Windfall Profit: Assaying a Big Boost in City Revenues

It is tempting to conjecture that the City of Knoxville's remarkable surge in revenues derived from the state's Hall income tax could go a long way toward solving the city's fiscal problems.

These revenues, as recently reported, rose to $12.7 million in the fiscal year ended June 30 from $4.1 million the preceding year. They reflect the 37.5 percent share to which the city is entitled of state collections from city residents on its 6 percent tax on dividend and interest income (the only types of income that are taxable in Tennessee).

That $8.6 million bonanza was the biggest contributor to a $10.4 million city budget surplus for the fiscal year. If Hall tax revenues were to continue in the current fiscal year at anything like last year's level, they would beget another big surplus since only $4 million of such revenue is budgeted. Beyond that, their continuation at the higher level would just about equal the big tab the city has staring it in the face by way of increased pension fund contributions.

In her budget address last spring, Mayor Madeline Rogero foreshadowed a $6 million increase in such contributions in fiscal 2014-15 and almost made it sound like a city tax increase would be needed to cover them. Since the contributions are projected to keep going up by another $2 million a year for several more years to come, only a new source of revenue can close the pension funding gap in any longer run.

Can a sustained increase in the Hall tax take become that source? The city's finance director, Jim York, insists that it cannot. He predicts that these revenues will drop sharply in the current fiscal year and prove unreliable in the future as they have been in the past (having varied from as much as $9.5 million in 2009 down to $4.1 million).

There are several reasons why even the 50 percent increase in statewide Hall tax revenues (to $221 million in fiscal 2012-13) isn't likely to be sustained this year. And the tripling of Knoxville's share clearly connotes some extraordinary occurrence.

Taking the latter first, after poking around a bit, I put my finger on a Wall Street Journal article reporting a special $700 million "dividend" by Pilot Corp. to its shareholders in 2012. Pilot's shareholders are, of course, the members of the Haslam family through which they maintain a majority ownership of Pilot Travel Centers LLC (aka, Pilot Flying J). The timing and amount of the "dividend" coincided with what Jimmy Haslam III paid up front for the purchase of the Cleveland Browns (with $300 million more due later). Apparently, not all of the $700 million was subject to Hall tax or else the city's 37.5 percent share of a 6 percent state tax would equal more than Knoxville's entire $12.7 million take for the year. Haslam spokesman Tom Ingram has said the Wall Street Journal story was not entirely accurate. But once having read it, I realized where Jim York was coming from.

Where statewide Hall tax revenues are concerned, 2012 collections got an artificial boost from the fact that a goodly number of companies accelerated dividend payments into that year in order to beat a Jan. 1, 2013 increase in the top bracket federal income tax rate on dividends to 20 percent from 15 percent. Moreover, 2013 Hall collections will be diminished by an increase in the exemption from the tax that's afforded senior citizens. The timing of Hall tax distributions to the city makes them all the more unreliable budgetarily. The city has no idea how much it will receive in any given fiscal year until it gets a lump sum payment in July after that year has ended.

So I've got to conclude that York is right on all accounts and that Rogero needs to establish another source of revenue to cover the city's mounting pension costs on an ongoing basis.

The huge "Haslam dividend" is nonetheless a welcome source of financial fortification to the city. It helped lift the city's fund balance to a record $70 million, of which at least $10 million can prudently be committed to capital outlays that might otherwise not have available funding.

Rogero has been quoted as saying, "There's a few projects that will be leveraging major private investment if we can spend a little money on them." But she won't be drawn out at this point on what they might be.

My own favorite is to make a start on implementation of the master plan for Lakeshore Park that was unveiled at a public meeting on Dec. 16. Since completing acquisition of the magnificent 186-acre site following the closing of Lakeshore Mental Health Institute in 2012, the city has committed $5.5 million for the demolition of a number of buildings that need to go before work on phase one of the master plan can start.

As envisioned by Lakeshore Park, Inc., the not-for-profit organization that has shepherded the planning process (with lots of public input), that first phase will consist of opening up the riverfront area of the park that was previously used as a UT golf practice facility and is largely obscured from public view.

Small world that it is, the president of Lakeshore Park, Inc. is none other than Dee Haslam, Jimmy's wife. The organization is planning a campaign to raise much of the $4 million needed for phase one (and also invite contributions for subsequent phases that include gardens, picnic areas, playgrounds, more walking trails, a canoe and kayak launch, and much more).

But the organization is hopeful that the city will provide funding for at least the infrastructure (especially utilities) to support a large pavilion with a river overlook that is a centerpiece of phase one, on which it's aiming to start work next fall.

It seems fitting to me that a portion of the "Haslam dividend" should go toward making Lakeshore the crown jewel of Knoxville parks that it can and should become.