Cincinnati 'Icon Tax': How does new sales tax proposal differ from stadium sales tax of 1996?

Deadline for putting measure on ballot is Aug. 6

CINCINNATI – If you've lived in Greater Cincinnati for more than a handful of years, chances are that when you hear the words "Hamilton County sales tax," you think "stadium."

The half-cent sales tax increase approved by Hamilton County voters to build new homes for the Bengals and Reds has been a source of controversy since before it was passed in 1996.

Now influential business and community leaders want Hamilton County commissioners to put a quarter-cent sales tax increase on the November ballot – this time to fund hundreds of millions of dollars in renovations and repairs at Union Terminal and Music Hall.

County commissioners have until Aug. 6 to decide.

Members of the Cultural Facilities Task Force pushing for the tax increase are quick to point out differences between their plan and the stadium sales tax. The half-cent stadium sales tax hasn't generated as much money as its supporters predicted, which has created ongoing financial headaches for the county.

"In all the focus groups and community interaction we had done, we knew one of the things we're going to have to explain over and over is the difference between what we've done here and the stadia tax," said Bob McDonald, the former CEO of Procter & Gamble who was chairman of the task force.

Simple Math For Complex Project

The big difference that McDonald and other task force members point out is simple math.

Proponents of the stadium sales tax in the 1990s assumed sales tax revenues would grow by 3 percent each year on average. When the county issued bonds to pay for the construction of Paul Brown Stadium and Great American Ball Park, officials counted on that rate of growth to have enough money to pay off the debt.

It's like buying a house and taking on a mortgage assuming your salary will increase by a certain amount each year.

Elected officials argued at the time that 3 percent was a conservative growth rate since the county's sales tax revenue had grown by more than 6 percent per year on average.

But that growth slowed.

And in 2008, sales tax revenue shrunk by more than 1 percent. In 2009, sales tax revenue shrunk by more than 7 percent.

Because the stadium-financing plan relied on 3 percent growth each year, it has been difficult for the county to dig itself out of the financial hole that those shrinking revenues created, said Hamilton County Commissioner Greg Hartmann.

 

"When you get that under water, you can't pay the obligations that were made," said Hartmann, who was not a county commissioner in the 1990s. "You can look at how far under water a fund of that size goes when assumptions are wrong."

The Cultural Facilities Task Force, on the other hand, is assuming 0 percent growth.

That means as long as Hamilton County's sales tax collections don't shrink, the extra quarter-cent tax should bring in plenty of money to pay off the bonds that would be issued to finance the renovations and repairs at Music Hall and Union Terminal.

"I believe the approach was very conservative and very thoughtful for this round, and it seems to have met the test for reasonableness for most people," said Kathryn Merchant, CEO of The Greater Cincinnati Foundation and a member of the task force.

Some critics, though, question whether even 0 percent growth is conservative enough. If the community faces another recession, sales tax revenues could shrink again year after year, said Jeff Capell, who spoke to county commissioners on behalf of COAST, the Coalition Opposed to Additional Spending and Taxes.

"It could happen," he said.

Still, proponents believe a 0 percent growth rate is the most reasonable assumption the task force could have made.

"It's not recession-proof, but it's a lot better than the prior assumption," said Tim Maloney, CEO of the Carol Ann and Ralph V. Haile/ U.S. Bank Foundation and a member of the task force.

Plan For A Cushion

The task force has been conservative in other parts of its plan, too, McDonald said.

The proposal includes a debt service coverage ratio of 1.50. That means that planners expect the extra quarter-cent sales tax to generate 50 percent more money than the county would need to pay off the bonds.

So even though the plan recommends issuing 14-year bonds, the county should collect enough money to pay off the debt in nine years, McDonald said.

 

The county's original stadium sales tax bonds were issued with a 1.25 debt service ratio, said John Bruggen, Hamilton County's budget director.

But Bruggen said the plan for the stadium bonds included a debt service ratio closer to 1.50, adding that it's not really fair to compare the actual bond issue with a plan like the one submitted by the task force.

The icon tax plan also includes a recommendation to create a $23.5 million "debt service reserve fund" when the bonds are issued. That would be the equivalent of one year's worth of bond payments.

That means if the extra quarter-cent sales tax revenue falls short, there would be extra money in the account to cover the difference, said Matt Staarmann, an executive with Ross Sinclaire & Associates, LLC, the local investment banking and asset management firm that put together the bond recommendation for the task force.

The county also established a debt service reserve fund in 1997 when it issued $322.7 million in 30-year bonds to fund the construction of Paul Brown Stadium. The $13.6 million cushion didn't last long, though, once the sales tax growth stalled.

Renovating Old Buildings Versus Building New

Another big difference between the "Save Our Icons" plan and the stadium plan is that Union Terminal and Music Hall already exist.

The plans for new sports facilities for the Bengals and Reds were little more than big-league dreams when voters approved the half-cent sales tax increase in 1996.

The promise to build a new football stadium – and the hard-fought sales tax campaign that followed – was an effort to keep the Bengals from leaving town.

The 1996 campaign estimated it would cost $544 million to build a new football stadium, a new baseball park and help redevelop the riverfront.

The final construction and interest costs for both Paul Brown Stadium and Great American Ball Park will cost closer to $1 billion, however. That includes interest paid on the debt.

McDonald said both Union Terminal and Music Hall have been studied carefully, and renovating the two buildings shouldn't result in the kind of cost overruns that plagued the county during construction of Paul Brown Stadium.

"We know these buildings," McDonald said. "Previous renovations have taught us what the risks are, what the scope is. This is not like building new buildings where you potentially have cost overruns."

Still, anyone who has bought an old house knows that renovations can bring surprises, too.

"You don't know with absolute certainty what you're getting into until you open up walls and that sort of thing," said Tim Mara, a lawyer who led the campaign against the stadium sales tax in 1996. "I'm sure these people have done their homework, but you really do have to worry a little bit."

Can Project Avoid 'Mission Creep?'

If county commissioners decide to put the quarter-cent sales tax increase on the ballot, Mara said he hopes they will write focused ballot language to ensure the money collected goes to Union Terminal and Music Hall.

"We went far afield with the stadium tax," Mara said. The money collected from the half-cent stadium tax increase also funds a property tax rollback and helped pay some of the costs of relocating Fort Washington Way, too.

"It ended up becoming a lot more than just the stadium sales tax," Mara said. "I guess you'd call that 'mission creep.' We don't want to have that happen here again."

For his part, Mara said he wants to support the icon tax. He worries that if the community doesn't act soon, Union Terminal could face demolition. And he understands that every year the repairs and renovations are delayed, the more expensive the projects become.

Still, Mara can't help but wonder whether there has been enough time for county commissioners to study the financing plan and whether there will be adequate oversight if the tax increase is approved.

"I want to support it. I hope they can answer these questions," he said. "I think it would be a crime to let those buildings fall down, and I think it is getting to that point."

Hamilton County commissioners will hold two public hearings on the proposed icon tax:

• The first will start at 6:30 p.m. July 23 at Sharonville Convention Center.

• The second will start at 11 a.m. July 28 at the County Administration Building downtown.

For more stories by Lucy May, go to www.wcpo.com/may. Follow her on Twitter @LucyMayCincy.

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