ADMINISTRATIVE REPORT

Date: November 17, 1997

Dept:City Manager

CC File No. 4207

TO:Standing Committee on City Services and Budgets

FROM:City Manager

SUBJECT:Tourism Vancouver Agreement: APEC Funding

RECOMMENDATION

A.1)THAT Council accept Tourism Vancouver’s proposal to provide the tourism publications and operate an InfoCentre; this agreement is envisaged as continuing indefinitely, but in any event is firm, on a continuing basis for ten years, and is wholly at Tourism Vancouver's cost in lieu of further APEC contributions (Attachment A).

2)THAT Council approve the principles set out in the Statement of Intent regarding the additional 2% hotel tax and that this Statement of Intent supersede (or rescind) prior resolutions regarding other uses of the hotel tax (Appendix B). It should be noted that Council has the legal responsibility to ensure that these funds are used in a manner that is consistent with the Statement of Intent on an annual basis.

3)THAT Council authorize the Director of Legal Services to enter into the Agreement and Statement of Intent generally as attached to this report.

B.THAT Council advance $600,000 from Revenue Surplus for APEC costs, to be repaid from 1998, 1999, and 2000 revenue budgets at $200,000 per year.

COUNCIL POLICY

There is no directly applicable Council policy. Council’s practice has been to allocate the 2% hotel tax to Tourism Vancouver. Council has passed resolutions related to APEC funding and the contract with Tourism Vancouver, which are described in the Background section of this report.

PURPOSE

This report presents a "Statement of Intent" in regard to the allocation of the 2% hotel tax to Tourism Vancouver, and a long term agreement between the City and Tourism Vancouver related to the provision of tourist-related services presently funded by the City. The intent of these agreements is to resolve the current dispute related to Tourism Vancouver funding of APEC-related City costs and to establish a clear long-term relationship between Tourism Vancouver and the City.

BACKGROUND

The background to the agreements recommended in this report is extensive. In 1988, the hotel and tourism industry approached the City to indicate a willingness to establish a voluntary 2% tax on hotel rooms, for allocation to Tourism Vancouver for the promotion and market development of tourism in Vancouver. The City and the industry approached the Province for the necessary legislation to establish the tax. The hotel industry representatives believed and agree that the tax was to be used exclusively for Tourism Vancouver for market development. The legislation, however, provides the money to the City for purposes of tourism and convention promotion in a more general way, and the City’s bylaw reflects the legislation language.

At the time the legislation was passed and thereafter, the City was making direct grants to Tourism Vancouver in the order of $700,000 per year to support a tourist InfoCentre and the development and printing of tourism related materials.

Over the intervening period until 1997, the relationship between the City and Tourism Vancouver operated much as originally envisaged. The City’s payment to Tourism Vancouver was converted from a grant to a contract, and held at similar or slightly lower levels. The value of the 2% tax, however, has increased dramatically to its present level of about $8 million, with continued growth anticipated. This reflects the growth of the marketplaces and Tourism Vancouver's successful marketing program.

In 1995, the City was approached by B.C. Trade to request the opportunity to host the 1997 APEC conference. At that time, it was anticipated that the costs to the City of hosting the event would be in the order of $700,000. Tourism Vancouver was among the several agencies urging the City to seek to host the event, and the City requested that Tourism Vancouver undertake to fund, directly or through fund raising, 50% of the cost, or $350,000. Tourism Vancouver accepted this responsibility, subject to a cap of $350,000 and clarification of the City costs which would be charged to them. An initial payment of $150,000 was made in 1996, with a further $200,000 to be paid in 1997.

In 1997, the City faced a dramatic reduction in funding from the Province. As a consequence of this $17 million funding cut, the City was forced to reassess all its budget priorities. Further, the attendance at APEC increased significantly, with a large number of high profile delegates who would require extensive security precautions. City hosting costs were expected to increase significantly at a time when the City budget was under extreme pressure.

In dealing with its own budget issues, the City elected to reduce the contract with Tourism Vancouver for the operation of the InfoCentre and the development of printing and materials from $600,000 in 1996, to $400,000 in 1997, and thereafter to $200,000 in 1998 and 1999. In addition, in the face of rising concerns about APEC costs, Council resolved to take 50% of the City’s hosting costs directly from the 2% hotel tax. The estimated City hosting cost for APEC is now estimated at $1.5 million.

Tourism Vancouver and the hotel industry regarded the City decision to allocate funds directly from the 2% hotel tax as a betrayal of the original intention of the tax, and indicated that they were not prepared to accept this decision. A series of discussions were initiated with a view to finding an alternate approach which would leave the 2% hotel tax exclusively to Tourism Vancouver on a continuing basis. At the same time, they acknowledged the increased maturity of the tourism industry, the growth in the 2% tax, and the increasing pressure on City budgets. They developed the general proposal outlined in this report, which was refined in subsequent discussions between Tourism Vancouver representatives and City staff.

DISCUSSION

The Proposed Agreements

The tourism industry is a major economic generator in Vancouver. The industry has grown significantly, with improved hotel occupancy and the construction of additional hotel space. The promotional and market development efforts of Tourism Vancouver have been significant in achieving this growth. Tourism Vancouver and the hotel industry believe that the proceeds of what they view as a self imposed tax should legitimately be allocated exclusively to their use. They argue that the tourism market is increasingly competitive, and that the full 2% tax is required to maintain the City's market share and pursue the growth in Vancouver’s tourism industry, and is most effectively managed by them directly. They believed that either the City should enter into a long term agreement confirming the allocation of the 2% tax, or that the legislation should be changed to allocate the tax directly to them.

The City acknowledges both the value of tourism to the City and the strong growth in tourism revenue. However, City staff have pointed out that the money is paid to the City of Vancouver and that at least in a legal sense, it is a City decision as to how those funds will be allocated. Further, City staff noted that the Director of Legal Services has advised that the current City Council cannot commit subsequent Councils in this regard and that therefore the City could not enter into a binding long term agreement even if it wished to do so.

After considerable discussion, City and Tourism staff have agreed on a Statement of Intent which reflects the original understanding of the tourism industry. In the Statement of Intent, the City acknowledges the history of the tax,the importance of tourism, and the value of promotional efforts and market development of Tourism Vancouver, and confirms City interest to flow the 2% funds through to Tourism Vancouver on a continuing basis.

In a companion legal agreement, Tourism Vancouver agrees to forego future (after 1997) contributions from the City for the production of tourism materials and the operation of the InfoCentre. Further, Tourism Vancouver commits to an annual briefing for City Council on tourism issues, a review of Tourism Vancouver operations, financial statements and a budget outline. This process will provide an appropriate line for the formal annual approval to allocate the funds to Tourism Vancouver.

With the $150,000 already contributed by Tourism to APEC costs, Tourism Vancouver sees this agreement as providing significantly more than the required funding to meet half the APEC costs as currently estimated.

Financial Review

The financial value of the proposed agreement to the parties is uncertain to the degree that it depends upon future decisions by Council in the absence of the proposed agreement. The total firm contribution of Tourism Vancouver is $550,000, based on the $150,000 contributed in 1996 and the Council resolutions indicating City payments to Tourism Vancouver of $200,000 in each of 1998 and 1999 which would not now be required. If the $200,000 annual City contribution were maintained or increased after 1999, the financial benefit to the City would significantly exceed the $750,000.

However, if the new Council would in any event have terminated the contract with Tourism Vancouver after 1999, the total benefit to the City would be less than the required $750,000 to offset APEC costs by $200,000, plus foregone interest.

Under these circumstances, it is not possible to state with certainty that the direct financial benefit to the City under this proposal is equal to half the projected APEC Costs. However, it is clear that an agreement to eliminate any ongoing contribution to Tourism Vancouver is a desirable outcome, and that the dollar value of the Tourism Vancouver commitment significantly exceeds half the estimated APEC cost.

Commentary

The proposed Statement of Intent and the Tourism Services Agreement maintain the nature of the previous relationship with Tourism Vancouver and the industry. The agreements also reflect the increasing capacity of the tourism industry to fund a wide range of promotion activities. Given both the origins of the 2% tax and Tourism Vancouver’s successful history of negotiating financial support from the City, the arrangement proposed seems appropriate and reasonable for the parties.

ALTERNATIVES

The City could maintain its current position that the funding to support APEC hosting costs will be taken directly from the 2% hotel tax. That action would provide a certain financial offset to the APEC costs. However, it is not consistent with the industry’s originalunderstanding in regard to the 2% tax and would be at some cost to the long-standing relationship with Tourism Vancouver and the industry. This action might well give rise to efforts on the industry’s part to alter the existing legislated arrangement.

CONCLUSIONS

The proposed arrangement establishes a desirable long term relationship between Tourism Vancouver, the industry, and the City. It acknowledges the voluntary nature of the supplementary 2% hotel tax, and provides Tourism Vancouver with relative certainty for future financial planning. For the City, the tourism services originally funded by the City are maintained, while the cost to provide these services is eliminated on a long term basis. The value of eliminating this annual cost on an ongoing basis exceeds half the estimated APEC hosting costs.

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(c) 1997 City of Vancouver