Sales tax changes, increase part of Fort Smith Board discussion about consent decree

Fort Smith City Director Kevin Settle on Tuesday (Feb. 11) proposed increasing the city’s sales tax by 0.375% to pay for mandated consent decree work rather than use almost 40% of the revenue from the 1% street tax fund.

The tax call, made at the Fort Smith Board’s study session, is part of what could address a financial plan to fund federally mandated sewer system work.

The board in November approved a 10-year financial plan for administration to forward to the U.S. Department of Justice (DOJ) and U.S. Environmental Protection Agency (EPA) that detailed how the city can achieve compliance with the consent decree if it is granted a proposed 10-year extension of the consent decree.

After decades of failing to maintain water and sewer infrastructure to federal standards, the city entered into a consent decree with the EPA and DOJ in late 2014. The consent decree, which began in January 2015, required the city to make an estimated $480 million worth of sewer upgrades in 12 years. That amount is now estimated to be as high as $800 million. The city has asked for more time, citing a variety of factors.

City staff has proposed three primary revenue sources for the financial plan. The first is the adoption of 3.5% increases to the sanitary sewer rate starting June 1, then an additional 3.5% increase Jan. 1, 2026, and each Jan. 1 through 2030. A second part of the plan is to issue $360 million in bonds to fund sewer project work. Money to secure the bonds would come from redirecting portions of a voter approved 1% tax that helps fund city parks, and the fire and police department. Also, 0.375% of the 1% street tax – which pays for street work, bridges and associated drainage – would be redirected to the $360 million bond issuance.

A 1% tax in Fort Smith now generates between $28 million and $30 million annually.

Both sales tax changes would require voter approval. The board of directors would have to approve taking all measures to the citizens in an election. All ordinances and resolutions would have to be adopted and submitted to the Sebastian County Election Commission before March 4 to be placed on a May 13 special election ballot.

Settle said during the board discussion that he is open to asking voters to approve a tax increase, which would boost the city’s combined sales tax rate to 9.875%. He said using part of the street tax fund would be “devastating” to a program that has allowed the city to make significant infrastructure improvements.

“I don’t want to hurt and devastate the street fund. It’s done so much good for this community,” Settle said, adding that the proposed reallocation in street tax revenue would result in $11.25 million in infrastructure lost each year for 30 years.

“That’s a lot of paving roads … that’s a lot of drainage work,” he said. “There will be some work that won’t get done. … That’s over $300 million out of the street fund (in 30 years).”

He said the higher sales tax rate will be off-putting to some, but the choice is to put more of the burden on city residents and ratepayers, or lean more on a sales tax that, according to Settle, up to half is paid by non-residents who shop in the city, “which is easier to swallow.”

Arkansas law allows a city to enact up to 3% in local sales taxes, according to Interim City Administrator Jeff Dingman.

Director Jarred Rego said it is “an open question” as to how voters will perceive the choice between partially redirecting existing taxes and voting for a tax increase. Director Neal Martin said he is for reallocating the street tax instead of increasing the overall sales tax rate. He said part of his opposition is because the plan the city presented is the one presented to federal officials.

“It’s (tax rate increase) not what we told them, and that causes me pause,” Martin said.

Director André Good also reminded the other board members that the EPA discussion also included an understanding that the financial plan would be presented for a board vote in May.

Director Christina Catsavis, who owns a retail operation, said the sales tax rate was at 9.75% when her business opened and dipped to 9.5% without customers noticing the change.

“I’m not saying it should go to 10(%), but I’m saying that people are rounding up to 10(%) when they spend, so I think we have a little bit of wiggle room there,” she said.

She also said having a May vote would give the city time to pivot for a November vote if voters reject a plan proposed in May. Arkansas law allows a municipality to have only two special elections per year, with those corresponding with primary elections in May and general elections in November.

Board members approved placing on the Feb. 18 agenda a resolution asking for voters to approve the original city financial plan presented to the EPA and DOJ, and a resolution asking voters to approve a plan that does not reallocate street tax revenue and seeks a 0.375% increase in the sales tax. The second proposal would also reallocate a portion of the 1% tax that goes to the police department. The board will vote then on which proposal is placed on the ballot.