Expect the Unexpected: Financing the Orange County Convention Center Expansion in the Wake of Recession and Terrorism
Donoghue, Sharon, Gassman, Eric, Taub, Stephanie, Winterkamp, Fred, Government Finance Review
More and more communities are using sector taxes to finance growing capital improvement programs. Sector taxes, such as those on tourism, investment income, tolls, and landing fees, among others, are less stable and predictable than sales and property taxes. In developing capital financing plans based on sector taxes, governments should always consider ways to predict and overcome unfavorable developments. Thanks to this kind of contingency planning, Orange County, Florida, was able to successfully complete a $748 million convention center expansion despite the severe financial strain on the tourism industry following the September 11 terrorist attacks.
This article begins with a brief overview of the convention center, the expansion project, and the associated funding plan. We then discuss the challenges that ensued and how the county met them by revising the original funding plan. Finally, we highlight the most significant lessons learned from this enormous undertaking--lessons in teamwork, capital planning, and project finance.
Orange County, Florida, is home to the City of Orlando and the Orange County Convention Center. The Orange County Convention Center is a world leader in the convention industry and a central element of the county's economic development effort. Convention center activities are responsible for more than $20 billion of past and future net economic benefit. With 2 million square feet of exhibit space, the convention center is the second largest in the United States. One million square feet of the exhibit space is the result of an expansion project begun in 1998 and completed in 2003.
Orange County's 5 percent lodging tax, called the Tourist Development Tax or TDT, funded both the original facility and the expansion project. A 1979 voter referendum levied the initial 2 percent TDT and prohibited other county revenues from funding convention center capital projects. As such, TDT funding was the only revenue source available for the expansion project.
Through the years, the TDT grew at a robust annual rate in excess of 10 percent, in spite of negative tourism impacts like recessions and the Gulf War. Annual TDT collections reached nearly $100 million for fiscal year 1999. As TDT collections increased, the county accumulated TDT cash reserves that would reach $140 million by 2001.
In 1998, the county approved a five-year, $748 million convention center expansion to promote the local economy. The project included a massive new building, as well as improvements to the surrounding roadways and the existing facility. Using the input of convention industry clients, the county designed the facility expansion to be an efficient venue that would attract even more leading shows.
THE BEST LAID PLANS
The plan of finance to fund the five-year expansion project relied on growing TDT revenues to support a series of debt issues (see Exhibit 1). A financial consultant's projections of future growth in TDT collections showed that these revenues would comfortably fund the plan of finance. Fitch Ratings, Moody's Investors Service, and Standard & Poor's assigned credit ratings of A+, A2, and A, respectively.
The county sold bonds and the project started. Series 1998B TDT revenue bonds provided $136 million to fund design work and land. Annual TDT collections increased to $108 million by fiscal 2000. Series 2000 TDT revenue bonds in the amount of $300 million funded the first portion of construction. Following this second offering, the maximum annual debt service for all outstanding TDT debt was $65 million.
The plan called for another TDT revenue bond issue of approximately $220 million in 2002 to provide the remaining construction funding. The plan anticipated final combined annual debt service of about $82 million for all outstanding TDT debt. With projected annual TDT revenues of well over $108 million, the county was confident it would have no problem servicing this debt. …