Marion — The Café Valley Deal

July 31, 2013

by FRANK STAHL

Marion, Ind. — Marion in Grant County makes a handy laboratory for examining the mix of politics, capitalism, economics and, some might say, neo-mercantilism that is municipal economic development in Indiana today.

With only about 30,000 residents, Marion is of a size that meaningful documentation can be gathered in only an afternoon. There is an innocence to official dealings here — many believe honestly and, alas, without question that mayoral and councilmanic machinations are creating wealth for a town that desperately needs some good news.

Marion officialdom does not stop at mere civic boosterism. It is unabashed and oddly fearless about the community’s recent dive into the legalistic waters of rebates, abatements and, to the issue of this journal, tax-increment finance.

All of which makes for a transparency, intentional or not, about details otherwise hidden in the files of the large Indiana law firms. The quick and the clever, you see, have found gain in channeling the combination of political fear and civic enthusiasm that is municipal economic development or, as they say, Eco-Devo. They have dispatched partners of their firms to Indiana cities to sell them on

The city of Marion, as other Indiana cities, is in the midst of financial difficulties. The most vocal and politically successful of it politicians believe their job is nothing less than to “create” jobs.

The mayor and city council reflexively squelch suggestions that Marion’s economic policy is a fallacy, that government cannot create jobs but only environments that industry and commerce find welcoming.

That is not part of the of Marion discussion — not the official one, at least. Nor is the observation that industry is averse to the type of government intervention that the leadership proposes.

Those questions were left to the city’s courageous newspaper, the Marion Chronicle-Tribune. Its staff, in editorial and in report, made clear to those seriously following the issues here that there is reason to doubt that a more appealing economic environment is being created — or at least whether the answer is  councilmen and a mayor pretending to be businessmen. Better, the newspaper advised, to simply lessen taxes and regulations.

The Chronicle-Tribune in article after article demonstrated that government, even at this basic level, has a miserable record picking winners and losers. Indeed, the serious question was raised as to whether city government can discern economic vitality whatsoever.

The newspaper argued generally and specifically that when the city government picks winners and losers it removes natural incentives and replaces them with arbitrary ones.

It was granted that prospective companies do not always make the best choice when locating. But when a governments such as those  in Marion and Grant County alter incentives it changes a company’s evaluation of risk and can remove completive restraints.

Finally, when these unnatural incentives are provided by public funding, risk is not completely internalized. Rather, it is absorbed in part by the taxpayer — thus  rendering problematic Marion’s impulse for down-home boosterism.

The Case of Café Valley

The Chronicle-Tribune provides a microcosm with which to understand all of this — a single deal between the city of Marion and Café Valley, a baked goods company. It is a near pluperfect example of what is involved when the government, not the market, decides a company is best suited for achievement.

Below is a time line made up of articles tracking the events that facilitated an officially brokered deal between Marion’s public and private interests. (Bullet points represent excerpted items from Chronicle-Tribune reports and editorials; they are reprinted here with permission.)

Jan. 27 — It begins early this year when the city of Marion announces it has a deal in the works. Jobs are says to be coming, and the city government deserves the credit. The city of Marion is proposing two deals totaling up to $26.5 million in economic development revenue bonds for a baked-goods supplier and redevelopment at the former Thomson plant.

• A public informational meeting is scheduled where city officials will present the plans to the Marion City Council. • The city’s development director, Darren Reese, declined to discuss details before the presentation in front of the city council. • As outlined in the legal notice, the loan may be repaid by “certain rental revenues,” a pledge of tax-increment revenues, the city’s “distributive share of county economic-development income taxes,” and a “special-benefits tax” by the Marion Redevelopment Commission “under a certain lease” of the project.  • The city would issue up to $12 million in taxable economic-development revenue bonds to allow the baked-goods supplier, Café Valley, to capture tax increment financing.

Jan. 30 — The headline reads, “City Serves Up Incentives.” It starts to become obvious that this is more of an endeavor than hinted at by Marion Officials a few days earlier. The financial burden to the already struggling municipality is becoming clearer.

• Officials say the company has made a commitment to repay city-issued bonds through tax revenue as the project takes off. It is says that the bonds will go toward several purposes: $4.2 million for the Growth Council to purchase the property from the current owner, Lester Lee, to buy AMVETS Post 5 and to perform demolition. • The city concedes it will have some financial exposure by planning to commit county economic-development income tax as security for the bonds. •  Reese, the city development director, says the financial institutions that will be involved in the deal did not want to split off the $2-million loan and incorporate it into the Café Valley deal through a bond refinancing. • Café Valley, then, would not be responsible for the Earthbound debt and $12.5 million of the Series A bonds would go toward the current project, with the rest being Earthbound. • To protect the city, Reese says the Series A bonds also had a built-in reserve fund and an interest arrangement that would pay for them for two years in case Café Valley does not come through:  “We may not have to pay the entire amount of the Thomson purchase until all the demolition is done. We’ll draw it down as necessary, not just all at once. We’ll minimize our exposure and minimize what our paybacks will have to be as we go.” Mayor Seybold adds that he does not believe the city is incurring long-term debt to issue the bonds: “It’s not like we go out and take a bond to build something. This is all based on the property tax and the ability of the company to pay their property taxes.” • Reese sums up by saying that the  $12-million Series B bonds are “the carrot’” for Café Valley to remain and expand in Marion.

Feb. 6 — With 26.5 million in a bond package at stake, the headline reads, “Café Valley Jumps Hurdles.” The so-called hurdles, though, seemed to be officials bending over backwards to over-subsidize the venture. 

• Development plans for Café Valley breeze through four different meetings, ending with the Marion City Council taking action that sets the stage for a public hearing on a $26.5-million bond package. • City officials say Café Valley will provide an opportunity to spark further development at the long-dormant Thomson site; they plan to purchase the entire 64-acre property through the Grant County Economic Growth Council. • The Council hears that the Thomson plant meets every requirement Café Valley sets for securing funding. • The Marion Redevelopment Commission takes a quick vote approving a plan that would ultimately allow tax-increment revenue to support the Café Valley project. • Councilwoman Joselyn Whitticker asks whether Café Valley would hire, local, minority or female employees and contractors.  •  Reese, the development director, says Café Valley is “completely responsible” for the $12-million Series B bond package: “If for some reason between now and then it doesn’t happen, we don’t purchase the Thomson facility and don’t ever give a dime to Café Valley of any money. They have to do what they do to create the money for us to recycle it back to them.” • Council passes a resolution 8-1 amending the Thomson allocation area (Fred Troxell being the dissenting vote).

 Feb. 10 — To some minds at the Chronicle, Marion is beginning to resemble Zenith, the fictional community in Sinclair Lewis’ Babbitt, a critical look at a community where boosterism and “going along to get along” are the price paid by the locally ambitious.

• The newspaper holds hope that adding accountability to the economic-development recipe might actually do the trick. • It is noted, however, that there are plenty of reasons to doubt this project, not least being that the Marion people sitting across the table from Café Valley are the same ones involved in earlier development disasters, i.e., Veriana, Marion Land Development, TriEnda, Earthbound and the seemingly perpetual prospect of a hockey arena. • As the details become more complicated, it becomes known that each bond issue in the Café Valley project has different parts funding different aspects of development of the Thomson campus and, additionally, the acquisition and redevelopment of the AMVETS property along 38th Street. • The city, we learn, is involved in delivering the bonds, and the Grant County Economic Growth Council is actually taking ownership of the property while under development.  • While Café Valley is using incentives from federal, state and local government, it will invest $22 million through traditional bank financing, says Larry Polhill, principal partner in the firm.  • The newspaper notes there is no guarantee that Café Valley will spark additional investment in the remainder of the Thomson property, bought with city money and under the control of the Growth Council. • A concluding series of questions is asked: “What if no more development comes to the site, ever? Can we figure that out together as a community what we should do or will the Growth Council, citing its private, nonprofit status, say the site and decisions about it are none of the public’s business? Vital to the ongoing project will be transparency of the sort displayed by Café Valley officials when they agreed to sit down with this newspaper last week and go through how their plans for Marion came together.”

Feb. 20 — “The Sweet Deal Turns Bitter” is the headline only 10 days later. It is clear that some on Council are pushing the project while others see the proposal as a risk that Marion cannot afford to take. 

• Frustrations run high as the City Council hosts a contentious public hearing on a development deal for Café Valley, which Mayor Wayne Seybold calls a “sweat deal.” • A principal in Café Valley reminds council members that, “We’ve always been considering other cities and states.” • City and company officials hope the Council will suspend the rules and approve two bond packages that would help acquire the Thomson property and build the new facility. •  Polhill believes some on the city council didn’t understand the deal: “I think there is a very significant lack of sophistication on the city council, if I can be that bold.” • Lucinda Caudill, Grant County Democratic Central Committee Chairwoman, says the issue isn’t whether the deal is good for Marion but whether the city can afford it if Café Valley fails; Mayor Seybold implies that Caudill has a political agenda.

Feb. 22 — Two days later, Bakery bickering continues as the mayor’s characterization of political opposition sinks in. He uses his “State of the City” address to promote the $48-million plan as a positive sign for economic development in Marion.

• Critics note that in order to sell the bonds the city has pledged economic-development income tax and its general obligations as a credit “enhancement.” That means those monies would go toward paying the bonds if revenue from property taxes is insufficient and Café Valley is unable to pay. • The newspaper adds that  “the lease is a mechanism to get the redevelopment commission’s TIF — which is the primary source of repaying the bonds — into the transaction.” Councilman Troxell says he cannot vote for the project because of the city’s financial state • Rob Young, business development manager for CME Corporation, which helped Café Valley select Marion from more than 50 locations, gives his word that the bonds will be repaid through the project’s own taxes, not the city’s. • Councilwoman Whitticker says she believes the need to complete the deal before Feb. 28 was because the city owes a payment on its Earthbound debt; City Development Director Darren Reese, however, says the city had already planned to make the $155,000 payment regardless.

Feb. 26 — Finally on February 26 the Café Valley deal was done. “Café Valley Deal OK’d,” a headline read that day. The deal is approved during a special City Council meeting over the objection of three Democrats who expressed concerns before the vote (two voting no and one abstaining). 

• City Development Director Reese says after the meeting that he is excited about moving onto the next phase of the project, which involves putting the details on paper and turning the bonds into money. • Reese says confirms that city officials were aware of Polhill’s past but had confidence in the plan: “We cannot continue to say no because we cannot continue to get ourselves in deeper than what we are. Unfortunately, we are in the position that we’re in, and it’s because we rushed into too many things.”  • About 50 members of the Marion-Grant County Chamber of Commerce attend the meeting in support of Café Valley.

March 8 — The newspaper notes that Marion is not the first such project started by the baked goods company. Its headline on reads,  “Café Valley’s Second Helping.”  In a city where promises of industry have been broken in the past, the editors urge readers to note of Café Valley’s history. 

• The newspaper reports that local officials were seemingly unaware Café Valley had planned to base its eastern U.S. operations in Spartanburg, S.C., but scrapped the project in 2011. •  Polhill, the Café Valley principal partner and board member, says the company did purchase a Spartanburg building, which was a former pie plant, but it was a lower priority than a new 285,000-square-foot facility it built and finished in Phoenix in 2011; he says Spartanburg officials were also open to development deal. • City Director of Development Reese says he was unaware that Café Valley had looked at Spartanburg; he does not see it as having a bearing on Marion, which approved local incentives for the company to build: “People buy and sell facilities all the time.”

 March 31 — “Breaking Bread, Ground” was one of the last headlines about Café Valley, whose officials expect the facility to be operational within a year and hiring a minimum 200 workers its first year.

• Amy Armstrong, Café Valley’s vice president of marketing, says Sun State Builders would do the construction. It is noted that some of the jobs will go to nearby Gas City. • City Development Director Lisa Dominisse declares the project ready to go from a financial standpoint: “All the funding is in place for Cafe Valley.” • The Marion City Council earlier approved bonds totaling up to $26.5 million for Café Valley to acquire the entire 64-acre former Thomson site. • These bond, again, are broken into two packages:  an up-to-$14.5-million Series A and an-up-to-$12-million Series B. Café Valley’s own property taxes are expected to go toward most of the Series A bonds. • Following refinancing earlier this year, the $2-million bond is said to be repaid along with the Café Valley-project bond for a total principal amount of $2.8 million, Bob Swintz, a financial adviser for the city, says.

To Date — The future of Café Valley as a corporate citizen in Marion is uncertain, critics note. What is certain is that the company is being excluded from a large portion of the risk involved in the initial investment. Thanks to TIF bonds, Café Valley is only required to pay its taxes as forgiveness for what amounts to a loan. Who will pay down the loan if the company moves out? In sum, economic development is as economic development does. Success is more certain when decisions are made based on sound and natural risk evaluations. The official policies of Marion, Indiana, go against this wisdom. We will see in the coming months and years if that proves prudent.



Comments...

  • granny says:

    This the first of these bond deals forced on the citizens of Marion by our mayor. He has done it twice before. The first one to a Chinese company who was supposed to build a furniture factory that would bring jobs to Marion. They did not locate here and we are on the hook for several million dollars in bond money on that one. The other was a Korean business man who,if i remember correctly, was supposed to relocate his corporate headquarters here. That also never happened and we are on the hook for millions more in unpaid bonds. Cafe Valley’s parent corporation was in federal bankruptcy court when this deal was done. Our citizenry is going to be paying for empty promises for the next 20 years at least. I wonder who is getting rich off these deals. It certainly isn’t the taxpayers of Marion.

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