Month: June 2019

Omni economic incentives facts

(Originally posted on June 30, 2019. The next day, the Mayor announced changes to certain TIF loans that impact this post, and a reader helped me with some details. I updated the post on July 1, 2019.)

During this election season, a lot of incumbents and candidates are talking about the Music City Center and Omni Hotel financing. I have spent a ton of time working to figure out the facts, but haven’t had time to get them collected for you. This is the first of at least two posts to try to provide some basic facts.

I’m going to start with the Omni Hotel, which received two three types of incentives — a tax increment financing, or TIF, loan and a property tax abatement and an annual development agreement payment. Let’s look at both these.

Tax increment financing loan

For the basics of how TIF works, you can:

The Omni Hotel was awarded a TIF loan of nearly $62 million in 2011. The property tax increment collected from nearly 20 other downtown properties is pledged to pay for the Omni TIF loan. Because of the property tax abatement we’ll talk about below, the Omni doesn’t pay any all of its property taxes itself at this time. Instead, its TIF loan is paid solely from the property taxes of these other properties.

According to a Nashville Business Journal article, the loan balance by 2012 had been reduced to about $54 million. Except for media reports, I don’t have data about the loan balances before 2016.

In early 2016, the current Council passed legislation requiring extensive annual TIF reporting. So, starting then, I can use data from those reports. According to MDHA’s annual reporting…

In 2015, the tax increment collected to pay the Omni TIF loans was approximately $6.6 million.

As of September 30, 2016, the outstanding Omni TIF loan balance was about $48 million.

In 2017, the tax increment collected to pay the Omni TIF loans was up to approximately $11.4 million for the year.

As of September 30, 2018, the outstanding Omni TIF loan balance was down to about $30 million. The MDHA reports are dense and hard to get through, but here is a summary of their data for tax increment collected in 2017 and the balance as of September 30, 2018.

With the loan balance around $30 million and the tax increment collected from the supporting properties over $11 million per year, these loans should be paid in full within several years.

NOTE: On July 1, 2019, the Mayor announced certain changes that will extend how long it takes to payoff the Omni TIF loans. Instead of using the $11.4 million in collected tax increment to pay the loan as quickly as possible, MDHA is getting a one-year waiver to pay only interest and a modest principal payment. This will significantly reduce the payment on the Omni TIF loans and allow $7.5 million of tax increment to be used for MNPS salaries instead. In turn, this will extend how long it takes to fully repay the loans.

Property tax abatement

In addition to the large TIF loan, the Omni received a 20 year property tax abatement that runs through December 31, 2030. This means that the hotel does not have to pay any property taxes until 2031.  Under the abatement, the hotel pays 37.5% of the regular taxes that would be due.

As a member of the Metro Audit Committee, I asked Metro’s auditors to list the value of all property tax abatements in the annual audit. In the most recent audit, the value of the Omni property tax abatement in FY18 was $2,282,645.

So while Metro will be able to keep the full property taxes from the 20 or so properties that are supporting the Omni’s TIF loan in just a few years once the loans are paid, Metro won’t receive any will only receive 37.5% of the regular property taxes from the Omni itself until 2031.

Development Agreement Payments

According to the Metro audit, there was a development agreement signed in 2010. I’m quoting the description from the audit:

On October 19, 2010 the Convention Center Authority (the Authority) entered into a Development and Funding Agreement with Omni Nashville, LLC (Omni) to facilitate the development of a premier headquarters hotel adjacent to the Music City Center. Under the terms of the development and funding agreement, the Authority will pay Omni annual economic development payments and incentives from excess tourism tax revenues collected…The amount remitted to Omni during the year ended June 30, 2018 was $12,000,000. The schedule of future annual payments is expected to be as follows:

2019-2026: $ 12,000,000 per year
2027-2033: $15,000,000 per year

These are big numbers. But it is worth keeping in mind how bad the economy was back in 2010. I’m told that another major hotel chain won the RFP, but couldn’t get financing. That ultimately led to the Omni Hotel deal. In hindsight, it is easy to argue that maybe the city or the Convention Center Authority should have owned the hotel instead of committing to these payments. But in 2010, there was no appetite for that risk because the economy was so bad.

Takeaways

Here are my takeaways about this information:

  • If you want to quantify the property tax impact from the Omni deal, the most recent numbers are that the Omni deal cost Metro about $13.6 million in FY18. That’s $2.2 million of  property taxes never received from the Omni because of the abatement, and about $11.4 million of taxes from the other properties that were used to pay the Omni TIF loan. Apparently, due to the newly announced deal, in FY20, things will be different because $7.5 million of these dollars will stay with Metro.
  • If you want to quantify the benefits received from the Omni deal, you cannot really do this because Nashville has never seriously attempted to reach a consensus about how to measure the benefits from economic incentives. If I get re-elected later this summer, figuring out a consensus way to measure the benefits will be a major objective.
  • If MDHA keeps using all of the tax increment from the nearly 20 other downtown properties, the Omni TIF loans should be paid approximately by the end of 2021. If that happens, because of legislation passed by this Council in 2016, ALL of the property taxes from those approximately 20 other properties would go permanently to Metro instead of being used for development loans. (NOTE: As of today’s announcement this won’t happen. While Metro will get to keep some of the tax increment dollars to run the city, that in turn will extend how long it will take to pay off the Omni TIF loans.)
  • There is something important to watch for in the upcoming year. There is a relationship between these numbers and the Mayor’s proposed parking modernization proposal. The Mayor and MDHA may attempt to refinance some of these TIF loans to allow more money to flow back to Metro. Of course, that would stretch out how long it will take to pay the loans. This point may be stale now. Instead of using TIF money to cover for the parking deal, the Mayor is pushing that toward education salaries.

I hope this post helps people understand the economic incentives provided for the Omni Hotel. In my next post, I’ll tackle the financing for the Music City Center. Please let me know any thoughts or questions.

Budget wrap-up

I am disappointed about how the budget turned out this year. I guess I’m glad for the debate. At least there now is a broad consensus that we will be right back in this same situation a year from now. I really hate that Metro is choosing to not fix a known, identified problem even though the delay squeezes employees on pay and constituents on services.

I want to thank everyone who has written or called this week with kind words and support. Please know that I consider it a privilege to be one of the voices carrying your message.

Looking forward to next year…

If you follow my posts, you know that I predicted the size of this year’s budget to within a few million dollars. I predicted $2.335 billion, and it came in at $2.332 billion. That wasn’t luck. The size of a budget is pretty predictable when it is playing defense — you pay what you must and not more. Despite some of the packaging and spin, this year’s budget was another status quo defensive exercise.

Using the same principles that I used this year, we can look forward to get a glimpse at what next year will bring. As you look at this, keep in mind that new Metro revenue (aside from the one-time sales) for this year was about $100 million. Here’s the minimum new spending that will be required in FY21:

  • Make up for relying on one-time non-recurring revenue, $41.5 million
  • Pay known existing new bond debt payments, $14.5 million
  • Pay for new bond 2020 bond issuance the Finance Dept. has told us about, about $25 million
  • 3% cost of living adjustment and a step increase for Metro employees, $25 million
  • Increase for MNPS that is the same as this year (i.e <3% cost of living adjustment and no step), $28 million

That’s $134 million of new spending required in FY21 before getting into any expansion of the government at all. This amount wouldn’t allow for the already-announced increase in Barnes Fund funding, or get WeGo Transit back to full funding, or help employees gain ground on what they’ve lost in the last several years, or expand any government service at all, or even cover inflation.

On the Council floor on Tuesday night, I argued that allowing the administration’s budget to go in effect would lay the groundwork for another tough budget season next year.

In my projections, the Finance Dept. had me assume that revenue will grow by $85 million in the upcoming year. Let’s assume they are conservative and the new revenue will be $100 million again. That would mean FY21 would have $100 million in new revenue and at least the $134 million in the basic new expenses listed above. The budget would again be looking at a shortfall of at least $34 million. Like the last few years, the only ways to fix this will be some combination of one-time non-recurring revenue (i.e., selling off more assets), cuts, and new property taxes.

Multiple district council members told me that in the days and hours before the vote the Mayor and his office told them that he would raise the tax rate next year. He’s denied that to the press. I guess you all can draw your own conclusions about what to make of that.

I continue to view this budget problem as a three-headed monster. There’s revenue, expenses, and determining the impact of economic incentives.

On revenue — that’s talking about property taxes. I think everyone knows where I stand on that issue.

On expenses — the Finance Dept. has been aggressive on that since before Mayor Briley took office. With the new budget in place, Metro will have cut at least $36 million in expenses over about two and a half years. Many departments have gotten rid of whatever fat there was and are now cutting into constituent services. I trust the Finance will continue to be aggressive about this.

On the impact of economic incentives — I will continue to work hard on tax increment financing reform. Beyond that, there continues to be a lot of information and misinformation the convention center. If I am re-elected, I think that topic will need more attention.

I’ll keep working on all three of these. Thanks again to everyone who helped trying to get a better budget passed this year. I genuinely appreciate the support.

New CM Vercher budget amendment

This morning, CM Tanaka Vercher, who is Chair of the Council Budget & Finance Committee, has released a proposed amendment to her Substitute Budget. I have reviewed her amendment and support it.

As a starting point, here’s my post from a few days ago about the five budget proposals.

In a nutshell, she and I were 5.2 cents apart on the proposed tax rate. Her amendment essentially splits the difference and she now is proposing a rate adjustment of 49.8 cents, which would move Metro’s combined property tax rate to $3.653. Her amendment would:

  • provide $50 million new MNPS funding (which is about $22 million more than the Mayor’s proposal); this is adequate to provide a 4% cost of living increase and a step increase in salaries;
  • fund 9 new firefighter and 20 new police positions;
  • allow for extended community center hours;
  • provide an additional $6.15 million in funding for WeGo Transit;
  • provide new Codes Department positions; and
  • expand support for important non-profits in Nashville.

I’ve updated my chart comparing the various proposals here.

This is not exactly what I wanted to achieve, but it is pretty close. And I have to give Chair Vercher credit — her final product covers fire, police, library, transit, plus 4% COLA and a step increase for MNPS, plus stockpiling money for the expected 2020 next Metro bond issuance, and saves a material amount for next year’s raises. I think that’s a good final product.

Here’s the statement of support I am issuing through the Metro Council office:

I have seen Chair Vercher’s amendment and support it. 
 
I appreciate Chair Vercher’s commitment to properly fund the Metro government both for this year and next year. We have been debating a tax rate adjustment since May 2018. It has taken a year of public discussion, but I am glad to see a growing consensus that status quo isn’t good enough. 
 
I believe Chair Vercher’s budget moves Nashville forward. Please join me in supporting her budget as amended.
CORRECTION: I updated the first bullet point to be accurate…my first post said there was $50 million more than the Mayor’s budget…but it is $50 million in new funding, which is about $22 million more than what the Mayor proposes.

5 budgets???

Mayor Briley proposed his budget just before the May 1 deadline set out in the Metro Charter. I got mine out on May 28. Another three were sent to Council members on Friday afternoon. One of them was expected — from Budget & Finance Committee Chair Tanaka Vercher. One had been rumored for a few days (CM Glover). And the last one was apparently a surprise to just about everyone (CM Pulley).

Then the Mayor dropped a Facebook press release around 5pm on Friday afternoon complaining about there being too many budget choices.

It is a lot to sort through…but here’s a summary of the similarities and differences between the plans.

When you are looking at the summary, keep your eye on several key points:

  • Which proposals rely on one-time non-recurring revenue? This is a sloppy practice.
  • The school system is clear that, without at least $55 million in new revenue, they cannot achieve even 5% raises. Details here. Only the Mendes/Davis plan does this.
  • Look to see if a plan provides funding for next year (FY21) or is limited to this year only. Only the Vercher and Mendes/Davis plans create adequate funding for FY21.
  • Look to see if a plan has the flexibility to fix the under-funding of the MTA budget.
  • Look at each proposed property tax. Three plans have a rate increase. Two don’t.

Finally, for more info, here’s a link to all my budget posts…and my FAQs about the Mendes/Davis budget proposal.

FAQs – FY20 Better Budget

As we get into the last few weeks of the Metro budget process, I put together a list of frequently asked questions and links to my budget blog posts.

The FAQs are here.

Here are previous posts about this year’s budget:

Maybe hold back on the high fives for now?? (March 19)

Proposed FY20 budget expected tomorrow (April 30)

1st thoughts about Mayor’s proposed FY20 budget (May 3)

The myth that “belt tightening” could fix the budget (May 4)

Impact of economic development spending on property tax rate (May 16)

A better budget for Nashville (May 28)

What about the $9M for transit? (May 28)

For last year’s budget posts, see:

Updated FAQs (June 10, 2018)