Kent lowers lodging tax reserve fund once more

May 16, 2009
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When Kent County commissioners made a few revisions to the county's fiscal policies last week, one affected the county's Lodging Excise Tax Fund. That revision is at least the fourth the commission has made to the beleaguered account in just the last two years.

Last year, commissioners removed roughly $800,000 in expenditures from the fund by directing those expenses to the capital improvements and general fund budgets. In 2007, they added a $200,000 annual expense for the West Michigan Sports Commission.

Commissioners also reduced the minimum fund balance, or reserve account, in the fund last year from 25 percent of a year's worth of tax revenue to 20 percent. The changes were made in an effort to stretch the fund's reserve and lower the account's outlays and deficit.

Not that long ago, the reserve requirement was a full year's worth of income from the hotel-motel tax, a 5 percent levy operators add to a guest's bill. In 2002, the tax income was $4.27 million and the reserve was $7.25 million.

But by the end of this fiscal year — which for this fund is Jan. 31, 2010 — the reserve is expected to be $251,943. And the fund is expected to end the year with an eighth straight deficit, a series of shortfalls that will total $7.38 million since 2002.

The change commissioners made last week lowers the minimum reserve from 20 percent to 1/12th of the expected tax revenue — one month's worth. That means the reserve should be kept at $500,000 if revenue from the lodging tax reaches $6 million a year.

But at the current estimate of revenue coming in at $5 million, the reserve is likely to be closer to $400,000. Had commissioners kept the minimum at 20 percent, the reserve requirement would have been $1 million, so the policy change allows the county to put another $600,000 into play this year to help meet expenditures.

But the reserve may still need a cash infusion of about $160,000 this year to reach a level above $500,000 to cover outlays, and those dollars will come from the general fund.

The fund had $1.1 million in the fund balance when this fiscal year began.

County Fiscal Services Director Robert White said the latest revision was needed to avoid having the fund cash out too early. The fund has two major expenses and both account for nearly 92 percent of all expenditures.

The county has to make an interest payment of roughly $700,000 June 1 for bonds that helped build DeVos Place, and a principal and interest payment of about $4.7 million for the same debt Nov. 1.

"When we get to Nov. 1 we will have spent all but about $100,000 of the annual budget. When we get to Nov. 1, we will have paid almost all the bills for the year, but still have November, December and January tax collections to count against this year," said White.

White said that payment schedule would create a cash overdraft of about $700,000 on Nov. 1.

"The minimum fund balance — you always have to have an absolute minimum — on Dec. 31 will be equivalent to 1/12th of the lodging excise tax revenues, because to have a zero cash balance on Dec. 31 means I'll have to put something in to make up for it. So I said it will be 1/12th of the annual lodging excise tax revenue," said White.

The county collects the revenue from the hotels a month after the 5 percent tax is added to guests' bills. So whatever amount the lodging industry captures in, say, December, the county receives in January. And that's why the lodging excise tax fiscal year runs through the end of January.

"It's about $500,000 that we expect to collect in January. So the minimum fund balance will be about $500,000. So then I'll have a zero cash balance because I'll have a $500,000 receivable here," said White.

Even with the minimum reserve set at approximately 8.5 percent instead of 20 percent, White said it wouldn't be easier to maintain the new, lower reserve than it has been at the higher levels.

"It will require a subsidy from the general fund, which will cover the deficit plus the amount necessary to maintain the zero-cash balance."

White said he expects about $160,000 will go from the general fund to the lodging excise tax fund this year. If revenue doesn't increase dramatically next year — which it isn't expected to do — and expenses aren't lowered, White said $1.2 million will be needed from the general fund next year. He based that subsidy estimate on tax revenue remaining at this year's level.

But Convention and Visitors Bureau President Doug Small told the Business Journal last month that revenue from the bureau's 3 percent lodging excise tax was down by about 10 percent this year.

"The hotels are paying 5 percent to the county and 3 percent to the CVB," said White.

White said the lodging receipts the county received in February and March were up a tad over last year. If the bureau's revenue projection is right, though, White said he will have to recalculate his forecast for the fund.

"If it's down 10 percent, there's several hundred thousand more that we won't be able to achieve. So we'll keep a close eye on it.

Expenses are up, while revenue hasn’t kept pace

Since 2003, expenses have risen faster than revenues to the Kent County Lodging Excise Tax Fund for five of seven years including this year. From 2002 through 2008, expenditures have exceeded revenues by $6.5 million.

Add the deficit forecast for this year into the equation, and by the end of this year, the fund will have lost nearly $7.4 million since 2002. If the forecast holds true, 2009 will become the eighth consecutive year the fund has recorded a shortfall.

Most of the account’s total revenue comes from the 5 percent tax hotel operators add to a guest’s lodging tab. Most of the account’s expenditures come from a bond payment the county makes to pay for the construction of DeVos Place, the city’s convention center.


Year
2009*
2008
2007
2006
2005
2004
2003
2002

Total
Revenue
$5,078,168
$5,090,120
$5,235,164
$5,018,056
$4,656,941
$4,303,465
$4,473,110
$4,275,007

Percent
Change
-0.2%
-2.8%
+4.3%
+7.7%
+8.2%
-3.8%
+4.6%
NA

Total
Expenses
$5,932,204
$5,774,960
$6,626,290
$6,171,955
$6,023,221
$5,407,809
$4,920,470
$4,658,590

Percent
Change
+2.7%
-12.8%
+7.4%
+2.5%
+11.4%
+9.9%
+5.6%
NA

Surplus
(Deficit)
($854,036)
($684,840)
($1,391,126)
($1,153,899)
($1,366,280)
($1,104,344)
($447,360)
($383,583)

* denotes estimate.

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