Does Carmel Have A Spending Problem?

Tim Hannon wanted answers.

The freshman Carmel city councillor had just discovered that Hotel Carmichael, Carmel’s 122-room luxury hotel slated to open next month, was more than $18 million over budget. It was the latest cost overrun for a city-subsidized project that, at $58.5 million, was now 46 percent over its original estimate. As he walked into his third Carmel City Council meeting at City Hall on a Monday evening in February, another surprise awaited him. Henry Mestetsky, the executive director of the Carmel Redevelopment Commission who reports to Mayor Jim Brainard, revealed that the commission had known about the cost overrun for about a year—yet Mestetsky had continued to list the lower figure in his monthly reports to the council.

Hannon was taken aback. Is this how things work here? he thought. I have to find out about the city’s finances from reporters?

Mestetsky said the CRC hadn’t disclosed the higher estimate, which he blamed on increased construction costs and labor shortages, because the commission wanted to wait until it was certain the increase was necessary. And its decision to fund the extra expenses without notifying the council, he said, was perfectly legal. “Yes, I should update the numbers in the packet,” he said. “[But] we wanted the update to happen when we could say with absolute certainty that there’s not going to be a dollar more spent.”

Hannon wasn’t the only person on the council who felt blindsided. Councillor Tony Green, who voted against the project in 2017, addressed Mestetsky directly. “You gave the perception to council members each month that we were staying the course,” he said. “The lack of transparency and oversight over the CRC has got to change.”

Mestetsky told the council that consultants couldn’t be held accountable for what he called a “nationwide construction boom.” But regardless of who is to blame, Hannon insisted the commission shouldn’t have kept the budget increase a secret. “How could you have access to $12 million to $15 million in funds and never come to the council for any sort of approvals or notifications?” he said.

“You gave the perception to council members each month that we were staying the course. The lack of transparency and oversight over the CRC has got to change.”

Hotel Carmichael is just the latest expensive project contributing to Carmel’s ballooning debt under Brainard. Critics say Carmel’s $1.3 billion in outstanding credit—the third-highest of any city in Indiana in 2019—is absurdly high for a place with less than 100,000 residents. Almost 20 percent of its annual budget is spent paying back bonds and other liabilities. Several new projects in the next few years, including more roundabouts and the redevelopment of the Hamilton Crossing retail center, will only further inflate that figure.

Brainard has argued for years that spending is necessary for growth, and that debt, accrued smartly, is a tool rather than something to be feared. He has no plans to change course as the wave of new construction gets underway. Economic and public policy experts remain divided over whether that’s a sensible strategy. But in Carmel, it’s increasingly clear that the amount of spending may be only part of the problem. What really infuriates Brainard’s most vocal critics is the opaque way in which his administration goes about doing it.

When Carmel’s longest-serving mayor took office 24 years ago, he ran on a platform of reversing the city’s poor spending habits—a position that now seems ironic. But Brainard wasn’t opposed to spending as a rule. Instead of copying the blueprint for urban sprawl, he proposed investing in green space, parks, and cultivating a new downtown.

Brainard turned Carmel’s dilapidated Old Town into a thriving area, one reminiscent of a dense, walkable European cityscape. He extended the Monon Trail and increased park space from 40 acres to more than 1,000. He built Hazel Dell Parkway and speckled the tree-lined boulevard with roundabouts. He constructed a walkable 80-acre downtown from scratch with apartments, shops, and restaurants. He built the Palladium and Center for the Performing Arts, which he hoped would become “the Carnegie Hall of the Midwest.”

But some members of the City Council—including Rick Sharp, who served as president for 12 years—began questioning Brainard’s spending and Carmel’s mounting debt more than a decade ago. Sharp was outraged when Brainard asked the state to approve additional revenue for the city budget without consulting the council. He and other councillors protested when the Palladium grew from Brainard’s original vision for a small $17 million multipurpose theater to a $175 million performing-arts complex—a cost increase of more than 10 times—and criticized escalating costs on a massive roundabout at Keystone Parkway and 96th Street. And a six-figure confidentiality settlement Brainard negotiated with the Center for the Performing Arts’s former CEO after he was accused of misusing city funds—without disclosing the payment to the council—did the mayor’s reputation for closing deals behind closed doors no favors.

“It’s not about getting businesses to come here anymore. It’s about getting businesses to come here that do what Brainard wants to do.”

A 2012 gaffe by the Carmel Redevelopment Commission added fuel to the critics’ fire. The commission overestimated the city’s annual tax revenue and couldn’t afford to pay both its debt and operating costs—a major embarrassment considering the mayor-controlled body had racked up around $140 million of debt without council approval. It had to ask for a $195 million bailout from the council, seemingly proving the debt hawks right.

But Brainard wasn’t deterred. When he proposed the purchase of a $5 million carousel with city funds in 2017, Hannon led the opposition. He collected nearly 1,700 signatures on a petition opposed to the carousel and Hotel Carmichael. Hannon said it wasn’t that Carmel residents didn’t want such amenities—he just didn’t think the city should be paying for them.

Three months after the council nixed the carousel, Standard & Poor’s downgraded Carmel’s long-term credit rating from AA-Plus, the second-highest rating, to AA. It noted that the city’s annual debt payments were projected to climb $17 million in the next five years, reaching $57 million by 2022. S&P wrote in a letter to the city that it was concerned that Carmel’s “crowded budget,” “high fixed costs,” and “heavy dependence on sometimes more volatile tax-increment revenues” would leave it vulnerable to the effects of a recession.

Hamilton County Councillor Fred Glynn, who lost a mayoral bid to Brainard last year, argues that it’s time for Carmel to become more selective about the projects it pursues. Glynn believes that while offering incentives made sense when Brainard took office in 1996, Carmel has developed since then, and the time has come to adopt a more careful spending strategy. He says the city subsidizes too many projects that should be left to the private sector, including Hotel Carmichael. He questions why the city is spending taxpayer dollars to subsidize a five-star hotel rather than allowing a hotel developer to build a mid-range one the private market would support.

Glynn also objects to Brainard’s strategic use of the Carmel Redevelopment Commission to bypass the need for council approval, a maneuver that allowed him to legally issue an $18 million bond to cover cost increases for the hotel without ever putting it to a council vote. In his view, Brainard has lost sight of what’s best for the city. “It’s not about getting businesses to come here anymore,” he says. “It’s about getting businesses to come here that do what Brainard wants to do.”

As tired as Brainard’s critics are of his ambitious spending, he is equally tired of refuting their talking points about Carmel’s debt. The usual complaints: Every one of Carmel’s 93,510 residents is on the hook for thousands of dollars of debt. (The $1.3 billion annual figure breaks down to $14,145 per person.) The city is writing checks to developers. Carmel’s credit rating is in the toilet. A recession will decimate the city’s finances.

All false, he says.

“Some of my opponents try to scare people with a very shallow analysis of the debt,” he says. “They don’t make the distinction between deficit and debt. Every year, we spend less than we bring in. Last year, we had unencumbered money of over $50 million. So, it’s not deficit spending.”

Brainard touts Carmel’s property tax rate, which is the fifth-lowest of any city in Indiana. Because much of the city’s budget is paid by commercial taxes, the average residential property owner owes less than $10 toward the debt per year.

Ball State University economist Michael Hicks agrees with Brainard that the $1.3 billion figure isn’t an automatic red flag. “Carmel is a relatively new city, and is heavily investing in infrastructure development,” he says. “That makes Carmel’s debt very different from a municipality with deferred maintenance or using debt to cross-subsidize operational expenses.”

“Some of my opponents try to scare people with a very shallow analysis of the debt.”

Brainard also downplays the percentage of Carmel’s annual budget that goes toward paying back debt. “If you buy a house, banks will generally let you go up to 28 or 30 percent of your income,” he says. “We don’t go that high. We keep it right around 20 percent. And in five years, without any additional debt, we’d be down around 14 percent.”

But Craig Johnson, an associate professor in Indiana University’s School of Public and Environmental Affairs, scoffs at Brainard’s assertion that those figures are a cause for celebration. “That’s astronomical,” he says. “When you start getting into the 5 to 10 percent range as a city, that’s a warning zone. When you’re above 10 percent, that’s very, very serious.”

What’s more, Johnson believes there’s no reason for thriving Carmel not to hold S&P’s top credit rating, which he says would allow the city to minimize borrowing costs. “Carmel is one of the wealthiest communities in the state,” he says. “They should have the highest credit rating in Indiana.”

Brainard disputes the notion that Carmel’s downgraded credit rating is a black mark on the city’s financial health. He says the difference between S&P’s current AA rating, the third-highest, and the top AAA rating is marginal, and that his city continues to receive competitive interest rates. And he notes that, despite concerns about Carmel’s debt, the S&P report praised its “very strong economy, strong management, and very strong budgetary flexibility.”

“During the 2008 recession—the worst since the Great Depression—we managed to keep an operating balance without reaching into our rainy-day fund or laying one employee off.”

While Brainard says Carmel could raise taxes to secure the top rating, he argues that doing so isn’t in taxpayers’ best interests. And he disagrees with S&P’s concerns about Carmel’s financial health during a recession. “During the 2008 recession—the worst since the Great Depression—we managed to keep an operating balance without reaching into our rainy-day fund or laying one employee off,” he says. “Most cities weren’t able to do that.”

As for Sharp and Glynn’s claim that the city shouldn’t be interfering in the free market with projects like Hotel Carmichael, Brainard says that if a project is worth doing, it ought to be worth doing with taxpayer dollars. And Hotel Carmichael, he says, is what CEOs told him they needed to bring their companies to Carmel. “I was talking to a CEO the other day, and he told me, ‘The new hotel is going to be so nice,’” Brainard says. “Because right now, he puts the visitors he really wants to impress in the Conrad, and then has to hire a car to Uber them between Carmel and downtown Indianapolis.”

He says the people who’ve complained about being blindsided by the hotel’s increased cost shouldn’t have been surprised. “One reporter said, ‘You didn’t tell anybody,’” Brainard says. “And I said, ‘Where were you when we opened all those bids in public? Did you add them up on your calculator?’ And the response was, ‘Well, no, I didn’t have time to come to all of those meetings.’”

While Carmel city councillors have been the ones sounding the alarm, not the media, Brainard remains committed to growth. He says it all comes down to the type of city residents want to live in. “You have to keep your debt reasonable,” he says. “And I really, truly believe that we do. But we can’t be so concerned about it that we fail to invest in things that make us competitive.”

Brainard believes the dispute over Hotel Carmichael’s cost estimate was all a misunderstanding. The $41 million figure included in the CRC’s monthly report was the original estimate—it was never intended, he says, to reflect the current cost. “I think there was a general understanding among everybody who was on the council last year—we had a few new members this year who may not have known because they weren’t going to meetings yet—that the cost had gone up,” he says.

But that highlights an issue Brainard’s critics say is at the heart of the problem: The mayor doesn’t seem to have much interest in transparency. Freshman city councillor Miles Nelson, Carmel’s first elected Democrat, says he isn’t necessarily opposed to Carmel’s spending, but to the lack of communication regarding project decisions. “I trust the mayor—he’s been a dynamic leader for the city,” he says. “But what I hear is that a lot of people don’t know what’s going on.”

He cites Brainard’s proposed $425,000 music and film festival, which the council ultimately allotted $50,000 for last fall. “I haven’t seen a proposed budget for it,” he says. “There’s already a dynamite film festival in Indianapolis, and I don’t know if Carmel needs to compete with that. Or maybe there’s a partnership we can do with other cities in Hamilton County, rather than absorbing the entire cost of the project.”

“I trust the mayor—he’s been a dynamic leader for the city. But what I hear is that a lot of people don’t know what’s going on.”

Like Nelson, Hannon believes Brainard needs to share more details about the festival before the council should give him the cash. And he thinks Carmel residents deserve more of a say in discretionary spending projects like the hotel and the selection of public art. In the latter case, Carmel is in the process of installing its most expensive roundabout sculpture: a $435,000 tribute to Hoagy Carmichael. While the seven-member Carmel Public Art Advisory Committee provides recommendations on which works to purchase, Brainard retains final decision-making power. “These are nonessential projects that we’re using taxpayer dollars for, so we should actively solicit citizen input,” Hannon says.

Unfortunately, Brainard seems unlikely to run that kind of city government. He counters that if residents don’t like his spending decisions, they can vote him out of office. He acknowledges he hasn’t always done the best job of articulating the rationale for his decisions, but he says he doesn’t want to head a city mired in referenda. “At the end of the day, somebody has to make a decision,” he says, “And I believe it ought to be the people that were elected to do so.”