That's why he released a statement last week calling for raising the county hotel tax, which funds the facility's bond payments, from 3.9 percent to 5 percent.

Molloy, the executive director of the Lancaster County Convention Center Authority, said he doesn't want to see roughly $900,000 a year taken away from the Pennsylvania Dutch Convention and Visitors Bureau to replenish the center's bond reserves, which would happen in April if the situation isn't addressed.

"I feel we need to be out front as a community to have a conversation and fix the problem," he said.

But Molloy's position paper was premature, other stakeholders said. And county hotel operators insist they should not have to pay even more to subsidize a facility they say is taking business away from them.

"They simply cannot support any further increase in the tax," said Stephen Sikking, a partner in Manheim Township's Eden Resort & Suites and the Fulton Steamboat Inn in East Lampeter Township, and a member of the Greater Lancaster Hotel and Motel Association.

Background

There was great fanfare when the $177 million Lancaster County Convention Center and Lancaster Marriott at Penn Square project opened in summer 2009 in the heart of downtown Lancaster.

The facility would create 300 to 400 full-time jobs, attract more than 100,000 new guests to Lancaster County each year and revitalize the city economy, proponents said.

Although physically integrated, the convention center and the 299-room Marriott have separate ownership structures.

The Lancaster County Convention Center Authority, a public entity, operates the former. Penn Square Partners, a private joint venture of High Cos. and Lancaster Newspapers Inc. subsidiaries, leases the hotel building from its technical owner, the Redevelopment Authority of Lancaster County, an entity that was brought in so the project could qualify for state grants.

Together, the hotel and convention center employ 172 people, Molloy said.

To help pay for the project, Lancaster County in 2000 imposed a 3.9 percent occupancy tax and a 1.1 percent excise tax, for a total of
5 percent, on all county hotels. State law allows the 3.9 percent to be raised to a maximum of 5 percent.

The taxes generated about $4.85 million in 2011, though receipts for December are not yet finalized.

The excise tax and 20 percent of the occupancy tax goes to the Pennsylvania Dutch Convention and Visitors Bureau to fund marketing and promotions.

The remaining 80 percent of the occupancy tax goes to the convention center authority, which uses it to pay principal and interest on $63.9 million in bonds issued in 2007 to finance construction.

The payment terms were based on the assumption that hotel tax revenue would steadily rise. Instead, the recession hit.

Tourism dropped off and hotel tax revenue followed suit. The convention center received about $1.27 million less than expected from 2007 to 2011, according to figures Molloy provided. That translated into a total shortfall between bond expenses and available revenue of $1.23 million in 2010 and 2011.

Bond payment projections for 2012 call for the convention center to receive $4.49 million from the hotel tax. That's $600,000 more than 2011, which was a record year for Lancaster County tourism, with 1.4 million room-nights sold, according to preliminary figures from industry analysts Smith Travel Research Inc.

Last year the authority delayed a $550,000 principal payment and refinanced the bonds, Molloy said. The new structure "flattened everything out," reducing large principal payments, he said.

Nevertheless, this quarter the convention center's bond reserves are expected to fall below the $5.25 million minimum set by the bond documents. Assuming that happens, the bond agreement requires the visitors bureau's 20 percent of the hotel tax to revert automatically to the convention center starting in April.

That will severely hamper the visitors bureau's efforts to market the county, Molloy wrote in his position paper. Moreover, he added, the extra money isn't enough to fix the convention center's problems.

In part, that's because Wells Fargo, the bank that holds the bonds, has said it would increase the interest rate if the bond-reserve threshold is crossed. That would result in $381,000 a year in additional borrowing costs, Molloy said.

Penn Square Partners supports raising the hotel tax, President Nevin Cooley said.

"This modest hotel room guest tax increase … is the only sustainable solution to the funding shortfall," he said in an email.

Visitors bureau: Not so fast

However, the visitors bureau opposes it, President Chris Barrett said.

The bureau has the reserves needed to absorb a short-term funding loss and has put together a task force with the goal of finding a sustainable long-term solution, he said.

"Everybody wants to see the convention center be healthy," he said.

A tax hike would be a last resort and would be considered only after exhausting all other options, said the Lancaster County commissioners, who would have to vote to approve any increase.

"We'll be vigilant about examining everything," Commissioner Scott Martin said.

It's already too late to prevent the visitors bureau from losing its hotel tax share, he said.

"The 20 percent clawback is inevitable," he said.

The Lancaster Chamber of Commerce & Industry has met with various stakeholders regarding the convention center but hasn't taken a position on the issue, President Tom Baldrige said.

The chamber wants to be sure a full analysis is done and the broadest possible array of solutions is considered, he said.

Studies differ as to whether a 1 percent tax hike is enough to change individual consumers' behavior, Barrett said.

Meeting and tour planners, however, are savvy businesspeople and highly price-sensitive, Sikking said. To keep their business, hotel owners would end up absorbing the tax themselves, he said. That in turn would leave less money for ongoing upkeep and capital renovations, he said

"It takes money from your business," he said.

Boost or bane?

Apart from the bond payments, the convention center is performing as or better than expected, Molloy said. It has beaten its budget targets the past two years and is generating on average 1,500 "spillover" room-nights a month, he said, or 18,000 a year — in other words, nearly 50 rooms a night for other hotels in the area to supply.

"If it were not for the Lancaster County Convention Center, the economics of Lancaster County would have been even more challenging over the last 2 ½ years," Molloy said, adding, "Its success will continue to build."

Whether or not it is succeeding, the business it takes from other county hotels exceeds the business it generates for them, Sikking said.

He offered the following analysis: Assuming the Marriott's occupancy equals the county average of 60 percent, its 299 rooms yield 65,481 room-nights a year, he said.

Even if half of that is new business, that still means 32,740 room-nights were spent at the Marriott instead of other county hotels, he said. Setting those against 18,000 annual spillover room-nights yields a net loss by other hotels to the Marriott of 14,740 room-nights.

Those figures are rough estimates. As a private entity, the Marriott does not release its actual occupancy rates.

Such an analysis incorrectly treats all hotel rooms as equivalent commodities, and assumes the county "was always going to have a static number of the same hotels," Molloy said. That's not realistic in a free market, he said.

"All the other hotels are free market. This one (the convention center and Marriott) is being subsidized," Sikking said.

Sikking belongs to the Greater Lancaster Hotel and Motel Association, which represents much of the county's hospitality industry. Members overwhelmingly voted to oppose an increase in the hotel tax, and wrote to the county commissioners this month to say so.

From the start, the convention center's critics charged the project could never generate enough revenue to justify its cost. Its proponents presented misleading financial projections and used political muscle to push it through, Sikking said.

"The hoteliers fought that entire project for many, many years," he said.

Investors in the Lancaster Host Resort in East Lampeter Township scrapped plans to expand its convention facilities when they realized the convention center would be built. That private investment would have generated spillover for nearby hotels on Route 30, who have seen minimal impact from the downtown project, Sikking said.

Sell, scrimp or haggle

Ultimately, there are only three solutions to the convention center's debt problems, Sikking said: Either revenue must go up, expenses must come down, or the public-private agreement that partitions Penn Square Partners' and the authority's responsibilities must be revisited, he said.

Expenses can't be trimmed much further, Molloy said. He called on the county's tourism industry to explore all avenues to increase demand. Martin, too, said "more heads in beds" would be the best avenue for improving matters.

It's far from clear whether Lancaster County could generate a sustained tourism boom, however. Room demand has crept only slightly upward over the years, slipping back in years with bad weather or a bad economy. Meanwhile, the number of rooms keeps increasing.

Average occupancy stayed above 60 percent through the 1990s, according to Smith Travel Research Inc., then fell to 57.4 percent in 2000, the year the hotel tax was imposed. It has not exceeded 58 percent since. In 2009, a recession year, it slumped to 47.8 percent, but has since recovered to stand at 54 percent in 2011.

The visitors bureau task force met for the first time two weeks ago and is meeting again this week, Barrett said.

"After that, we'll have a much better idea of where we go," he said.

The bottom line is that the convention center has been built, and is a splendid facility, he and Baldrige said.

"So now, we have to focus discussion on how do we best protect that asset and the tourism industry of Lancaster County," Baldrige said.