The "downsizing" of Hercules Bacchus Works has shrunk West Valley City's bond revenues, and the company may have to swallow a bitter pill to restore them.
To boost the bond fund, city officials have proposed lifting the $20,000 cap off West Valley City's utility tax, which would affect Hercules and "one or two" other major industries. Homeowners and small businesses would not be affected.The controversial proposal is generating intense opposition from Hercules, the Utah Manufacturers Association and other business groups, which say the tax cap is a necessary incentive to large-scale economic development.
West Valley officials argue that they have an obligation to preserve the integrity of the bond fund and have limited options. They also note that West Valley City is one of the few cities in Utah with such a tax cap.
The city issued $14 million in revenue bonds in 1989 to buy and develop the 600-acre overpressure zone - West Ridge - around the Bacchus Works and has relied upon tax revenues from Hercules' operations and income from the land developments to retire the debt. An overpressure zone is a safety zone around the plant.
During the past seven months, Hercules - the city's largest employer - has reduced its work force from 4,700 to about 3,500 and trimmed operations to remain competitive.
"As we look at the trend, we have seen a decline in revenues from Hercules, which impacts our ability to pay off the bonds," said West Valley Finance Director Russ Sanderson. "They (the bonds) are by no means in serious trouble, but we have an obligation to our taxpayers to make sure they don't reach that point. You bet we're concerned."
Sanderson explained that the cap was enacted as an inducement to economic development. However, utility rates haven't increased as much as expected and very few businesses even approached the $20,000 cap.
"We expect that lifting the cap will cost Hercules in excess of $200,000 per year," Sanderson said, adding, "That may not be much in terms of their total operations, but it means a lot to us."
It also means a lot to Hercules. Dave Nicponski, the company's government affairs director, said the cost could be substantially more than $200,000. The additional tax burden is unwarranted, he said, because Hercules has already more than met its tax obligation to West Valley City.
"We are working closely with the city's financial people to show them that the cumulative taxes Hercules has paid since 1989 have in fact exceeded the revenues that were anticipated."
And he suggested that the extra cost could require more cost-cutting, including more layoffs.
"If the purpose of the cap was to promote economic development, then that purpose has not changed," said Larry D. Bunkall, president of the Utah Manufacturers Association. "We are encouraging West Valley to maintain it as an incentive."
Because cost-conscious companies with big utility bills are more likely to locate in a city with a franchise-tax cap, the policy actually increases the city's tax base, he said.
Nicponski said, "We're sensitive to the fact that we're a big revenue source for West Valley, and we want to see West Valley succeed. We are in a partnership with the city, and we're comfortable that we can work this out."
Sanderson also called the relationship with Hercules a "partnership" and expressed his own hope that Hercules will succeed. The reduction in operations is affecting more than just the bond revenues, he said.
The so-called "ripple effect" is being felt in individual households and by small businesses throughout the community, according to Sanderson. "Putting a number on it is almost impossible, but I have friends and neighbors who work out there, and I know it's having an impact."