The emerging multi-million dollar question: What to do with the Fort Smith Convention Center?

story and photos by Michael Tilley

Editor’s note: This is the first of a two-part report on the funding of the Fort Smith Convention Center and the overall administration of the city’s tourism efforts. The second part will post on Jan. 8.

After a 1996 tornado devastated parts of downtown Fort Smith and ripped through Van Buren, Fort Smith civic and business officials rallied to create an almost $55 million response plan that included riverfront development, expanding the Fort Smith Public Library system and significantly expanding a Fort Smith Convention Center built in 1966.

The city proposed a one-cent sales tax to fund the efforts. To gain support from business interests, primarily the Fort Smith Chamber of Commerce, the city agreed that state tourism turnback funds to support a newly expanded convention center would not be mingled with the city’s general revenue fund.

Billy Dooly was the president of the Fort Smith Chamber of Commerce in 1996 and 1997 when the convention center renovation was packaged with library and riverfront expansions for a city sales tax vote. He said the package was sold to the chamber board and to the business community with a promise from the city that turnback funds would be used only to support the convention center.

Dr. Jerry Stewart, the retired CEO of Cooper Clinic, doesn’t recall any specific promises, but does remember a “clear concern” about how the city would use the turnback funds and if the convention center would someday be a financial albatross when the turnback funds expired.

“Yes, I think it’s safe to say we (chamber board and other business leaders) had some issues about how you expand these things (convention center and libraries) without that (future operations and maintenance funding plans) in place,” said Stewart, who was a member of the chamber board during the sales 1996-1997 sales tax push.

However, business leaders didn’t think to require the city to agree to a more broad promise in terms of convention center funds; which is to say, no one thought the city would use revenue from convention center operations for any purpose other than reinvesting back into the convention center.

Someone should have thought of that.

THE REVENUE DRAIN
The way in which the city of Fort Smith has siphoned funds away from the Fort Smith Convention Center is not only unusual, some say it violates the spirit of an agreement city officials made more than a decade ago when seeking public support for a sales tax to fund the center’s construction.

And in just a few short years, the city might wish it had back some of that convention center revenue spent on other city projects.

Beginning in 2003, the city has funneled more than $3.4 million of convention center revenue into the library system ($1.125 million since 2003), the city’s parks department ($976,726 since 2003) and senior citizens programs ($1.3 million since 2003).

City officials estimate combined 2009 and 2010 convention center revenues of more than $1.44 million, which means that by 2010, the city will have drained more than $4.8 million away from the convention center to fund non-tourism related projects and organizations.

“Technically, the city is probably covered legally (with the shifting of revenue), but it sure as hell isn’t within the spirit of what we all originally talked about,” Dooly said.

Dooly said the shifting of convention center funds is similar to when the city used sewer and water funds to subsidize construction of a new building for the Fort Smith Police Department.

“That was a stink then, the way they used money from one pot for another purpose. Now, here we are again, because this is a very similar type thing,” he said.

Ray Gosack, Fort Smith deputy city administrator, doesn’t at all see a problem with the way the city has managed convention center funds. What’s more, he’s not sure about any promises to the business community with respect to convention center revenues.

“I don’t know that the city ever promised” to keep all the convention center funds tied to current and future convention center operations, he said.

Furthermore, Gosack notes that prior to the convention center renovation and the turnback funds, the city subsidized convention center operations with general funds — or, in other words, the convention center revenue and expenditures have never been fully autonomous from city coffers.

THE TURNBACK PROGRAM
The tourism turnback fund was created under the 1977 City-County Tourist Meeting and Entertainment Facilities Assistance Law. It was amended in 2001 under Act 1073, sponsored by State Rep. Jodie Mahony, D-El Dorado. The amendment changed the law so that annual line-item requests by each city or organization seeking tourism turnback funding was replaced by a set amount for a certain number of years. Not only did the Act greatly streamline the process, it essentially limited the tourism turnback funds to nine cities and organizations and put an expiration date on the program.

From 2001 to 2016, the state is expected to spend $94.29 million on the program, according to information from Debbie Rogers, who manages the program for the Arkansas Treasurer’s office. Rogers did not know how much was spent between 1977 and 2001, saying it would be “a big challenge” to research that number.

Most of the nine cities and organizations eligible for tourism turnback funds under Act 1073 see their funding end by 2010. The city of Little Rock is scheduled to receive funds through 2016, and should collect more than $13.4 million between 2009 and 2016.

The state’s convention center industry would be limited to just two or three small operations without the turnback program support, said Montine McNulty, executive director of the Arkansas Hospitality Association.

“What has it meant? I think you can point to the economic development they (convention centers) have produced for those cities that had the foresight and leadership to recognize the importance of bringing visitors to their communities,” she said.

THE FORT SMITH SHORTFALL
Fort Smith officials were in early 2001 interested in developing a “spending/savings plan” with the tourism turnback funds to be received from the newly revamped turnback program. An e-mail from then Assistant City Director Dean Kruithof informed key members of the city staff, including Gosack and then City Administrator Bill Harding, that Fort Smith would get about $1.8 million annually through 2010 for the newly renovated convention center.

“Keep in mind the Legislature will review the funding formula and make an appropriation every session, so while this is supposed to be a 10-year commitment, we should not take these funds for granted,” Kruithof wrote in the concluding sentence of his April 23, 2001 e-mail memo.

The biggest problem facing the city is that its portion of the state’s tourism turnback funds are set to expire in 2010. Between 2001 and 2007, the city collected $13.23 million in turnback funds, with $4.36 million of that used to help pay down the 1997 sales and use tax bond debt. Proceeds from turnback funds between 2008 and 2010 are estimated at $4.47 million.

A second problem created from the expiration of turnback funds is that convention center expenses are considerably higher than convention center revenue. Convention center expenses in 2006 ($1.46 million) and 2007 ($1.87 million) were 58.6 percent higher and 66.7 percent higher, respectfully, than revenue in those years.

And it gets worse. With no turnback funds and no money in the bank, there is no reserve fund for capital improvements for a large facility that will be 10 years old in 2011.

“How can they, in good conscience, take away from the convention center and put that money in the general fund and then say the convention center doesn’t have any money?” Dooly inquired.

The issue has confused and frustrated Frankie Hamilton, director of the Fort Smith Convention Center since 1994, who feels the pressure of a looming shortfall but has never had the authority to take steps to avoid it.

“It is confusing, very confusing, when you’re told to save money and put money back and do all you can to watch the money. And then (the city) pulls money out for this project and for that project and none of the projects had anything to do with supporting” the convention center, she said.

McNulty wouldn’t address issues of any specific city, other than to say she has always advised cities collecting tourism turnback funds “to sock away as much of that money as you can for capital improvements or maintenance. … We need to face the reality that the day is coming that the convention center industry is going to have to generate its own money or be subsidized by its own community and not the state.”

SEEKING SOLUTIONS
Discussions among the city board of directors and the convention center commission to make up the funding difference have included consideration of reinstating the business license fee, increasing franchise fees for utilities and seeking a one percent or two percent tax on prepared foods — commonly referred to as a restaurant tax.

The business license fee reinstatement could generate as much as $1.5 million a year. Increasing the franchise fee could raise an extra $450,000, and a 1 percent restaurant tax might provide $1.8 million annually.

“The question with that (restaurant tax) is, ‘Is the community ready for that? Is this the time, with this economy, to do that?’ Probably not,” Gosack said.

The question of the convention center financial shortfall is on the agenda for a planned Jan. 10 planning retreat of the Fort Smith board of directors.

What solution(s) might the board find? Gosack shrugged his shoulders, and shook his head, giving the universally recognized physical gestures indicating, “I don’t know.”

Without a financial cure, the city estimates a $696,257 operating loss in 2010, with a year-end fund balance of just $255,928 — meaning the city faces a potential budget expenditure of as much as $1.5 million in 2011, and between $1.8 million and $2 million for subsequent years. That kind of financial line item on a general fund of about $45 million “will be a big hit,” Gosack said.

While it could be a financial burden, ensuring the success of the convention center is important, Gosack stressed. Between January and November of 2008, the center hosted more than 225 events that brought an estimated 100,000 people to the area, according to city figures. Like parks and roads, convention centers aren’t built to be revenue generators, they’re built to capture tourism dollars, he explained.

A memo from Hamilton noted, “Convention centers are built as a catalyst for bringing more tax dollars into the city coffers by the groups using the facility. The attendees fill restaurants and hotels, spend money on gas and gifts.”

(The City Wire will post the second part of this story Jan. 8.)