Many of you are aware that Herriman city is set to approve 30 million in new bonding for our city.  When I first heard about this my antennae went up.  I am a former candidate for the city council and have long felt that the city’s finances are directly connected to type of growth the city encourages.  The city will deny that is the case. The problem is with 43% of our budget coming from fees primarily related to building and development.  How could this not be a huge factor?  My goal isn’t to inpune our city’s leadership but rather look at just what effect the debt would have on our city. My gut told me it wasn’t a good idea,  but I have been wrong before.  What I ended up finding took me down several interesting paths and directions.   My goal is to explain this in simple to understand terminology and relate this to our own finances at home.

3 bonds being proposed 

The city is planning to vote on 3 different bonds.  Lets start with what they are for. Lets call the first bond, BOND 1, This bond is a refinance of an existing bond that was used to build Herriman parkway and includes additional money to extend Herriman parkway.  The refinance portion is around around 7.2 million and will serve to refinance the debt it took to build Herriman Parkway.  There is an additional $3 million that will be added to the bond at the time of refinance that will serve to lengthen Herriman parkway for the planned SLR development.  The city is claiming an annual savings in the refinance of this debt.  This would result from lowering the interest rate and taking the term and renewing it for 20 years.  The current bond has been in place for about 5 years.  BOND 2 is for approximately 5 million.  This is to make improvements to Herriman main street anticipating the arrival of Wal-mart. BOND 3, This bond is the big one, 15 million for city hall.

Types of bonds 

This is where things got interesting for me.  Municipal bonding is a very complex issue.  City bonds are defined by what type of security is being used to secure them. Most important security in this case is the type of revenue source.  This makes comparing city by city complex.  Our city has 3 main types of bonds.   In the future I think I am going to release a separate article explaining the types of bonds and how they impact our city’s finances.  The type of bond being proposed for the 30 million that I have termed as consisting of bonds 1,2, and 3 is a sales and franchise tax bond.  This is a very popular type of bond for a city to issue.  It is backed by sales tax and francise tax as its security.    The bond holders have no other form of security with this type of bond.  If the economy crashes they still have no more security than from the revenue from this source.   The ratio the city can borrow up to is 1.2x the revenue from this source.

Sales tax and franchise tax

What in the world is franchise tax?  Franchise tax is the tax paid on your electric bill,  your phone bill etc.  Think of these as the nickel and dime fees on your bill that many of us don’t pay attention to.   This is very much a tax that you pay in most cases without even realizing it.  The city council sets the rates for this.  Currently the city levies 4% on telephone and 6% on all other utilities.  Sales tax, that on its face may sound simple and easy to understand.  Many do not realize that half the sales tax revenue generated in a city stays in the city. Sales tax in Herriman is currently 6.85%; of that amount 1% is local option. The local option 1% is the part that is distributed to the City, 0.5% based on population and 0.5% staying in the city at point of sale. The other half is divided up by the state based on population.  I like to think of sales tax as the city’s golden goose.   The size and value of this goose depends on of course the amount of money coming in.  This is almost like free money coming into the city.  It often has no strings attached and can usually be spent on many different things the city wants.    Simply put our city wants to borrow for these bonds using the revenue from our golden goose and franchise tax as security for these bonds.

Impact to our city’s finances 

This is the $64000 question or in this case the $30 million question.   The question I had was 1, what was the condition of our current city’s finances. 2, what effect would all this have on our city.  Naturally I wondered, could the city afford this?  3, I thought the best measure was a detailed comparison to other city’s around us.  The city currently has a sales tax and franchise revenue bond for about 7.2 million.  This actually puts us on the lower end of city debts in comparison to ours.   This is a good thing!!    That is current, what effect does increasing our debt by over 4x have?  I have conducted an analysis of our debt, relative to spending and detailed comparisons to city’s around us.  The numbers aren’t the easiest to pin down because different cities offer different services.  Sometimes even different parts of a city have different services they charge for.  The services a city provides is generally referred to as “business type” in the city budget.  I went through the various cities and figured one number that being, General Fund. I think the general fund amount is the one that is most fair because it excludes special services a city might provide in most cases and excludes money the city takes from a source and merely does a money in money out arrangement.  I have included a wide range of cities around us, a couple are older more established cities, one is what I define as a bedroom community.  Others have advantages our city doesn’t currently have.   Bluffdale for example is supposed to be spending 8 million on their city hall.  I have actually adjusted their debt to reflect that in the chart.

Highlights from the numbers 

The first thing that sticks out to me is how good of condition we are in with our current bonded debt.  This put us as one of the lowest of the cities around us.  That all changes if bonds 1, 2, and 3 are indeed passed.  It actually makes us have the highest debt per resident of any city around us.  The most troubling thing about that in my mind is we have the second weakest sales tax base to handle this debt.   We have the second lowest percentage of our city’s budget being derived from sales tax revenue.  I admit I am guilty of comparing us to Riverton and Bluffdale.   The numbers make Riverton look like its carrying alot of debt relative to its annual budget.  Riverton has a population 50% greater than ours, but only has a budget 16% more than ours does.  The shocking thing to me is Riverton actually has the highest percentage of its budget being derived from sales tax.   This reflects 2 things, a golden goose that is laying eggs and fiscal responsibility.

Effects in easily understood terms 

I support Bonds 1 and 2, with one caveat.  I am not happy about bond 1 extending out the term of the original debt on Herriman parkway.  This is adding 5 more years till this is paid off.  There are penalties to early pay off of bonds.  The city staff claims that part of the deal they want to negotiate will include a “10 year call”.  That means after 10 years the bond could be paid off early without a penalty.  However there is no guarantee what future councils would do with extra money.  The city claims it will be reimbursed by the SLR development for that portion of the bond.  We will need to watch closely that the money collected for that is actually used to pay off that bond. Bond 2 in particular is serving the purpose of increasing the size and production of our golden goose. That being tax revenue generated from Walmart.  The residents will realize a 20-50% return on their investment.  I don’t often support the government being involved in complicated issues.  This case is different.  The ROI is so great its simply a no brainer. I have always contended sales tax revenue is the only thing that can ween us off our dependency on growth.   Think of it as the antidote to a drug habit, addiction to one time development money.  Bond 2 Related in terms a business owner can identify with.  This would be like me, as a business owner buying a new piece of equipment to offer a new service that will make a profit.  Bond 3, Well that would be like saying lets go ahead and buy a new Tahoe while we are at it.   When the mini van is still running.  Simply put this will take us from a 7.8 ratio on our sales tax and franchise revenue to a 2. The city is allowed to borrow clear down to a 1.2.  You might think thats ok, we still have some room for debt left.   To that I would say NOT much.  This saps the easiest revenue source for our city almost to its max.  The city can gain other revenue sources but it would have to raise taxes or come up with some sort of fee to back the money.  Remember a sales and franchise tax bond is the easiest form of bond for the city to obtain.  Our mayor stated that when he was elected he had a “vision of economic development” That sounds great, he likes golden geese!  The problem and fear I have.  What if the city had an opportunity that came its way?  What if the the city needed to make an investment much the same way its doing for Walmart?  We will be largely tapped out.  Imagine missing an opportunity like this? Worse yet what if it forced our hand and caused an irresponsible choice to be made with other revenue? We do have a couple more strings that can be pulled but I would term them on the extreme end.   The city is already dependent on growth for so much of its budget.  My contention is putting our city in this much debt will mean the city will be less choosey about the growth it allows.  I think the city should be concerned about what the quality  of materials being used in the developments around us.  I think we need to be more careful and not make mistakes.   The consequence of this kind of debt creates an urgency to grow as a city.   I can point to at least several specific cases where the city has rushed development.  Made a poor bargain and our city has been left with the consequences.  That is why I am writing this and its way I ran for office. fiscal responsibility=smarter growth!!!

Solutions, 

We will at some point need a new city hall.  I am not confident that the city has looked at other alternatives.  The alternative I suggested is leasing some space in the deserted shopping area behind taco time.  There is nothing that says city staff need to be in the same building.   Yes its nice to drive the tahoe.  The question is can we get by with the minivan for longer?  This whole deal feels a bit like anticipating a promotion at work and running out and spending the money before you even get it.  I think the city should try to get by for 5 more years.  Then we will have developed our commercial base to the point where we will have more of an easy lift leveraging it.

problems with process

We had public comment on this Wednesday night September 23rd. The problem is how does the public know what to comment on? We haven’t even really gotten a sales pitch on this from the council. The deal was lumped together with 2 other bonds the city wants to pass. The agenda didn’t even say one was for the city hall, just said bonds 30 million. No explanation of what they were for and why. Shouldn’t we have had the open house on the city hall deal BEFORE the public comment on the bonds? As of now and on the record public comment is closed unless the council reopens it.  I just got a copy of the most recent September news letter.  I saw nothing in there about the bond issue.  All I saw was an open house announcement,  I didn’t see any mention of this issue in August’s news letter either.   The council missed a golden opportunity to explain all this.   I can’t see how in good conscience these bonds can be lumped together and voted on as ONE agenda item. They each have very different consequences to our city and thus should be voted on as separate. There have been some residents that have suggested this issue be a referendum voted on by the people.  We have a representative form of government and this isn’t always the most appropriate method for a decision like this.   However, the current makeup of our city council will have around 2 months left in office when this is voted on.  After the first of the year we will have a city council will 2 new members.  My suggestion is for the new council to vote on this.  That way can hold them accountable.  They will have to be the ones dealing with the consequences.  I don’t think its right for 2 departing members of the council in essentially their final act to put our city in this kind of debt. The impact to our city’s finances is the biggest its ever been and the council hasn’t clarified and explained its position.  This appears to me that the council is looking to hide from debate on this issue. To them I say this, look take some incoming fire!!!! hiding from it looks suspicious.

Final thoughts

We will have leveraged our city dramatically, I think the case could be made that Herriman will have borrowed the most against its easiest to use funding source (sales tax and franchise) of any other city around us.  While currently having one of the weakest sales tax bases (in relation to its annual budget) to pay for it.  This is a criticism the city must be prepared to accept.  The city claims no new taxes.  The problem is this is money spent from a revenue source that could be used for other items in the general fund.  The city has a number of options if it didn’t spend the money on a new city hall. They could lower the amount we are paying in pesky fees from franchise taxes.   They could depend less on revenue from growth and its development fees(one time money) The point I am making is buildings aren’t free, YES we as residents are paying for this.

special thanks

I just want to thank, city staff and Carmen Freeman in particular.  We have some amazing people at our city.  I have been a loud and vocal critic at times of our city.   These people have treated me with fairness and respect.  Brett Wood, city manager and finance guru Alan Rae,  They have taken time for me and allowed me access to any information I wanted.  They have my heart felt thanks.  Mayor Freeman, by all reports is a man of good ethics and fairness.  That has been my experience as well. I look forward to working with these people in the future.  I most want to bring debate and inform the residents.  I hope those reading this will make their voices and opinions heard.

Steve Garrett “The residents watchdog, not the good ole boys lap dog”

**notes

total annual budget in chart is from the approved 2016 budgets from the state auditor’s site.  2014 financial statements, state auditor website. Total debt, That is sales and franchise tax debt only.  West  Jordan showed 0 of this type of debt.  However I listed what they term as “revenue debt” for west jordan.  I am not sure of the revenue backing this bond.  Sales tax figures are found from the 2016 approved budget, via state auditor’s site.  population figures are from www.utah-demographics.com