Wellington warns state of possible default on bonds
The mayor and council have put it in writing: "Wellington City is not able to give the citizens the services they deserve. Wellington city cannot make payments on the referenced bonds." The officials contend that the state has cut city revenues to the point where its ability to meet its financial obligations is in jeopardy.
The blunt warning of potential default on its $1.4 million loan from the state's Community Impact Board has been included in a mass-mailed letter sent to all members of the CIB, the individual members of the Legislature's Revenue and Taxation Interim Committee, and the Senate President and House Speaker.
Mayor Ben Blackburn and all council members have signed it.
This is the latest step in a long and not very successful campaign to get back a $166,000 loss in sales tax revenue that resulted from a tax break granted to coal equipment suppliers four years ago. SB 277 was enacted to remove some of the state sales tax on food, but it also contained two provisions that hobbled Wellington's budget: first, a tax exemption on mine equipment with a life expectancy of more than three years; second, a change in collections from point of sale to point of delivery.
Since mines receiving the products and services are in the unincorporated county or even further away, it meant that Wellington's anticipated tax revenues nosedived. In terms of raw numbers, it meant that Wellington saw its sales tax revenue plunge from $437,301 in fiscal year 2008 to $254,676 in FY 2011. In terms of impact, it meant that the city cut its full-time workforce from 11 to seven workers, resulting in a reduction of city services. It has also, according to the mayor and council, strained the budget to the point of being unable to carry the full burden of debt it incurred when times were good.
Wellington insists that it acted responsibly and in good faith. The letter notes that in the bond covenants with the state, "The State of Utah pledged in the Bond document that it would not do anything that would alter, impair or limit the excise taxes in a manner that reduces the amounts to be rebated to the issuer..."
The roots of the situation go back to 1987, when the city, with the help of the CIB, bought acre acreage along Ridge Road for an industrial area. The first major addition was a lumber mill, which has since gone out of business. But in 1994, then-mayor Paul Childs was able to persuade Joy Manufacturing, a major producer of mine equipment sales and services, to relocate to the area.
Seven years later, with sales tax revenue from Joy appearing stable, the city decided to commit to a $1.4 million loan for road improvements. The principal and interest on bonds purchase by the CIB were secured by those sales taxes.
When SB 277 put a major hit on those revenues, then-mayor Karl Houskeeper and city recorder Ken Powell approached the CIB for some relief in September 2009. The city got a three-year deferment on principal payments and was advised to petition the legislature for some sort of concession.
In the 2010 legislative session, Rep. Christine Watkins introduced bill to remove the tax exemption but the bill died in committee.
In June 2010, Mayor Blackburn met with the Interim Revenue and Taxation Committee and the chair of the committee advised that the Utah Mining Association and other stakeholders study the topic.
By the fall of 2010, the Southeastern Utah Association of Local Governments hired a lobbyist, reasoning that cities other than Wellington were also being impacted by the tax exemption and shift in taxing location. That resulted in the drafting and passage of SB 76 in the 2011 session.
However, the act has been a disappointment. Although intended to protect Wellington and other government subdivisions from drastic loss of revenue, the funds allocated for Wellington's reimbursement will be $58,000. That is $108,000 less than what was lost. Not only that, but the city notes the reimbursement will last for only five years and then go to zero.
The bonds have another 20 years to go.
One possible solution, suggested by Mayor Blackburn and others, is for the legislature to make it clear that the CIB has the power to turn the balance of loan into an outright grant or to restructure the bond agreement to avoid a city default on payments.