Downturn exposes Duluth’s vulnerability to dependence on tourism tax

The economic downturn has exposed the shaky financial underpinnings of several Duluth city-subsidized facilities whose existence depends heavily on tourism taxes. Not only to meet payroll, but also to make payments on tens of millions of dollars in bonds that become the responsibility of city taxpayers in case of default.

The lengthy list of liabilities compiled by the Duluth Monitor starts with the Duluth Entertainment Convention Center/AMSOIL Arena, which ran $600,000 in the red in the month of June alone.

In addition to the lost business, the DECC will lose additional revenue due to the significant decrease in the city’s tourism tax collections brought on by the pandemic. Under state statute, the DECC is entitled to receive a specific proportion of the city’s tourism taxes each year, an income stream which helps the facility pay for operations and capital improvements. Therefore, when tourism tax collections drop, the DECC’s income drops. In 2020, the DECC had originally been scheduled to receive an estimated $1.78 million from the tourism tax, but more recent projections by the city show this amount dropping to $1.07 million—a 40 percent reduction.

The DECC is also worried that a shortened or canceled hockey season might cause the University of Minnesota-Duluth to default on their AMSOIL Arena lease—which would add an additional $612,000 loss to the DECC’s bottom line.

“Between the unemployment and potentially not having any tourism tax dollars [and possibly] not getting money from UMD, it’s all starting to snowball,” [Finance Director Caty] Kaups told the board.

DECC needs the Bulldogs’ lease payment and the city tourism tax  to pay its next nearly $2 million installment on bonds issued to construct the arena back in 2008.

But it gets worse. Duluth’s visitor tax also props up the municipal bond payments still owed on several other city-subsidized ventures and infrastructure projects.

In addition to the AMSOIL bonds ($40.635 million), the city uses tourism tax to pay off bonds for Spirit Mountain’s water line ($2.1 million), Wade Stadium improvements ($2.3 million), the DECC seawall rehabilitation ($4.45 million), the Grand Avenue Chalet ($7 million), and St. Louis River Corridor projects ($13.6 million)—a total of $70 million in construction bonds supported by tourism taxes.

On June 22, 2020, Mayor Emily Larson informed the City Council, “We project a 50 percent decrease in revenues from tourism tax [for 2020] … What’s hard news is that most of that money … is spoken for with our previous bond commitments and repayment commitments we have made.” In other words, after paying the bonds, there may be no money left for the various major entities which depend on the tourism tax to subsidize their operations: Great Lakes Aquarium, Spirit Mountain, Lake Superior Zoo, and the Depot. The funding for a host of smaller organizations is also in jeopardy.

For now, the immediate future of DECC and possibly numerous other Duluth attractions remains as uncertain as the UMD Bulldogs’ hockey season and the flagging tourism tax they depend on.

Currently, UMD has not indicated, one way or the other, what their plans are for the upcoming hockey season—whether they will honor their lease or have no choice but to default on it.