But like The Pyramid (and FedEx Forum, for that matter), the funding sources that are available to pay for a new convention center – TDZ, TIF and hotel-motel taxes – cannot be spent on schools.

After straining these revenue sources to pay for FedEx Forum, it’s difficult at this point to imagine how there would be enough revenue to pay off $500 million in bonds, whose yearly debt service would be about $35 million a year.

In the end, finding that amount of money is the single greatest hurdle for the project to clear. Already, Memphis Mayor Willie W. Herenton – reprising comments about the Bass Pro Shops at The Pyramid – has said that no general fund or property tax money will be used for a new convention center.

Nothing Decided

Actually, on this one, we agree with Mayor Herenton that there’s no downside to considering whether a new convention center is needed. He promises that no decision has been made, and most encouraging of all, he suggests that before his special convention center committee should consider what to build, they need to determine Memphis’ competitive context and if there is any realistic way to move it from being a third-tier convention destination to the top tier.

It’s a question that requires complete honesty and the setting aside of special interests and preconceived notions by every one on the Herenton committee. After all, cities across the U.S. have chased conventions for years by building new convention centers, then building convention center hotels, then expanding the convention center, then expanding the hotels, etc., and yet, their relative place among convention centers remained the same.

The First Step

So, before anything definitive is decided, the first task is to determine what Memphis really needs and what results are realistic. It should be an open and candid discussion – keeping in mind the arguments by advocates in the tourism industry and the warnings by the Brookings Institution that cities are wasting money in the mushrooming convention centers.

This time at least, Mayor Herenton appears willing for this kind of serious, thoughtful analysis and evaluation. If there is to be a new convention center, at least, Memphians will be reassured that this time the answer to making Memphis a top-tier convention center isn’t preordained.


Tom Guleff said...

Mr J,

Another good post, however, you have to learn that the cart goes in front of the horse. It only makes political sense. :)

Anonymous said...

We need another convention center about as much as we need another term in office from Herenton.

Anonymous said...

Willie waves his Willie Wand and we citizens don't have to use tax revenue to build ANYTHING !

Didn't anyone hear what he said ?

He talked about drinking Hateraid, and by goodness, if anyone should know, its someone God Ordained to be Mayor.

He's the smartest guy in the world, and has a clear vision.

Just axe him.

Zippy the giver said...

He's Chicken George for mayor.
A sixtysomething man that speaks like that is really embarrassing to have as a mayor.
It's his "press-persona".
It serves nothing but his ego.

bob said...

Doesn't anybody wonder just a teeny bit how badly the current crisis in the financial markets has hurt the city?

How much have we lost?

When will the city admit it?

Smart City Consulting said...


That's a great question, because the financial crisis has the potential to change everything - and we mean everything.

Zippy the giver said...

nothin from nuthin leaves nuthin.
two times nuttin is still nuttin.

Zippy the giver said...
This comment has been removed by the author.
Zippy the giver said...


The US government
is the sole owner of all of America's bad debt in Mortgages, and the lower class is driven to the brink and over in one summer, and the rich are floating high above it all, who will we sell all that bad debt/houses soon to be vacant/American soil to?
Saudi Arabia or China?

Who's slaves will we be?

It' called economic warfare.

With foreign countries and turncoat federal representatives in congress.

I hope you were paying very close attention to treasury secretary Paulson.

The path and plan IS OFFICIAL! Paulson said it out loud.

"We are selling the "bad debt" and real estate foreclosures to foreign governments".

Did you get that clearly?

We are about to be finished off by the job Bill Clinton started by selling seats on the board of trade, we are about to be the slaves of foreign governments. They are not releasing who yet, but, you better pay close attention.

A convention center is really going to be the smallest blip on your radar into the future.
It isn't going to happen at all.
Depending on who's money we take, possibly, running for your life will be a bigger spot.
The yammering idiots we "supposedly" elected got sucker-punched, not JUST by their own greed, but, by foreign governments
. The game/war is almost over and we have clearly been KO'd.
I guess George's fumbled battlecry "Fool me once, shame on you, fool me twice, uh uh uh, we can't get fooled again", was DEADLY WRONG! Congress was easier to fool, with money.

Chuck said...

Dear Smart:

The problem with "no taxes" for revenue-generating public works projects is the potential that the "revenue" will not materialize. Then the taxpayers will be saddled with the bill.