(from Maine Townsman, February
by Joan Fortin & Lee Bragg, attorneys with Bernstein, Shur, Sawyer & Nelson
A pall hangs over the air in and around the towns of Millinocket and East Millinocket these days. On January 9, 2003, Great Northern Paper, Inc. (GNP) - the lifeblood of both towns - filed for Chapter 11 bankruptcy, leaving its approximately 1,100 employees out of work. Not only will a surge of unemployed mill workers place a strain on social services, the outfall of the situation will also seriously impact the ability of these municipalities to raise revenues.
In 2002, GNP made up 71% of the tax base of East Millinocket, and 54% of the tax base of Millinocket. To date, none of GNP's 2002 taxes have been paid to either town ($3.4 million in East Millinocket and $4.4 million in Millinocket). Both towns now face the unenviable challenge of providing necessary municipal services with less money, in uncertain times, and with an unstable tax base.
For East Millinocket, January 9, 2003, brought other news: the State Board of Property Tax Review issued its written decision in GNP's tax abatement appeal regarding its 1999 taxes. The State Board awarded GNP an abatement of $33.37 million, resulting in a $557,329 tax refund at approximately 8% interest per year. Based on the town's original assessment, GNP made up approximately 82% of the tax base of East Millinocket in 1999. With the abatement awarded by the State Board, GNP's percentage of the tax base dropped to 75%. Even with this reduction, GNP still has the dominant position in the town's tax base, meaning it will fund the most significant part of any refund paid (approximately $417,996).
GNP's contest of its property taxes has been ongoing for some time. Georgia Pacific Corp., owner of the mills after the hostile takeover in 1989, and Bowater Inc., after its purchase of the mills from Georgia Pacific a few years later, both engaged in the abatement process but neither owner took the dispute past the local level as did the current owners who commenced and continued assessment appeals to the State Board for tax years 1999 through 2001.
It has not yet been determined what effect, if any, GNP's bankruptcy will have on those disputes and the future assessment of the two mills, as well as other properties in the towns. With the recent news that on February 11 Belgravia Paper Co. Inc. submitted a $91 million bid for bankrupt GNP, both towns are hopeful that they won't face the prospect of idle and nonproductive mills, though that prospect remains a possibility.
Current Impact of GNP's Bankruptcy
Without 2002 tax payments from their largest taxpayer, Millinocket and East Millinocket have been forced to batten down the hatches and prepare to ride out the financial storm.
East Millinocket, with a population of approximately 1,800, appears to be the hardest hit. The town recently laid off three full-time workers and three fill-in and part-time employees. The hours at the town office have been reduced from 40 to 32 hours per week, resulting in a 20% pay cut across the board for the administrative staff. The town is trying to avoid drawing off its tax anticipation note as long as possible for fear that it won't have funds to pay back the loan. The town is limiting overtime of municipal employees, delaying unnecessary spending, and closely re-examining the municipal budget, which is expected to undergo significant cuts.
The town also moved its Annual Town Meeting forward a month (from May 20 to June 24) to allow more time to work on difficult budget issues, and hopefully to allow enough time for a sale of GNP to take place.
The School Committee too has jumped to the challenge presented by GNP's bankruptcy and recently sheared $175,000 out of the current school budget.
In a heartwarming effort to contribute to the common cause, retired school teacher Andy Hopkins stood up at a recent School Committee meeting and volunteered to give up his retirement pay for February 2003 and called upon his fellow retirees to do the same. East Millinocket Treasurer Beverly MacLeod, says the town has already received Mr. Hopkins' returned check uncashed.
Millinocket, with a population of approximately 5,000 and a slightly broader tax base, has thus far been spared the need to lay off employees or reduce the hours of municipal operations. Nevertheless, town officials here are also reducing expenditures, and taking other steps in an attempt to avert the cash flow problem that is expected to hit in June.
GNP's bankruptcy has also required both towns to take a fresh look at an idea that has been batted around in the past - consolidation of municipal services. Millinocket, East Millinocket, Medway and Woodville are currently discussing the feasibility and extent of consolidating municipal services. The towns have formed subcommittees to examine police, fire and ambulance, public works and solid waste treatment, recreation, and administrative services. Unlike prior discussions about possible consolidation of services, this time the towns have charged each of the subcommittees with developing a concrete plan, including staffing and budget needs, to be presented to the municipal officials for consideration. An off-shoot of this effort is a separate initiative, already underway, to review, among other options, possible consolidation of the Millinocket school system with the already consolidated schools of East Millinocket, Medway and Woodville.
Clearly, a prolonged bankruptcy proceeding, or worse, a distribution of GNP's assets to its individual creditors would have a devastating impact in the Millinockets' ability to generate the revenues necessary to provide municipal services. Even with a relatively quick sale to another company willing and able to operate the mills, however, the current situation and the likelihood of a reduced workforce at the re-opened mills will undoubtedly have some impact on future assessments in both towns.
Recent Assessment Disputes with GNP
From Millinocket Town Manager Eugene Conlogue's perspective, Millinocket and GNP have had a "rocky" history since 1986, when the company announced that it would be laying off a significant number of employees. The company, at the time employing 3,600 employees, announced plans to eliminate 1,200-1,400 jobs. In the ensuing years, tensions calmed a bit and GNP's owners began to work with the two towns more along the lines of how they might treat a vendor - keeping an aggressive eye toward any opportunity for cost cutting. As a result, GNP's owners since that time, Georgia-Pacific Corp., Bowater, Inc., and now Inexcon of Maine, Inc., all aggressively pursued requests for tax abatements, typically seeking abatements in the millions of dollars simultaneously from both towns. Of these recent owners, however, only Inexcon took its appeals beyond the local level.
The most recent tax abatement dispute stemmed indirectly from Bowater's 1995 abatement request, which resulted in both towns entering into separate agreements with GNP to conduct joint valuations of the respective mills. When that arrangement unraveled, Bowater again began pursing abatements in both towns. While ultimately ending up in very different places, Millinocket and East Millinocket both began the process of litigating their disputes with GNP then attempted to use tax increment financing (TIF) deals to resolve the ongoing tax disputes, encourage investment in the mills, and minimize the potential for future tax abatement requests.
East Millinocket entered into a TIF with GNP, then owned by Bowater, in 1998, which would return to the company 100% of the taxes it would pay on a $250 million capital improvement project to modernize the East Millinocket mill. Instead of making this investment, Bowater instead ended up selling the mills to Inexcon.
Inexcon did not continue with the program to make the capital investments that were the foundation for the TIF so it sat dormant while GNP's new owner filed for an abatement of its 1999 taxes. That tax dispute was hotly contested for 22 days of hearings before the State Board during the summer and fall of 2001 and the winter of 2002, ultimately resulting in the State Board's January 2003 decision that East Millinocket must abate the assessed value the town assigned to the mill's machinery and equipment for the 1999 tax year.
The State Board determined that an abatement of $33,373,000 of the $160 million value the town had assigned to the mill's machinery and equipment was warranted. East Millinocket appealed that decision to the Superior Court, and that appeal is pending. Meanwhile, GNP filed for abatements of its 2000 and 2001 taxes as well.
In Millinocket, GNP had filed tax abatement requests for both 1998 and 1999. The dispute over the 1998 taxes was already scheduled to be heard by the State Board when GNP and Millinocket agreed to a TIF deal that would return to GNP 85% of the taxes it paid to Millinocket on a $170 million capital improvement project for a period of 12 years. Unlike the TIF in East Millinocket, however, GNP did undertake the planned capital improvement project, spending approximately $150 million to rebuild paper machine No. 11 and upgrade it to among the top machines in the world capable of producing supercalendar-ed paper. For Millinocket, an additional benefit of the TIF is that, except under limited circumstances, the agreement bars GNP from seeking a tax abatement during the life of the 17-year TIF.
All of the efforts both parties have expended to resolve these tax disputes, however, have been called into question by GNP's bankruptcy.
Millinocket has not yet analyzed whether its current TIF can be transferred to another owner - assuming that GNP will be purchased in the coming months - which means Millinocket could face tax abatement requests from the new owner of the Millinocket mill.
Concerning the East Millinocket appeal, on February 7, 2003, Superior Court Justice Donald Marden ruled that East Millinocket's appeal of the State Board decision cannot proceed for now, as it is subject to the automatic stay provisions of the U.S. Bankruptcy Code.
Depending on what happens with GNP's bankruptcy and East Millinocket's appeal, GNP's taxes for 1999, 2000, and 2001 could all remain at play for some time. Moreover, if a sale of GNP is not consummated by the April 21, 2003 deadline imposed by U. S. Bankruptcy Judge Louis Kornreich, the appeals could become moot if GNP's assets end up being sold piecemeal to satisfy the approximately $100 million debt GNP owes to its more than 1,000 creditors.
Looking forward, Millinocket and East Millinocket will soon be confronted with the question of what is the "just value" of the two mills for tax purposes. The towns' assessors will also be confronted with the complicated problem of trying to determine the best method or combination of valuation and appraisal methods for arriving at a fair estimation of the mills' "just value." Both issues - the "just value" and the method used to arrive at the "just value" - will depend in significant part on whether and how GNP is purchased, exactly what operations will continue at the mills and how the regional, national and international markets receive the mills' future operations and products, among other issues.
If GNP is purchased and the mills start up again, these issues could present likely areas for future disagreement on the mills' valuations if the towns and the new owner are not able to develop a sense of common purpose and positive working relationship.
The sentiment expressed by Millinocket Town Manager Eugene Conlogue bodes well for a positive start, Conlogue has declared that his "number one goal is to get GNP up and running again - everything else is secondary."
Mary Morris, administrative assistant to the board of selectmen in East Millinocket, also feels that a sale and restart of both of GNP's facilities "is in everybody's best interest."
Despite the towns' strong desire to see the mills purchased and re-opened, questions related to how the facilities will be valued for tax purposes remain. William Van Tuinen, assessors' agent to the board of assessors in East Millinocket, feels that it's too early to determine how GNP's bankruptcy will affect both residential and commercial assessments in East Millinocket for the coming tax year.
In Maine, "tax assessors are under both a constitutional and statutory obligation to determine the 'just value' of taxable property. 'Just value' is the equivalent of 'market value.'" Shawmut Inn v. Inhabitants of Town of Kennebunkport, 428 A.2d 384, 389 (Me. 1981).
In terms of future valuations of the GNP's property, the current bankruptcy proceedings raise several questions that remain unanswered for the time being. While the Maine Law Court has recognized that a foreclosure sale is not necessarily determinative of a property's "just value," [see Citizens Savings Bank v. Howland Corporation, 1998 ME 4, 6, 704 A.2d 381, 383; McCullough v. Town of Sanford, 687 A.2d 629, 631 (Me. 1996)], it is still an open question how a state or federal court might view a bankruptcy sale's effect on a property's "just value."
Under normal conditions with income producing properties, such as GNP's mills, assessment methodologies attempt to recognize that "just value" is tied to the owner's investment in the "sticks and bricks and nuts and bolts" that comprise the property, what other similar properties have sold for and the property's long term ability to produce income for its owners. Indeed, the Law Court expects municipal assessors to recognize that the value of fixed assets, such as real estate, are "fairly constant and must be gauged by conditions, not temporary and extraordinary, but by those which over a period of time will be regarded as measurably stable." Shawmut Inn, 428 A.2d at 390.
According to Robert Crawford, Esq., one of the attorneys representing East Millinocket in the recent tax appeal before the State Board, applying these principles to complex industrial properties is all the more complicated because most paper manufacturing plants are older facilities that have been upgraded and added to significantly over time, because the facilities are highly specialized and therefore not easily comparable, because there are few sales and because it is very difficult with any precision to forecast future markets and market conditions or the ability of management to capitalize on such trends. In the instant case, however, these principles ultimately may play a small role - or no role at all - in the ultimate determination of the "just value" of GNP's properties in Millinocket and East Millinocket.
GNP's assessments are not the only assessments potentially at play for the coming tax year. The assessments of other commercial and residential properties in and around the Millinockets may well feel the impact of GNP's troubled times. Clearly if the mills are not re-opened, the values of residential homes in and around the two towns could plummet. Even if the mills are re-opened, however, real estate values will likely reflect the extent to which the new owner of the mills retains or cuts current employment levels. Recognizing these types of uncertainties, East Millinocket is already considering conducting a town-wide revaluation in the coming year.
Despite what could be considered a gloomy outlook for the region, Morris and Conlogue remain encouraged by the presence of potential purchasers of the mills and by the existence of at least one formal bid for GNP. Morris recognizes that the future is going to be different from the past in East Millinocket, especially with technology continuing to replace workers at the mill. Nevertheless, Morris expects "a few years of struggle and then a positive outcome in the end." Economic development will continue to be a focus as both towns prepare to move ahead. Both towns have been working with the Millinocket Area Growth Investment Council (MAGIC) in an effort to diversify their tax base, and both towns are, among other things, considering the use of TIFs to encourage economic development in the towns.