Saturday, July 10, 2010

How the City of Indianapolis Diverts Property Tax Revenue (And Then Wastes It)

Great piece over at Had Enough Indy on how the City is using abatements, clawbacks, and PILOTs to divert revenue from local government to the City's coffers. (Though I would never use the word "clever" to describe the Ballard administration.) Hopefully she won't mind my copying it over here. To go straight to her website click here. Pat Andrews, author of the blog, is an expert when it comes to municipal finance issues.
With the advent of the age of the tax caps, Indianapolis needs to learn to share property tax proceeds and not scarf as much of the pie as they can legally get away with.

As property tax caps are now in full effect and a ballot question in November could make them constitutional in Indiana, legal loopholes are being mined by the City of Indianapolis to allow the City to take a tad more than they are due.

The one power that the City of Indianapolis has that no other taxing unit in Marion County has is the right to grant abatements. Which it seems to do with abandon lately. Just look at the Jeff Swiatek's article in yesterday's Star business section, where he reports an abatement for CSO Architects, Harlan Bakeries, Greatbatch Medical, and Sharp's Academy - all in one fell swoop.

Now we are all lectured to remember that an abatement is a forgiveness of taxes in the future for businesses or expansions of businesses that do not exist today - taxes that we are supposed to believe would never have been generated because these businesses would have taken all their marbles and gone to another County to play, had Indianapolis not stepped up to sweeten the deal with a forgiveness of property taxes. The City forgives not only the money that would be owed to Indianapolis, but also the taxes that would be owed to our schools, the library, our township, etc. I'm actually not trying to build a case against abatements; not at the moment anyway.

One good aspect of the abatement process in Indianapolis, is the routine inclusion of 'clawback' clauses. If the business doesn't invest the full amount of money promised, or create or retain the full number of jobs promised, the City can get the amount of the forgiven taxes back.

The 25th floor, under Mayor Ballard, is very very clever when it comes to finding and mining legal loopholes. I don't want to discourage that sort of thing entirely, since the State wields a heavy hand when telling all cities and towns how to go about their business. Finding a good loophole from time to time could be beneficial.

But, in today's property tax climate, we should all be concerned that the tax revenues are meted out proportionately and therefore fairly.

The Ballard Administration found a loophole in the case of 450 E. Market Street (see "Ludicrous or Clever - You Decide" and "MDC Public Hearing On The TM Miller Enterprises Abatement" and "MDC to Hold Public Hearing on Abatement for 450 E. Market") and were set to abate about $6.7 million in property taxes, get paid that very same amount, and use the money to buy an overpriced garage. In short, the City was planning on taking the tax money that would have gone to the schools and library and township and health & hospitals and keep it for its own. On top of it all, it was going to waste that money on buying a garage that it didn't really need. This deal, even though it passed all MDC and Council votes, has not yet been inked down - and that is a very good thing.

The Ballard Administration found another loophole with the $5 million clawback of abated taxes in the case of Navistar. (See "Abatements - Scary Loopholes Need Closing") And they kept it all -- even though the property tax distribution formula would suggest they 'deserved' only about 20% of it. They kept all the money. Then, they wasted that money by sending it on to the Indianapolis Economic Development, Inc. and the Indianapolis Convention and Visitors Association; two not-for-profits living largely off government largess while paying handsome salaries for its operators.

Now the Ballard Administration has found an even bigger loophole whereby proper apportionment of property taxes is set aside to the benefit of the City over the rest of the taxing units. This one makes the $6.7 million and $5 million deals look like chump change. And this is the loophole on the carve out of the sewer utility from the property tax system.

Indiana Code 36-3-2-10, authorizes Payments In Lieu of Taxes (PILOT) from otherwise property tax free parcels in Indianapolis. Indiana Code 36-3-2-10(d)(4), lists "wastewater treatment facility", which at the time, was owned entirely by the City of Indianapolis.

The City-County Council recently increased the PILOT payments from the sewer utility and authorized the money be used to pay off 30 year bonds for infrastructure repairs. (See "City-County Council Should Vote Down Prop 132") The plan is to sell the sewer utility for another $260 million in cash to Citizens Energy. The sales agreement stipulates that Citizens Energy will not attempt to get the Legislature to change the sewer utility from a tax-free, PILOT paying, enterprise into a property tax paying enterprise. Now, this tax-free status is very different from the gas utility and the water utility -both of which currently pay and which will continue to pay property taxes after this sale goes through.

I have asked a couple of folks in City government this question: Are the PILOT payments from the sewer utility more than, less than, or equal to, the amount the utility would pay if it owed property taxes? I have not been able to get an answer. The law does not allow PILOT payments to be more than the utility would pay in property taxes - so let's just toss that possibility out.

Let's run through the remaining two possibilities.

If the PILOT payments are equal to the amount the utility would pay if it owed property taxes, then the City is actually keeping all of roughly $25 million per year for 30 years, when all it would be due is 20% of that. That means that roughly $20 million per year will not go to schools and the library and health & hospitals and the townships. And, over 30 years that would add up to $600 million.

If the PILOT payments are less than the amount the utility would pay if it owed property taxes, then the City is forgiving 80% of the taxes Citizens would otherwise have to pay and shafting the schools and the library and health & hospitals and the townships.

Why the Council voted to increase the PILOT payment from the sewer utility BEFORE getting a clear okay from the State Legislature that it will not rescind the special tax free status of that utility in the future, is beyond me. If the Legislature were to do that, then Indianapolis taxpayers could be on the hook for repaying those infrastructure bonds - and not just as ratepayers, but also as taxpayers. But, it all depends upon the answer to my question: Are the PILOT payments from the sewer utility more than, less than, or equal to, the amount the utility would pay if it owed property taxes?

In any case, I finally come to the final point of this post. With property tax caps fully implemented, the City should refrain from pulling any of the money owed to the other taxing units to use for their own purposes. And, if the City will not do it of its own accord, the State Legislature should step in and require this simple act of fairness.

2 comments:

Marycatherine Barton said...

Thanks for this call, Paul.

Justin Sara said...

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