Props 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.

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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.

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