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March 28, 2000

IPSCO's $10 Million Signature Loan

by Bill Patterson

Property taxes in Mobile County are so low they draw national attention. Places Rated Almanac highlighted Mobile County's "extremely low" rate, pointing out the county's rate is only nine percent of rates on Long Island, the metropolitan area with the highest property taxes. Many Mobilians argue low property taxes are a good thing, and local voters have consistently rejected referendums that would raise local taxes. Last year voters overwhelmingly defeated a property tax increase to benefit the public schools.

But some local leaders and educators want higher taxes. They argue inadequate funding for public schools and municipal services hurts economic development. When these leaders speculate on why voters consistently reject higher taxes, they might ponder the consequences of special treatment given big corporations by local government. Perhaps voters wonder why they should pay when big companies don't.

Another example of this special treatment is about to be given to IPSCO, the Canadian steel maker building a mill in north Mobile County. The company has already been given, in 1999, land, roads, water and sewer service, property tax exemptions and approval for exemptions from state income taxes. These benefits will be worth over $60 million. In the latest deal, the county intends to issue tax-exempt Solid Waste Disposal bonds to raise $10 million for IPSCO. To do this, the County Commissioners will have to change the structure of the twenty- year old Mobile County Industrial Development Board.

Alabama enacted its first major industrial recruiting legislation, the Cater Act, in 1949. The Cater Act, and its benefits for industry, remained largely unchanged for four decades. The law allowed local governments to create Industrial Development Boards with authority to issue tax-exempt industrial development bonds and to grant tax exemptions. These boards sold municipal bonds, used the proceeds to construct manufacturing plants, and leased the plants to their client companies. Local government, through an industrial development board, became the landlord of the industrial property. The board charged a rent to cover costs and the repayment of the bonds. Ownership of the property by a public board exempted the property from ad valorem taxes.

Industrial Development Boards have existed in Mobile County since 1962, when the city of Mobile approved the City IDB. Nearly two decades later, in 1981, the county approved the Mobile County IDB under the 1977 law authorizing county industrial development boards. This is the law under which the Mobile County IDB still operates. The current Board members are Danny Price, Retired General Gary Cooper, and James Mostellar.

A Creative New Deal for IPSCO

Alabama's legislature worked hard during the 1990s to find new ways to grant incentives for industry. Under the Cater Act, property-tax breaks were tied to the board holding title to the property. This requirement for board ownership ended with Alabama's Tax Incentive Reform Act of 1992. The 1992 act allows city and county governments themselves, or the industrial development boards or county authorities they approve, to abate property taxes and other taxes without a lease. The 1992 act requires payment of school taxes.

At the urging of IPSCO, Mobile County will transform the Mobile County IDB to an Industrial Development Authority, abandoning what IPSCO's attorney, John Andrews, termed "the fiction" of pubic ownership of industrial property. In a February 25 letter to Mobile County IDB attorney Maury Friedlander, Andrews explained the advantages to IPSCO of an Authority over a Board. Andrews wrote: "The principal reason IPSCO would like to work through an authority as opposed to a board is because of the difficulty of financing its particular project through a lease as opposed to a loan." In 1989 the legislature passed a law that allowed counties to set up county industrial development authorities.

Andrews listed the main benefits to IPSCO from an authority structure as opposed to a board. Bonds issued by an authority do not have to be filed with the State of Alabama's Securities and Exchange Commission. Also, an authority structure would help industrial recruiters to get more benefits for their industrial clients, "including the right to receive grants directly from cities and counties." Finally, and "most importantly as far as IPSCO is concerned," Andrews pointed out, an authority would have "the power to loan bond proceeds to a user [IPSCO] as opposed to having to go through the fiction of owning a project, leasing it to the user and giving the user an option to buy for a nominal sum." The Alabama legislature made such a loan possible when it amended the industrial development authority legislation in 1999.

Under what its attorney calls "the loan scenario," IPSCO wants the county to issue $10 million in tax-exempt Solid Waste Disposal bonds because "only property qualifying as used for solid waste disposal may be financed tax exempt under the current situation." IPSCO claims it qualifies as a recycler because one of its raw materials is used steel. But only equipment that actually disposes of solid waste qualifies for Solid Waste bond financing, causing a problem for the steel maker because, according to its attorney, "no single piece of equipment provides solid waste disposal in this particular project." If IPSCO were to borrow $10 million with bonds sold by an IDB, it would "require title to the entire mill to be placed in the name of the Board." The mill will be worth $400 million. Andrews wrote that IPSCO "is not inclined to deed the entire project to the Board just because it is impossible to pull out a separate $10 million piece of equipment." So the company has insisted the County Commission and the Mobile County IDB must create a county industrial authority.

When IDBs issued bonds to raise money for projects, the bond buyers were protected because the board held the deed to the industrial property. What does IPSCO intend to offer as security on its $10 million loan? Maury Friedlander told The Harbinger: "It's between the bank or lender and the company as to what the security is. It might be a letter of credit or, just as when a person has good credit, similar to a signature loan." Asked if the Mobile County IDB had voted to reincorporate as an Authority, Friedlander told The Harbinger the Board approved the change on March 20. "The Board agreed to it and felt it was the thing to do." He believes the County Commissioners would authorize the change at their next meeting.

Authorís note: Margie Welch helped with research on this article.

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