What Can a Quarter-Percent Sales Tax Support?

The Cultural Facilities Task Force (CFTF) presented to the Hamilton County Commissioners on June 23 a plan for renovating Union Terminal and Music Hall, funded largely by $225 million in bonds to be supported by a quarter-percent sales tax for 14 years.  Commissioner Chris Monzel surfaced on August 6 an alternative (and subsequently adopted) plan calling for approximately $170 million to be provided by the same tax-rate increment over a period of just five years.  The Monzel plan calls for 76% as much funding in just 36% as much time, without changing the tax rate.  Clearly, the Monzel assumptions are more aggressive than those from the CFTF.  This observer sees two key assumption categories that could account for the difference. 

Timing of expenses relative to funding

The CFTF program called for prompt selling of approximately $225 million in 14-year bonds in order to lock-in current low interest rates.  That would have created a large bank account to be drawn down as renovation progressed over four or more years.  The Monzel plan makes no mention of issuing bonds, and it’s hard to imagine that a five-year sales tax duration would support anything close to $170 million in bonds, given the expected coverage ratios and underwriting expenses.  Applying the CFTF assumptions to a five-year sales-tax probably leads to a bond issue not more than $100 million. 

The factor that potentially bridges the gap between funding plans is the timing of expenses.  Union Terminal is not a shovel-ready project.  It will require a lot of engineering before the high-burn-rate field construction begins.  The CFTF projected that field construction would begin in 2016 or later, and that it wouldn’t be completed until 2018 or later.  It the sales tax boost were to start on January 1, 2015, there would be four years of revenue collected by the end of 2018.  If the Union Terminal renovation team were told under the Monzel plan to manage its cash requirements to match sales-tax proceeds, a program extension of as little as one year might get it accomplished without any bonds at all.  Monzel may expect to see Union Terminal renovated on a fund-as-you-go basis. 

Debt-service coverage ratios

The CFTF funding plan called for a 150% debt-service coverage ratio, meaning that debt-service obligations would be limited to two-thirds of the expected sales-tax proceeds.  That’s how the CFTF projected that 14-year bonds could be called early and paid-off in nine years.  That plan could have left five years of sales-tax revenues with no associated commitments.  The CFTF never disclosed publicly any plans for using or shutting-off those revenues, but I think it’s reasonable to assume that the occupants of Union Terminal and Music Hall would have offered plans to utilize some or all of the available funds.  In particular, Museum Center will need some not-yet-identified funding to improve its exhibits, which have largely stagnated as Union Terminal has faced an uncertain future.  The five-year Monzel plan apparently shuts off that potential funding stream, presumably at some distress to the occupants.

Neither side has been forthcoming about the detailed assumptions and schedules behind the outline plans offered, so the foregoing includes some speculation.  It will be interesting to see how the players reveal their ideas as we move toward election day.