Public Incentives Review Committee

Meeting Minutes

City Commission Chambers, City Hall

April 23, 2007, 10:00 a.m.

(approved 4/17/08)

PIRC Members Present: Mayor Sue Hack, Vice Mayor Mike Dever, Brenda McFadden, Jason Edmonds.

PIRC Members Absent: Kirk McClure, Cindy Yulich, County Commissioner Bob Johnson

City Staff Present: David Corliss, Frank Reeb, Staci Kemerling

Others Present: Beth Johnson, Lavern Squier, Lartrell Riggins, Berry Plastics

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Mayor Hack called the meeting to order at 10:05 a.m. and noted a quorum was present

Approve draft of 2/20/07 meeting minutes

Mayor Hack called for a motion to approve the February 20, 2007 draft PIRC meeting minutes.

It was then moved by McFadden, seconded by Edmonds, to approve the February 20, 2007 draft PIRC meeting minutes. Motion carried unanimously.

Review and discuss draft of 2006 Annual Tax Abatement Report

Frank Reeb, Director of Administrative Services/City Clerk gave an overview of the abatement report. He said as they could see from the introductory information, there were 8 businesses that currently receive abatements in 2006, which compared with 13 in calendar year 2005. He said there were actually 6 abatements that ended in calendar year 2005. He said 2 expired, specifically RAM Garage Door Group and API Foils, after a 10 year abatement period for each. He said 4 ended early; Martin Logan paid off an IRB early, Microtech agreed to increase its in lieu of payment from 50% to 100% and but the IRB continued. He said Progress Vanguard sold its business in 2006 and Serologicals also sold their business.

Hack asked if Serologicals ever had a tax abatement due to having never been in business.

Reeb said that technically they did for a couple of months. By that he meant there was an Order from the Board of Tax Appeals issued directing the County Appraiser to abate the tax but it was a matter of one to two months at the most.

Reeb then discussed the graph labeled “Number of Tax Abatement Companies by Year”, showing current and pending tax abatements. He said there were eight businesses that received tax abatements for calendar year 2006 compared with 13 in 2005. He said an assumption on the chart was that 3 abatements would be started in 2008. He said they were in pending status and the City Commission had approved the initial approval for tax abatements for AMARR Garage Door Group, Berry Plastics, and API Foils. He said for purposes of this chart, he made the assumption that all three of those abatements would begin in calendar year 2008, thus they saw the spike in 2008 going up to 10 businesses. He said by and large, with the high water mark being calendar year 2002, it was a declining scale.

Edmonds said if he understood correctly, one matured or expired next year, then following that two more do, and then three more the following year so they were all coming off.

Reeb said that was correct. He also said with respect to the three abatements, Amarr, Berry Plastics, API Foils, when one of those did become active in the sense of having an Order from the Board of Tax Appeals, it would be the first time they enacted some of the changes with Ordinance 7706 regarding the wage floor and health insurance requirements. He said when one of those three, Amarr, Berry Plastics, or API Foils, came online the annual report will also look a little bit different. He said there was in the code a third party auditor requirement. He said a lot of that information with the wage floor and health insurance requirement would go to a third party auditor for confidentiality purposes. He said the current abatements do not have the wage floor or health insurance requirement.

Reeb outlined Table 1 which consisted of primarily historical information. He said it captured capital investment, information about when the abatement started and ended and the specific abatement percentage. He said the information that did change from year to year was the appraised value of the property subject to the abatement. He said by and large the information was a snapshot of the abatement for each business in general.

Reeb said there were a couple of things worth noting about Table 1. First the Amarr abatement, ended December 31, 2006, so it would drop off from the report this time next year. He said a portion of the abatement for DST systems had also expired. The abatement for the used equipment that it purchased from Sallie Mae was a 100% tax abatement that was only for five years and those five years have come and gone. The 50% tax abatement on other property was the only DST abatement that continued. He said the other thing worth noting were the end notes primarily for Berry Plastics and Sauer Danfoss, and they provided some explanation why initial capital investment may not be close to 100% as they would like to see. In respect to Berry Plastics, their machinery and equipment was only 34% of what was projected on their application. He said the reason behind that was after the abatement was approved, there was a decision by Berry Plastics to lease machinery and equipment instead of purchase it. The leased property was not subject to an abatement which was why it showed up as only 34%.

Reeb said Table 2 contained full time and part time employee information. He said Table 2 was an attempt to list employment numbers for the specific calendar year, in this case 2006, and compare that to the number of employees projected on the abatement application. He said they also had 5 years of employment information included in the Table in order to see any trends. For 2006, there were four businesses that did not meet the number of employees projected. He said the four were DST Systems, Jayhawk Bowling, PROSOCO, and Reuter Organ. In terms of how that may look compared to past years, DST Systems had approximately 146 employees or so for each of the last 5 years. He said he would note they were not expected to have any part time employees, so while they may be 29 full time employees below projection, they were 87 part time employees more than what was stated on their application. He said Jayhawk Bowling was just two employees short of its expectation and that was relatively consistent with past years.

He said PROSOCO was a bit interesting. Depending on how they counted the numbers, they were either 7 employees below projected or 18 employees above projected. The difference came from how those 50 employees moved over from the Kansas City Kansas facility were counted. Prior to opening the Lawrence facility, PROSOCO had a business in Kansas City, Kansas, and when it first received its abatement, it moved that business over to Lawrence, Kansas. They had 50 employees in the Kansas City, Kansas operation when they moved over to the Lawrence office. He said depending on how they counted those, it was either minus 7 or plus 18 in the number of employees as of 12/31/06 compared to the number of employees projected on the application. For consistency purposes, he counted them as if they were new positions, so they had 75 new positions and 68 employees as of December 31, 2006. He said he got Bruce Boyer’s okay to essentially cut and paste the explanation from the PROSOCO questionnaire which was at the bottom of page three and up to page four in the report. He said they have had about the same number of employees, although it had gone up a little bit over the past couple of years. He said Boyer wanted him to mention that while they did take an employment number snapshot at December 31, 2006, right after that date PROSOCO hired three or four other employees, so it was actually now in the low 70’s and not 68.

Hack said it was interesting to look if they added up the number of employees in just the full time category over projections. That number was 149 and if they took away the under projected amount, which was only 38, they still have a net overage of 111 employees, which indicated the program was working.

Reeb commented that Table 3 outlined how businesses were doing in terms of paying wages. Table 3 attempted to compare the job category to a benchmark, which was the average wage for that job category as determined by the Kansas Department of Labor 2006 Wage Survey. He said for the most part they used a 6 digit SOC code for each business and job category. In most cases, there was reported information in that wage survey, but at times, there was not a 6 digit SOC code to match. On a couple of instances, as noted in the report, they were able to use an SOC Code that was one digit off, which was pretty close but not identical. In a few other situations, a four digit SOC code was used. He said again there were notations throughout the tables when something different than a 6 digit SOC code was used. He said this year’s wage information from the businesses was much better. It was the third or fourth year they had prepared this specific type of wage comparison and it appeared that based on the information the businesses provided, that it was starting to become a little easier for them to get this information and thus was easier for staff to put it together as well.

He said the bullet points after each business were a snapshot of what each company was doing by job category. He noted there was more detail in the bullet points than what they would actually see in the table in front of it. For example, Allen Press reported 65 job categories and 57 full time positions. He said they would not see 65 job categories in the table for Allen Press because they did not include information when there were only two employees or less in each job category because there was a desire not to divulge confidential wage or salary information. He said staff overlooked one part time job for Allen Press and would, subject to the PIRC’s OK, remove that position by the time this report moved forward to the City Commission. In general terms, the full time job information ranged from about 33% of full time jobs meeting or exceeding the benchmark wage in the case of Reuter-Organ up to 100% for Amarr Garage Door Group. He said the other businesses were somewhere in between that and most were in the 60% to 80% range.

He said he thought it was worth noting that in terms of whether businesses are meeting projections on wages, this information should be used as a starting point rather than a conclusion. There were a few variables that they did not factor in which supported looking at these numbers as the starting point of any analysis. For example, staff did not look at tenure. He said there may be people that were new hires at a lower salary, compared to someone who might have been there for two or three years. Also, the number of employees was not factored in. He said this was looking at all jobs in the business here in Lawrence. He said the code only required a review of the jobs that were created as a result of the abatement. He said when they listed that a job was not meeting or exceeding the average wage, whether it was one cent below, one dollar below, or five dollars below, it was below. For those reasons and perhaps others, they may want to look at this information as a starting point and not a conclusion if the Committee wanted to discuss a specific company’s wages.

Edmonds asked how the information was gathered and reported by the employer. He asked if this information was fairly simple to glean from payroll data.

Reeb said he was not in a position to fully answer the question but understood that some businesses have payroll data or tracking systems that utilize SOC codes, so it was relatively simple to essentially cut and paste the information into a report for these purposes. Other companies were not set up that way and what he heard from the businesses was that it ran the spectrum of relatively simple to quite a challenge and fairly time consuming to put together. In short it depended on the business.

Edmonds said he understood the importance of not reporting on two employees or less to ensure confidentiality but said even a threshold of 5 employees or less may divulge more information than necessary.

Lartell Riggins, Berry Plastics, said that it was time consuming for Berry Plastics to compile the information necessary for the report. She said additionally the definition of the print operator SOC Code did not match the responsibility of their operators. She said they went to the statewide data from the Kansas Wage Survey because they thought it was a better match than the Lawrence definition but it was still not a good match.

Edmonds said it seemed like they were trying to make neat little boxes, but the people that made pipe organs for a living were different than someone who made plastic cups. It was very difficult to draw those neat, detailed categories.

Hack said the committee may want to consider having a conversation to ascertain whether there was another way to get the information needed that did not stress the resources of the business or staff. She said they did want to know if it was accurate. She said they spent hours in PIRC going through this report, narrowing and broadening the scope, and it was recognized that it was a huge amount of labor, mostly for the companies and staff. She suggested looking at whether the method was more cumbersome than necessary and looking into whether there was a way to get the information necessary without making it overly difficult for companies and staff in the process.

David Corliss, City Manager, said there was a lot of judgment that goes into fitting employees into the correct SOC code and it was not clear. There was a challenge to make precision judgments when actually some companies that were below what the standard in their abatement agreement may have a good reason for being there. He said there may be a downturn in the economy. What the City did in response to that situation had never been clear. They struggled with that as well.

Hack said PIRC had to be looked at as a facilitator to have companies meet what they were required to do rather than as a “gotcha tool”. She thought Brenda McFadden did a great job of bringing some things to the table in terms of tax expertise. The business had to have the ability to actually conform to what the City wanted to do from an abatement requirement perspective and the City had to look at the soundness of a company and whether the City was getting them into something that they would later regret. Although PIRC was not looking to catch companies, it did not mean they would let it slide if the abatement agreement was not upheld.

Edmonds noted that companies are being held to a higher standard than the company shareholders would require in a free market. He said no one could predict what it would be and could only make good, informed decisions based on current information.

Reeb then briefly discussed the remaining tables in the report noting they were fairly self-explanatory. He said Table 4 was an overview of property taxes related to the abatement; Table 5 showed companies receiving industrial revenue bonds and related tax abatements; Table 6, local expenditures and sales from a questionnaire distributed earlier in the year; and Table 7, which outlined company achievements, training and the companies’ involvement in the community.

Hack stated that Table 7 was remarkable in outlining job training and service to the community. She said training was something they struggled with as a community. Sometimes they forget the last part because they get lost in the numbers. She said she was glad to see some comment in that.

She asked if there were any changes anyone would like Reeb to make in addition to the one part time job category deletion for Allen Press.

McFadden said this was the first report since she had been on PIRC where all businesses reported back information. She said it was also the first report where Table 7 showed so much detail. Companies were increasing their adherence to what PIRC was wanting from them.

Hack said that was the tough part between the current tax abatement policy versus the previous tax abatement policy that did not require that. In holding people to the standard that was not a standard at the time. She said it was good for them to have the information and they probably needed to come together as committee, and ask what they really wanted to know and how much time did staff and the company need to spend to prepare the annual report. They needed to make it more of how they could help as opposed to policing.

It was then moved by Edmonds, seconded by Dever, to approve the 2006 Annual Tax Abatement Report and forward it to the City Commission. Motion carried unanimously.

Other items as raised by PIRC members.

Hack thanked Reeb for compiling the report and Berry Plastics for attending the meeting.

Reeb thanked Carly Herman, intern in the City Clerk’s Office, for her assistance in preparing the reports.

Dever referenced absent PIRC member Kirk McClure’s email. He said that clearly in McClure’s opinion things were not going well. He asked for any comments on McClure’s assessment.

Corliss said McClure made conclusory statements based on an inaccurate belief that 90% was the standard of substantial compliance. The committee and City Commission have to make a policy decision based on information given. He said they had an agreement with the newer firms that have more recent tax abatements where they made it clear the City Commission had the authority to alter the tax abatement based on the information they got if they found something was not in substantial compliance.

Dever asked if there were no numerical comparisons by which the business will be penalized.

Corliss said some communities are structured so that it was numerical, but the City Commission and the PIRC have not made recommendations in favor of that. They recommend the process of getting the information and making a decision; but it was made on an individual, case by case basis.

Dever said he agreed with that approach.

Hack said she thought there were some people who made assumptions about why companies came to a particular community and that tax abatements do not need to be a part of their tool box because companies were simply not looking for tax abatements, they were only looking for locations and people. She said they have tried to make the point that those assumptions were not accurate, but PIRC meetings in the past have been a battle over tax abatements in general as opposed to what was in front of them regarding a specific abatement. She said like them or not, whether you believed in them or not, they were what they had and the community supported them. She said having that battle of whether they should have tax abatement or not, instead of the very thing they were to analyze, was not a constructive use of anyone’s time.

Dever asked if the City would continue this methodology of gray type analysis. He said he wanted to make sure he understood the PIRC’s role before he approved the report when it was before the City Commission.

Hack said her hope was that they could have a conversation at the Economic Development Board level as to how they could best use this information and whether the responsibility as a community was to put the hammer down on companies or was it to create an atmosphere that companies know that they were appreciated and valued and made contributions to the community. If they were having difficult times, how could the community help companies that were struggling. She said the asset level and giving back to the community and a huge amount of taxes that were paid by the companies had been completely lost in the conversation.

Edmonds said as one who just saw this for the first time, he sat through one hearing for API Foils, he was overwhelmed by the benefit of the API Foils project, which was tiny compared to the benefits of the Berry Plastics project. He said if all they looked at were compliance issues, then they completely ignored that there was a huge benefit in the project, and ancillary things that happen, more jobs, purchases, children that go to schools, and all the great things that happen. He thought the current policy seems to make it difficult for companies to do this; they were trying to analyze something that was intended to be an incentive for businesses to do business in Lawrence, Kansas. He said they were mired in detail with this policy instead of looking at the big picture.

Hack said they needed to work on things that would perhaps bring them into a different balance, in terms of the information they asked for and the information received, and what they do with it.

Dever said it took a lot of time to prepare, and if they were not going to truly use the data for the shallow comparisons, which were going to occur when they tried to fit a round peg into a square hole. He said it seemed like a futile attempt to compare numbers. The information was good, it was just to put above and below and there was no numerical statistic that says good or bad. He said he wanted to make sure that the reports did not paint the wrong picture.

Hack said she thought the way they stood now were that they did paint a bad picture but they were taking too much time from companies and staff to put together. She said she did not think there was any reason to say there was something wrong with having standards. If they were going to give a tax abatement, they want the companies to step up. She said they were taxpayer dollars but also company dollars being paid to taxes, so it was a balance. She said they would move this on to City Commission as a Consent Agenda item but it may be pulled by member of the public for discussion. She said she would assume that it would get accepted, but thought their charge was to have a conversation about the policy and the role of PIRC, and the data and what we used it for. It was an opportunity to look at policy and to see if they were doing what they said they were doing.

Edmonds asked from an accounting standpoint, could they arrive at a less cumbersome process and still arrive at a good conclusion.

McFadden said they talked about this before in past PIRC meetings but she would like more time to review past information before answering that question.

Corliss said other communities were asking some of the same questions. They wanted a report back on the number of employees, the wage comparison was a challenge because of requirement of the survey mean and how they got that. He said the property tax numbers were not difficult, and some of wage information was challenging for them and more so for the company.

McFadden said if they did not have to compare it and use the SOC codes, they could just report what the different numbers were. She said she did not know what that would do and she would not want to extend the ordinance.

Corliss said they could compare it to what they were going to put in the application, which had some value to it.

Hack asked if that was what they wanted to know.

Edmonds said they were going to end up with 80 part time jobs instead of 40 full time jobs, but he thought that the people who had the jobs were happy to have them or they probably would not show up.

Corliss said the view of those that have wanted that detailed information, thought that it was important that if they do tax abatement that they have wages that were at or above state level, but in his mind it was not strong criteria the City Commission used in granting an abatement compared to other criteria.

Hack said it was the wage floor that was critical and what they should focus on was whether the business meets the wage floor or not. She said as they reviewed a request for an abatement, they asked the range of wages and all of those things and there should be a way to comply with the projected wage range as they said they would meet as opposed to trying to figure out the difference between a pipe organ maker and a plastic cup maker and how the numbers work. She said she thought that was a waste of time.

Edmonds said if there was a process for a claw back or whatever it was, then they should dig into deeper detail to get someone to report, but not if they were in a generally compliant range to allow them to declare that they were.

Hack said a couple of years ago, Sauer Danfoss was hit with a business downturn following 9/11 and hoof and mouth disease in Europe which also impacted their bottom line. She said as a community they have to have an understanding of these types of impacts on a business.

Corliss said they have to ask what success was. He said to some extent they were counting leaves on trees as opposed to seeing the forest. To some extent, some of the judgments were difficult for companies. Some companies were going to say that they were going to be more profitable and viable with fewer employees. He said more employees did not necessarily translate as success for a company’s bottom line. He said they wanted more employees and more investment. Many employers use temporary employees as a trial period and training period. They were outsourced and not put on the company payroll. They were still being paid but not technically in the employer’s payroll. He asked how they measured it. He asked how that related to the bigger employment issues. Most value to companies and the community was that they provide a clear direction for this report.

The meeting adjourned at 10:55 a.m.