Categorized | Tax Alerts



TAX ALERT: UTOPIA to call on member cities’ sales tax pledges

In 2009 UTOPIA, Utah’s largest municipal telecom system, will begin to draw on sales taxes pledged by UTOPIA’s member cities, despite vehement and repeated statements by UTOPIA representatives that the sales tax pledges would never be called. Now taxpayers in cities that joined UTOPIA will face property tax hikes to pay for the services those sales taxes were supposed to support.

When UTOPIA was first formed, full member cities pledged to back UTOPIA’s bonds with their own sales tax dollars. If UTOPIA was unable to make the bond payments out of business revenue, they would draw on the member cities’ sales tax pledges. The cities would then have to replenish their sales tax pledges in the coming year.

Table 1: Original Sales Tax Pledge Amounts
for Each UTOPIA Member CityDocument2

Your Taxpayers Association warned cities not to join UTOPIA. We argued that cities should not compete with the private sector in providing telecom systems, and if they do decide to compete, the cities will not succeed. Relying on hopes instead of evidence, 11 cities joined, and pledged to back these bonds.

In 2009 UTOPIA finally had to make its first bond payment out of subscriber revenue. (The previous bond payments had all been made from the proceeds of the original bond sales.) Unfortunately, UTOPIA simply did not have the subscriber revenue to cover these payments.

Instead of calling on the sales tax pledges, UTOPIA doubled down. They asked member cities to back new bonds with additional sales tax pledges. Unlike UTOPIA’s original bonds, the new bonds matured in 33 years, and the member cities’ possible exposure jumped from $200 million to half a billion dollars.

Your Utah Taxpayers Association argued that UTOPIA’s member cities should reject UTOPIA’s new proposal. Convinced that UTOPIA could weave flax into gold, UTOPIA’s member city councils, excepting Payson, followed UTOPIA’s recommendation, and bet half a billion dollars in sales taxes that UTOPIA could succeed.

When they sold the new bonds, UTOPIA expected to make the first 3 years of bond payments out of the bond proceeds. As credit markets went haywire last year, UTOPIA found itself paying far more in interest than they had planned. They couldn’t trade into more favorable terms, because their track record gave potential investors no confidence that UTOPIA could succeed. As a result, UTOPIA’s available cash fell precipitously.

Table 2: Total Pledge for Each UTOPIA Member City,
Following the 2008 Refinance of UTOPIA’s Bonds Document2

Now, one of UTOPIA’s biggest cheerleaders is begrudgingly acknowledging that the sales tax pledges will be called. In Murray Mayor Dan Snarr’s April message, he wrote, “At this point in time, no tax dollars have been used on this project. That may change, and we may need to help pay for some of the operations until there are enough customers to cover expenses.”

Given the rumors we are hearing about UTOPIA’s dwindling cash, and the fact that UTOPIA called an emergency board meeting to accept a different benchmark for their interest payments, Mayor Snarr’s “may” sounds suspiciously like “will.”

If Mayor Snarr is correct, and we believe he is, taxpayers in UTOPIA’s member cities face property tax hikes. Member cities will have to divert some of the sales tax revenue that should pay for fire, police and other basic city services, and instead pay for their ill-conceived UTOPIA venture. To continue providing fire, police and the other basic city services, these cities will have to raise their property taxes, the only tax they can raise to balance the budget.

UTOPIA’s socialist telecom system was a bad idea to begin with. That’s why UTOPIA failed to generate the subscribers necessary to pay for its own operations and the original bonds. Refusing to acknowledge they had made a mistake, the member city councils doubled down. Now taxpayers in the member cities will be stuck with higher taxes for the next 33 years. We can only hope that this debacle serves as a warning to other cities about the dangers of competing with the private sector.



Leave a Reply