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574.294.5471 Fax: 57;+.293.

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The Honorable

City of Elkhart, Indiana

Dick Moore
Mayor

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the at)' with a heart


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Office of the Mayor


229 S. Second St
Elkhart, Indiana
46516

March 22, 2013

This morning I met with the final group to complete my study on the Compact issue. began by meeting with one of the authors of the Compact Agreement and had very interesting discussion and was educational. I advanced my education by reading the letters and memos put forth,by Mayor Perron in 1998. I then called in so'me of my supporters, a group of businessmen and told them of the cities past and current position on the Compact. This morning I entertained a group of outside the city property owners who are concerned about what they see as a negative impact upon their business relative to implementation of the Compact. I talked of the history of the Compact and addressed what I had heard as their questions during the Council meetings and listened again to their concerns. It was as expected a financial concern. Hearing nothing new, I proceeded to announce this Press Conference. The History, Benefits, Challenges, and Solutions Culminating in the Elkhart Compact Agreement Over the last 30 years, the federal, state and local governments as well as insurance companies and financial institutions have urged communities to master plan community growth using land-use plans and utility master plans. They have also collectively encouraged communities to require municipal sewer and water for medium/high density housing, commercial/retail projects, and industrial development for environmental purposes. In the 1990's, the State of Indiana passed legislation making the annexation of property contiguous to the city boundaries very difficult. Since that time annexation rarely occurs and when it does, it is usually either vacant land or property that is in need of city water and sewer due to the failure of well and/or septic. '. Prior to 1998, the City of Elkhart in order to promote business growth, job creation and community progress allowed property owners outside the Elkhart city limits to connect to city sewe'r and water. In exchange, property owners would agree to and be required to pay three times the sewer rate that Elkhart city property owners pay and agree to be annexed by the City of Elkhart without opposition when annexation occurred. As industry and Elkhart grew, this
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arrangement promoted mainly business growth in unincorporated areas outside the city in industrial parks and commercial developments. The Elkhart community was able to grow and expand the work force and business was able to operate with city sewer and water. In 1998, the City of Elkhart under the leadership of Mayor Jim Perron moved to annex an industrial area south west of the city limits. The industrial park was developed under the three times tool and city sewer and water was extended to the industrial park. During construction, when a property owner asked the city to connect to the sewer and water lines the city required the property owner to sign the three times agreement. The city would provide sewer and water at three times the city rate and the property owner would not oppose annexation when the city chose to annex the property. It was a good deal, but one side failed to honor their agreement with the City. When the plans to annex the property were announced one large-company calculating the cost to be annexed and feeling sticker shock, the company hired lawyers to protest the annexation even though the company had agreed not to do so. The company broke its word to the city. This move prompted the administration to declare it would no longer provide city water and sewer to new industrial parks and commercial development areas outside of the city limits. This in turn stopped growth and shutdown expansion of industry along the perimeter of the city. A compromise was needed. Business on one hand needed municipal sewer and water to build and operate (due to the environmental positions taken by federal, state, and local governments) but was overwhelmed with the immediate increase in property taxes when annexed. The city, on the other hand, wanted to continue to grow outside the city limits, encourage industry, and employ its citizens. The Mayor invited a group of major land While there were many things to developers in our area to serve as a committee to study the issue and a compromise was met and the Elkhart Compact Agreement was established. consider, the main objective was to be sure the city did not provide utility services outside of the city in a manner and at a cost that put industry inside our city at an unfair advantage. The goal of the Compact was that no matter where you chose to locate inside or outside it would remain financially neutral. The Elkhart Compact Agreement The main issues facing the authors of the compact agreement were: 1. How to avoid sticker shock to companies that would eventually be annexed by the city. 2. What would be a fair formula to apply to property owners outside the city both and still be fair to the citizens of Elkhart whose taxes help maintain the sewer and water system?
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3. If you own a facility within the city limits of Elkhart you receive 100% of the benefits of the taxes you pay to the city; police, fire, trash, snow plowing, sewer/water, etc. 4. If you are a citizen of Elkhart your home property taxes pay some of the cost of operating the city and you receive 100% of the benefits. 5. The Elkhart citizen and business owner pay taxes to maintain the sewage treatment plant, the sewer and water lines, water towers, bond payments for public utility projects, the operating costs of the Department of Public Works, the fire hydrants, roads etc. 6. All properties outside the city limits but connected to sewer and water are subject to annexation. Once annexed they would pay 100% of the city taxes and receive 100% of the benefits. 7. The Compact fee is not a sewer usage fee. The Compact fee is a payment in lieu of city taxes. The authors in 1998 recognized that those under the Compact Agreement should not pay 100% because they would not receive police, fire, snow plowing, trash collection, etc. It was determined by the authors that these services encompassed about 25% of the overall cost to the city and,. therefore, those using sewer and water outside the city limits should pay the equivalent of 75% of the city taxes. The 75% served a second purpose. If the business operated under the 75% Compact fee for several years, when the property was annexed, the sticker shock would be far less. The theory was if the business had grown accustomed to paying 75% of the city taxes when annexed an increase of 25% with the additional services would be easier for the company to absorb and justify. For those located inside the city limits their property taxes were and are based on the assessed value of their property. It was determined by the 98 group that to be fair to all parties those outside the city should pay 75% of what the same property would pay if inside the city. The city could not send a property tax bill to property owners outside the city limits so the question was how could the city collect the 75%1 There had to be a way and it has now evolved into the monthly Compact bill. As to the benefits of being connected to city utilities they concluded it was more than just having the benefit of sewage treatment and clean water. suppression system or firewall to expand the facility. According to the State Building Codes, if the property owner's facility is over 12,500 square feet the facility must have a fire

Insurance companies require annual pressure and system tests. Municipal water provides ample pressure for most fire suppression systems. And there was the environmental issue. Due to recent environmental regulations, most financial institutions and insurance companies would require a business to have municipal sewer and water especially after the 2007 financial crisis and its effects on commercial real estate. Therefore, both existing building owners and new construction would greatly benefit from having municipal sewer and water. Being connected also translates into lower insurance rates. Most insurance companies favor having a building served by municipal sewer and water which would reflect in lower insurance rates for the property owner (fire suppression and less risk of environmental contamination). Since the property is located outside the city limits the tax rate for property taxes is less and those under the Compact fee can budget to pay monthly installments rather than two large payments per year. Because the assessed value of a property is calculated once a year, new construction can calculate the Compact fee months in advance before the assessed value is determined and budget accordingly. Finally, the overall tax package with a Compact fee included is still very competitive when compared to other municipalities within the region. It was a thorough study of the needs of both the city and its neighbors on its perimeter. These are my findings based on hearing the history of the Compact, while meeting with one of the authors, listening to members of the Common Council and also to the concerns of some of those affected by the Compact and crunching a lot of numbers. First, I find that calling something that is clearly defined by another name clouds reality. Payment in Lieu of Taxes (PILOT) is reality. Therefore, the revision that I will be sending for Council approval will remove the title word Compact and replace it with Payment in Lieu of Taxes (PILOT). That is what it is. That is what South Bend and Goshen call what we have been calling a Compact. And, while it appeared in 1998 that the annexation of properties outside of our city limits had been made very difficult due to the actions of the state of Indiana, it is even more difficult today because Elkhart County has established TIF districts outside of our cities. It is of no benefit for a city to annex property located in a county TIF district. The city provides all the services and the County gets the taxes on the improvements. Another finding is that the ordinance using the assessed value to determine what the payment should be is still the right way to go. It is a tax and our taxes are based on our assessed value. The authors of this Compact now to be called PILOT understood that and we concur with their opinion today. You cannot establish a fee that supports the City taxpayers
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day to day operation based on usage. That is a monthly sewer service rate that all of us pay and that money goes directly to the utility. All of us who live or operate a business inside of our city, the same people who own the utility pay the monthly usage fee and then also pay the city tax. The PILOT was deSigned to assist the people of Elkhart by supporting a portion of the city's operation. We also are reminded that the intended PILOT from the beginning was to make your choice of location inside the city or out financially neutral. And the city simply must not lend itself to any situation that creates a financial advantage to locate outside of the city limits. Finding Mayor Perron's notes and documents and meeting with one of the authors of the Compact I finally discovered why 75%. That seemed to me to be the problem today. 75% today did not seem to be getting us where the authors of the Compact wanted us to be. After the committee in 1998 made their decision that the Compact was of necessity to level the playing field they took into consideration the fact that those industries outside of our city do not receive 100% of our programs. They determined by calculating that what they do not receive would equal about 25% of the total budget. Therefore, they came up with a 75% factor. portion by 25%. It is also quite evident that there was no Circuit Breaker in 1998. As I continued to gather information and run the calculator what became evident was the 75% of yesterday now equaled hundred percent today because of the Circuit Breaker. Using the 75% factor today and factoring in the Circuit Breaker those industries outside of our city will be paying the same taxes as those inside. That was not the intent of the founders of the Compact. Again, the premise that they worked with was to make it as finanCially neutral as possible and yet recognize that those in industry outside of our city do not receive all the tax supported benefits. The Circuit Breaker has to be considered today. It is obvious that there needs to be a change in the formula. We then looked at various percentages, knowing what our target must be to continue to support our Great Elkhart Fund and have come to realize is that the new factor in the formula will be 500..6. That puts 3 of the 4 major cities in the region at the same level, South Bend, Goshen, and Elkhart. Mishawaka does not extend utilities unless the property is annexable. This achieves another level playing field. The current PILOT will be reduced for all who are willing to stay connected which includes those who have been our customers over the last 15 years. Collectively, all of our industrial customers outside of our city will realize an annual reduction of $787,162 with the 50% factor. The city's expected PILOT revenue will be $1,574,328 down from the 75% rate which was expected to generate $2,361,492, but sufficient to maintain our Great Elkhart Fund, supporting some very important programs. I have said over and over that any changes in the formula must be in the best interest of the owners of the Public Utility. They are the people of the City of
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So

while the Compact is not totally financially neutral, they felt it was fair to reduce the city tax

Elkhart and those industries that have chosen to locate within our boundaries. I believe what I am sending to the Common Council gives our outside the city customers the relief they are seeking and intended by the original Compact and at the same time will serve the people of Elkhart in a just and fair manner. One can never consider any issue totally closed. With downturns, upturns, possible changes in the Circuit Breaker, assessed value, etc., the City will probably revisit our program many times just as it will other policies and ordinances overtime. I do remind you the entire offering as described here is subject to Council approval.

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