MADISON — Selectmen are proposing a plan for the town to establish a credit line and borrow money in order to mitigate the effects of a drop in valuation of Madison Paper Industries on taxpayers.

Residents will be asked to approve the establishment of a revolving loan that will allow the town to spend, borrow and pay back up to $2.5 million as needed at a special town meeting scheduled for Sept. 16.

Along with the establishment of the line of credit, residents also will be asked to approve an increase in the tax rate of no more than $2.50 per $1,000 of assessed value, to take $500,000 from tax increment financing money to reduce taxes, and for the town to use $800,000 from undesignated funds to reduce taxes.

“I think it makes sense certainly for the board and residents to consider this plan,” Town Manager Dana Berry said during a special selectmen’s meeting Thursday night. “There may be some other things we can do, but we need a line of credit as a backstop based on where we are and where we are going.”

In August, selectmen learned from the board of assessors that the value of local paper mill Madison Paper Industries, the town’s largest taxpayer, had dropped from $229.7 million in 2013 to $80 million.

That means that the overall value of the town, which was valued at $485 million in 2013, will drop to $335 million this year. If no action is taken, taxpayers could see an increase in the tax rate from $17.53 per $1,000 of assessed value to $23 per $1,000, an increase of about 30 percent.

The town could pay to have an outside valuation of the mill done, but even if it were to produce a different valuation than that of the board of assessors, it would not take effect this year, according to an informational slide show shown at the meeting. The cost of an outside valuation for the mill would be about $400,000, Berry said.

In two to three years, when the state fully recognizes the lower valuation of the town, it will be able to provide more funding to the local school district, School Administrative District 59, but in the meantime, it would be a good idea to establish the loan, Berry said.

“It’s going to take a couple years for that to catch up, and it won’t do anything in 2014,” he said.

That would allow the town to cap the tax rate at $19 per $1,000 and allow for a more gradual increase of the tax rate over the life of the loan, which would be for an estimated seven years, Berry said. The exact terms have yet to be determined.

Other plans that have been discussed as ways to minimize the effect of the valuation change include petitioning the state to lower the town’s valuation in 2015, putting a hold on special projects and capital improvements and imposing budget cuts from the town and school budgets.

The town has a balance of $1.5 million in a checking account. The school district is owed $485,000 in September and the county is owed $1 million by Nov. 1.

“Establishing a line of credit is not inappropriate, given the size of expenditures we incur,” said Jack Ducharme, vice chairman of the Board of Selectmen. “The nice thing about a line of credit is it doesn’t cost you a lot of money to have, unless you borrow against it, but it’s there as a cushion.”

Selectmen also will be meeting at 6:30 p.m. Monday at the Old Point Avenue facility with a panel of local legislators to discuss tax relief and what can be done on the legislative level. The special town meeting is scheduled for Sept. 16 at the Madison Junior High auditorium, with an information session at 6 p.m. and the meeting at 7 p.m.

Rachel Ohm — 612-2368

rohm@centralmaine.com