Consideration and Adoption of Ordinance No. 2016-32:  An ordinance to enter into a Fourth Amendment to the Development Agreement  (DA) with Nestle-Purina PetCare Company (Nestle-Purina) to extend the agreement and underlying lease until October 15, 2017 (Possible extension of Development Agreement with Nestle-Purina; odor mitigation and FUTS easement).

The City entered into a Development Agreement with Nestle-Purina in 2003 to facilitate reinvestment and expansion of the company’s local presence. A D. was approved which, in essence, removed much of the company's property tax liability in exchange for commitments to expand and improve the facility. The Flagstaff plant has since grown and resulted in positive impacts to their organization and to this community's economy. Accompanying their success and increased production is the concurrent increase in the aroma from the cooking of the product. This Fourth Amendment to the Development Agreement will support Nestle Purina’s efforts to accomplish a 50% reduction in odor and will facilitate the dedication of land to the City of Flagstaff for an easement for the Flagstaff Urban Trail System (FUTS). City staff and Purina are still negotiating a proposed Fourth Amendment to the Development Agreement, to be provided prior to the Council Meeting for Council and public review.

At current rates, Nestle-Purina experiences a property tax savings of approximately $400,000 annually as a result of the DA. The DA was originally to expire in October 2015, and tax savings over the term of the DA were approximately  $924,230  less than anticipated, for several reasons, including changes in Arizona property tax laws and decline in property values during the Great Recession. As proposed, the DA now would expire in October 2017.  The property tax savings is experienced as a loss of revenue by those entities funded in part by property tax (City, county, and school district). Nestle-Purina pays a government property lease excise tax of approximately $85,000 annually.  The value of the easement being provided could be estimated at $92,000.  It is anticipated that there will be an economic benefit through enhanced development and prosperity on the eastern side of Flagstaff, but it is unknown what extent that benefit will be.

Nestle-Purina has provided the following numbers they anticipate as one time and ongoing costs for the odor reduction.  The numbers are the result of the Brown and Caldwell study which has been attached to this staff summary for consideration.  The deferment of property tax is a public contribution towards those total expenses. Nestle-Purina anticipates it will spend $1,100,000 in direct capital expenditures for odor dispersion equipment during the first two phases of the odor mitigation project.  Annual energy costs to Nestle-Purina are also anticipated to increase during that time period by approximately $272,000.  Finally, odor analysis will be conducted after each stage of implementation which, based on its cost estimates, amounts to an additional $100,000.

COUNCIL GOALS:
9) Improve the economic quality of life for Flagstaff through economic diversification, and by fostering jobs and programs that grow wages and revenues
REGIONAL PLAN:
Goal E.3. Regional economic development partners support the start up, retention, and expansion of existing business enterprises.

Council approved the first Development Agreement in 2003. The First Amendment was then approved by Council in 2008. The Second Amendment was approved in 2015, followed by a Third Amendment which was approved in 2016. The Second and Third Amendments were approved to provide time to develop an odor mitigation strategy for consideration. That strategy is this Fourth Amendment. First reading of this ordinance occurred at the August 16, 2016, Council Meeting.

Approving the Fourth Amendment provides continued property tax relief to Nestle-Purina PetCare until October 2017, and commits Nestle-Purina to reducing the odor from the plant by 50%. The odor reduction is perceived as critical to the development of the regional mall and as a community benefit. Approval also commits Nestle-Purina to dedicating right of way for a FUTS connection.

Rejecting the Fourth Amendment places all Nestle-Purina properties back onto the tax rolls as of October 2016. Regional partners would share the additional $400,000 in their funding. Nestle-Purina would not be obligated to install new equipment to minimize the odor from production at this time. ADEQ will continue to be responsible for regulating air emissions.

Nestle-Purina entered the market in 1976 and employing approximately 150 residents of Flagstaff. During the course of business operations, the company, originally Ralston Purina, was acquired by Neslte Corporation, thereby becoming Nestle-Purina. The transition brought questions about the ways that the Flagstaff plant would contribute to the global operations and there was concern that the plant could close. A closure such as that would have a significant impact on Flagstaff’s resiliency as it would reduce high paying manufacturing jobs and reduce the diversity of the economy as a whole.  The City of Flagstaff was concerned that Nestle-Purina would be closed and worked with Nestle-Purina and the Department of Commerce to retain the company.
 
The original effort was enacted through a development agreement which reduced the property tax liability for the company’s local operations in exchange for the expansion and improvement of the facility and the number of jobs in the community.  That increase in production and expansion has exceeded the amount committed to by the company and Nestle-Purina currently employs approximately 300 individuals.
 
Nestle-Purina meets regulatory thresholds for odor, as regulated by ADEQ.  Nestle-Purina has voluntarily agreed to work with the City to reduce the aroma impact and has provided the attached study at its cost to determine options.  The solutions will have both immediate costs and, for Nestle-Purina, ongoing maintenance and energy costs to operate. 

Nestle-Purina PetCare has been a long standing community partner providing over 300 Flagstaff families sustainable employment. A recent economic impact study states that NPPC provides an annual economic impact of $54 million.

Complete reduction of the odor is practically impossible if production continues. The proposed 50% reduction of  odor is expected to improve the out of doors experience for the surrounding commercial and residential areas including the regional mall.

Nestle-Purina is in compliance with odor regulations, as regulated by ADEQ . The odor mitigation plan is a voluntary effort in an attempt to work with the City to provide a public benefit. While implementing the odor mitigation plan will add costs to NPPC, the NPPC organization is aware of the plans to improve the shopping experience in the area, and views the effort as part of being a good neighbor and part of the community.

The fresh mountain air is a true amenity to the region as is the opportunity for gainful employment. Providing tax relief to NPPC in exchange for a commitment to reduce the aroma from production by a minimum of 50% while also creating a needed connection to the FUTS network bridges these two critical components of our community.  Mitigation of aromas from production will minimize the perceived negative experience that may otherwise impede the east Flagstaff area from reaching its full potential.

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