Hotel tax receipts dip

March 22, 2009
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What began as a bang-up year for Kent County's lodging-excise tax ended with a thud. Instead of hotel-motel tax receipts rising by a projected 4.3 percent in 2008 from 2007, that revenue actually fell by 1.2 percent last year from the previous year.

The fund's reserve will be all but empty by the end of this year, and the county will have to inject cash into the account to stabilize it next year.

As for the hotels, the concern isn't just over a limp occupancy rate of 53 percent; it's also now over the discount rates lodging operators have to offer guests to stay.

Revenue from the tax, a 5 percent levy operators add to a guest's bill, rose nicely for seven of the first eight months last year compared to 2007. But after the financial market collapsed in September, receipts stalled in October and fell in November and December. The downward trend continued into January, when tax revenue was nearly 16 percent below the previous January. The fiscal year for the fund runs from February to January.

Tax receipts for 2008 finished at $4.98 million, down from the 2007 figure of $5.04 million. Revenue to the fund, which includes a dwindling amount of interest income, fell short of meeting expenses by $684,840 — the seventh straight year the tax fund has ended the year with a deficit. The latest shortfall lowered the account's reserve to $1.1 million. Six years ago, it was $7.2 million.

"In early 2010, you'll run out of reserves in that fund," said County Fiscal Services Director Robert White to members of the county's Finance Committee last week. "In late 2009, you'll run out of cash."

The largest expenses the fund has this year are a $4.87 million bond payment for the construction of DeVos Place; $700,000 in marketing support for the Convention and Visitors Bureau; and $200,000 to the West Michigan Sports Commission. The county's funding agreement with the CVB is in its final year.

The fund's forecast for this year has tax revenue at the 2008 level, but a deficit of $854,036 — about $170,000 higher than last year's shortfall.

The 2010 budget projection has a 5 percent increase in tax revenue to $5.23 million, but the convention center bond payments will cost the county $5.4 million next year.

The county is responsible for two DeVos Place bonds. The larger one rises by 3.8 percent each year and it has been paid by revenue from the lodging tax. Payment for the smaller one was moved to the county's general fund last year, and that $393,438 outlay will get the same treatment this year. But next year both bonds will be paid for by the hotel-motel tax — the original source of those payments through 2007.

The 2010 budget projects a deficit of $508,000, and that is without financial support for the CVB. White told committee members they will have to make a cash infusion of $300,000 into the fund next year to cover the shortfall, and that money will have to come from another source. He also said they should begin thinking about cutting the fund's expenses.

White said the county couldn't refinance the DeVos Place bonds to lower the annual debt payment because there wouldn't be enough savings from such a move, as the current bonds carry an interest rate around 4.5 percent. He said the county would have to pay a "Michigan premium" to the market in order to refinance, meaning Kent would have to offer buyers an additional point because of the state's recession, the uncertainty over the auto industry, and the high-unemployment figure in the state.

"My reasonable estimation is there is no savings here," said White.

The county will likely have to violate one of its own policies by year's end. It had pledged to keep the fund's reserve at a level equal to 20 percent of the annual bond payments. But because of the projected deficit, the county will be about $700,000 short of meeting that number by the end of the year.

White told the committee it was unlikely the Convention and Arena Authority could help with the bond payments. The CAA is running an operational deficit for the building, and the $20 million in its reserve will be needed to make future capital improvements to Van Andel Arena and DeVos Place

CVB President Douglas Small said the meeting business was down last year, but things look solid for this year and next year. "There is some good news in the future," he said.

The bureau measures its success on the number of hotel room nights that are booked each year, along with the number of meetings held here. CVB Executive Vice President George Helmstead said 97,200 room nights are booked for this year with another 1,921 listed as tentative; 75,267 are booked for next year with another 12,121 possible.

"We research 100 new groups a year. We look five, six, seven years in the future. We send out 450 leads a year and we book 200 meetings. Sixty of those go to the building next door," said Helmstead, referring to DeVos Place.

"Each convention takes a three- to six-year term to book. We're on pace with what we've done in the past," he added.

Helmstead said the sports commission has booked between 15,000 to 20,000 room nights per year in its first two years and he characterized that number as being in the "good" range.

"They're in their third year and they're doing great," said Helmstead.

Small said hotel revenue, on a per-room basis, was also down last year and not just here. For instance, per-room revenue for hotels in Phoenix was down by more than 50 percent last year from having to offer reduced rates to draw business.

"We've had a bigger dive in rates than in occupancy," he said.

County Commissioner and Finance Committee Chairman Dean Agee asked Small what it would mean to the bureau if his organization wasn't funded by the county next year. Small said revenue from the hospitality field totaled over $100 million last year. Losing the county dollars, he said, would negatively affect the 27,000 employed in the industry here and make life tougher for local businesses that depend on hospitality revenue.

Seven years of red ink, and counting

For the previous seven years, revenue to the county’s Lodging Excise Tax has been short of covering the fund’s expenditures by $6.53 million. And if the forecast for this year holds true, the fund will suffer at least its eighth consecutive deficit — which will push the cumulative shortfall to $7.38 million.

While revenue from the tax has risen from 2002 to last year, so have expenses — most notably in 2004 when the county began using the account’s receipts to make payments on a second bond series related to DeVos Place.

Last year, the county removed that bond payment to its general fund. It also shifted a zoo payment to the capital improvement fund, and reduced its annual support to the Convention and Visitors Bureau. Those three changes cut the fund’s expenses by $1.03 million, yet the account still recorded a deficit last year of $684,840.

Here is an eight-year look at the Lodging Excise Tax Fund.


Lodging Excise Tax Revenue

Interest Income & Other

Total Revenue

Total Expenses

Annual Surplus (Deficit)







*Denotes estimate

Source: Kent County Fiscal Services Department, March 2009

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