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Steamboat Springs Local Marketing District 2016 Operating Plan

The Local Marketing District (LMD) of Steamboat Springs was formed pursuant to the Special District Act of the State of Colorado. As such, under Title 29 Article 25-110, the LMD is required to file an operating plan and a proposed budget for the next fiscal year with the clerk of the local government (City of Steamboat Springs) no later than September 30 of each year.

Background:

The Local Marketing District collects a 2% tax on nightly accommodations within the District boundary.

The LMD was approved by the voters in the District in the 2004 election, and began collecting the tax on January 1, 2005.

In November 2011, the qualified electors of the City of Steamboat Springs passed Ballot Measure 2B by 60.74% allowing the City to increase the Sales Tax by 0.25% for a period of five (5) years to support commercial winter air service with the goal of growing seats and rebuilding reserves. The proceeds of the tax are provided to the LMD for this purpose. The tax was imposed beginning January 1, 2012.

As a result of the sales tax initiative, the LMD was required to enter into an Intergovernmental Agreement (IGA), which then required that the LMD draft and submit a set of Bylaws to the Cityfor acceptance. The IGA and the Bylaws were approved and adopted by both the LMD and the City.

With the 2016 Operating Plan and Budget submission, the LMD has two funding sources to manage; the legacy LMD 2% tax on nightly accommodations, plus the 0.25% Air Service Salesand Use tax.

Purpose:

The LMD revenues are dictated by State Statute on what the funds may be used for, which includes marketing, promotion, and business development. The statute allows the funds to be used for airline service as defined as business development.

Exhibit A

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Funding:

x LMD Funds (2% tax on accommodations within the District)o Provide funding for air service contracts and for marketing of winter air service in

conjunction with agreed upon participation from the Steamboat Ski & Resort Corp. (SSRC).

o Are not restricted to a certain season; the LMD Board plans to have a similar summer air program in 2016 as in 2015, but will review the results from 2015summer flights before making any commitments.

o Are collected and used for program expenses in the budgeted calendar year. In other words, tax revenues generated in 2016 will be used for 2016 program expenses.

o Provide a portion of the funding to supplement management of the air serviceprogram.

o Can be used for marketing. Due to the growth of seats available in the 2015/16 season of approximately 13%, the LMD Board unanimously recommends amarketing contribution of $300,000 out of the LMD funds to be included in the 2016 budget. This marketing would be supplemental to the $2.5-3 million ofmarketing dollars put forth by SSRC and is subject to a specific air program marketing plan produced by SSRC.

o Pay for other LMD expenses as approved by the LMD Board, including: Community education Contract management fee to SSRC Legal fees, including tax renewal election expenses Administration (contract with Steamboat Springs Chamber Resort Assn.) Financial services (1% administrative fee to the City) Miscellaneous and contingency

NOTE: The total number of property units and room rates add a variable to forecasting and planning. The DestiMetrics information that the Chamber has contracted for, the lodging properties are supplying information to, and the LMD is financially supporting, will provide a more accurate outlook on bookings which will help reign in this variable.

NOTE: City staff has worked very hard to ensure all the Local Marketing District properties are submitting the LMD tax to the City, including rental by owner/ property management companies.

NOTE: The lodging community not only collects the Accommodations tax, it also assists in marketing Steamboat Springs as a vacation destination. In addition to the robust SSRC marketing campaign supplemented by LMD funds, the lodging

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community markets to their extensive past guest databases. The larger properties also place advertising to sell the destination further supporting the marketing outreach and sparking the interest of potential winter travelers.

x Air Service Sales Tax Funds (0.25% tax on sales within the City)o Provide funding for winter air service in conjunction with agreed upon

participation from the SSRC pursuant to the contractual agreement between the LMD and SSRC.

o Are collected in the prior calendar year and then used for program expenses in the next budgeted calendar year. In other words, tax revenues generated in 2015 will be used for 2016 program expenses. 2016 tax revenues will be used for 2017program expenses.

o Are subject to an administrative fee totaling 1% of revenues paid to the City to provide collection and finance services.

x LMD Boardo Contracts with SSRC to manage the air program.

o Administers the program pursuant to the terms and conditions of the Air Program Contribution Agreement between the LMD and SSRC (and approved by City Council), as modified by the First, Second and Third Amendments.

o Allocates funding for flights with consideration of: Current economic dynamics of the airlines and traveling public. Steamboats target markets. Non-stop connections to hubs. Approximately 40% of passengers into

Hayden originate at a hub airport, with 60% from points beyond. Hub airports offer connections to approximately 150 additional cities.

Proximity to Steamboat. The closer the originating city to Steamboat, typically the lower the cost.

Diversification of carriers, and addition of new carriers to promote competition.

Worst case scenarios, i.e., full-cap expenditures, taking into account past performance and risk.

x SSRCo Contracts with air service carriers to secure competitive air service into Steamboat

Springs (HDN), by funding appropriate minimum-revenue-guarantees (MRG),often based on opportunity costs.

o Provides extensive marketing and sales of the air program with a significant budget of $2.5-3 million. Efforts include air-specific online advertising, emails, webpages, cable TV, PR, events, group sales and more.

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o Presents specific flight or airline costs to the LMD in Executive Session, due to the confidentiality of contractual details with air service carriers.

o Establishes and maintains partnerships with four to eight air service carriers as well as relationships with several hundred key airline contacts in different departments including Network Planning, Revenue Management, Pricing, Marketing, Leisure Sales and Operations.

o Hosts an annual Airline Partners Summit in Steamboat every February with approximately 100 key airline attendees.

x Funding Waterfallo As a result of the execution of the Air Program Contribution Agreement as

amended in the First, Second and Third Amendments, a funding waterfall has been established that prioritizes each funding source. Please refer to the exhibit 2016 Winter Air Service Waterfall illustrating the funding based on the 2016proposed budget.

Operating Information:

x LMD funds are collected by the State of Colorado and deposited with the City of Steamboat Springs. The LMD works closely with the City Finance Director to ensure compliance with statutory requirements such as periodic tax audits.

x The Air Service tax is included in the collection of overall sales and use taxes by the City.x The City collects a 1% fee of both the LMD accommodations tax and the portion of the

sales and use tax allocated to Air Service. The City then provides accounting and oversight services, including recordkeeping, annual audits, fund investments, etc.

x The LMD Board of Directors does not receive any compensation or fees, and does not directly handle any funds.

x It is the practice of the LMD and SSRC to budget the full MRG exposure (often referred to as CAPS). It is possible that the MRG costs actualize lower than the CAPS and realize a savings.

x The LMD has established a reserve account that is projected and forecasted for every year and is used at the discretion of the LMD Board as approved by City Council.

x The LMD utilizes a calendar year as its fiscal period. Program costs are recognized in the year when paid. For example, the actual air program expenses for the 2015/16 season will be received often in June of 2016. The full expense will be posted to 2016 even though a portion of the expense is attributable to December 2015.

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x LMD Accommodations Tax revenues are accrued in the year the tax is collected.x The Steamboat Springs Chamber Resort Association provides organizational and

administrative assistance to the LMD for a nominal fee to offset their time and expenses.

2016 Air Program Notes:

x SSRC, with approval from the LMD Board, has established a program of approximately 122,500 round-trip available seats for the 2015/16 winter season which is an increase of 13% of seats flown in the 2014/15 winter season; 22% over 2013/14. The increase in available seats is on peak dates and days of week. The 2014/15 season had 108,750 round-trip available seats with a 69% load factor (percent of available seats). The 2013/14 season had 100,000 round-trip available seats and a 70% load factor.

x SSRC contracted with United to expand frequency of nonstop flights in 2015/16.o Washington, DC expands from 13 Saturdays to 27 Saturdays and Sundayso Newark goes from 15 Saturdays to 27 Saturdays and Sundayso Los Angeles expands from four per week to daily, a 71% increase

x The Delta service from Minneapolis/St. Paul (MSP) expands with an extra Saturday flight February 13 March 26.

x The nonstop jet service from Seattle (SEA) on Alaska Airlines will fly four times per week; an increase from three flights per week over the 14/15 season.

x An additional flight from Dallas is in place over the holidays for the second year.x United expanded weekend flights from Chicago to daily most of the season. This flight is

outside of the MRG program. These flights are significant in that they provide competition on pricing, offer more flights for visitors, and SSRC/LMD does not have to pay regardless of performance. This is possible due to the overall MRG program with United.

x The LMD contracted nonstop summer flights daily from Houston in the summer of 2015,from June 25 through September 7. This doubled capacity over summer 2014. The flight is performing at expected load factor levels.

x The air service contracting environment continues to be a challenge as airlines are still risk adverse and choose to fly routes that are the most profitable, usually business routes.SSRC and the LMD have responded by increasing seats only on higher demand dates and days of the week so as to more closely align capacity with demand.

x Yampa Valley Regional Airport (YVRA) collected about $4.3M in landing fees, sales tax on fuel, security fees, and rents. YVRA operations are self-funding. The air service, made possible with the MRG, assists in bringing in sufficient operating revenues to YVRA to allow the airport to function without subsidies from the County.

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x Please refer to the map enclosed for cities served.Enclosed documents:x 2016 Proposed Budgetx 2016 Winter Air Service Waterfall x Map of cities served x Map of Local Marketing District

Local Marketing DistrictUnaudited Financial Presentation

as of 8/24/2015 2013 2014 2015 2015 2016

Actual Actual Budget Projected Budget

Projected carry over 303,093$ 1,272,771$ 2,053,930$ 2,053,930$ 2,816,630$

Revenue2% Tax Jan - December (net of state fees) 1,369,268$ 1,626,301$ 1,300,000$ 1,500,000$ 1,500,000$

Interest 2,605 3,567 2,700 2,700 3,500

Total Revenues 1,371,873$ 1,629,868$ 1,302,700$ 1,502,700$ 1,503,500$

ExpensesAir Service Costs (From Accom Tax) 330,761$ 723,016$ 1,700,000$ 340,000$ 1,210,114$

Winter Air Service Marketing - - 250,000 250,000 300,000

Summer/Fall Air Service Marketing - 49,862 50,000 50,000 50,000

Winter Air Service Mngmnt Fee 50,000 50,000 50,000 50,000 50,000

Summer Air Service Mngmnt Fee - - 10,000 20,000 10,000

Administration/Legal 7,741 9,568 15,000 15,000 35,000

City Services 1% 13,693 16,263 13,000 15,000 15,000

Other Expenses - - - - 50,000

Total Expenses 402,195$ 848,709$ 2,088,000$ 740,000$ 1,720,114$

Revenue less Expenses 969,678$ 781,159$ (785,300)$ 762,700$ (216,614)$

Accommodation Tax Reserve Balance 1,272,771$ 2,053,930$ 1,268,630$ 2,816,630$ 2,600,016$

Projected carry over 1,120,962$ 1,272,350$ 1,437,784$ 1,437,784$ 2,762,756$

RevenueSales Tax 1,177,006$ 1,290,196$ 1,300,000$ 1,300,000$ 1,400,000$

Building Use Tax 54,988 96,774$ 60,000$ 60,000$ 60,000$

Vehicle Use Tax 37,478 47,385$ 45,000$ 45,000$ 45,000$

Voluntary Assessment 15,730 19,486$ 17,000$ 17,000$ 17,000$

Less Admin Fee (12,852) (14,538)$ (14,220)$ (14,220)$ (22,000)$

Total Revenue 1,272,350$ 1,439,303$ 1,407,780$ 1,407,780$ 1,500,000$

Expenses

Air Service Cost (Sales/Use Tax) 1,120,962$ 1,273,869$ 1,324,824$ 82,808$ 2,762,756$

Total Expense 1,120,962$ 1,273,869$ 1,324,824$ 82,808$ 2,762,756$

Revenue less Expenses 151,388$ 165,434$ 82,956$ 1,324,972$ (1,262,756)$

Airline Service Sales Tax Reserve Balance 1,272,350$ 1,437,784$ 1,520,740$ 2,762,756$ 1,500,000$

AIRLINE SALES & USE TAX

ACCOMMODATIONS TAX

22015 Budget (CAPS) 2015 Actual2016 Proposed Budget (CAPS)

1. Steamboat Ski & Resort Corp. $1,111,732 $1,111,732 $1,111,732

2. Fly Steamboat $10,000 $10,000 $0

3. Sales and Use Tax (prior year) $1,324,824 $82,808 $1,324,972

4. Sales Tax Reserve $0 $0 $1,437,784

5. Accommodations Tax (current year)

$1,000,000 $0 $888,114

6. Accommodations Tax Reserve $450,000 $0 $0

7. Steamboat Ski & Resort Corp. $577,405 $0 $0

WINTER TOTALS: $4,473,961 $1,204,540 $4,762,602 In 2015, SSRC paid 92% of actual costs. Actual costs were 27% of the total budget

Winter Air Service Program Cost Payment Waterfall

To the extent funds are available in the Accomodations Tax Reserve account and approved by the BOD

Any remaining balance of the approved program expenses

Notes

First in, last out

Program is on hold

Funding up to the amount generated by the annual sales tax

To the extent funds are available in the Sales Tax Reserve Account

Funds the remainder up to the amount as approved by the BOD

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