Review and Comments
on the Financial Framework Agreement
between
Town of Perry and Quoddy Bay LNG, LLC
dated February 5, 2007
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I have reviewed a copy of a Financial Agreement by and between the Town of Perry and Quoddy Bay LNG, L.L.C. as well as a Summary of Financial Framework Agreement between Town of Perry and Quoddy Bay LNG, L.L.C. Save Passamaquoddy Bay has asked me to review the Financial Framework.
In reviewing the Financial Framework Agreement, I observe the following:
- The Financial Framework Agreement is, essentially, an agreement to agree. It does not take effect until a Comprehensive Agreement is negotiated and signed, and then only if a tax increment financing district (TIF) for the Facility is also established by the Town of Perry. Neither the Comprehensive Agreement nor the TIF agreements are available for review. Quoddy Bay is not obligated to any of the terms in the Financial Agreement unless and until a Comprehensive Agreement is negotiated and signed and a TIF is established. However, since the Financial Agreement states that the Comprehensive Agreement shall include the following terms and no others, the Town will not have the opportunity to reconsider if it decides the benefits are less than anticipated and/or inadequate to meet Town needs. Neither will the Town have the ability to terminate the Financial Agreement once it is approved by voters on or before April 1, 2007, although Quoddy Bay will have the right to terminate it.
- The purpose of a tax increment financing district (TIF) is as follows according to the Maine Department of Economic and Community Development, Municipal and State Tax Increment Financing Rule:
The municipal and state tax increment finance programs are designed to assist municipalities in encouraging industrial, commercial, or retail development, increasing employment opportunities, and broadening tax bases.
A TIF establishes a geographic district within which any value added to the tax base by development is set aside from the overall property value assessment, and the tax on that value (the tax increment) is used to invest in public, usually physical, infrastructure to support specific businesses and/or the economy as a whole. The tax increment may be spent by a municipality, by one or more companies in the TIF district, or by a combination of the two.
Three types of spending targets are allowed. The first is spending on economic development-related infrastructure within the TIF district. The second is spending on economic development-related infrastructure outside the district boundaries but directly related to development activities within the district. An example of this would be improvements to a municipal sewer plant to allow processing of effluent from industrial activity in the district. The third is spending by a municipality on more general efforts to improve the economy such as supporting a municipal economic development staff, creating a revolving loan fund for businesses in the community, and/or purchasing land for future projects. Every year the municipality must provide the state with a report on: 1) the extent to which public improvements and project plans outlined in the development program have been completed; 2) the extent to which debt incurred in implementing the development program has been retired; and 3) any other information specifically requested by the department. All expenditures must pass the straight face test. If any TIF funds are not expended on economic development infrastructure as specified in the TIF development program in any given year, the value of property corresponding to the unspent taxes is added back into the town's total assessed value and revenue sharing is reducing accordingly.
A TIF is not intended to be a device that allows the Town of Perry to keep the added value of the development of the LNG Terminal off the state assessed value list for the Town thereby allowing the Town to continue to receive general revenue sharing funds and education revenue sharing funds from the state that would not be received if the value of the development were not protected by a TIF. Nor is a TIF primarily intended to allow the Town of Perry to forgo payment of taxes to Washington County that would otherwise be required based on an increase in assessed value.
The discussion of the TIF in the Summary of Financial Framework Agreement between the Town of Perry and Quoddy Bay LNG, LLC (undated document) however, strongly suggests that this is exactly the basis on which it is being required. The discussion reads, with no TIF, the Town would lose an average of $860,000 per year in state education funding and revenue sharing and pay an average of $520,000 per year additional county tax.
A TIF that allocates 100% of financial benefit to a single business is very unusual, according to the State of Maine. At this point, no information is available on the TIF, its provisions, geographic scope, who benefits, and how those benefits will translate into specific infrastructural projects. According to provision (1) (a) of the Financial Agreement, Quoddy Bay shall not be entitled to any tax reimbursement under a TIF unless the Town's mil rate in any given year is high enough to cause Quoddy Bay's tax assessment to be higher than the Annual Payment amount, in which case Quoddy Bay shall be entitled to tax reimbursement under the TIF that would allow Quoddy Bay's tax payment for that year to remain at the agreement Annual Payment amount. In other words, through the Financial Agreement, the TIF is being used to set a cap on the amount of taxes Quoddy Bay will owe the Town of Perry on an annual basis.
A TIF must be allowed by the State of Maine once it is voted on by the Town of Perry. Towns must submit detailed applications for designation of state tax increment financing districts to the Maine Department of Economic and Community Development which must follow a detailed review procedure before deciding whether or not to issue a Certificate of Approval. If the Town of Perry does not structure the TIF to meet the goals for which a TIF is intended, the State of Maine may disallow it, thus making the Financial Agreement null and void.
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There is no indication in the Financial Agreement that the Town of Perry has even begun to consider how they will spend the projected annual payment from Quoddy Bay LNG. The people of Perry would be wise to insist on a comprehensive spending plan before approving any Financial Agreement. The spending plan should address all additional costs the Town of Perry will incur as a result of the Quoddy Bay LNG development, as well as address any existing deficiencies in town infrastructure and services that will affect future town budgets. The lack of such a plan may result in inappropriate spending not in the best interests of the community.
- The Financial Agreement contains no analysis of the impact of Quoddy Bay LNG on the cost of municipal government and service delivery over time in the Town of Perry. Indeed, the Financial Agreement focuses exclusively on revenues. Fiscal health is a function of the relationship of costs to revenues. To determine whether or not the Agreement is a good deal for the Town of Perry, the Town would first have to consider what expenditures it will need to add to the Town budget to responsibly accommodate the Quoddy Bay LNG project, as well as to address an existing infrastructure or service deficiencies.
Types of additional spending that will or may be required by the Town of Perry to address the impact of Quoddy Bay LNG are many and varied. The Town of Perry will require permanent 24/7 365 day a year professional staffing to ensure public safety. Additional police and professional firefighters will be needed. Current staff levels for police and fire protection services will be insufficient to insure public safety during the three year plus construction period when population will swell to many times its current size. Additional equipment for land and sea-based security and possibly expanded buildings to house this equipment will be required. All staff will require extensive training in how to handle LNG emergencies. None of these costs have been calculated at this time.
In addition, the Town of Perry should strongly consider an emergency operations center that would direct and control response functions and stock emergency kits. A local emergency operations center will need to be able to communicate effectively with responders throughout the region and in Canada. Ideally, responders should also be able to communicate directly with one another. Putting this type of communications infrastructure in place will cost money. Planning for evacuation routes and emergency transportation will also be needed and will not be easy given the geography and transportation networks in and around Perry.
Safety and security at sea is a particular issue. Given that the major facility will be located at Split Rock, it is unclear how responsibilities for safety and security at sea will be shared. Local fire and police personnel are typically required to be on duty whenever an LNG tanker is approaching, departing or at dock. This cost of this coverage has been estimated at $12,500 per shipment. If there are 65 to 141 ships per year, depending on ship size and volume of production, the cost for safety at sea alone would be $812,500 to $1.76 million per year.
Then there is the matter of town government staffing. A budget of $3.6 million per year, as stipulated in the Financial Agreement, is twice the amount of the 2006 total Town expenditures. A significantly higher budget will require greater oversight and management, particularly if it goes toward infrastructure development and maintenance as would be required by a TIF. Right now, Perry does not even have its own full-time town clerk. Revaluing of properties alone may require additional assessors. A town manager may also be required. Roads receiving higher levels of traffic will require more maintenance, especially during construction. While the Agreement speaks to capital investment in roadwork, it does not address the costs of ongoing maintenance.
Several provisions of the Agreement will require baseline information and ongoing monitoring. This is particularly true of (1)(c) Permit Conditions with respect to solid waste transfer and sewage removal, (7) Improvements to Old Eastport Road and Cannon Hill Road, (12) Impacts to Local Fishing Industry, and (13) Transfer of Licenses or Facility. For example, who will determine if the roads are adequately improved or if they are brought back to their existing condition? How will existing condition be documented and at whose expense? Who will determine if there are any negative impacts to the local fishing industry? Who will ensure safe and lawful handling of solid waste and sewage? If the Town is taking this responsibility, it will require appropriate staffing and related expenditures.
Once staffing, equipment and infrastructure are in place, the Town of Perry will need to finance and maintain them over the duration of the Agreement period and possibly beyond. Only when the full scope of Town responsibilities and related expenditures are identified can the residents thoughtfully consider the relative costs and benefits of the development and the extent to which the proffered $3.6 million per year will be sufficient to meet community needs. It is entirely possible that the mil rate will go up, not down, over time even given the additional infrastructure and services the Town will have to provide with an annual payment of $3.6 million from Quoddy Bay LNG.
An analysis for the Town of Harpswell, a community with a much larger tax base than the Town of Perry to begin with, found that as soon as the added municipal costs required to address pre-existing conditions and to accommodate the LNG development were included in the Town budget, tax rates required to support the LNG development with a TIF were higher than tax rates without the LNG development. A similar detailed analysis should be undertaken by the Town of Perry prior to signing any Financial Agreement.
- The Financial Framework Agreement assumes the anticipated development cost of the portion of the Quoddy Bay LNG development in the Town of Perry to be $250 million. If the portion of Quoddy Bay LNG development in the Town of Perry costs more than $250 million to build, the Financial Agreement and the calculations on which it is based will not accurately reflect the true value of Quoddy Bay's taxable assessment. For example, if the true cost of construction is $350 million, the Town of Perry will have forgone taxes on $100 million by signing the Agreement. It is worth noting that the $250 million estimate was originally made in 2006 and costs of construction are rising each year.
- There is nothing in the Agreement itself that specifies the annual payment will be made every years for 25 years. In fact, provision (15) Miscellaneous says, This Agreement shall terminate immediately on the occurrence of one of the following events: March 26, 2027 which is barely twenty years out, not 25. The Financial Agreement leaves the impression that the Annual Payment will be made each year for 25 years, but Section 1, which defines the terms of the annual payment, does not state the duration of those payments.
- Three provisions of the Agreement are so weak and vague as to be entirely unenforceable and essentially meaningless. Provision (10) Local Access to Natural Gas is one of these. What does it mean that Quoddy Bay will cooperate with the Town and other local communities in negotiations for local supply, etc.? How will you know if they have or have not? Just because they agree to cooperate doesn't mean the Town of Perry will receive natural gas through a pipeline.
Provision (11) Local Hiring Preference is another. The clause, to the extent feasible and consistent with applicable law relieves Quoddy Bay of any measurable obligations.
Provision (12) Impacts to Local Fishing Industry is also poorly defined. What is the local fishing industry? Does this only include people with fishing licenses who live in Perry? What is a potential negative impact and who decides whether it is caused by Quoddy Bay LNG? Who are the representatives entitled to negotiate? What if, despite negotiations, negative impacts persist? Under this provision, Quoddy Bay LNG has no obligation to financially compensate fishermen for losses.
By signing the Financial Agreement as written, the Town of Perry will forgo the opportunity to strengthen these provisions in the Comprehensive Agreement.
There is no mention of another class of businesspeople likely to suffer losses and that is people whose businesses depend wholly or in part on the tourist trade.
- Under provision (8) Cost and Fee Reimbursement Payments, only those legal and professional fees that are pre-approved by Quoddy Bay are covered. What if the Town wants a second or third opinion and Quoddy Bay does not approve? Does Quoddy Bay have the right to disapprove of the Town's selection of service providers? Required preapproval by Quoddy Bay will not allow the Town to maintain objectivity in hiring.
- The Financial Framework Agreement does not take into account the reduction in property values that will partially offset the added value of the Quoddy Bay LNG facility. In the Report on Potential Economic and Fiscal Impacts of LNG Terminals on the Whole Passamaquoddy Bay, Yellow Wood estimates that 375 properties will be adversely impacted by an LNG development at Split Rock. 113 of these properties are in the Town of Perry. Reductions in property values related to LNG development associated with the Split Rock site are estimated to be between $820,304 and $2,362.374. These losses represent not only a reduction in tax base, but a reduction in the value of assets held by affected individual property owners. There is no relief granted for these owners in the Agreement except for adjoining property holders who may have the option to sell their properties to Quoddy Bay LNG. The Agreement does not stipulate to what uses Quoddy Bay may put the properties it acquires. Other residential and commercial property owners beyond the borders of Perry will be adversely affected by Quoddy Bay LNG. There is no provision in the Agreement for compensation to them.
- The Financial Framework Agreement requires adjacent landowners to notify Quoddy Bay in writing on or before December 31, 2007 of their desire to sell their residential property. However, there is no guarantee that Quoddy Bay will have unappealable permits by that date. Therefore, property owners are being told they must agree to sell to Quoddy Bay LNG before they even know for sure whether or not the development is going to happen.
- The Financial Framework Agreement pertains only to the Town of Perry and does not address cumulative costs to surrounding towns, the region, and Canada that will result from locating a LNG facility in Perry. Not only is there no provision that obligates Quoddy Bay LNG, L.L.C. to share the benefits of the facility beyond the border of Perry, if the Town chooses to enact a TIF it will be deliberately withholding benefits that would otherwise accrue to the school district and the county.
- Although the Emergency Response Plan (ERP) impact fee payment is presented as part of the Financial Framework Agreement, its extent is expressly limited to those items required under the Energy Policy Act of 2005. The detail in the Agreement (new fire and emergency services, etc.) is not in the Energy Policy Act, and is, therefore, misleading. The Energy Policy Act of 2005 simply states in Sec 3A (e)(1), In any order authorizing an LNG terminal the Commission shall require the LNG terminal operator to develop an Emergency Response Plan. The Emergency Response Plan shall be prepared in consultation with the United States Coast Guard and State and local agencies and be approved by the Commission prior to any final approval to begin construction. The Plan shall include a cost-sharing plan.
By signing this Agreement (assuming it is superceded by a subsequent Comprehensive Agreement with similar provisions), the Town of Perry is, in essence limiting Quoddy Bay's cost sharing responsibilities with respect to Emergency Response to town-related costs, and making the Town responsible for any contributions to a larger regional effort. This is being done before any comprehensive study regarding the requirements for ensuring public safety has been undertaken, let alone completed. Since an accident can occur anywhere along the LNG tanker route as well as at the tank farm, coordination will be required beyond the Town boundaries.
The Town will be responsible for the first $300,000 of ERP expenses even if those expenses are related to the Energy Policy Act of 2005.
- There are no provisions for enforcement of the Financial Framework Agreement in the Agreement itself. Any agreement is only as good as its enforcement. What resources will the Town of Perry require to enforce this agreement or the Comprehensive Agreement that supercedes it? Will the Agreement be enforced through the courts? Through arbitration? Who will pay? Is the Town prepared to put funds aside to enforce the Agreement through arbitration or the courts if necessary? How much money should the Town of Perry put aside to ensure its ability to enforce any and all aspects of the Agreement? Is it actually legally feasible to enforce the agreement if and when Quoddy Bay is sold to someone else? If not, it will be null and void as soon as such sale occurs. The Financial Agreement could state that Quoddy Bay LNG, L.L.C. will remain liable for all payments, including the one-time contribution to the school described in provision (3), but it does not.
- The $3.6 million isn't a minimum payment as described in the Summary of Financial Framework Agreement; rather it is a MAXIMUM payment. The Agreement absolves Quoddy Bay of payment of impact fees over and above the annual payment, and of payment on property value increases that would result in taxes over and above the amount of the annual payment. The $300,000 ERP impact fee payment is included in the annual fee unless the ERP costs exceed $300,000 a year. The amount and timing of any additional ERP impact fees has yet to be specified. The only additional specified costs to Quoddy Bay are a one-time donation to the school of $1 million, a $100,000 per year contribution to a scholarship fund whose recipients must be confirmed by Quoddy Bay. There are unspecified costs associated with two time improvements to Old Eastport and Cannon Hill Roads (pre- and post-construction), reimbursement of legal and professional fees, and residential property buyouts.
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