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Even after the passage of a new hotel-room tax hike this spring, San Diego taxpayers could be on the hook for millions of dollars more than expected each year to expand the Convention Center, according to a worst-case scenario outlined in a new city report.

Before now, city leaders have said the day-to-day operating budget, which pays for police, fire, libraries and other regular city services, would owe $3.5 million annually as part of the $520 million expansion plan.

But the city budget’s annual bill could be as high as $9 million to $13 million, according to the report. The new information comes in advance of a City Council vote today on the project’s entire financing plan.

The higher bill comes if projections for hotel-room tax revenue don’t materialize. City hoteliers passed a special tax in the spring that hikes tax rates by 1 percent to 3 percent depending on a hotel’s proximity to the Convention Center. City officials are targeting the money from this tax increase to cover a series of loans planned to finance expansion.

They say they’ve made conservative assumptions that protect the budget as well as developed contingency plans to further safeguard taxpayers. But some aspects of those plans are suspect and ultimately the city will be on the hook for the debt whether the assumptions come true or not.

“We have the obligation to pay $9 million to $13 million,” city Chief Operating Officer Jay Goldstone said. “There’s no question about that.”

The overall financing proposal is complicated and still not finalized. We’ll break down how the plan is supposed to work, how city officials say the budget is protected and what the risks are.

How It Works

The city plans to take out three sets of long-term loans to pay for the expansion.

The new hotel-room tax and a $60 million contribution from the Unified Port of San Diego back the first two loans, which are expected to pay for the majority of the expansion. Payments on these loans vary slightly year to year, but total around $21 million annually.

The day-to-day budget backs the third loan. But the city expects there will be enough revenue from the hotel-room tax to pay for the first two loans and limit the budget impact on the third to $3.5 million.

The annual payment on the third loan ranges between $9 million and $13 million, meaning the city needs an extra $5.5 million to $9.5 million from the special tax to cover what it owes.

That won’t be a problem, Goldstone said.

“Professionally, I feel very comfortable that the city’s real exposure is going to end up at the end of the day being the $3.5 million,” he said.

And backers point to estimates that show the expansion will generate more than that amount, allowing the city budget to profit.

The Protection

The city has a number of contingencies to keep the budget’s contribution from being greater than $3.5 million a year.

Most notably, officials have based its plan on a zero-percent growth rate in special tax revenue after 2017. By contrast, in the past 10 years hotel-room tax revenues have grown on average 4.2 percent annually, and that’s counting the recession, according to an Independent Budget Analyst report released Friday.

“While there is a downside risk, the IBA believes [special hotel-room tax] revenue projections are conservative and acknowledges the significant long term upside potential,” the report said.

The financing also contemplates a stabilization fund to sock away hotel-tax revenues for years when the money might not materialize.

The city also has a written pledge from the board of the Tourism Marketing District, which takes in $25 million-plus in hotel-room tax revenues a year, to cover the city’s bill if it’s more than $3.5 million. Goldstone said he’d have more details on how that plan might work at today’s council hearing.

Lastly, the city plans to have a third party analyze its revenue projections before it borrows the money. The council also will vote at least once more before the city issues the bonds.

The Risk

The deal won’t happen until two decisions are made outside of the city’s direct control.

A court needs to decide if it was legal for the city’s hoteliers to have voted on the hotel-room tax hike, rather than the public. And the California Coastal Commission has to approve the expansion plans. City officials hope to have both decisions resolved by January.

But City Attorney Jan Goldsmith doesn’t expect the court case to be wrapped up by then.

“It appears highly unlikely the matter will be settled by early 2013,” a Goldsmith spokesman said.

Even if the city clears both the legal and Coastal Commission hurdles, timing matters. The financing plan relies on current interest rates, which are low. If rates go up, the city might have to pay more to borrow money, which results in greater risk to the budget.

The plan to tap the Tourism Marketing District if the city’s cost exceeds $3.5 million a year also isn’t a sure thing. The district needs to be renewed and that has its own legal challenges. If renewal happens, it remains unclear if the district can legally contribute its money to a building project, such as the expansion. The city report on the financing plan doesn’t have any mention of a payment from the district and the IBA report said that “this pledge is no longer considered to be legally viable.”

The Bottom Line

City leaders can build in all the safeguards they want, but the fact remains that the budget ultimately is responsible for an amount far greater than $3.5 million annually to finance the expansion. City leaders have talked about formally capping the city’s contribution for almost a year. But they never capped it and this financing plan makes the budget risk all the more clear.

Liam Dillon is a news reporter for Voice of San Diego. He covers San Diego City Hall, the 2012 mayor’s race and big building projects. What should he write about next?

Please contact him directly at liam.dillon@voiceofsandiego.org or 619.550.5663.

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Liam Dillon

Liam Dillon was formerly a senior reporter and assistant editor for Voice of San Diego. He led VOSD’s investigations and wrote about how regular people...

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