Cities all across California are struggling to funding city services while covering the rising cost of pension obligations. They would kill to have Anaheim’s tax revenue base – which is built on an ever-expanding river of Transient Occupancy Tax (TOT) revenue that will ultimately become a flood. That is, if – as the city’s finance director recently informed the city council – currently planned 4-Diamond hotel projects are completed. If any of them – particularly the 4th Disney hotel – are cancelled, a budgetary shortfall will emerge.
At the May 8 budget workshop, Finance Director Debbie Moreno apprised the council that the 5-year budget forecast was balanced – but that was and is a near-run thing because revenues are “barely able to keep pace with PERS increases.”
“If any of our assumptions on hotel development don’t materialize, we may need to make adjustments in future years,” said Moreno told the council. When asked by Councilwoman Kris Murray which 4-Diamond cancellation would have the greatest impact on the city’s budgetary health, Debbie Moreno replied: “The most impactful would be the new Disney hotel.”
And the only thing on the horizon that could result in any of these 4-Diamond hotels not “materializing” is the Resort unions’ $18 minimum wage initiative.
TOT Growth: The Secret Sauce of Anaheim Budgetary Health
Anaheim’s TOT revenue is immune to the Amazon.com-led revolution in online shopping that is eroding the sales tax revenue that constitutes most cities’ primary revenue source. Not too long ago, cities vied to attract “big box” retailers in the order to increase sales tax revenue – a strategy that has been up-ended as more and more consumers buy goods online. In city after city – including Anaheim – sales and property tax revenue is either flat or declining. Even newer, financially healthier cities like Irvine are grappling with how to deal with the depressive of effect of online shopping on their revenues.
Contrary to the carping of naysayers, the Anaheim Resort is truly the goose that lays the golden eggs – and those eggs are only getting bigger and more golden. TOT revenues continue to outstrip original projections, and the data demonstrates Anaheim’s future budgetary soundness depends on the completion of several planned and approved 4-Diamond hotels in the Resort district.
The Numbers Don’t Lie
The Anaheim Resort that is the foundation of the city’s booming tourism and convention economy is the result of a 1996 agreement to dramatically revitalize Resort infrastructure and appearance. This strategy has succeeded well beyond what its originators expected and the TOT revenue generated as a result has dramatically outstripped the original projections.
A 2007 study by leading hotel industry consultant PKF projected that by Fiscal Year 2015-16, the surplus TOT revenue remaining after debt service would be $10 million. The actual number was nearly twice that amount: $18.3 million.
The positive gap between projected and actual TOT general fund revenue is expanding. The PKF study projected the TOT revenue remaining after debt service in 2019/20 would be $10.5 million. Current city projects peg that number at nearly three times that amount: $27.1 million.
Growth Begets Growth
Anaheim civic leaders have pursued a 50-year strategy of nurturing the growth of the city’s tourism and convention sector. The result of that investment is Anaheim – virtually alone among large California municipalities — has a reliable tax revenue stream that is relatively immune from the depressive impacts of e-commerce and is growing aggressively even as sales and property tax revenues flag.
As noted by Finance Director Moreno in her May 8 budget presentation, unless all five 4-Diamond hotel projects approved under various TOT rebate agreements are completed, the city will have difficulty meeting future obligations – especially escalating pension obligations.
Completion of those luxury hotels – proposed and pursued due to the TOT rebate policies – on the other hand generates a net increase in TOT revenue in the short term and a TOT revenue windfall in the long-term when the rebates expire. Since the TOT rebates are front-loaded, the 10% of TOT from these 4-Diamond hotels that goes directly to the city general fund balloons over time.
According to city projections, the 10% of TOT from just three of those projects – the JW Marriott GardenWalk, the Westin Anaheim and the 4th Disney hotel – will generate $666,864,749 by the time the TOT rebates expire. At that point, that river of TOT revenue will turn into a flood.
Anaheim’s Enviable Tax Revenue Situation
In 2016, three Orange County cities dealt with their budgetary crises by placing half-cent sales tax increases on the ballot. More Orange County cities will do the same this year; the Santa Ana City Council is coping with its massive budget shortfall by placing a massive sales tax increase on the November 2018 ballot to spike its sales tax from 7.75% to 9.25%.
Without the Resort District, Anaheim might well be in the same budgetary boat as Santa Ana. There’s no discussion of a sales tax increase in Anaheim because there’s no need: the TOT revenue stream from the Resort is robust and growing. Anaheim used to have a utility tax – like most cities – but it was eliminated in the 1990s. Anaheim cable subscribers – like residents of many cities – used to pay a franchise tax; that was abolished under Mayor Curt Pringle.
How many cities have been able to lower or eliminate local taxes while substantially boosting tax revenues?
Eliminating those taxes was possible because of reliable tax revenues – almost entirely paid for by non-Anaheimers – from Anaheim’s growing tourism and convention economy – growth that is nurtured by city policies. Those policies – including the TOT rebates to attract 4-Diamond hotel development – are why Anaheim doesn’t have to turn to sales tax increases in order to fund city services and meet its financial obligations.
The horsefly in the ointment is the self-destructive Resort unions’ initiative to boost the minimum wage at these hotels to $15 an hour in January 2019, escalating to $18 by 2022. Passage of this measure – or even the prospect of passage – threatens to delay or kill the the 4th Disney hotel, the second GardenWalk hotel and the second Wincome project.
Something to keep in mind next time the naysayers try to paint the Anaheim Resort as a poverty engine and an albatross around Anaheim’s neck.