Convention Center Ruling Reinforces Private Tax Scheme

by on March 12, 2013 · 9 comments

in Business, Economy, Government

SD Convention CenterProps 13 and 218 necessitate convoluted scheme to effectively privatize public assets

The privatization of public resources took another step toward reality yesterday, although in this particular case it may not be a terrible thing.  In a tentative ruling, Judge Ronald Prager determined that the unusual taxation method being used to finance the $520 million expansion of the San Diego Convention Center is perfectly legal, giving the project the green light.

In 2011, the city’s hotel interests got together with the City Council and concocted a scheme to raise taxes without really raising taxes—at least not in the traditional sense—in order to fund the project.  The Convention Center, they said, is not big enough.  San Diego is losing out on the biggest events because of a lack of convention center space.  Without the expansion, not only would the city not be able to lure the biggest events to town, but we could stand to lose some of the ones we already have.

Comic Con, the San Diego born and bred conclave that is one of the most well known and celebrated events in the entire country, has become so big that it has just about outgrown the available space at the San Diego Convention Center.  This led event organizers to entertain offers from other cities that could provide much bigger accommodations.  Despite earnest entreaties from Las Vegas, Anaheim, and Los Angeles, Comic Con decided to stay true to its roots and keep its estimated $180 million economic impact in San Diego……for now.  But unless viable plans to expand the Convention Center were solidified, Comic Con would outgrow San Diego and would be forced to leave by necessity.

In 2009, San Diego Mayor Jerry Sanders received a comprehensive report from his Citizen’s Taskforce on the Convention Center Project.  The report found that “39.7% of prospective customers that do not book (the) San Diego Convention Center attribute that decision to “Center Unavailable,” or a lack of space.”  The study also found that the city lost hundreds of thousands—in some years close to a million—of potential hotel room nights because of it.  An expanded convention center, however, would bring an additional economic impact of $698 million to San Diego County.

There is clearly a solid meritorious case for making the investment to expand the Convention Center.  The facts are on the expansionists’ side.  The threat of losing Comic Con alone should send shudders throughout the region.  So it should be a no brainer. Raise taxes to build the thing, and the city will easily make it up in projected revenues.  And it doesn’t even have to come out of the average taxpayer’s pocket.  Instead, it’ll come in the form of an increase in the transient occupancy tax (TOT) that is paid by hotel guests—out-of-town visitors who will leave a little extra money here for the local economy.  Win-win, right?

If only it were that simple.  Because if it were, San Diego could have avoided an awful lot of controversy, and the last few weeks in city government would not have been quite so interesting.

Back in 2004, San Diego had two different initiatives on the ballot that sought to increase the TOT, one in the March primary, and another to replace it in the November general election.  March’s Prop C failed while earning nearly 62% of the vote.  November’s Prop J failed with over 58% approval.  Overwhelming majorities, and yet they both failed.  Why?  Because of Prop 13, the 1978 law that places strict limits on California property taxes, and 1996’s Prop 218 that requires a full 2/3 of the public vote in order to raise any “special taxes,” such as the transient occupancy tax.  Thus the failure of Props C and J in 2004.

In order to get around Prop 13, in 1982 the Mello-Roos Community Facilities Act was passed.  In general, property taxes are the primary mechanism to build and maintain local community assets like schools, roads, libraries, and parks.  Instead of having to clear the 2/3 majority hurdle, Mello-Roos called for the creation of Community Facilities Districts (CFD’s), which allowed for assessments or taxes on local property owners within the defined area to be put to specific uses or improvements.

Which brings us to the Convention Center expansion project, and the creation of the Convention Center Facilities District.  The hotel interests and the City Council decided that they wanted the expansion project to happen, and they didn’t think they could get the 2/3 vote of the public in order to raise the TOT (a logic that might also be applied to the TMD, but more on that in another post).  Instead, they used a provision in Prop 218 that allows local property owners to choose to tax themselves without a public vote.

But it gets weirder still:  The “tax”—an additional three percent tax on hotel guest bills for Downtown hotels, two percent for areas further out such as Mission Valley and Mission Bay, and one percent for other outlying areas—was approved by a vote of the hoteliers in a system that was weighted heavily in favor of those properties that make the most money.  In other words, the higher your revenue, the more votes you were allowed to cast.  So while a majority of the properties voted against the tax, it passed overwhelmingly because the biggest hotels had an outsized voice in the matter.

This whole “rigged” vote was highly unusual, and had never been done before.  So while the City Council and former mayor Jerry Sanders gave their full approval of the scheme, just to be sure they sort of sued themselves, asking a judge to weigh in on whether or not the plan would hold up under legal scrutiny.  The suit was joined by San Diegans for Open Government and local activist Mel Shapiro, who both opposed the plan.

Yesterday Judge Prager gave his nod of approval.  He ruled that the Convention Center Facilities District was properly set up, that the hotel owners were properly given the authority to vote to increase taxes on their own property (even though the consumers will be the ones that directly pay for it), and that as a Charter City, the City of San Diego had the authority to create and approve the weighted election scheme.  All proper and legal.  Carry on.  The hotel owners want the Convention Center expansion, and it’s perfectly legal for them to make their customers pay for it.

This whole plot has the potential to set a very interesting precedent and become a very slippery slope, argues the Voice of San Diego’s Scott Lewis, where the voters are no longer vested with the ability to decide matters of taxation.  Instead, property/business owners would have that authority.  “What other businesses could seize on this idea and impose a tax on their customers to build something they want?” Lewis asks.  Good question.

If you’re confused by the legal labyrinth that led us to this point, well, so am I.  Still.  This whole thing about whether we can or cannot raise taxes to pay for things we want is very confusing and mindnumbingly complex.   But the anti-tax crusaders who so distrust government to the point where they want to starve it to death have put us in the precarious position of not being able to fund public improvement projects or services without clearing impossible hurdles.

It would be so much easier and so much more sensible if San Diegans were simply able to raise the TOT—which is effectively what this is anyway—like any other municipality outside of California and allocate portions of those funds to fuel the projects that we want.  But because we’ll never get a 66.7% majority to agree on much of ANYTHING, let alone a transient occupancy tax, we’re stuck having to find new and creative ways to get around the law.

And because of it we may have effectively succeeded in privatizing public assets along the way.

 

avatar

Andy Cohen

Andy spent 15 years working in the highest levels of the San Diego professional sports world, including both the Padres and the Chargers. He began his foray into writing while a volunteer for Francine Busby's 2010 Congressional campaign, eventually becoming a contributor to the now defunct SDNN. He has reported on local and national politics for both the OB Rag and the San Diego Free Press. When not reporting news and events, he offers political and policy commentary from a liberal perspective, occasionally turning back to his sports roots. While he does not hide his more liberal political bent, Andy always strives for fairness in the telling of a story.
avatar
avatar
avatar
avatar John Lawrence March 12, 2013 at 2:02 pm

What’s to prevent the city from decreeing a certain portion of the city a special district and then raising taxes within thst district to pay for improvements to that district. So if you went to a restaurant within that district, you would pay a higher tax etc. This would get around the sticky business of actually having to make people vote to raise property taxes or sales taxes.

avatar Andy Cohen March 12, 2013 at 2:06 pm

A little oversimplified, but yes, that’s pretty much the point that Scott Lewis made. And it’s pretty scary. Our labyrinthine tax system has created this monster out of necessity.

avatar Doug Porter March 12, 2013 at 2:20 pm

Hear, Hear! For the Beer Tax!
Bar owners (and their landlords) should get into the act. A mere pittance added to each bar tab could give us a giant fountain in Pacific Beach that spews beer.
Think of the tourism possibilities! Who needs Comicon when we can have Pee-Bee?
And if we get the local microbreweries involved we’ll be boosting a significant industry.
Ah, the possibilities are endless…

avatar La Playa Heritage March 12, 2013 at 9:47 pm

Bravo.

The lame City Council is still putting us in this terrible position. Just let us vote.

Maybe the new Councilman Kersey will champion the public’s Right To Vote issue to finance our public infrastructure needs. For example: A 5 percent increase in TOT for public infrastructure, advertisement, and marketing, that can include a maximum of $520 million in public TOT funds for a contiguous convention center expansion.

Part of the City Council’s giveaway to private Hoteliers also includes any incremental TOT Increment from the existing 10.5 percent, equates to $86.3 million for Fiscal Year 2013.

Therefore if San Diego adds additional hotel rooms or increase hotel prices in the future, then all of the 10.5 percent TOT revenue above the 86.3 million FY2013 baseline will go towards paying for the Expansion on top of the addition $520.

There may also be a way for the proposed 500-room Hilton Bayfront addition to be paid with these new private taxes and any public Tax Increment on existint TOT, but the financing issue is murky.

avatar bob dorn March 13, 2013 at 9:00 am

It’s way too late to say, “The facts are on the expansionists’ side,” Andy. Major cities that have recently expanded their convention centers are showing deficits and wishing they hadn’t spent the money. And… I think the public will gag on this expansion, making the downtown seafront an impenetrable wall of steels and glass. After all, the misused taxing power is now fueling a runaway urban development sector that not only overwhelms the local planning professionals but also bribes a majority of the council.
I don’t think we should be seeing an economic upside that rivals the magnitude of the loss of the city’s power to make its own decisions. Most of the profits from this privatization scam will be enjoyed elsewhere, by the international chains that have ruined so many of the world’s paradises.

avatar Andy Cohen March 13, 2013 at 9:45 am

I certainly agree with your overall sentiments about the way this is being orchestrated, but I do disagree with you about the need for the CC expansion. San Diego is not “other major cities.” If you had a choice between Atlanta, Nashville, Phoenix, Denver, or San Diego on the waterfront, which would you choose? San Diego’s even got it over LA, which is in the middle of Downtown and not exactly a garden vacation spot.

San Diego’s stiffest competition should be Vegas, because Vegas just has a unique draw.

When event planners are telling you point blank that they’d love to bring their event to San Diego, but you just don’t have enough space to accommodate them, what does that tell you? The fact that we were about to lose Comic Con should tell you all you need to know. Losing Comic Con would be like losing the Chargers. It’s a pretty big deal.

avatar Brent Beltran March 14, 2013 at 12:00 pm

If the choice was between losing Comic-Con or the Chargers I’d say bye bye to the bolts. And I’m a life long Chargers fan. There are more benefits to the city with an expansion of the CC than the building of a new stadium that will be vacant most of the year.

avatar La Playa Heritage March 14, 2013 at 12:27 pm

San Diego can have a multi-use NFL Stadium and Contiguous Convention Center Expansion, only is the public is allowed to vote to increase Hotel taxes by 5 percent to a maximum 15.5 percent. The City Council and Hoteliers already pre-approved a 5 percent increase (2% TMD + 3% Special Tax) for an Effective 15.5 percent Hotel Tax rate.

http://www.tinyurl.com/20120619

There will be more Special Election in May/June 2013. San Diego could put the issue to a public vote.

Comments on this entry are closed.

{ 1 trackback }

Older Article:

Newer Article: