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Ocean City Council is considering increasing the room tax rate for tourists renting hotel or condos to boost revenues.

With property tax revenue still off, city looks elsewhere for money

(Nov. 30, 2018) A half-cent increase in Ocean City’s room tax rate could be in the offing, as the City Council sees that as a possible way to increase revenues because of static property taxes and the increased cost of services.

Bumping the room tax rate for hotels, motels and rentals from 4.5 to 5 percent, was discussed as part of a revenue and fiscal policy review presentation given by Budget Manager Jennie Knapp and City Manager Doug Miller during the council work session on Tuesday.

“We want to go over some of our fiscal policies, which includes the debt policy and how we use fund balance in reserves,” Miller said. “We are coming up to budget preparations for FY20.”

Knapp said real property taxes account for 48 percent of general fund revenues, while charges for services, grants and room taxes supply the rest.

“Part of the conversation as we go into next year’s budget is … trying to determine what revenue sources in the general fund should pay for what services,” she said.

The general fund is the city’s primary operating budget, which in addition to supporting public safety, public works, solid waste, recreation, tourism, special events, general government and debt service, also provides partial funding for the Ocean City Municipal Airport, the convention center, transportation department and “pay-as-you-go,” projects.

Knapp and Miller separated the departments covered by the general fund umbrella into two categories: core services and quality of life services.

“We consider the core services to be the departments that preserve property values [and] provide traditional municipal services,” she said. “These include government administration, public works, public safety and debt service.”

Ocean City began collecting room taxes in 1998 and last increased rates from 4 to 4.5 percent in 2008 as part of an agreement with the lodging industry to spend a portion of that on resort marketing.

 Knapp said, however, that reduced property tax revenues over the past decade have offset the economic boost that room taxes provides.

“Costs to provide core services increased during this time period but the revenue source that traditionally covered these … property taxes, decreased,” she said.

Knapp said Ocean City collected about $47.9 million in property taxes in fiscal 2009, which funded 82 percent of core services costs, but by fiscal 2017 that number dropped to roughly $43.2 million which only covered 69 percent of the costs for providing core services.

“Parking revenue increased from $2.5 million to $4.7 million during the same time frame, which covered some of the cost previously from property tax revenue,” she said.

Although the Worcester County Commissioners would need to approve the change, Knapp said the city could raise room tax rates to 5 percent without state authorization.

“We would recognize an additional $1.73 million in revenue,” she said.

Knapp said the city ordinance that raised room tax rates a decade ago also increased the percent of gross room revenue dedicated to the resort’s advertising budget from 1.4 to 2 percent starting in 2012.

“At the time we implemented this ordinance it was important that we increase our advertising and that we had a way to fund it,” she said. “Advertising and marketing is paid primarily through a combination of room tax and the Maryland state tourism grant.”

Additionally, Knapp said the city receives a $300,000 grant from Worcester County government to offset tourism expenses.

“We’ve increased the percentage going to advertising and reduced the amount of room tax that’s staying in the general fund to pay for other expenses,” she said.

Knapp said in fiscal 2009, a third of room tax revenue, roughly $3.7 million went into the advertising budget, with 67 percent, about $7.8 million flowing to the general fund.

By fiscal 2018, Knapp said those percentages had altered, with 44 percent of room tax revenues, roughly $6.8 million dedicated for advertising, and 56 percent, about $8.5 million, going to the general fund.

“Advertising as a percentage of gross room revenue was 1.65 percent in FY18 with the other portion of that 2 percent being made up by marketing costs,” she said. “We actually are spending about $1.2 million on what I would consider marketing costs at this point.”

Knapp said the marketing category includes funding for sponsorships, the Tourism Advisory Board, as well as research and support for special events.

Knapp estimated if room tax rates were set at five percent, based on the current two percent funding formula, the advertising budget would increase about $58,000 with the amount dedicated to general fund expenses jumping more than $1.6 million.

“That would increase the advertising budget but it would greatly increase the amount that’s going towards the general fund,” she said.

Knapp said room tax revenues used for general fund expenses have only increased about $826,000 in the last decade.

“We could discuss changing the percentage that we dedicate to advertising or marketing,” she said. “Do we want to devote a certain percentage to advertising and another percentage to marketing costs?”

Turning to debt policy, Knapp said city code specifies the aggregate amount of bonds, notes and other indebtedness cannot exceed 5.2 percent of assessed property value.

Knapp reported the city’s fiscal 2018 assessed property value was more than $8.9 billion, of which 5.2 percent is roughly $464 million, far higher than the city’s current $115 million in outstanding bonds, loans and leases, which is equal to 1.3 percent.

Knapp also noted the city’s net bonded debt, limited to no more than 3 percent of assessed property value, or approximately $267 million, is at 1.13 percent with outstanding bonds totaling about $101 million.

“We’re below the limit of what we can borrow per our policies,” she said.

Councilman John Gehrig moved to forward the fiscal policy discussion to the Tourism Commission for further refinement.

“It makes sense if we offer this to the Tourism Commission to workshop some suggestions and ideas,” he said. “Specifically about the [room tax] increase, how to handle it, and the ordinance change language.”

Councilwoman Mary Knight, who serves on the Tourism Commission, said she would pull comparable data for room taxes in surrounding areas prior to the next meeting.

“The last time I did it we were very well below [other rates,] especially in Rehoboth, and some Delaware beaches just raised theirs quite substantially,” she said.

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