‘A second pandemic.’ How Kentucky coal communities are bracing for financial crisis.

Some of the most financially-distressed local governments in Kentucky, particularly those in the state’s eastern coalfield, are bracing for large reductions in tax revenue that could jeopardize funding for a variety of essential services, including road maintenance, jails and senior centers.

Local officials in several Eastern Kentucky counties said layoffs and business closures resulting from the spread of novel coronavirus could lead to a sudden decline in revenue from occupational taxes, which provide a substantial amount of funding for several county and city budgets.

They warned that the expected drop in revenue could put several local governments — many of which are already walking a financial tightrope — in dire straits.

The full extent of the damage likely won’t be felt for another month or more, but for counties that are reeling from a precipitous decline in coal and mineral severance taxes, it could make “a very bad situation almost untenable,” said Pike County Judge-Executive Ray Jones.

Layoffs and business closures from the coronavirus have put a record-number of Kentuckians out of work, with more than 160,000 people filing for unemployment benefits during a two-week period last month.

That historic spike in unemployment will likely lead to a corresponding and equally substantial decline in revenue from occupational tax — a tax that some cities and counties impose on a businesses’ payroll.

In Laurel County, Judge-Executive David Westerfield said occupational taxes represents about a third of the county’s budget.

Pulaski County Judge-Executive Steve Kelley, a Republican, said he thinks the county will see a reduction in occupational tax revenue of 20 to 25 percent.

“We’ll take a hit,” he said.

Kelley said the county should be able to get through the rest of the fiscal year without too much trouble, but that the pandemic will complicate budgeting for the fiscal year that begins July 1.

In Perry County, Judge-Executive Scott Alexander said the his county relies primarily on occupational tax revenue during the months of April, May and June.

A substantial decline in that tax revenue “ultimately could cripple what we’re doing,” Alexander said.

“As this money goes down it will impact all aspects of government,” he said. “We were already on the edge of even functioning as a county. Now, we’re falling.”

The Kentucky Department for Local Government, which is tasked with advising counties and cities on budget, personnel and other matters, declined to provide comment for this story.

‘A second pandemic’

Perry County, like others in Eastern Kentucky, has struggled to rebound from a sharp decline in coal severance taxes that once helped fund nearly all aspects of county government.

In the first three quarters of Fiscal Year 2020, Perry County has received about $239,000 of regular coal severance installments from the state. It received more than $2 million during the first three quarters of Fiscal Year 2010.

Those figures reflect the dramatic decline in coal production and employment that has rattled Eastern Kentucky’s economy over the past several years. Along with declining coal severance taxes, counties have seen a continued outward migration of residents that has forced local governments to make sweeping cuts in services.

“I hate to say that this is our second pandemic, but in a way we’ve already went through one where we lost everything we had, and now what businesses are left, they’re going through it as well,” Alexander said. “It’s a double-deal on our economy.”

Alexander said Eastern Kentucky counties will require action from Frankfort “desperately and quickly” if they are expected to maintain services at their current level.

“We’ve got to look at some guidelines or stimulus or changing some rules that allows us to buy three months or six months until the economy comes back up,” Alexander said. “When we’ve been trying to build a new economy and then this comes on top of it, it’s going to make re-starting twice as hard.”

Pike County, once the largest coal producer in Kentucky, is grappling with similar problems.

During a special meeting of the Pike County Fiscal Court, Judge-Executive Jones, a former state senator, said the county will likely have to further reduce the number of county employees, in part because of the decline of occupational tax revenue.

“While my legal career and while my service in the legislature has helped prepare me for this job, nothing can prepare someone for dealing with the fallouts of a pandemic that is literally shutting down the United States of America,” Jones said. “We are going to see some significant financial problems here in the county in the next several months, and the problem is none of us can predict when the state of emergency will end and these restrictions will be lifted.”

Coupled with declining coal severance payments are increasing pension and insurance costs for Pike County. In three years, the county’s pension obligations will rise by $820,000, Jones said.

During the first three quarters of this fiscal year, the county received $486,294 in regular coal severance installments. In the first three quarters of 2015, it received more than $2.65 million.

Across much of Eastern Kentucky, local officials for years used the massive coal severance checks, in part, to subsidize solid waste departments, water districts and other local agencies in order to keep rates low for customers.

In the case of Pike County’s solid waste department, prior administrations spent more than $1 million to subsidize the department.

“They may as well have taken $1 million of taxpayer money and just thrown it into the landfill,” Jones said.

Pike County, like others, has publicly debated how to increase revenue and whether its population can support increased property or occupational taxes.

In Eastern Kentucky, counties governments have struggled to find new revenue streams that its population can afford.

Pike County, for example, declined to increase property tax rates “because we know a lot of businesses and families simply cannot shoulder an additional tax burden,” Jones said.

Harlan County has so far declined to implement an occupational tax for the same reason.

“This is something that’s going to have to be tackled at the legislative level,” Harlan County Judge-Executive Dan Mosley said about the ability of Eastern Kentucky counties to raise revenue.

“The need for comprehensive tax reform at the state level has never been more visible than it is today,” he said.

‘It comes full circle’

Cities, including several county seats in Appalachian Kentucky, could also take a substantial hit.

Donald Mobelini, mayor of Hazard, the county seat of Perry County, said the city is anticipating a substantial decline in occupational tax revenue during the next financial quarter.

“We’re very concerned,” Mobelini said. “They’ve got all these stimulus packages for unemployed people, but if there’s not a stimulus package for cities and counties we’ll be in financial trouble.”

“Nobody’s really looking down the road, but I think all cities will struggle over occupational tax. You’ve got more people unemployed now than there have ever been,” he said.

In Prestonsburg, the county seat of Floyd County, collection of its occupational tax provides about a third of the county’s overall revenue.

“We don’t foresee any essential services being cut, but we’ll have to look at other areas, maybe parks and (recreation),” said City Clerk Sharon Sester.

Sheena Maynard, the spokeswoman for a group of business owners called Prestonsburg Merchants, said while many small businesses continue to provide curb-side services, she’s concerned about how long they can operate given the decline in business.

“To a point, everybody is still operating, but everybody is probably operating at 10 percent of their normal business,” Maynard said.

Many businesses have cut hours, and are shifting to online sales during the forced closures.

Maynard said the city will likely have to cut back on things that improve the quality of life in the area.

“Christmas time here is as good as any large city on the map — the decorations, the events, they do it 100 percent — but where’s that money coming from if there’s no money coming into the businesses and we’re not paying taxes?” Maynard said. “It comes full circle. It’s not just us suffering, literally the whole community is suffering with us and it’s gonna be a long-term problem.”

This story was originally published April 8, 2020 at 1:57 PM.