Should Midway City Bond for Open Space?

Wilson Presents Information on Municipal Bonding

by Robin M Johnson

Colleen Bonner, mayor, opened a public hearing regarding municipal bonding and open space by turning time over to Brad Wilson, city recorder. The hearing was held during the council's regular meeting held on Wednesday, June 28 and lasted just over two hours. Wilson's presentation took about 22 minutes. 

Bonner said, "Brad has worked really, really hard to put together this presentation and so I want to thank you, Brad, for doing that."

Information gathered by Wilson was heard by the council for the first time. The only member of the council to  have experience going through a bonding process with Midway City is the mayor as two bonds were taken out by Midway City during her first term as a city council member. The first was taken out in 2000 for road improvements on Burgi Lane. The second in 2002 for purchase of five acres adjacent to Midway Cemetery in order to expand to the south. 

Wilson said the presentation has two parts. "The first thing I would like to talk about is Bonds, and Municipal Bonds, in general. The second portion we’ll be talking about Open Space specifically, and the process of bonding for open space." Sources Wilson used in gathering his information include the Utah Constitution, the Local Government Bonding Act, the Utah State Tax Commission, the Utah State Auditor, and Zion’s Public Finance.

Wilson said good reasons to bond include "raising a significant amount of money; usually in situations where you wouldn’t be able to have those resources, other than for bonding. It helps you address an immediate need. It also puts the burden on present or future users or taxpayers to repay the debt. So rather than people who have preceded you, it’s people who are going to come after we are going to actually have to pay the debt for the bond. It is generally cheaper debt, it can be tax exempt.

"There are various users of municipal bonds. Obviously the government can issue bonds and use the revenue, an example would be recreational facilities. If a government wanted to do a recreation center, they could bond for that. Non-profit organizations can also use municipal bonds to raise money, an example would be a hospital. For-profits can use bond money, so time to time in the city we have developers come and ask the city to issue municipal bonds to help them with their development projects. Obviously we haven’t accepted any of those offers or gone forward with any. But that is a legitimate use of municipal bond money."

Wilson gave the city's bonding history. "In 2000 we wanted to reconstruct Burgi Lane. The purchaser of the bonds was the Utah Community Impact Fund Board. We bonded for $1.4 million. $1 million at 2.5 percent interest, $.4 million at no interest. Those bonds were paid in full in 2011. In 2002 we bonded to purchase additional land for the city cemetery. Again the bonds were purchased by the Utah Community Impact Fund Board. It was for an amount of $200,000 at 2.5 percent interest and it will be paid in full in 2023."

Many types of municipal bonds exist, Wilson said he was surprised at how many there are. He spoke briefly about Revenue bonds and at length about General Obligation bonds. Revenue bonds are usually issued when you want to build a project that will generate revenue, such as a hospital or a convention center. The revenue generated from the completed project pays for the bonds. 

Regarding a convention center Wilson said, "The theory here is you would issue the bonds and then as people pay to use the convention center that revenue is then used to repay the bond. The idea there is the actual users of the facilities are the ones who are paying the debt. This type of bond only has to be approved by the local legislative authority. So if the city council votes to do that, they can move ahead with those type of bonds.

"General Obligation Bonds, Wilson said, are backed by the full faith credit and resources of the government, up to and including property tax revenue. No assets are used as collateral and it usually involves an increase in property taxes. So in theory if a community has excess money it can pay off those bonds using that excess money. But usually governments of municipalities don’t just have that kind of money laying around, so what they will do is they will raise property taxes to pay the debt or repay those bonds. They are generally at a lower interest rate than Revenue bonds. They are considered safer than Revenue bonds."

Voter approval is required before General Obligation Bonds can be issued. The city must go through a five step Referendum process to be able to issue these bonds. Wilson outlined the steps as follows, 

Step One, Adopt a resolution by the legislative body, the city council, seventy five days or more before the election. For this year it would have to be adopted about mid August. 

Step Two, Submit the ballot proposition, or the actual language that is going to be on the ballot, also seventy five days before the election. 

Step Three, Prepare arguments for and against bonding. 

Step Four, Prepare and distribute a voter information pamphlet.

Step Five. Hold a general election, requires a majority of the voters to approve the issuance of bonds. 

Wilson said, "There are limitations to bonding. Public entities, for example, with general revenue bonds are prohibited from donating in support or opposition of the bond. So if the city council passes a resolution, the city organizes and administers the election but the public entity cannot donate in support or opposition of that bond. That includes time, so for example that would be staff time. Staff could not work on city time in opposition or support of that bond issue on the ballot. 

"The bonding amount cannot exceed statutory limits. In the Utah State constitution it sets out those limits for municipalities. So for sewer, water, and electric purposes the city can bond up to eight percent of the taxable value of all property. For Midway City that would be $75 million. A city can also bond for general purposes. That limit is four percent of the taxable value of the property which would be $37 million ... open space would fall under general purposes. And so the city, according to the Utah State constitution, can bond up to $37 million and change."

The city would need to have a bonding team. Wilson said "When you issue bonds it’s a relatively complex process. You have to involve a number of people in that process. The city would be the issuer, but you also have to have an issuer counsel, a municipal adviser, an underwriter, and in some cases you would need an escrow verification agent. So there’s a team of people that you need to bring together if you are  ... going to issue a general obligation bond.

"There are other things to consider when you are talking about bonds. Who purchases the bonds? Are there other costs related to bonding? Are other county entities planning on issuing bonds or raising their tax rate that would also impact property taxes? Are there other reasons the city might increase it's tax rate on property taxes?"

The state of Utah purchased Midway's two previous bonds. Wilson said, "The idea behind that is the state receives certain money and they want to reinvest that money back into the community. So in the process they ask that the city issue bonds and the state purchases those bonds and it allows them to invest that money into the community."

Wilson said the state doesn't purchase any and all bonds, there are certain things they are not interested in. When asked if the state buys open space bonds Wilson said he has not heard of it. He agreed to contact organizations like the Impact Funds Board and ask, but stated he would be surprised if the state did purchase open space bonds. 

If the state does not buy open space bonds the city would have to go on to the open market. Wilson said, "The first thing we would have to do is ... obtain a debt rating, so we would go to Moody Standard & Poors or Fitch and establish a debt management policy. Right now the city is not rated as far as debt is concerned."

Other costs in the bonding process are adviser's fees, authorization and issuance costs, and municipal bonds carry about 3.5 percent interest, plus or minus, on the open market. 

Regarding bonding and other property tax impacts from the county Wilson said, "I spoke to the Wasatch County clerk and asked, what increases are you going to see on your property tax bill this year? He indicated the first thing you are going to see (this November) is Wasatch County last year increased their property tax rate, they increased it to see $300,000 in additional revenue, so you are going to see that on your property tax bill. 

"Also, the Wasatch County Special Service District increased their levy by $50,000, and again, realize that’s spread throughout the entire county, so your portion on your bill would be very insignificant. 

"The Wasatch County School District, there was a bond approved for them last year, however because of the previous bonding (now paid off)  you’re actually going to see a reduction this year in the amount of bonding costs on your property tax bill for the Wasatch County School District.

"And then, there has also been some discussion on the county level about bonding for open space, and they are specifically looking at the North Fields as a place that they would like to preserve. So they are discussing bonding and potentially using a property tax increase to pay for those bonds."

Midway City may need to consider replacing the revenue that will be lost  from the Resort Communities Tax after the 2020 Census is complete. Wilson said, "The reason we are able to levy that tax is because we have so many hotel rooms in Midway compared to the population. Because we can charge that tax, in fiscal year 2016-17 we received $430,000, which is about 13 percent of our general fund budget, which is a significant amount of money for a city the size of Midway. However, our population is increasing and the number of hotel rooms that we have is not increasing. So we anticipate that, probably in 2021, we will no longer be able to charge that tax. So probably, around that time, it will be around $500,000 that we will lose in our general fund budget.

"What do you do if you lose $500,000? The first thing you look at is you reduce your budget, so that would be a loss in services. So you would say road maintenance, maybe you would close the ice rink, you know, just whatever when you’re looking at that kind of a reduction. The other thing you can do is you can broaden the city’s tax base. And that was the idea, in part, behind the C-4 proposal. It was an effort to broaden the city’s tax base so that we would then be able to increase the revenue that we receive to help compensate for the loss of the Resort Community Tax. We did hold a public hearing on C-4 zone; there were a number of people who suggested 'rather than doing the C-4 zone, increase my property taxes'. Which I think is a fair comment to make, and if you were to recover the entire cost of the loss of the Resort Community tax, that would mean a 64 percent increase in your Midway portion, just your Midway portion, of your property tax bill.

Next Wilson looked at general obligation bond costs if the city were to bond, first for $6 million and then for $10 million. On a $6 million bond with a twenty year term the maximum annual debt service, the maximum that the city would have to pay in any given year, would be about $400,000. Since Midway does not have additional revenue to repay the bonds a property tax increase would be the repayment method. 

Wilson said, "We would anticipate, and it has been requested by various citizens and citizen groups, that the city pay for a bond using an increase in property taxes. And if we did that, and we had to repay the $500,000 a year, that would require a 58 percent increase in the Midway City portion, just the Midway City portion, of your property tax bill."

The annual impact per $100,000 of value on a home would be $35.00. For a home valued at $350,000 property taxes would increase by $125.00 while a home valued at $500,000 would have $180.00 increase in property taxes each year. For a business it would be $65.00 per $100,000 in value, for a business valued at $500,000 property taxes would increase by $326.00.

Wilson said, "If you were going to bond at $10 million, return of 20 years, your maximum debt service would be $626,000;  so that’s what they city would have to pay each year. Your property tax increase, just your city portion only, would be 96 percent. The annual impact would be $59.00, per $100,000 value of your house, or $200 for a house valued at $350,000, and almost $500 for a house valued at $500,000. For a business (valued at $500,000) it would be $543 per year.

"So hopefully, that gives you a general overview of the bonding process if the city was to issue bonds. Especially general obligation bonds, it shows kind of the lay of the land the city has to deal with."

Next Wilson presented information on open space starting with the 2016 survey related to the revision of the city general plan. Wilson said, "483 people responded to the survey, which is ten percent of the city’s population, or 17 percent of the registered voters. And 88 percent of the people who responded said it was very important to preserve open space, which is nine percent of the population or 15 percent of the registered voters. So this issue really came to the fore front, I think, in part because of that survey."

Wilson worked with Michael Henke, city planner, to come up with examples of how much property $6 million could buy in Midway. The examples given were for the purchase of the land with the development rights. Wilson said, "These are examples, they are not recommendations, some of the properties that we have used already have development applications submitted for them so obviously this is not property that would ever be purchased for open space.

C-4 Zone, undeveloped portion, about 19 acres. Map provided courtesy of Midway City. 

The first example was for commercial property. Wilson said a good example would be the area being considered for the C-4 zone. The proposed C-4 zone is over 20 acres. $6 million would purchase the C-4 zone's undeveloped property of about 19 acres, leaving Midway Automotive intact. 

The next group of properties were land in residential zones. The property south of Midway Elementary and Michie Lane from the new Deer Creek Estates development west to Center Street, and the property south of  Stonegate  subdivision and west of Center Street. Wilson said, "This is essentially what you can buy with $6 million. Now there are certainly other options. These are just a couple that we came up with. You can purchase smaller parcels at various locations, you don’t have to use all of your money to purchase one giant piece of property."

Residential property south of Michie Lane and East of Center Street  More residential
property south of Stonegate Subdivision on Michie Lane and West of Center Street.
Map courtesy of Midway City. 

Development rights could be purchased but the costs of development rights vary widely on a case to case basis, Wilson said. "If you’re not going to purchase the property outright, but you’re going to go to a property owner and say we want to purchase the right to develop off that and you could retain the property, farm it, do whatever you want with it, but you can’t develop it. 

"Sometimes development rights are 50 percent of the cost of the property, sometimes they are as high as 90 percent of the value of the property. So if somebody was selling their property for $100,000, you may be able to go buy the development rights for $50,000 or (up to) $90,000 depending upon the situation."

The advantage to buying the development rights is stretching dollars. Rather than buying the entire property, only the development rights are bought and moved off the land to another parcel in the city. The land remains open space still belonging to the property owner who can use it as he chooses within city code. The property could not be developed with homes and businesses in perpetuity

Wilson's  final consideration is a land trust would be created. Wilson said, "Usually what happens is there is a conservation easement that would be on that property and it is held by a third property. That third party would be a land trust. So the city would not actually own, or not actually retain the conservation easement, it would be a third party. So that would ensure that that would never be developed. You can also purchase density, hillsides, and ridge lines."

Bonner then asked Steve Ferrell, Wasatch County council member, to talk about the county's open space plans. The public hearing followed, and the council members concluded with statements. Articles on each of these items to follow. 

Together the council decided to identify all options for preserving open space, to consider forming a committee relating to open space, and to take their time, not to rush but to move slowly, and hopefully get it right. A work meeting regarding forming a committee is scheduled for Wednesday, July 12 at 5:00 pm.