LOUISVILLE, Ky. (WDRB) – In an odd consequence of the travel industry grinding to a halt in 2020, Louisville Metro taxpayers are left holding the bag for about $5 million in unexpected costs related to years-old deals to publicly subsidize the construction of two privately own downtown hotels, according to Mayor Greg Fischer’s administration.
The $5 million represents debt payments on bonds Metro government issued to help fund the construction of the Louisville Marriott Downtown in the early 2000s and the Omni Hotel in 2018.
Normally, the debt payments are offset by state tax revenue derived from activity at the hotels – such as sales taxes on purchases and income taxes on hotel employee paychecks.
But because the hotels were closed or operating at a reduced capacity for most of 2020, those state taxes didn’t materialize, leaving Metro taxpayers on the hook for the bond payments.
Metro Chief Financial Officer Daniel Frockt told the council budget committee last week that Metro's additional costs for bond payments is an estimate built into the city's proposed budget for the fiscal year starting July 1, and the exact amount of the shortfall isn't known yet.
The $5 million in unexpected costs is negligible compared to Metro’s projected $704 million general fund budget for the fiscal year starting July 1, but roughly equal to what Metro spends to operate the Air Pollution Control District or Metro Animal Services.
“We could make good use of $5 million, and I would never, ever say it’s an insignificant amount of money,” said Metro Council member Bill Hollander, a Democrat and chairman of the council’s budget committee.
City officials hope the federal government will allow Metro to use some of its estimated $388 million haul from the Biden COVID-relief bill to cover the bond payments.
“If American Rescue Plan revenue recovery guidelines allow, Metro will pursue a federal recovery of this shortfall,” Frockt said in an email.
Frockt said Tuesday that city officials are still poring over federal guidance issued Monday as to how the influx of cash can be used.
But even if the federal money can be put toward the hotel debt payments, that would mean less federal money available for other needs, Hollander noted.
Frockt told the council budget committee that city officials think the $5 million hit will be one-time phenomenon, as hotel activity is bouncing back in 2021.
"I think they will likely come back," he said.
Metro taxpayers are exposed because of deals in which city officials were eager to jump start the construction of big hotels meant to serve larger conventions and bring more tourists downtown.
The city borrowed about $30 million to contribute to the construction of the Marriott, which was completed in 2005; and about $112 million for the Omni Hotel, which opened in 2018.
Like a mortgage, Metro government owes payments on that bond debt each year. But under an economic development program called tax-increment financing, the payments are supposed to be covered by tax revenue generated at the hotels, money that would otherwise go to state government.
When WDRB first highlighted Metro’s government’s potential exposure in April 2020, a spokeswoman for Fischer said the hotel subsidies have nonetheless paid off in the long run.
“TIFs (tax-increment financing) are used to help spur development, and there’s no doubt the downtown area encompassed by the Marriott and the Omni have been transformed, as evidenced by record levels of jobs, capital investment, and tourists,” Fischer spokeswoman Jean Porter said last year. “The benefit of those projects will ultimately far outweigh the difficulties of the current downturn.”
At the time the hotel deals were inked, it would have been hard to foresee a situation in which the tax revenue would fall so dramatically, Hollander said.
“If we had known there was going to be a global pandemic that would effectively shut hotels for the better part of a year, maybe we would have done something differently,” he said. “But that was pretty hard to predict.”