Maytag’s departure could cripple city’s budget

By PETER HUSSMANN
Editor

Newton Mayor Chaz Allen gave an upbeat assessment of Newton’s future in his State of the City address early this year. Residential and commercial property values had risen from the year before, he said, and a number of development projects were planned or completed that would boost the property tax base, including the $70 million Iowa Speedway.
“The state of the city is good,” he said.
Allen didn’t know it at the time, but Newton’s future was about to be rewritten. Several months after his address, Newton learned that Maytag might close its local doors. Some signs indicate Newton may be in a better position than first thought to weather such a blow. But the fact remains that closing the headquarters and production facilities in Newton could cripple the city’s ability to provide basic services to residents.
Not only is Maytag Newton’s largest employer, it is also the city’s largest taxpayer. It will pay $1.68 million in property taxes to all local government coffers this year, 56 percent of which go to City of Newton accounts. And regardless of Maytag’s future, the company is already assured of lower tax bills next year because of lower property valuations.
The growth indicators Allen mentioned in his speech won’t help the city fund the services it provides next year or likely anytime soon. In a nutshell, Newton’s financial condition looks worse this year than last year, when the council found it couldn’t even fund its own municipal band.
And that was with Maytag still here. Take the company out of the equation and it’s not clear what might happen. Much of Newton’s current financial trouble stems from actions taken long ago. At the time, they appeared to be the right things to do, but a look back helps to explain the city’s financial situation today.

Keep Maytag in Newton
In late 1993, Maytag dropped a bomb. The company announced that it would introduce a revolutionary new washing machine product that not only cleaned clothes better but provided significant water and energy savings as well. The Maytag Neptune was heralded as a breakthrough product in the laundry market, well above the bar set by Maytag’s other U.S. and foreign competitors. The only question that remained for Maytag was where the machine would be built.
At first, Newton residents seemed none-too-excited about the announcement. Surely, as Maytag’s flagship plant, the new product would be built in Newton, the initial reaction seemed. Maytag, however, was noncommittal. The decision would be based on where the most favorable economic conditions existed for the $40 to $50 million capital investment: Newton or its Herrin, Ill., laundry plants. Newton got the message. If the community was not selected as the site for the new laundry platform, there was a real possibility that local production could dwindle or even come to an end.

The community sprang into action. A Keep Maytag in Newton committee was formed. Letters of support poured into corporate headquarters. School children wrote emotional letters about what the loss of their mother’s or father’s jobs would do to their families. Banners lined the streets and avenues. Young and old rooted for the Maytag team at pep rallies in the school gym. If ever a community was behind its long-time corporate partner, it was Newton.
But the real work of deciding which community would come out on top was taking place behind the scenes. Each community was given an opportunity to address Maytag’s site selection team on what it could offer.
Newton city officials, aided by state economic development officials, put together a major package. Newton offered a $4.15 million economic development grant. The state provided $2.325 million in grants, tax credits and jobs training accounts. Natural gas and electrical utilities chipped in another $2.15 million in incentives. The county gave $2.5 million for the development of an intermodal railway loading station. The UAW Local 997 granted Maytag the right to bring in new hires at 70 percent of base pay with parity being reached over a three-year period. Herrin, too, offered a major incentive package.
On a cold day in January 1994, then-Maytag CEO Leonard Hadley announced the results. “Both our laundry manufacturing operations are very successful,” Hadley told a crowd of local leaders gathered at the headquarters. “But in the final analysis, our extensive study revealed that it would be most economical for us to locate this future production in Newton, and today’s highly competitive marketplace absolutely demands economical manufacturing.”
The community rejoiced – especially Maytag workers. “That big noise you heard was a sigh of relief,” said then UAW Local 997 President Rick Avery.

Machinery and Equipment tax
But one more hurdle remained. State lawmakers had to vote to eliminate the state’s tax collections on machinery and equipment, a significant part of Maytag’s decision to invest new capital at the Newton plant.
The debate was couched in terms of economic development. Proponents of the legislation argued the tax put Iowa at a competitive disadvantage in attracting new manufacturers to the state. Other states, including Illinois, did not tax companies on their capital assets. Lifting the disincentive would foster the growth of industrial and commercial development within the state. The new values of added industrial properties would offset any loss in M&E taxes to local governments, they argued.
Opponents said eliminating the tax could prove disastrous to the local tax bases of communities with a heavy industrial presence. Small cities like Fort Madison and Newton would be especially hard hit, opponents said, due to the value of the machinery and equipment as a percentage of the total assessed value.
In the end, lawmakers kept their promise to Maytag. A plan was put together where new M&E values would not be subject to taxation while existing values would be phased out under a 10-year declining reimbursement schedule designed to give communities time to accumulate new values to offset lost revenues.

Newton Budget
Newton’s problem is that other values have not grown enough to offset the loss of M&E taxes. In 1999, M&E values in Newton stood at nearly $32 million, 80 to 90 percent of it under Maytag roofs. Its final payment under the 10-year phaseout amounted to $457,000.
The end of that income, along with the loss of some other state aid and relatively stagnant local property values, left Newton with a severe budget crunch.
To make ends meet, the city was forced to cut 15 full-time positions, including police officers and fire fighters, eliminate about a dozen seasonal temporary positions, dip into reserve funds and severely curtail — if not eliminate — funding to a number of community organizations, including the YMCA, teen center, RSVP and the municipal band.
Newton City Administrator Dave Schornack shudders to think what might happen to city services and employee levels should Maytag close.
“If that happens, there’s not much left but salaries and benefits,” he said. “We’re talking about jobs if we’re required to cut much more from the general fund. We’re talking about closing down departments.”

Maytag’s taxes
Maytag’s dominance in the local economy is highly visible in the value of its 30 properties and the taxes they generate. The 112-year-old Fortune 500 company’s properties account for 82 percent of the total industrial value in the city. Its $39 million total assessed value this year is more than 10 percent of the city’s total tax base.
As the city’s single largest property tax payer, Maytag will pay a combined $1.68 million to all taxing jurisdictions this year, and 56 percent of that will go to City of Newton accounts.
But Maytag’s tax input in the local economy has already begun to fall. Earlier this year, Maytag officials approached county assessor officials seeking reductions in the values of its two largest properties, Maytag headquarters and its Plant 2 production facilities.
The headquarters received the largest reduction, dropping from an assessed value $14.1 million this fiscal year to $12.7 million for next year, a 9.8 percent drop. Maytag’s production facility also received a new valuation, dropping from $19.3 million in the current taxing year to $18.3 million, a 5.1 percent decrease. One commercially-owned Maytag property saw an $18,000 valuation increase between 2004 and 2005.
Overall, Maytag’s valuation for taxing purposes for the coming fiscal year now stands at $36.68 million, a 6 percent decline.
What all this means is that Maytag’s valuation has already fallen $2.36 million as city officials prepare to start work on next fiscal year’s budget. At current city tax rates, that means a $38,000 decrease in revenues to city coffers next fiscal year.
And that doesn’t even count the more than $1 million in tax abatement Maytag will receive next year as part of property improvements made at its production facilities, just less than half of the city’s total industrial tax abatement for the coming fiscal year.
County officials said Maytag indicated it would be back again to ask for further valuation reductions.

TIF Funds
In his State of the City address, Mayor Allen noted several economic development projects that will bring new value to the community. Specifically, he noted about $5 million worth of new projects along the city’s western corridor, including the Okoboji Grill, the Newton 66 gas station, Casey’s, Country Kitchen, KFC/Taco Bell and Culver’s. The mayor also noted the new Newton Village project near downtown Newton, valued at $9.5 million, and the $2.75 million expansion at Park Centre.
But the big project he targeted in his address is the new $70 million racetrack development currently under construction on the south edge of town. All told, the new developments carry values of nearly $90 million, about two and half times the value of all 30 Maytag properties combined.
But local residents won’t see any of that value flowing to the bottom line any time soon. And in the case of the racetrack, this year’s kindergartners will be out of college before any of the value flows to the city’s general fund.
This is because all these development projects are in urban renewal zones. By designating these areas as urban renewal sites, the city can issue tax increment financing bonds to pay for infrastructure improvements — such as building new roads or sidewalks or installing special lighting fixtures — to assist the development. In addition, bonds can be used to offer developers economic development grants, as the city has done for several of the recent developments.
Local taxing bodies still receive revenue from the area, but only on the value of the property prior to the development. The taxes paid on any gains in value are earmarked exclusively to pay off the city’s debts on its infrastructure improvements.
Only when those debts are paid and the urban renewal designation is canceled will the gains in tax revenues begin to flow directly into the local governments’ general funds. That can take a long time. The history of the North Central Urban Renewal Area — and the problems potentially in store for the district should Maytag headquarters close — serve as an example.

North Central TIF
In the mid-1980s, the city identified an area in need of revitalization. Stretching from the hospital on the east to the West Eighth Street viaduct on the west, the area was a mish-mash of older homes, some severely decaying, commercial properties well past their prime (the old Churchill Hotel was being used as an apartment rental property) and abandoned buildings.
At the time, state law required cities to designate such areas as blighted to take advantage of urban renewal district provisions. (Since that time, however, state law was changed to allow economic development projects to fall under urban renewal statutes, a course of action aggressively pursued by the city.) The city designated a large area north of the downtown as the North Central Urban Renewal Area with the goal of replacing deteriorated properties with new projects that would strengthen the city and increase the area’s taxable value.
The city went at it full steam. Dozens of properties were purchased (with displaced residents receiving relocation assistance payments) and torn down. City development officials also worked to attract new tenants to the area. Many new projects took over the old landscape — Park Centre, the new library, Peoples Natural Gas and the Eye Care Center, among others.
The effort has been hugely successful. The base value for all the properties in the area when it was designated in 1986 stood at $16.1 million. The base value in the current tax year stands at $55.9 million, nearly a $40 million gain.
Taxes collected above the base year values flow into a TIF account that pays off the bonds the city has used to develop the area. Since its inception, the city has spent nearly $22.6 million — not yet counting the $125,000 that went to The Vernon Company to assist it in renovating a production area following a fire. Today, nearly 20 years later, the city still owes more than $7.6 million.
Payment of that outstanding debt could become a problem in the future should Maytag headquarters close, city officials say. Currently, about $502,000 of Maytag’s total $1.68 million property tax bill goes into the Newton TIF account. In other words, 30 percent of Maytag’s tax bill goes toward paying off the tax increment debt instead of funding the budgets of local taxing units. The remaining $1.1 million in Maytag taxes is divided between the school district, Jasper County and the City of Newton’s general fund. Newton’s general fund receives approximately $438,000 this tax year.
Schornack, the city’s administrator, says that if the Maytag headquarters is closed, the city may have difficulty financing the debt obligations that remain in the North Central TIF district and could force the city to expand the timeframe for paying off those obligations. The remaining values in North Central Urban Renewal Area may not be sufficient to finance the current debt schedule, he said.
“(Maytag leaving) could hammer that TIF fund to the point that we may not have enough to pay our debt obligations,” he said. “We may have to renegotiate some refinancing.”

Residential valuations
When the mayor gave his State of the City address early this year, he noted the continued growth rate of residential property values. Home values rose 2.3 percent, from $528 million in 2004 to $540.6 million this year.
“It’s not as gloom and doom as everyone says,” the mayor said back in March, well before Maytag’s announced sale. “Property values are remaining pretty consistent. Two percent is not a huge growth rate, but it’s consistent.”
On the surface, Newton’s $12.6 million gain in residential property values appears to be a good thing, resulting in more tax revenue. But in reality, the city will see lower gross taxable residential values to fund its budget early next year.
Two factors are causing the decline. The first is tax abatement.
While the city saw a 2.3 percent increase in residential assessed values for the year, it also saw a 14 percent increase in the value of residential abatements included in its assessments. The 2005 residential assessments include $10.5 million worth of abatement value. In 2004, the residential abatement stood at $9.2 million. For the two years, the actual values of residential properties stood at $518.8 million in 2004 compared to $530.1 million this year, a $11.3 million increase.
But the bigger culprit is the residential rollback. Each year, the Iowa Department of Revenue sets the percentage of a residential property’s total assessed value eligible for taxation. For example, if the rollback was set at 50 percent, a home with a $100,000 assessed value would have a $50,000 taxable value.
Five years ago, the rollback was 56.26 percent. Last year, the rate was set at 47.96 percent. Next year, according to preliminary state figures, the rollback will fall to 46.18 percent. The final rollback figure will be set Nov. 1.
Should that preliminary rollback figure stand, and local assessor officials feel it will, it will contribute to a $4 million net reduction in the gross taxable valuation of residential properties within the city next year. That figure does not include the homestead and military tax credits available to homeowners.

Commercial values
Commercial values in Newton saw a 3.5 percent increase from 2004 to 2005, bringing the value up more than $4.6 million to $135.4 million this year. However, the $10.5 million in tax abatements given to commercial properties needs to be backed out from the total, bringing the net commercial assessments in the city to $124.8 million. But, as was seen earlier, much of this new commercial value sits in tax increment financing districts. Much of the new value is earmarked solely for the repayment of city debt associated with the districts and does not flow to the city’s general fund.
To compound matters for the city, state revenue officials have indicated commercial properties will likely receive a rollback this year. A preliminary rollback figure of 98.95 percent has been issued, which will bring down the assessed value of commercial properties in Newton to $123.5 million this year. That, however, is still an increase over last year’s commercial value of $119.5 million, which takes into account the $11.1 million worth of abatement given to commercial properties in Newton in 2004.

Industrial values
Industrial values in Newton also took a hit this year, nearly all of it from Maytag. For 2005, industrial values dropped $2.42 million, 98 percent of which is accounted for by the $2.36 million reduction in Maytag values. Industrial values in 2004 stood at $46.6 million, which included $2.38 million worth of industrial abatement. This year the valuation fell to $44.2 million, which includes $2.24 million worth of abatement. There is no rollback planned for industrial properties.
For all classes of properties combined — and taking into account new values, rollbacks and tax abatement — the city will have $2.3 million less in gross taxable values in 2005 than in 2004. In addition, M&E taxes are gone for good and much of the new values the city has seen are tied to TIF accounts untouchable for general fund purposes. Finally, the city’s general fund tax levy is at its $8.10 maximum rate, leaving little wiggle room in finding ways to fund city services.

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