Financial analysis of fairgrounds annexation

Summary Findings Proposed City of Tulsa Fairgrounds Annexation January 2007

Assignment
Estimate the costs of providing the County Fairgrounds with City services if the area was annexed and estimate any additional revenue the City would receive from such annexation. The area covers 230 acres, which is approximately one fifth of one percent of the land in the current corporate boundaries.

Findings

1. The only potentially significant cost identified in the study is policing during the Fair. The worst-case scenario is a $500,000 cost not offset by a charge for service.
2. Given confidentiality laws relative to sales tax records, it is difficult to estimate tax receipts generated at the Fairgrounds. However, using public sales tax information and Fairgrounds’ financial reports it is possible to estimate a range of General Fund revenue generated by the annexation. The minimum is $389,000 and the high-end estimate is $1,109,000.
3. Under a worst-case financial scenario in which the Police Department provided a high level of service for the Fair and did not charge a special event fee to recover the costs, the General Fund could lose approximately $111,000 annually.
4. Alternatively, if the special event fee was charged and the high-end estimate of revenue is accurate, the General Fund would gain approximately $600,000 annually.
5. Oklahoma City’s fairgrounds are owned by the City and are in the City limits. It does not enjoy a competitive advantage vis a vis sales tax over other venues in Oklahoma City. For the first five months of 2007, the OKC Fair website lists more events than the Tulsa Fairgrounds’ website. It does not appear jurisdictional location affects business activity.
General Fund Revenue and Cost Estimate of Fairgrounds Annexation (Finance Department January 2007 - All estimates based on FY 06 tax collections.)

	General Fund	General Fund
	Minimum Revenue	Maximum Revenue
	Versus Costs (1)	Versus Costs (2)
Total Revenue	$ 389,000	$ 1,109,000
Total Cost	$ 500,000	$ 500,000
Difference	$ (111,000)	$ 609,000

1. Police Department would not charge special event fee for the Fair.
2. Police Department would charge special event fee during the Fair.

Technical Addendum on the Financial Impact of Annexing the Fairgrounds
Prepared by the Finance Department with Assistance from Operating Departments
January 2007

Assignment
Estimate the costs of providing the County Fairgrounds with City services if the area was annexed and estimate any additional revenue the City would receive from such annexation. The area covers 230 acres, which is approximately one fifth of one percent of the land in the current corporate boundaries.

Research Methodology - Costs
Each City department and agency was asked if the annexing the Fairgrounds would affect their operations and if it did, how much would it cost to provide the additional service.

Results
The great majority of the departments stated there would be little or no impact. In some instances, Fire, Public Works Utilities and EMSA for example, service is already being provided. The exceptions to this general response were Development Services and Police.

The Development Services Director, Jack Page, noted there would be a slight increase in annual inspections, and in building permits and field inspections during construction of improvements at the Fairgrounds. He noted the County is not charged for these services so there would be no revenue offset for the additional work, nor did he believe the additional work would create a problem for his operation.

The Police Department indicated they could absorb the day to day patrolling of the area with out additional resources. However, police activity during the Tulsa State Fair (Fair) could be problematic. The County Sheriff informed the Chief of Police his office would no longer provide police service to the Fairgrounds during the 10 day Fair if the City annexed the area.

During an interview, Under Sheriff Brian Edwards stated the County Sheriff provides police service to the Fair and uses a very proactive strategy to prevent crime and disturbances. Virtually all field deputies and volunteer reserves are deployed at the Fair during its ten-day run. On Fridays and Saturdays, enough deputies and reserve officers are assigned to the midway to allow an average of one officer every ten yards. This allows a quick response to any disturbance and prevents minor incidents from escalating. The deployment pattern requires up to 160 deputies on Fridays and Saturdays. About 100 deputies are used on weekdays. There are added costs associated with the mounted patrol and other assigned officers.

Chief Been, and Deputy Chiefs Wells and Andrus (the latter works as the chief of security for the indoor venues at the Fairgrounds) confirmed this level of service is being provided by the Sheriff. They stated the City would have five options in regards to the Fair.


1. Treat the Fair as a special event and bill the Tulsa County Public Facilities Authority (TCPFA) for the extra service.


2. Encourage the County Sheriff to continue to provide the service.


3. Inform the TCPFA to arrange for security privately.


4. Tulsa Police Department (TPD) would staff the Fair at levels comparable to the County Sheriff’s effort.


5. TPD would respond to calls for service but not assign additional officers to the location during the Fair.

The option that would clearly increase costs without a corresponding increase in revenue is number four. An estimate of the costs based on 100 officers on Fridays and Saturdays and 50 on the other days is $300,000 in salaries alone. The Police Chief indicated it would cost $500,000 once all of the issues were thoroughly analyzed. As a comparison, Deputy Chief Wells indicated the Professional Golf Association’s tournament this summer will spend over $200,000 for security. The security costs for the 2001 US Open was $270,000. Given this information, the $500,000 estimate seems reasonable.

This is the major cost side impact and it is a policy issue that can only be resolved by elected officials.

Research Methodology - Revenue
Before describing the methodology for estimating potential revenue, it needs to be noted three or four vendors who currently rent facilities on the fairgrounds have stated in writing to county officials that they prefer the status quo. While they did not say they would leave the fairgrounds if it were annexed, there may be some risk of business loss if the area is annexed. Given all of the unknowns surrounding this matter, there is no way to quantify the impact their future actions would have on potential city revenue.

Sales Tax
Given the large number of events at the Fairgrounds, it seems logical to assume millions of dollars in sales tax are generated there. However, a closer examination revels this assumption might be optimistic.

It is very difficult to arrive at a definitive amount of sales tax generated on the Fairgrounds given the records City staff can access. Before describing the methodology used to make an estimate, some special conditions existing there need to be noted.

First, no sales tax is collected on Fair admission tickets or on food concessions and catering at the Fairgrounds as the TCPFA is the recipient of revenue generated by the sales. The TCPFA is exempt from collecting sales tax on these items under Oklahoma law. Based on revenue figures in the TCPFA Financial Statements Years Ended June 30, 2006 and 2005, if the exemptions did not exist and if the area was in the City limits, the City would have received an additional $187,000 in sales tax revenue from those activities alone in FY 06.

Secondly, as a public body the TCPFA does not pay sales tax on electricity, natural gas or telephones. Lastly, sales tax is supposed to be remitted to the jurisdiction where the material or service is delivered not the point of sale. The sales tax on a hot tub bought at a show in EXPO Center would be credited to the municipality where it was delivered.

Methodology Used to Estimate Sales Tax Receipts Generated on the Fairgrounds
Given the data constraints, it is impossible to determine historic sales tax collections at the Fairgrounds. A methodology was devised to provide a reasonable range of expected collections based on an analysis of the sales tax and financial data that are available.

The first step was to isolate the sales tax collected in the unincorporated area of the County. This was accomplished by using Oklahoma Tax Commission published reports to identify total monthly sales tax collections by municipalities in Tulsa County, normalizing same to one cent, and subtracting the total from the normalized one-cent Tulsa County monthly collections. After determining the two totals, the detailed data were reexamined and a number of SIC categories were eliminated from the analysis. There are several categories for which the TCPFA does not pay sales tax (utilities, food sales and communications for example), there are others that were too small to be important (leather and leather products for example) and there are some sales activities that would obviously not take place on the Fairgrounds (mining for example). Five categories remained and the total tax generated by their sales was used to establish a maximum amount of tax that would be collected in the unincorporated areas. The formula is described below.

A = Tulsa County Collections divided by Tulsa County Tax Rate
B = Town B Collections in Tulsa County divided by Town B Tax Rate
C = Town C Collections in Tulsa County divided by Town C Tax Rate
D = Town D Collections in Tulsa County divided by Town D Tax Rate
E = Town E Collections in Tulsa County divided by Town E Tax Rate
F = Town F Collections in Tulsa County divided by Town F Tax Rate
G = County Sales Tax Paid on Selected SIC Categories
H = Total Cities’ Sales Tax Paid on Selected SIC Categories

(A-G)-((B+C+D+E+F)-H) =Maximum Fairground’s Sales Tax per Penny

The results indicate a penny sales tax in Tulsa County, less certain receipts recorded in selected SIC categories generally not applicable to sales on the Fairgrounds, generated $39.93 million in FY 06 and the comparable number for the municipalities was $39.0 million. The difference of $928,000 was collected in unincorporated areas.

The $928,000 provides the estimated maximum amount a one-penny sales tax could have generated at the Fairgrounds in FY 06. However, this number cannot be realistically used to judge Fairgrounds sales tax, as some portion of it was generated in other unincorporated areas. For example, there are retail establishments in Berryhill and Turley as well as other outlying areas. The industrial establishments in the Cherokee Industrial District, near the Airport and on the west bank of the Arkansas also generate sales tax. The maximum estimate per penny provided later in this report will be less than $928,000.

Other information in the TCPFA Financial Statements Years Ended June 30, 2006 and 2005 can be used to estimate a minimum amount of sales tax collections. The Revenue Statement listed commissions paid by firms doing business on the Fairgrounds. Using dollar amounts reported by the Authority’s staff and outside auditor, and the percents paid as contained in the applicable contracts it was possible to calculate the sales made by the vendors subject to sales tax. (As it has been reported Bells is leaving the property, its payment to the TCPFA was discounted 100% in this analysis.) Also the SIC category of “Amusement” was examined and it was clear that a certain amount of the ticket sales for events on the Fairgrounds were reported and a sales tax estimate amount was established for these events. Based on these figures, it can be safely assumed the annexation of the Fairgrounds would generate at least $139,000 per penny of sales tax for the City of Tulsa.

To arrive at a final range it was assumed a certain percent of the total taxes collected in the unincorporated areas would be generated at the Fairgrounds. As shown on Table 1, assuming 25 percent is the accurate amount, a one-cent tax would generate $232,000. The subject annexation would result in a maximum increase of $464,000 annually to the General Fund. The minimum amount would be $278,000.

A check on the reasonableness of these numbers is provided by the Oklahoma City Fair Grounds. The City of Oklahoma City owns the fairgrounds land and the area is in the City limits. The grounds and Fair are operated by an authority and a not for profit company under agreements with the City. The Oklahoma City Finance Department staff indicated activities at the fairgrounds generate $26,000 per penny of sales tax annually. The number does not include sales tax remittances from vendors who participate in shows on the grounds or promoters who hold concerts there. Nor does the Oklahoma City Fairgrounds lease land to private operations that generate sales tax (Big Splash, Tulsa Drillers, a hotel).

Methodology Used to Estimate Other Taxes and Utility Fees Generated on the Fairgrounds
The methodology used to estimate Use tax receipts was similar to the sales tax methodology. The data were not as comprehensive so gross collection totals were used and no adjustments were made based on sales that would likely be made on the Fairgrounds. Subtracting total county receipts from total municipal receipts and assuming 10 percent of the remainder would have been generated at the Fairgrounds, the General Fund would have received an additional $70,000 in FY 06. Ten percent was chosen, as most of the use tax activity would have been generated by the TCPFA.

Based on revenue reported in the TCPFA Financial Statements Years Ended June 30, 2006 and 2005, hotel/motel tax receipts would have been received in FY 06 if the Fairgrounds had been in the City. For confidentiality reason the receipts have been included in the use tax numbers noted above.

While, the TCPFA’s utility bills would not be subject to sales tax, franchise fee revenues would be generated. The estimated amounts for ONG and AEP/PSO in FY 06 have been made based on expenditures in that year. The amount does not include the utility payments for the businesses leasing land on the Fairgrounds. As they are private operations no public data are available.

Utility revenues were provided by Public Works based on actual bills. As “in city” customers pay less than “outside city” customers, water and sewer revenues would decrease if the area is annexed. However, stormwater fees would be assessed. The net change to utility revenue would be a loss of $97,000 annually. Table 2 shows a summary of the additional revenues for all funds and the General Fund.

Conclusion
If the City annexed the Fairgrounds, the most significant new cost would be police protection during the ten day annual Fair. On the revenue side, given the limitations of the available data, it is impossible to determine additional revenue the City would collect if the Fairgrounds is annexed. A reasonable range for all General Fund revenue sources is between $389,000 and $1.1 million.

The financial outcome of annexing the Fairgrounds would be determined by public safety service levels during the Fair. If the City provided the same level of service now provided by the County Sheriff and did not charge the TCPFA for same, it would cost approximately $500,000. This worst-case financial scenario would cost the City approximately $110,000. Assuming the Fair would be treated as a special event and TCPFA billed for the service, the annual net revenue increase in the General Fund would be approximately $609,000. A revenue versus cost summary is provided on Table 3.

(The tables mentioned were not in the copy of the report that was given to me.)