Tuesday, April 10, 2012

Oconee, Clarke Memo of Understanding with Caterpillar Provides Tax Reduction Details, Penalties for Company Nonperformance

Phantom Bonds Issued

The Oconee County Industrial Development Authority, in partnership with the Development Authority of Athens-Clarke County, has bought the 265 acres that will be used by Caterpillar for its new plant and will build the roads and other infrastructure for the plant.

To raise money to pay its part of these costs, Oconee County sold $10.4 million in general revenue bonds on Feb. 23.

The county is required to pay off the bonds by March 1, 2034, increasing property taxes for that purpose if necessary.

The two industrial authorities, at least on paper, also will build, own and equip the Caterpillar plant, which will straddle the Clarke and Oconee county line near Bogart on U.S. 29.

Second Set of Bonds

To raise money to do these things, the two authorities sold another set of bonds in February.

Caterpillar itself purchased the bonds, and Caterpillar also is solely responsible for paying them off.

This second set of bonds is the tool Oconee and Clarke counties are using to provide tax abatement to Caterpillar. The reduced taxes were an enticement used by the two counties to get Caterpillar to relocate its plant here.

The bonds are referred to as tax abatement bonds or “phantom bonds,” according to Oconee County Attorney Daniel Haygood. They are phantoms, Haygood said, because they do not really involve the exchange of money.

Caterpillar “just added a circular flow of funds from itself to itself,” Haygood said.

The total cost of buying the land, building the facility, and equipping it is estimated at roughly $200 million, according to the Memorandum of Understanding between the two industrial authorities and Caterpillar signed on Feb. 17.

The Oconee County Board of Commissioners and the Unified Government of Athens-Clarke County signed attachments to the MOU acknowledging the agreement, since the governments ultimately are responsible for their development authorities.

I obtained a copy of the 51-page MOU from Oconee County Administrative Officer Alan Theriault and met with County Attorney Haygood on March 23 to review the document, which Haygood helped to write.

Haygood and I also have exchanged a series of email messages about the MOU since our meeting.

The MOU spells out in detail the tax abatement procedures, including the sales of the phantom bonds, though they are not referred to as such in the document.

The MOU specifies that the two authorities will issue a maximum of $210 million in bonds, with Oconee County’s share to be $140 million. Most of the plant will be in Oconee County.

The MOU also spells out Caterpillar’s commitments and the protection provided to the two counties and their citizens should Caterpillar decide not to build the plant or to stop using it before the tax abatement plan ends.

The use of the tax abatement bonds takes the land, building and equipment off the tax records, since they are owned by legally created entities of the two counties.

This means Caterpillar will not have to pay property tax on the facility or on manufacturing equipment it will be operating.

Instead it will pay taxes on the less highly valued lease it will have for use of the facility and its equipment.

Since Caterpillar will have exclusive possession and use of the facility and equipment through that lease, that lease is an asset that can be taxed.

The value of the leasehold interests will be determined by the Boards of Assessors of the two governments using normal assessment techniques for such leases, according to the MOU.

But even that lease will not be taxed at full value.

In the first year, the assessment will be only at 10 percent of the fair market value of the leasehold interests, and that rate will continue for three years. The rate will then increase each year until it reaches 100 percent in 20 years.

Abatement Extended

But the MOU provides Caterpillar yet another way to reduce its taxes on the lease.

According to the MOU, separate Tax Commencement Dates will be assigned to property acquired in each of the first 20 years of the facility’s operation. This means that property leased for the first time in the 20th year will not reach full assessment until the end of an additional 20 years.

This stretches out the abatement for some leases to 40 years, though language in the Bond Purchase Agreement between Caterpillar and the Oconee County Industrial Development Authority limits these extensions to 30 years. Haygood gave me a copy of that document, dated March 1, 2012.

Since property in Georgia is taxed only at 40 percent of assessed value, the applicable millage rate will be multiplied by 40 percent of assessed value of the leasehold interest, which will have been reduced according to the schedule in the MOU.

Caterpillar has the option to purchase the property, the facility and the equipment from the two development authorities at any time prior to the end of the 20-year agreement. If it does that, it will pay taxes at the normal rate.

According to the Memorandum of Understanding, the parties agree that the incentives being offered by the two counties “are being provided to induce the Company to locate its operations” in the two counties and “the incentives provided for in this Agreement serve a public purpose.”

What the counties gain, according to the MOU, is “job creation and investment.”

The MOU specifies that Caterpillar must create 100 full-time positions by the end of 2013 and must continue to increase hiring to 1,050 by the end of 2021. By the end of 2032, it must have at least 1,100 persons employed full-time.

Penalties Specified

Caterpillar also agrees through the MOU to invest $50 million by the end of 2013, $100 million by the end of 2014, and $195 million by the end of 2021. The investment figure by the end of the agreement in 2032 remains at $195 million.

If Caterpillar does not begin construction by the end of this year, it must repay the authorities for costs incurred for roadway and utility construction.

If Caterpillar does not achieve “substantial completion” of the project by June 30, 2014, it will pay $500 per day up to a maximum of $300,000 to the authorities.

Each year, according to the MOU, Caterpillar will produce a report on how well it met the job creation and investment goals spelled out in the document.

Any shortfalls will be calculated as percentages, and a project shortfall percentage shall be the average of the two shortfall percentages for a given year.

If that average shortfall is 30 percent or less, Caterpillar is not required to do anything.

This means that Caterpillar could hire only 105 persons in 2014, rather than the specified 150, without any penalty if that year it also had a shortfall of 30 percent in investment.

If it had no shortfall in investment, it could hire only 60 full-time persons in 2014, rather than the specified 150, without penalty.

Community Recovery Payment

If the percentage is greater than 30, Caterpillar agreed in the MOU to make a community recovery payment.

That payment is calculated by multiplying the shortfall percentage by the amount of property tax savings for the project.

In its news release of Feb. 17, Caterpillar estimated its level of employment at the local plant to be 1,400 and the investment to be “about $200 million.”

Those figures have been the ones used by local officials and the media in describing the project, not the more conservative figures from the MOU.

The announcement said that the company was “shifting production from Japan to the United States” for small track-type tractors and mini hydraulic excavators. These products are currently being manufactured at a plant in Sagami, Japan, near Tokyo, according to the release.

“Once the transition to the new facility in Athens is completed,” the news release said, “the Sagami plant will continue to serve a key strategic role in Caterpillar’s global growth strategy as a high-tech component facility.”

The release made no mention of how the shift would affect employment at the Sagami plant.

Canadian Plant Closed

In February, Caterpillar also announced it was closing a 62-year-old plant in London, Ontario, that makes railroad locomotives. According to The Wall Street Journal report at the time, 450 jobs were lost.

That decision was made after a labor dispute. The paper reported that Caterpillar opened a locomotive plant in Muncie, Ind., in 2011, and was filling jobs at that plant at roughly half the wage of those paid to the Canadian workers.

Haygood and other county officials told me that the decisions by Caterpillar to shift work played a role in negotiations over the MOU.

The $10.4 million bond that the county sold to cover its part of the costs of purchasing the land and providing the infrastructure for the Caterpillar plant would cost the county $4.2 million in interest if it is paid according to the current repayment schedule.

That brings the total cost of the bond to $14.6 million.

Haygood told me that the county expects to need less than the full amount and will use excess funds to pay off the debt.

First Payment of Principal in 2015

For 2013 and 2014, the county will only make interest payments of $288,866 and $292,112, respectively.

The first payment against principal of $410,000 will be made in 2015, bringing the total payment due that year to $702,112.

That money will have to come from the county’s general fund.

The two development authorities purchased the tract for the Caterpillar plant on March 6, according to copies of the deeds that Haygood provided to me.

The Oconee County development authority purchased 120.4 acres from the Orkin family, and the Clarke County development authority purchased 142.2 acres from the Orkins. The total purchase price was $9.2 million, according to Haygood.

In addition, the Clarke County development authority purchased 2.4 acres from Martha Clark, according to the deed. Haygood said the purchase price was $175,000.

Those 2.4 acres were part of a 5.9-acre tract owned by Clark, according to the deed and the Clarke County tax records. The property is at 188 Pine Valley Road in Bogart.

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