Instead of building new futures, poor KY counties using coal money to pay past debts
Coal severance tax funds originally meant to help Kentucky’s poorest counties build a brighter future instead are going to pay past debts, often for expensive projects that flopped, and routine county government expenses, such as monthly insurance bills and pension contributions.
In Harlan County, for example, the lion’s share of this year’s coal severance funds — $500,000 — went to pay down old bonds that financed the opening of a 227-bed jail 14 years ago. County officials say an early plan to make a profit by housing state prisoners at the jail did not succeed. The larger jail instead is costing the county money.
Harlan County gave $75,000 more this year to pay down another bond, this one for the ambitious expansion two decades ago of a nonprofit assisted living facility, The Laurels, that officials say did not bring in the patient revenue it was supposed to. The county has acquired the 82-bed facility, which reported losing $155,728 in 2020.
“I’m not a big fan of paying other people’s bills. But there was a lot of money borrowed before I took office, and so we’re having to spend a lot of what we get now in coal severance — and it’s been getting smaller every year as coal production declines — on the debt service to retire all of that,” Harlan County Judge-Executive Dan Mosley said.
A 90-minute drive north of Harlan, the outstanding debt on the 2006-07 construction of the Knott County Sportsplex consumes $591,200 annually in coal severance funds. That is most of Knott County’s allotment.
But the recreation center’s future is uncertain, given its revenue shortfalls and serious structural problems that prompted the state fire marshal to order it temporarily closed this year. Parts of the damaged center remain off-limits to the public out of safety concerns.
“I’m afraid it’s going to fall down before we finally pay it off,” said Zach Weinberg, a former Knott County judge-executive.
By contrast, Owsley County, with a 36 percent poverty rate among its 4,415 people, used its coal severance tax money this year to make a big investment in its future: $400,000 to buy land for all-terrain vehicle trails and rental cabins. That’s part of a prospective outdoor tourism draw, Sturgeon Creek Adventures. If successful, the project could create up to 19 local jobs, according to one county estimate.
But on the same day in August that Owsley County invested in its tourism development, it reported spending $75,000 in coal funds simply to pay overdue county bills.
“Under previous administration, several audits were not paid,” Owsley County officials wrote in a spending report for the $75,000. “The county has struggled to keep up with audit payments since. This money will be used to catch up all past-due audit bills.”
A lost opportunity
The Herald-Leader analyzed how eight Eastern Kentucky coalfield counties with the highest poverty levels — Leslie, Harlan, Breathitt, Bell, Knott, Clay, Knox and Owsley — said they spent a combined $6.2 million in coal severance tax funds in 2020 and 2021, according to reports they submitted to the Kentucky Department for Local Government.
The 4.5 percent state tax on coal extraction and processing has raised billions of dollars since it started in 1972.
The initial hope was that coal-producing counties would use their share of the revenue to make their economies more diverse and resilient by adding non-mining jobs. The addition of factories, for instance, could lessen the region’s dependence on coal, which had a history of booms and busts before settling into its current decline.
But a network of coal severance tax-funded industrial parks built across Eastern Kentucky in the 1990s enjoyed, at best, limited success in attracting manufacturing jobs. So Kentucky’s legislature in the 2000s gave the counties more flexibility to spend the money on a variety of projects, including public safety, tourism, infrastructure and education.
Unfortunately, county leaders and state lawmakers from the region often scattered their coal severance money across the mountains with no real strategy in mind, said Jason Bailey, executive director of the Kentucky Center for Economic Policy in Berea.
“This is when you started to see coal severance money going toward baseball uniforms and softball fields, flagpoles, senior citizens centers, water and sewer projects,” Bailey said.
“I mean, some of these were good projects. It’s just that there was never enough long-term thinking,” Bailey said. “We never sat down and said, ‘OK, what can we do over the next few years with this large sum of money that will let us really invest in smart ways in these communities?’”
Not every state spends all of its income every year, as Kentucky does. Nearly two dozen states have “sovereign wealth funds” where they save part of their revenue stream, invest it and amass a fortune, the way some people put aside a portion of their money for retirement.
The largest and most famous is the Alaska Permanent Fund, built on a portion of the state’s lucrative oil royalties. As of June 30, the APF held $82 billion — enough to pay dividends to every Alaskan and cover a portion of the costs of state government, all without denting the principal.
Kentucky lawmakers were urged over the years to set aside a portion of the coal severance taxes in a sovereign wealth fund that could benefit the coalfield counties well into the future. “Tuck some of the severance money we glean from the coal industry into a trust and let it grow,” the Hazard Herald urged in 2012.
Lawmakers rejected the idea.
“Some states chose to save some of their money and look ahead. We did not do that, and so now we’re faced with this dwindling revenue source as coal production winds down,” Bailey said.
Coal severance money has been shrinking across Eastern Kentucky. In 2011, Harlan County — where nearly one in every three people live in poverty — was given more than $4 million in coal severance funds to spend on its own projects. A decade later, that sum has dropped to $1.5 million.
“We’ve had to cut in some areas,” said Mosley, the Harlan County judge-executive. “You know, we’ve closed a couple of our parks because the playground equipment was deteriorating, and we just couldn’t replace it.”
Paying debts and daily bills
Of the $6.2 million in coal severance tax funds analyzed by the Herald-Leader, $2.6 million — or 42 percent — was spent repaying the principal and interest on old loans. Debt service was owed for the Knott County Sportsplex; larger jails built 15 years ago in Harlan and Leslie counties (the latter of which already is badly overcrowded); the expansion of The Laurels; overdue bills owed by Owsley County; and a water utility in Harlan County.
Often, when bonds were issued for these projects, officials expected they would pay for themselves. In 2000, for instance, when the county signed onto $1.53 million in 30-year debt to add 32 patient beds to The Laurels, the final offering memo said “the only source of funds” expected to cover the debt would be The Laurels’ own revenue.
However, the 82-bed facility usually has somewhere between 65 to 72 residents, which is just not enough to balance the books, Mosley said.
“It’s a sad situation,” Mosley said. “They never got up to the number of residents needed to satisfy the obligation, so the county has been on the hook for it ever since.”
Not everyone worries about so much of the region’s coal severance tax funds going to pay down old debts.
“Debts have to be paid,” said state Rep. Chris Fugate, R-Chavies, who helps allocate public funds for his district in Harlan and Perry counties. “If this is how they need to be paid, then that’s not a concern of mine. As long as it’s not going to something wasteful, then I’m not going to object.”
More than $1 million — or 18 percent of the coal severance tax funds — was spent paying county government bills, the sort of routine expenses that local tax collections normally cover for cities and counties.
The largest share was Bell County’s $689,141 allocation for its employee health, unemployment and workers’ comp insurance and contributions to the state pension system. Leslie County spent $200,000 for its employees’ workers’ comp insurance. Knott County spent $120,000 on property and liability insurance. Clay County spent nearly $80,000 replacing voting machines.
Beyond those two major categories, smaller sums went to roads ($555,189), tourism development ($425,483), community and senior centers ($349,251), parks ($280,072), infrastructure ($259,487), nonprofit organizations ($210,000), public safety ($129,124) and education ($100,000).
Coal severance tax money at this level pays for lots of small projects. Leslie County said it added a new building for pregnant dogs and their puppies at its animal shelter. Clay County reported demolishing a two-story structure in Manchester that fire gutted years ago. Harlan County said it replaced the roof on the Lynch railroad depot.
The nonprofit Owsley County Action Team received $100,000 from the county government earlier this year. The Action Team owns space in a Booneville strip mall from which it assists other groups providing services like remote work job training, addiction treatment and cleaning up local properties for new uses.
On its last two publicly available tax returns, the Action Team reported losing money. That makes coal severance tax funds critical to its mission of helping the community, said Donna Hardin, the nonprofit’s director.
“It’s been vital to us,” Hardin said. “It’s what keeps our program feasible. As you’ll notice, we don’t really break even on our own.”
