A history of the emerging funding problem with the Fort Smith Convention Center

Editor’s note: Fort Smith City Administrator Dennis Kelly suggested during a May 20 meeting of the Fort Smith Convention Center Commission that a restaurant tax may be needed to offset an upcoming funding shortfall, according to this report from The Times Record. What follows are excerpts from a two-part series about convention center funding posted by The City Wire in early January. All figures used in the story were current as of December 2008.

story by Michael Tilley

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.

But mingling happened.

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.

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. 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. 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 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.

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.

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.

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.

MANAGEMENT COMPARISONS
Unlike what has happened in Fort Smith, there was no siphoning of turnback or general revenue funds in Hot Springs or Pine Bluff, two towns that also benefited from the state’s tourism turnback funds.

Steve Arrison, CEO of the Hot Springs Advertising and Promotion Commission, which manages the Hot Springs Convention Center, said his group puts as much of the turnback and revenue funds possible into a reserve fund. Arrison estimates a reserve fund of about $8 million by 2010. Hot Springs is set to collect another $2 million in the next two years from the turnback fund. A hospitality and restaurant tax in Hot Springs not only supports the city’s advertising and promotion efforts, it also funds operations at its relatively active and successful convention center.

Also, Hot Springs manages its tourism and convention effort under one organizational umbrella — not unlike the way it’s managed in most cities in Arkansas and around the country. Except for Fort Smith, where the Advertising and Promotion Commission and the Fort Smith Convention Center — both in the business of recruiting and taking care of tourists and visitors — operate under separate budgets with separate directors.

Arrison politely refused to comment on the dual nature of Fort Smith’s tourism and convention effort, other than to say it was “unusual” and also to point out the many advantages — coordinated advertising, coordinated staffing, etc. — his organization sees from having the tourism and convention center operate under one roof.

Gosack, with the city of Fort Smith, said there has not been any “serious discussion” of pulling the advertising and promotion effort and convention center management under one administrative roof.

However, new Fort Smith City Administrator Dennis Kelly said at a special Dec. 23 city board meeting he is “seriously looking” at a review of downtown Fort Smith tourism and economic development efforts. Kelly said he wanted to the board to know he is giving the issue considerable thought, but would not have a report prior to the board’s Jan. 10 retreat. (Link here for the convention center discussion during the Jan. 10 board retreat.)

ORIGINAL STORIES
To read the original stories, link here for Part I and here for Part II.