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Room tax increase debate morphs into youth sports marketing discussion during Ocean City Council work session on Tuesday.

Revenue discussion leads to sports complex study

(Feb. 1, 2019) Allocating about $1.3 million in additional revenue from a proposed half-cent increase to Ocean City’s room tax rate involved a nearly two-hour City Council discussion Tuesday, as it also ventured into matters of economic growth and youth sports marketing.

City Manager Doug Miller told the council the Tourism Commission voted Jan. 3 to recommend bumping the room tax rate for hotels, motels and rentals from 4.5 to 5 percent.

Although it concurred on the overall concept of the increase, the Tourism Commission was undecided on when it should be implemented, Miller said.

City Budget Manager Jennie Knapp said the rate increase would yield an additional $1.3 million in general fund revenues if enacted for fiscal year 2020, which begins July 1, 2019. If the effective date were to be pushed back to Jan. 1, 2020, the revenue would be approximately $492,000, she said.

“We get 65 percent of our room tax in the first six months of the year [with] 50 percent in July and August alone,” she said. “If we wait until January, it doesn’t help our overall budget as much.”

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.

Miller said the Tourism Commission recommended the amended ordinance language establish funding levels for destination advertising and marketing, while also providing flexibility for spending room tax revenue.

“Over the last decade, the public safety budget has gone up from $31 million to $35 million, economic development and tourism from $3.6 million to $8 million and debt service from $3.5 million to $5.6 million,” he said. “Those benefit our visitor constituent so it’s somewhat logical that the room tax pay for some of these expenses.”

After confirming that Knapp preferred enacting the rate increase for fiscal 2020, Councilman Tony DeLuca moved to approve the room tax ordinance revisions for first reading, which was quickly seconded by Councilwoman Mary Knight before Councilman John Gehrig began looking backward to plot a path forward.

“About 11 years ago, the advertising budget was around $1.7 million,” he said.

When room tax rates were last increased in 2008, Gehrig noted 2 percent was dedicated for advertising, which subsequently grew to just over $6.9 million by fiscal 2019.

Knapp said the 2008 rate boost increased the percent of gross room revenue dedicated to the resort’s advertising budget from 1.4 to 2 percent starting in 2012.

“It essentially gave every piece of the increase in room tax to the advertising budget,” Knapp said. “The amount that’s going into the general fund to pay our bills has essentially been the same for last 10 years.”

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.

“In 2007 … almost $8.6 million of room tax revenue was going into the general fund,” she said.

Although about 67 percent of room tax revenues went to the general fund in fiscal 2009, that allocation dropped more than 10 percent by fiscal 2018.

“As we increased that formula from 1.4 percent of gross room revenue to 2 percent ... the amount of room tax going into the general fund went down,” she said. “We are finally getting back to the point where we are getting as much money out of room tax as we were 10 years ago.”

Knapp also noted maintaining property taxes at the constant yield rate has kept that revenue stream stagnant for the past decade.

“We actually are getting less property tax revenue than we were in 2007,” she said.

Gehrig faulted the proposed plan for continuing to allocate 2 percent of room tax revenues for advertising and marketing without consideration to encouraging future growth.

“So, the proposal is to raise the room tax half a point and spend it on everything except economic development?” he said.

Knapp questioned that assertion.

“We would be increasing the marketing aspect from about $800,000 to over $1 million in the first year and as room tax would grow, that number would grow,” she said.

The rate boost would increase the general fund contribution from more than $8.6 million in fiscal 2019 to about $10.6 million in fiscal 2020, which includes $400,000 for increased expenses incurred from special events.

“If you don’t want to raise property taxes, and you don’t want to put in parking meters, then we have to have a mechanism to pay for [special event expenses],” she said.

Gehrig opposed the proposal while calling for more input from area businesses and residents.

“What trends are happening right now from a business perspective?” he asked. “People travel differently these days and we need to attack that differently.”

As vacation preferences have morphed for younger demographics, Ocean City has failed to adapt to changing times, Gehrig said.

“We’re a last-minute weather-based weekend destination,” he said. “We don’t have the repeat guests that we used to in the past [and] that’s why we get so many last-minute bookings.”

Citing past economic investments for developing golf tourism and expanding the convention center, Gehrig said the burgeoning youth sports travel movement could provide an even greater opportunity to lure visitors.

“We can actually have these tournaments turn into vacations,” he said. “I’m sure we have a lot of ocean front rooms we could fill with college scouts.”

After Gehrig requested the earlier motion be withdrawn, DeLuca asked Miller when a decision would be required to enact the increase for fiscal 2020.

“We need your decision by the end of February or first part of March, so we can complete our revenue estimates for the budget,” Miller said. “The Worcester County Commissioners need to concur and I’m not sure of their timeframes.”

Councilman Matt James, who also chairs the Tourism Commission, agreed with Gehrig and noted he made a comparable request to have the council discuss building a sports complex for youth tournaments during its Jan. 3 meeting.

“I’m not ready to support this motion unless we have a detailed discussion on sports marketing,” he said.

DeLuca agreed to pull his earlier motion if the sports marketing details could be firmed up by the end of February.

Councilman Dennis Dare said developing an area sports complex has been on his radar for a few years and agreed the topic deserved further study through an independent consultant.

 “It’s a big decision and needs to be well thought out,” he said.

Dare said setting room taxes at 5 percent would have minimal impact on business and then took that sentiment even further.

“I think we need to look at the state legislature to go even higher than that,” he said.

Knight agreed the topic warranted an economic impact study but also raised residential considerations while noting a sports complex would most likely be built just outside Ocean City.

“It is an amazing opportunity, but we’ve got to be able to sell it [and] how can you substantiate spending over $1 million for something outside of Ocean City proper?” she asked

DeLuca withdrew his initial motion after Miller suggested a first reading on the revised room tax ordinance language could be added to the agenda for next week’s council meeting, with potential passage on second reading at the following meeting on Feb. 19.

City Solicitor Guy Ayres said the ordinance would need county approval prior to council passage.

After voting 4-3 against a subsequent motion from DeLuca to request the Worcester Commissioners approve the fiscal 2020 room tax increase, with James, Martin, Gehrig and Councilman Mark Paddack opposed, Dare moved for Mayor Rick Meehan to send a letter to county officials seeking the countywide rate increase, which was approved 5-2, with Gehrig and James against.

Finding agreement in the end, the council voted unanimously for another motion by Dare to have staff prepare a request for proposal for a sports marketing study.

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