BUSINESS

Carmel robbed roads, maintenance funds as development costs mounted

Chris Sikich
chris.sikich@indystar.com


CARMEL – Struggling to pay both debt and ongoing costs associated with one of the nation's most sustained suburban building booms, Carmel has systemically been reaching for money or limiting budgets intended for city services.

An Indianapolis Star review of budget documents reveals that in the last five years the city has slashed funding meant to repair and repave crumbling roads, diverted money intended to pay for sewer work, and delayed plans to extend Illinois Street and fix public amenities such as the reflecting pool at City Center.

"We, on the council, call it a shell game," said Councilman Rick Sharp. "The city is moving money from one area to pay for another and at the same time saying there has been no tax increase."

Carmel, though, is only about halfway through the massive redevelopment of its urban core. And now, 16 years into the reconstruction, Mayor Jim Brainard needs even more money, and the council's help to move forward.

For the first time, Brainard will ask the council to pass potentially tens of millions in bonds backed by the full faith of the city for use by a private developer. He believes commercial property taxes paid over time and other financial guarantees from the developer will cover the expenses. If those funds fall short, however, property taxes ultimately will back the bonds.

Carmel-based Pedcor, the city's main redevelopment partner, is asking for the bonds to build a parking garage and other infrastructure for a $100 million continuation of City Center. And, to the north, Old Town Development is considering a similar financing proposal to build a parking garage and public plaza in a $150 million project at Midtown.

The new development boom would have the usual Carmel flourish. The last wave brought the Romanesque Palladium. The new wave would bring an architectural nod to Rome's famed Spanish Steps — a $500,000 flower-laden decorative staircase at City Center.

Brainard wants to complete the vision he started so many years ago.

"We have made tremendous progress in Carmel building a walkable, bicycle friendly, urban core," Brainard said. "But we have yet to finish it."

Approval may not come easily.

Related content: 5 takeaways from Mayor Brainard's State of the City.

Building up civic debt

The cash-strapped redevelopment commission's debt load is a continuing concern for the mayor's critics on the council and, they say, reason to move forward cautiously with development projects.

Since Brainard began redeveloping Carmel in 1998, the mayor-controlled board has been charged with collecting commercial property tax dollars to fund and manage the city's redevelopment.

But now the commission's finances are so tight it's going to unusual lengths to generate income.

Consider this: On Oct. 1, the commission agreed to sell the former Shapiro's Delicatessen building for $2.1 million to Pedcor, about $400,000 less than it had spent to purchase the building just three years earlier.

The commission needed cash, and fast: $1 million to pay development costs this year, such as adding greenscapes at redevelopment sites.

More land sales could come next year, said executive director Corrie Meyer, if Carmel decides to keep building.

The other $1.1 million from the sale of the Shapiro's building will reduce debt obligations.

Debt has been a debate in Carmel since the City Council backed most of the commission's debt in 2012 with property taxes. On the verge of insolvency, the commission no longer could pay its debt without the bailout. The council's backing allowed it to refinance at lower interest rates, saving $55 million over time.

And now, even as it prepares for another round of expensive development, the commission is going to great lengths to avoid tapping those property taxes.

There's cause for concern. The commission's tax-increment financing districts will fall $43 million short of paying the $486 million it owes through 2037, according to Umbaugh, the group's financial adviser.

So the commission, with the Council's approval, diverted money from two other taxing districts — collectively called Parkwood — to pay back debt.

The Parkwood tax districts were created to pay for projects in an entirely different part of the city — in a Duke development at 96th Street and College Avenue. The work long-ago completed and now paid off, the city could have closed both districts. That move would have lowered taxes throughout Carmel. Instead, the money is being spent to pay for development outside the districts.

But diverting that money won't be enough to pay back the commission's debt. Umbaugh estimates the commission would still fall $9 million short of its debt obligations through 2037 without additional funding.

And so the redevelopment commission is using income from three other sources to pay back the obligations. That includes $200,000 annually in rent payments from the Civic Theatre, $400,000 annually in grants from the Carmel City Center Community Development Corp. and about $1.1 million the city annually pays the commission for utility bills.

When accounting for all of those sources of income, Umbaugh reports, the commission will have a $27 million surplus in 2037.

Brainard is confident the financial structure is sound and the city can begin rebuilding again after a two-year pause. Council members aren't so certain.

Ongoing costs

The council is concerned that redevelopment costs have increasingly been shifted from the redevelopment commission to taxpayers.

Since 2010, the city has funded an annual grant — $2.5 million this year — for operations at the art center. Since 2013, the city has funded more than $2 million annually to pay for maintenance and operations at properties owned by the redevelopment commission.

Related story: Palladium shifts costs to taxpayers.

At the same time:

• The city slashed its annual road funding budget from $3 million in 2010 to $383,000 in 2011 and $800,000 in 2012.

• The council and mayor stopped collecting money in the cumulative capital sewer fund five years ago. The fund is intended to pay for sewer projects. But in 2009, the city began diverting roughly $1 million annually from the sewer fund to pay the bills in the city's general fund.

• In November, the city will create a stormwater utility to pay for storm sewer projects and services, and plans to charge residents $60 annually. Businesses will pay more, with fees structured according to property size.

• Officials have delayed the completion of Illinois Street, a local alternate to U.S. 31, they once hoped would be finished before the highway's closure this year. They needed $5.1 million.

• Officials have delayed the repair of City Center's reflecting pool, where concrete and other materials have been crumbling.

• Officials have used savings accounts to pay for projects. The council approved $220,000 from the Rainy Day Fund to pay for a study of flooding in the Johnson housing addition west of Old Town. Why? The engineering department's annual budget, generally about $1 million, has paid little more than salaries for the past 10 years.

Council finance chair Luci Snyder said residents, over the past several years, have noticed city services have been underfunded.

"When we are shorting funding for some of those basic services to perhaps fund newer and more glamorous projects," she said, "it can only go on for a year or two before the cracks in the system are noticed."

Brainard, though, blames the economy, which slowed growth in the commission's tax-increment financing districts. Revenues in the city's general fund continued to grow, but not as quickly as the mayor anticipated.

Building permit revenue decreased 46 percent — about $1 million annually — and income-tax revenue decreased 9 percent — about $2.2 million annually.

The mayor believes Carmel weathered the economic downturn better than most cities.

"We managed to get through the recession without laying off one employee and without raising taxes," he said.

And now that times are improving, he said, the city is catching up.

He's budgeted $4 million for road repairs next year. He asked the council to approve a bond this summer to pay for Illinois Street, a project that should be complete by spring. And, he told The Star Thursday, he's submitted a funding plan for about $800,000 for the council to fix the reflecting pool.

The projects

Brainard believes the new projects will spur economic growth, further broadening the tax base and lowering taxes. But perhaps more importantly to the mayor, he wants Carmel to thrive as a destination.

The redevelopment plans are bold.

• Pedcor's proposal includes 10 new buildings with about 575,000 square feet of retail, restaurants, offices, apartments and condos in a $100 million project at City Center.

• Old Town Development wants to build 270 flats and condos, more than 200,000 square feet of office space, and more than 85,000 square feet of commercial and retail space in a $150 million project in Midtown.

The two developers are negotiating funding plans for infrastructure with the redevelopment commission. They want the city to provide incentives for parking garages, roads, sidewalks and public amenities — the Spanish Steps at City Center and a public square at Midtown.

Pedcor is positioned to ask for as much as $17 million. Old town hasn't made a formal proposal yet. If the projects are backed by property taxes, the developers could negotiate lower interest rates.

The council plans to take its time to analyze both deals.

Council president Eric Seidensticker said the majority of council members are generally supportive of both projects. But he's not sure the city can afford more debt — or the risk to taxpayers.

"The real crux of the matter is who is going to be paying for what," Seidensticker said. "If the redevelopment commission had not gotten themselves in financial difficulty over the years, we would be in a much better position to help."

Some council members, such as the council's finance chair, Snyder, wonder why, more than a decade into Carmel's massive redevelopment, developers can't pay their own way. It's become frustrating, she said.

"We're the idiot partner," Snyder said, "that keeps giving away our future revenues."

Moving forward

Despite the council's misgivings, Brainard believes both projects are affordable.

"The economy is good," Brainard said. "Developers are willing to invest. Lenders are willing to lend. We'd like to see the areas completed."

Any development, the mayor says, comes with a public cost. New neighborhoods and developments on the outskirt of town, he says, cost cities like Carmel millions of dollars to extend roads, provide parks, hire police officers and firefighters, build public safety buildings and buy safety equipment.

Urban redevelopment projects, Brainard argues, provide the better public value for taxpayers: Multiple-story structures in the urban core net more tax revenue than single-story structures in the 'burbs. The city services already exist in the urban core. The city, he said, needs only to provide the infrastructure.

"There is a cost to all development to the taxpayer," Brainard said. "In redevelopment that money is generally redirected into parking structures."

Pedcor plans to finalize a proposal for the Council by November. Old Town Development also is finalizing plans.

Ultimately, the details of each proposal could dictate whether Carmel moves forward.

Call Star reporter Chris Sikich at (317) 444-6036. Follow him on Twitter: @ChrisSikich.