A report produced for Manitou Springs strongly recommends that the city come to terms with the owners of the Pikes Peak Cog Railway to rebuild and reopen the 127-year-old attraction.

“We believe allowing the cog to stop operating for an extended period is a grave mistake,” the report by Summit Economics states.

The report, called an opinion letter, was presented to the city Sept. 28.

‘Grave’ is somewhat of a strong term, but it was by choice because everyone knows the capacity and contribution historically of the cog,” said economist Tom Binnings, who authored the report with his colleague, Paul Rochette.

“It’s not even something in my view that you can let go for a period of time and say let’s see what happens,” Binnings said. “That type of structure depreciates pretty quickly. It’s critical they reach a deal and move forward with constructing the cog.”

The railway is owned by The Oklahoma Publishing Co., which also is the parent company of The Broadmoor hotel, all owned by multibillionaire Philip Anschutz.

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The cog shut down late last fall and did not reopen because it needs major repairs and upgrades. Its owners say they need tax incentives that guarantee revenue in order to invest up to $100 million for the repairs.

Representatives of the cog and the city of Manitou Springs have been negotiating a tax incentive agreement for months. The city ratified an initial agreement June 26.

Manitou Springs could experience significant financial damage if the railway closed permanently, the Summit Economics report stated.

“If the cog were to shut down, we estimate a $2.9 million [annual] decrease in taxable retail sales in 2018 dollars,” the report said. “At roughly 10 employees per $1,000,000, over 29 jobs or proprietors would be lost in Manitou Springs. … The City would lose an estimated $115,000 in sales tax in addition to the entire amusement tax from the railway from fewer tourists.”

Other negative effects of a $2.9 million drop in taxable sales could be a potential loss of $145,000 in rents and $1.8 million in real estate value — 6.3 percent of the market valuation of all the commercial properties along Manitou Avenue.

That could result in a loss of $6,700 in annual property taxes to the city, and Manitou School District 14 could lose $27,000 annually, the report stated.

“The loss to sales and sales tax revenues is felt almost immediately and should already be occurring given the current interruption of cog operations,” the report states. “The employment impact can take one to two years to be fully realized. The real estate impacts can take longer and should only occur if the shutdown is permanent.”

“I would tend to agree with ‘grave mistake,’” said Manitou Springs Interim City Administrator Malcolm Fleming, who has been involved in ongoing negotiations with cog representatives.

Without an agreement, the city would have to cut $600,000 from its current budget and make similar cuts in future budgets, Fleming said. To make up the lost revenue, the city would have to take drastic measures such as increasing property taxes by 9 mills, a 59 percent jump over the current 13.072 mills equal to about $325 a year on a $500,000 home.

The city’s current annual tax benefit from sales at the two retail marijuana shops will not persist forever, Fleming said. In addition, the city has just learned that the property tax assessed valuation in Manitou has dropped by $4 million.

“We expect there will be about $35,000 less property tax coming to the city,” Fleming said.

That would augment the loss of $500,000 in annual tax revenue from the cog and, at a rough estimate, $100,000 in sales taxes from the restaurants, shops and other businesses that serve visitors using the attraction.

Although the number of visitors to the Pikes Peak region has increased by 10-12 percent annually for the past few years, Fleming said Manitou’s general sales tax revenue this year “is about what it was last year — up 1 percent. Would it be up more if the cog was in operation? We don’t know.”

The Broadmoor did not respond to a request from the Business Journal for comment.

Contentious issue

Since the original tax incentive agreement was proposed, Manitou Springs residents and businesses have vigorously debated subsidizing the railway’s rebuilding.

Some business owners say they are already feeling the loss, but other citizens oppose the 50-year term of the tax incentive agreement and think the proposal places too great a burden on the city’s taxpayers.

A July 18 community meeting hosted by The Pikes Peak Bulletin, a sister publication of the Business Journal, drew more than 150 people. John Weiss, publisher of the Bulletin and chair of Colorado Publishing House, which publishes the Business Journal, has been an outspoken opponent of the agreement.

Citizens raised numerous concerns at that forum and several subsequent meetings. Two Manitou residents have filed a lawsuit seeking to overturn Manitou City Clerk Donna Kast’s rejection of a petition to authorize a vote on the agreement.

Under the original agreement, the cog offered to pay Manitou Springs $500,000 this year and a similar amount in 2019 to compensate for the loss of revenue during construction.

But the railway would reap all of the benefit of potentially higher revenue from increased ticket prices and/or higher ridership, “and [the] city’s ability to continue service levels is eroded,” Fleming explained in a presentation at a community meeting Oct. 2.

Rebate provisions of the original proposal created an effective tax rate of 2.5 percent on the cog; that was not acceptable to many Manitou merchants, who must pay 5 percent of their sales to the city.

Under a second cog proposal on Sept. 17, the city was partially protected from inflationary impacts by capturing revenue from annual ticket sales exceeding 400,000 and a higher minimum tax rate in the later years of the agreement. But the city would fare even worse under what Fleming termed a “low” scenario of ticket price and ridership increases.

The latest cog proposal, made public at the Oct. 2 meeting, mitigates inflationary impacts by capturing revenue from annual ticket sales exceeding 375,000, sets a minimum tax rate of 3.8 percent in the later years, and would generate more tax revenue under medium-to-high ticket price/ridership scenarios.

The cog has consistently held fast on the 50-year term, however.

Waiving use tax — a provision to which Manitou has agreed — during a large redevelopment project and capping or eliminating tax receipts on new development are common in the world of incentives, the Summit Economics report stated. Ten to 25 years is the most common duration for tax receipt caps.

“Fifty years is an abnormally long ‘payback’ period, but such terms are associated with toll road, utility, and housing contracts,” the report said.

“A 50-year deal can make sense if you think of it as two 25-year deals, where part of the proposal is to replace the trains in 15-25 years, which the cog has indicated they would do,” Binnings said. “Under that sort of circumstance, I think you could justify a 50-year deal, but not if they don’t perform in that regard.”

Manitou Springs Mayor Ken Jaray said the city is continuing to listen to citizens’ concerns and to negotiate with the attraction’s representatives.

“There are still some things we need to get resolved, but we are making really good progress and positive changes for both the cog and for Manitou,” Jaray said. “I do feel like we’re closer to an agreement.”