Memorandum

City of Lawrence

City Manager’s Office

TO:              David L. Corliss, City Manager

CC:               Diane Stoddard, Assistant City Manager

FROM:          Roger Zalneraitis, Economic Development Coordinator/Planner

DATE:           October 20, 2010

RE:               Resolution of Intent to Issue Industrial Revenue Bonds (IRBs) for Plastikon Industries, Inc.

Plastikon Industries of Hayward, California, has announced their intention to purchase the former Serologicals Building in East Hills Business Park.  Plastikon intends to use the building to manufacture medical products for Siemens Health Diagnostics.  Over the next three years, the firm will hire up to 126 people at an average wage of approximately $45,000 per year.  Of note, this wage figure excludes the wages of the plant manager, quality control personnel, and engineers.  Including these wages would substantially increase the average salary. 

Plastikon intends to purchase the building for $2.5 million, and invest up to $4.5 million in renovations and new machinery and equipment.  This will amount to $7 million in total investment.  The company has asked in turn for two incentives from the City:

1) Industrial Revenue Bonds (or IRBs) to finance the $7.0 million in purchases and investments; and

2) A $500 per employee training incentive.  This incentive will be split between the City and County, and is paid over 5 years.

At this time, the Commission is being asked only to consider the Resolution of Intent to Issue for the IRBs.  The resolution indicates the City’s general agreement to proceed with the issuance of these bonds, but does not bind the Commission to future action to actually close the bonds, which require an ordinance to be considered at a later date.  The resolution also sets a date for a public hearing for November 16, 2010.  The attached Notice of Intent will be published in the official City newspaper in advance of the hearing. 

The City has received both the application and the $1,000 fee for an IRB filing.  A copy of the application is attached.  It should be noted that the application has incorrect average salaries for new hires.  The correct average salaries will be reflected in the cost-benefit model that is being prepared for the incentive review, and more importantly in the performance agreement that will be negotiated between the City and Plastikon in order for them to receive the employee training incentive, if the incentive is approved by the City and County. 

About Industrial Revenue Bonds

IRBs are a conduit financing mechanism whereby cities can assist companies in acquiring facilities, renovating structures, and purchasing machinery and equipment. IRBs provide a sales tax exemption for all construction related material for firms.  Because Plastikon is using the IRBs for a manufacturing facility, the bonds will also be tax exempt at the federal level, which will allow them to receive a lower interest rate on their debt.  When IRBs have been issued, the municipality owns the underlying asset and the debt is repaid through revenues earned on the property that has been financed by the bonds.  IRBs are repayable solely by the firm receiving them and place no financial risk on the municipal jurisdiction.  If the company defaults the bond owners cannot look to the city for payment.

As previously noted, the Resolution of Intent to Issue does not bind the City to issuing the IRBs.  The Resolution primarily allows for two things.  First, it schedules the public hearing that is required by the Internal Revenue Code for federal tax exempt bonds.  Second, it allows expenses accrued by Plastikon to be reimbursed from the future IRB bond proceeds, should the IRBs be issued by the City.

The next public step in the application process will be for the Public Incentive Review Committee (PIRC) to consider Plastikon’s employee training incentive, likely on November 3^rd.  After the PIRC hearing, there will be a public hearing by the City Commission on November 16^th.  This hearing is required by the Internal Revenue Code for federal tax exempt bonds to be issued, and will also include review of the employee training incentive proposal.  Additionally, the Commission will consider first reading of a bond ordinance and the employee training incentive.  Finally, the City will consider second reading of the IRB issuance in early December.

Action Requested

Approve Resolution No. 6909 indicating the City’s general intent to issue up to $7 million in industrial revenue bonds for Plastikon Industries and schedule a meeting of the Public Incentive Review Committee (PIRC) for November 3, 2010 to consider an employee training incentive for Plastikon, if appropriate.