Need for more revenue has city looking to find a way
(Jan. 11, 2019) With expenses outpacing revenue over the last decade, Ocean City government is considering increasing room tax rates a half cent to net an estimated $1.7 million in new income annually.
Budget Manager Jennie Knapp provided expense and revenue data comparing fiscal years 2008 and 2018 as part of a room tax ordinance discussion during the Tourism Commission meeting last Thursday.
Knapp and City Manager Doug Miller had discussed a proposal to bump room tax rates for hotels, motels and rentals from 4.5 to 5 percent as part of a fiscal policy presentation during an Ocean City Council work session in late November.
The resort 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. Although the Worcester County Commissioners would need to approve the change, the city has the ability to raise room tax rates to 5 percent without state authorization.
In an interview this week, Knapp said the city’s three largest sources of revenue, which account for approximately 70 percent of the general fund, are property taxes, room taxes and parking fees, with the first two sources slightly decreasing since 2008.
“We’ve operated business on the same money for 10 years,” she said. “Our budget has grown but the three big revenue sources have not grown.”
Real property taxes account for 48 percent of the general fund revenues, with other sources such as room tax, charges for services and funding from outside agencies providing 52 percent.
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 said property taxes, room taxes and parking fees in fiscal year 2008 totaled $54.3 million, which grew less than four percent to $56.1 million in fiscal 2018.
On the other end of the scale, expenses grew more than 12 percent during the same period, going from $75 million in 2008 to $84.4 million in 2018.
“These are the three largest sources in the general fund,” she said. “Take your pick which one we want to increase.”
Knapp said the city has maintained property tax rates, which totaled $43.1 million in 2008 and $42.9 million in 2018, at the same rate through annual adjustments based on assessment totals.
“If the assessment goes down, the rate goes up; if the assessment goes up the rate goes down,” she said.
Of the big three earners, Knapp said parking fees, which jumped from $2.7 million in 2008 to $4.5 million in 2018, is the sole area with boosted revenue.
“Parking has increased because we’ve extended the season when we charge … and we’ve increased the rates,” she said.
When room tax rates were last raised, Knapp said although the half-cent increase was earmarked for advertising, that percentage, which started at 1.4 percent in 2009, was raised to 2 percent in 2012.
“It was supposed to dedicate the half percent to advertising but the way the ordinance was written it actually dedicated 2 percent of gross room revenue,” she said.
Over that same stretch the advertising budget has more than tripled, increasing from $2.2 million in 2008 to more than $6.9 million in 2018.
“What that means is the amount that has stayed in the general fund has not increased over that 10-year period and at times has actually gone down,” she said.
In 2008, room taxes raised roughly $10.7 million, with advertising and marketing costs taking about $2.2 million of that figure to leave more than $8.5 million for general fund expenses.
By 2018, although room taxes netted more than $15.5 million, with advertising costs of roughly $6.9 million, the tally remaining for general fund expenses, about $8.6 million, was nearly identical to a decade earlier.
“As it increased to 2 percent, it started taking away from what we had to work with toward other expenses in the general fund and we’re just starting to get that back now,” she said.
Knapp also said if the percentage of room tax dedicated to advertising was limited to the 2009 rates the current $6.9 million total would be cut to $3.4 million.
“We’ve devoted the entire increase in room tax to increase the advertising budget and now I’m saying we can’t do that anymore,” she said.
Knapp said room taxes should continue to fund marketing and advertising but could perhaps be supplemented.
“We want to increase a bit every year and we don’t want to tie it to gross room revenue and we have to figure out what that formula is,” she said.
Knapp also said the options are limited in terms of cutting expenses.
“There’s no place to cut expenses unless we cut them from public safety or tourism,” she said.
Following last week’s tourism meeting, the mayor and City Council will examine the proposed rate increase before budget work sessions start in April.
“We just need to increase what’s going into the general fund to offset the town’s expenses,” she said. “It’s not us being greedy, it’s just trying to do our business.”