For the past seven years, a payment-in-lieu-of-taxes deal actually cost New York Air Brake more than it would have paid in property taxes without the agreement — to the tune of $183,726.
And a proposed amendment to the deal will mean Jefferson County, the city of Watertown and the Watertown City School District will receive less money than they've relied on from the company.
The tax problem, which Air Brake discovered last year, is blamed on an outdated formula for the PILOT approved in 1995 by the three taxing jurisdictions to help the company complete a $9.7 million capital project at the facility at 748 Starbuck Ave.
The county, city and school district have cashed in on the snafu since 2006, collecting more from Air Brake than they would have if the property were on the tax roll. The county has received an extra $54,411, the city $56,516 and the school district $72,799.
To fix the problem, the Jefferson County Industrial Development Agency will ask localities that approved the 20-year PILOT to amend its language. If approved, Air Brake would make payments based on the 2013 property value of $2,876,000 — a little more than half of what it was when the PILOT was approved.
With lower payments from Air Brake, the three taxing units could be forced to make up the drop in revenue by raising taxes or cutting expenses. And even if municipal boards reject the amendment, the company can still cancel the PILOT and payments will drop the same amount.
Assuming 2012 tax rates stay the same, in 2013 Air Brake's payment to the county would decrease $11,044 from $31,796 to $20,752, the city's payment would decrease $11,036 from $31,775 to $20,739 and the school district's would decrease $15,240 from $43,878 to $28,638.
The problem with the PILOT stems from the $5,223,168 assessment of Air Brake's property when the plan was formed. That assessment was fixed for the 20-year life of the PILOT, and planners failed to account for the chance the property would be worth considerably less in future years.
That's what happened in 2006, however, when city Assessor Brian S. Phelps conducted a property revaluation; the facility's assessed property value dropped from $5,223,168 to $2,771,500, based on market prices for light industrial buildings.
As a result, Air Brake's PILOT payment was higher than its tax bill would have been. Company officials didn't become aware of the situation until last winter, when they contacted Mr. Phelps to find a solution to the problem. Mr. Phelps said he was surprised to discover the PILOT included an odd formula that doesn't resemble agreements made today.
Payments are “based entirely on an agreement that doesn't have anything to do with what the property is valued at today,” he said. “I advised the company to take the property off the tax-exempt roll with the PILOT and to start paying full taxes right now.”
Though Air Brake has the authority to cancel the PILOT, the company has decided it would rather amend it, said company President Michael J. Hawthorne. Legal counsel advised the company to alter the PILOT, he said, but did not offer an explanation.
“The intent of this program was for New York Air Brake to add jobs to the area, but we recently determined that we are disadvantaged by this,” Mr. Hawthorne said. “We could opt out of the PILOT and pay less taxes, so we decided it makes sense for us to amend the PILOT. We will continue to work through whatever changes are needed to get this right.”
Donald C. Alexander, JCIDA chief executive officer, said the agency is trying to get the amended PILOT approved so it takes effect in 2013. If the amendment is approved, Air Brake will continue making payments through 2015 before the property is placed back on the tax roll.
“It turns out the original assessment for the property was highly overrated — substantially more than its real property value today,” Mr. Alexander said. “Air Brake could have canceled the PILOT, which is allowed under its terms, but they're trying to maintain a relationship with the JCIDA” by amending it.
The PILOT agreement made an assumption the property value would remain the same — if not increase — in the following 20 years. The company has gradually increased its payments to taxing entities over the life of the agreement. Under the formula, payments made to taxing jurisdictions are based on a property assessment that climbs every five years: by 25 percent of $3.2 million from 2001 to 2005, 50 percent from 2006 to 2010 and 75 percent from 2011 to 2015. Added to that portion of the formula for each year is the $1,956,168 fixed amount the building was worth before the capital project.
“The big difference comes from the original assessment made,” Mr. Phelps said. “Adding $3.2 million in value to this equation is a bold assumption because this is a 100-year-old building. It looks like a nice building, but the market value of it today is much lower because it's less modern. The building has a very low ceiling, for example, and a modern building would need at least six to eight more feet of clearance.”
JCIDA board members want to approve the amended deal with municipalities by today, which is the deadline for Air Brake to make the first of three payments this year under the PILOT agreement without incurring a late penalty.
Despite that request, the Watertown City Council took no action Monday. Council members did not believe the deadline was real, so they agreed to wait until JCIDA provided the city attorney's office with the actual agreement.
“There's no magic deadline on it,” said Councilwoman Roxanne M. Burns. “They're just trying to hold your feet to the fire.”