The New Orleans Regional Transit Authority and the Ernest N. Morial Convention Center appear to be preparing for a legal battle over a $31.8 million pot of money and roughly $7 million in recurring annual tax revenue.
The controversy stems from a longtime arrangement that forces the Regional Transit Authority to hand over about half of its hotel tax revenues to the tourism industry every year — a portion of which went to the Convention Center. The RTA stopped honoring the agreement in February.
At a Tuesday committee meeting, members of the Convention Center’s governing body, the Ernest N. Morial New Orleans Exhibition Hall Authority, entered an executive session to discuss potential litigation with the RTA. Executive sessions are closed to the public.
The full board has previously entered executive sessions at two other meetings this year, in April and June, to discuss “prospective litigation regarding the Regional Transit Authority’s continued legal obligations to contribute the agreed upon portion” of the hotel sales tax.
And RTA board meeting agendas for this year show six closed-door sessions to discuss a 1999 lawsuit that resulted in the revenue-sharing arrangement in question.
Meanwhile, the New Orleans Tourism Marketing Corp., the city-controlled agency that promotes tourism, may also face legal action over the RTA hotel revenue.
Under the tax-split deal, the NOTMC served as the intermediary between the RTA and the Convention Center, collecting about half of the RTA hotel-tax revenue and sending a portion to the center. NOTMC CEO Mark Romig told The Lens in an interview that the Convention Center is demanding some of the hotel tax revenue that the RTA handed over to his agency in 2018.
“We’re kind of in the middle of this,” Romig said.
$62 million
The roots of the dispute between the RTA and the Convention Center go back to 1985, when New Orleans voters approved a citywide, one-percent sales tax through a ballot initiative that specified that the money would be “dedicated to transit and transit-related purposes.”
Disagreements over whether the tax should be applied to hotels, however, resulted in the controversial tax-sharing compromise.
The sales tax makes up the majority of the RTA’s funding, more than $80 million last year according to its 2018 audit.
February letter from RTA to NOTMCThis is $62,000,000 that has been unavailable to the RTA for investments in transit services, improvements to infrastructure, amenities for our riders, and the replacement of aging vehicles.
The portion of the RTA sales tax generated by hotels was about $13.9 million last year, according to RTA and NOTMC audits. Under the arrangement, only about half went to the RTA.
As for the rest, the agreement dictated that about half — $6.9 million — would go to the NOTMC, which would then turn over half of that allocation — $3.4 million — to the Convention Center.
But earlier this year, the RTA announced that it would no longer participate in the tax split.
In February, RTA Board Chairman Flozell Daniels sent a letter to Romig informing him that the RTA would stop handing over any hotel sales taxes and keep the revenue for itself. He also demanded that the convention center return the $31.8 million it has accumulated from its portion of the payments.
“This payment from the RTA to NOTMC and [the Convention Center] has totaled over $62,000,000 since the settlement agreement took effect in 2001,” the letter said. “This is $62,000,000 that has been unavailable to the RTA for investments in transit services, improvements to infrastructure, amenities for our riders, and the replacement of aging vehicles.”
The New Orleans City Council passed a resolution supporting the RTA’s decision in April.
In his letter, Daniels went on to request arbitration with Mayor LaToya Cantrell to settle the issue. It’s unclear if that’s happened. Cantrell’s communication team did not respond to questions from The Lens and an RTA spokesperson declined to comment on the arbitration request.
Romig told The Lens that he’s hopeful the disagreement won’t come to a lawsuit.
“I think it’s still in discussion,” he said. “My sense and my hope is that it can still be resolved and all parties leave happy.”
According to the RTA’s Director of Marketing and Communications, Angele Boutte, the RTA has not been in discussions with NOTMC.
“The RTA has not received a response regarding the letter dated February 12, 2019,” she said in an emailed statement.
Possible legal dispute between NOTMC, Convention Center
Romig has another problem to deal with aside from trying to restart payments from the RTA. NOTMC is also facing “prospective litigation” with the convention center, according to Romig and a recent NOTMC board agenda.
According to the terms of the revenue sharing agreements, all the money first goes to the RTA, which then pays roughly 50 percent to NOTMC. NOTMC is then responsible for forwarding half of its allocation to the Convention Center.
The RTA completely stopped handing over money this year. But before that, in the second half of 2018, they started withholding some funds — specifically the portion that goes to the Convention Center, according to Romig. So for the last two quarters of 2018, NOTMC was receiving its normal revenue without passing any money to the Convention Center.
Mark Romig, NOTMCWe’re kind of in the middle of this.
“The Convention Center has sent us communications demanding us pay half of what we received in the third and fourth quarter of 2018, even though it was our net,” Romig said.
At its August meeting, the NOTMC board planned to go into executive session to discuss “consideration of prospective litigation after written demand,” according to the meeting agenda. Romig said that was a reference to the convention center demand, but that not enough board members were present to reach a quorum, so it wasn’t discussed and will be taken up at the next board meeting.
‘Phase V’
The 1985 ballot measure that created the one percent sales tax stated that the money would specifically go toward public transportation. But there was another stipulation: hotel room sales would be exempt.
For over a decade, hotels remained untaxed. But in 1999, the RTA sued the city’s director of finance, arguing that the hotel exemption was invalid and demanding that the city start collecting the tax from hotels on the RTA’s behalf. A coalition of hotels and tourism entities, including the NOTMC, quickly intervened in the case.
Before the case went to trial, the RTA settled the matter with a cooperative endeavor agreement: The sales tax would apply to hotels. The RTA would get 60 percent of the first $7.2 million in annual hotel tax revenues, and 40 percent of anything above that. The rest would primarily go to the NOTMC and the Convention Center, with a small portion — 3.45 percent — going to the city for tourism promotion.
Then, in 2002, the parties signed the Phase IV Escrow Fund Agreement, which set up a special account controlled by the Convention Center. The NOTMC would deposit roughly half of the RTA payments into the fund to be used “solely for the benefit of the Phase IV Convention Center Expansion Project.”
The Phase IV project was scrapped in 2007, but the RTA payments continued to flow into the fund.
“This Fund was created for the express purpose of supporting the development of Phase IV of the Convention Center’s expansion, a project that was placed on indefinite hold in 2007 and has since been replaced by a private hotel development generally referred to as ‘Phase V,’ “ Daniels said in the letter, referring to the Convention Center’s current taxpayer-subsidized improvement plan, which includes a controversial 1,200-room hotel.“The RTA has not consented to use of our revenue to support such a project.”
Now, the RTA is demanding that the money that went to the Convention Center be returned. But according to the 2002 agreement, the end of Phase IV meant the money should have gone to the NOTMC, not the RTA.
In addition, the Phase IV Escrow Fund Agreement stipulates that the RTA hotel tax revenue sharing cannot be canceled until all bonds secured using the RTA payments are liquidated. In 2012 and 2014, the convention center used the RTA payments to refinance old loans. Those bonds aren’t set to expire until 2027 and 2025.
To make things more complicated, the NOTMC is set to merge with another tourism marketing group.*
As part of the infrastructure deal brokered between Cantrell, Governor John Bel Edwards and the tourism industry last spring, NOTMC is being absorbed by New Orleans and Company (formerly the New Orleans Convention and Visitors Bureau).
The move puts into question the future of the cooperative endeavor agreement between the RTA and the NOTMC. Romig said he didn’t immediately know exactly what would happen to the revenue-sharing agreement when the two organizations merge, which is expected to happen in January.
“Discussions about the CEAs are ongoing,” Kristian Sonnier, New Orleans and Company’s vice president of communications and public relations, said in an email. “It would be premature to comment on this effort at this time.”
The RTA wouldn’t answer questions about its legal strategy. But the agency’s February letter to Romig and the language in the 1985 ballot measure “speak for themselves,” Boutte said in the email.
“For two decades our service has been impacted by limitations on financial resources, while the resources available to the tourism and hospitality marketing agencies have steadily increased,” the letter said. “New Orleans cannot be a 21st century city without 21st century transit for its citizens — including the thousands of tourism and hospitality workers reliant on the RTA’s services.”
As for the NOTMC, Romig said that it has had to dig into its cash reserves to meet the obligations of its 2018 budget, which was set with the expectation of the RTA payments.
“We’re learning to live without it,” he said. “But I would like to know that one day we would have those dollars.”
*Correction: This story originally said that NOTMC “may not exist” after its upcoming merger with New Orleans and Company. After this story was published, NOTMC CEO Mark Romig contacted The Lens to clarify that the agency will continue to exist and “still will have some function and existing contracts/commitments to honor.”