City Finance Director Warns City Council On Diverting Hotel/Motel Tax Funds Away From Waterfront

Wednesday, February 12, 2020

City Finance Director Daisy Madison has warned City Council members on diverting hotel/motel tax proceeds from the Waterfront, saying it could lead to the city's bond rating being lowered and the city having to pay more on higher interest rates.

The City Council had been set to vote next Tuesday on a resolution dealing with allocation of Hotel/Motel funds from short term vacation rentals. Vice Chairman Chip Henderson removed the resolution from the agenda after the presentation by Ms. Madison, though he said he was "frustrated."

Councilwoman Demetrus Coonrod said she still wanted to use some of the growing short term vacation rental tax proceeds for other projects, saying other parts of the city deserved attention downtown has long gotten.

Ms. Madison said the city in 2002 set up the hotel/motel tax as a way to help fund Mayor Bob Corker's ambitious $120 million 21st Century Waterfront Plan. She said a $55 million bond issue was approved, and the city later issued $8 million more in bonds to help deal with infrastructure problems at some of the features of the project, including the Hard Edge and the Passage.

She said there have been regular payments on the debt and refinancings, but additional funds have been pulled out for other waterfront work, including the Walnut Street Bridge and Holmberg Bridge.

She said $44 million of the debt is still owed.

Ms. Madison cited a recent $533,000 deficit. She said that would have approached $1 million were it not for $314,268 from short term vacation rental tax payments.

She said the percentage increase on collections from traditional hotels and motels is going up at a declining percentage, but there has been a rapid rise in short term vacation rental tax payments.

Ms. Madison said with a change in allocations "bondholders could perceive that the city is not honoring the pledges made to them at the time of the sale if the revenue stream for which they were to be repaid is directed for another purpose.

"To change the definition of the tax and/or to redirect the tax on this subset of the initial tax base may be perceived as a renege on our promise to the bondholders and a lack of confidence in pledges made for future bond sales, resulting in higher rates and potentially lowering of bond ratings.

"This sets a dangerous precedent of revising the pledge made to bondholders prior to debt retirement that could impact how the city's pledge is valued in future years." 


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