Author Archive

Sex and the City’s Subsidies in Baltimore

July 1, 2008

Critics of urban economic development often complain that municipal officials are too cozy with developers – giving away the subsidy candy store for projects in burgeoning urban real estate markets. Now Baltimore Mayor Sheila Dixon is at the center of a controversy in which, it appears, she was literally in bed with one particular developer.

Dixon recently acknowledged that while City Council president she had a “personal” relationship with Ronald H. Lipscomb, a prominent Baltimore developer. This relationship, lasting from late 2003 to early 2004, is now fodder for a state investigation into city spending practices.

Even though Baltimore code (Art. 8 Sec. 6-27) bans public officials from accepting gifts “…from any person that the public servant knows…has a financial interest that might be substantially and materially affected …by the performance or nonperformance of the public servant’s official duties,” Dixon allegedly accepted lavish gifts (including fur coats and pricy airline tickets) from Lipscomb. But state prosecutors are finding that it’s Lipscomb who may have benefited the most from the relationship.

Dixon has acknowledged that, as Council president, she “twisted some arms” to facilitate a subsidy deal for a development spearheaded by Lipscomb’s Doracon Contracting and Struever Bros. Eccles & Rouse. In 2003, the city gave the Frankford Estates residential development almost $6 million in tax increment financing, an $800,000 grant, and land worth $237,000. It also waived $47,600 in building permit fees.

But that’s not all: During Dixon’s tenure as president, the Baltimore City Council also approved a 15-year “payment in lieu of taxes” subsidy worth roughly $7.2 million for The Zenith, a downtown apartment tower for which Doracon served as a contractor, and a 20-year tax break worth $13.6 million for a joint venture between Lipscomb and two other developers for a residential development called Spinnaker Bay.

State investigations into city spending practices have been ongoing since a March 2006 Baltimore Sun series questioned Dixon’s role in approving city contracts with Union Technologies, which was employing her sister at the time. Union Technologies’ owner has since pled guilty to tax evasion charges and agreed to cooperate with further investigations.

Home Depot Pays Off Bonds Linked to Cancelled Store

June 25, 2008

Home Depot is spending $2.4 million on a Wichita, Kansas store that won’t ever open. The struggling home-improvement retailer announced last month that it is closing 15 stores and canceling plans to open 50 new ones – including the Wichita location.

However, the city of Wichita had already issued $2.4 million in tax increment financing (TIF) bonds to clean up the brownfield location in a blighted area. Future increases in property tax revenues would have been used to finance the TIF bonds.

Home Depot has agreed to pay off the bonds even though its not required to do so, according to The Wichita Eagle. That’s great news for the city. Although the money came in the form of non-recourse bonds (meaning investors who purchased the bonds would have no recourse to get their money back if the building was not built and there were no increased taxes to collect), defaulting on the bonds would probably hurt Wichita’s bond rating and its ability to sell similar bonds in the future.

The housing market downturn has hit Home Depot hard as both consumers and homebuilders are reluctant to embark on new projects. The firm’s 2008 first quarter consolidated net earnings were $356 million – a drop of 60 percent from the same period last year.

All retail development is increasingly risky. The International Council of Shopping Centers predicts 5,770 store closings in 2008, an increase of 25 percent from 2007. Municipal governments usually cannot rely on the goodwill of giant retailers when deals go south. If state and local governments are going to subsidize retail (something Good Jobs First recommends only when a project is located in a neighborhood that is demonstrably underserved with basic retail such as groceries, pharmacies and clothing stores), every deal should have clawbacks so that communities are not left holding the bag.

Big Victories for Partnership for Working Families and Affiliates

June 19, 2008

Our friends at the Partnership for Working Families (PWF) and its affiliate organizations do amazing work. So it’s not surprising they are winning big victories – most recently in Pittsburgh and San Francisco, and hopefully another in San Jose this fall.

PWF affiliates work to ensure that low and middle income workers and communities share in the benefit of economic growth and development. Often, they campaign for community benefits agreements (CBAs) – legally binding contracts signed by developers and community coalitions that spell out a set of community benefits that the developer must provide as part of a development project.

In Pittsburgh: Pittsburgh United’s One Hill CBA Coalition, is close to winning the city’s first-ever community benefits agreement for the new Penguins hockey arena and 28 acres of surrounding land. The agreement, which has been tentatively approved by the Penguins, would require that all new jobs in the development pay living wages and provide health benefits. Neighborhood residents would be interviewed first for the new jobs. Also, the arena would have to prepare a LEED Certification Plan (the gold standard for green building).

In San Francisco: The San Francisco Labor Council, ACORN, and the San Francisco Organizing Project have entered into a CBA with housing developer Lennar for a massive redevelopment in the Bayview-Hunters Point neighborhood. Lennar has agreed to ensure that 32 percent of the housing units are affordable, provide neighborhood residents with $27 million in housing assistance and $8.5 million in job training services, require local hiring for project construction, and ensure labor peace in the project’s key industries. In exchange for these concessions, the organizations were strong advocates in support of the project on two city ballot initiatives – helping the initiatives pass on June 3rd. Now Lennar has a green light for the city’s largest redevelopment project since the 1906 earthquake.

In San Jose: Working Partnerships USA is organizing community, faith and labor leaders to support living wages for workers at the Mineta San Jose International Airport. In a recent report, Worker Partnerships found that over half of the surveyed airport employees weren’t trained in critical emergency procedures, such as facility evacuation. Paying a living wage would reduce turnover at the airport, increase the amount of long-term, skilled workers on site and consequently improve airport safety. Airport workers and community advocates spoke in support of a measure to require living wages for airport workers before the San Jose City Council’s Transportation and Environment Committee on June 2nd. Worker Partnerships is hopes to win an airport living wage ordinance this fall.

Transit Ridership Grows, But Agencies Can’t Keep Up

June 5, 2008

As gas prices soar, American workers are increasingly choosing to commute via public transit – good news for environmentalists and smart growth wonks everywhere! But high fuel costs are also crippling the budgets of many transit agencies that paid 44 percent more for fuel this year than last.

According to a new report from the American Public Transportation Association (APTA), public transit ridership was 3 percent higher in the first quarter of 2008 than it was last year (a difference of 85 million transit trips). Also, Americans took the more trips on transit last year than that have in 50 years (10.3 billion trips).

However, public transit budgets are often funded through sales tax revenues that have been shrinking as Americans spend less during tough economic times. Combined with high fuel costs, this means that transit agencies are increasingly cutting services.

Moreover, America’s sprawling land use patterns means that the vast majority of workers still can’t access transit. According to APTA president, William Millar, fewer than 20 percent of households have easy access to buses or trains. However, it’s not practical to assume that transit authorities, constrained by tight budgets, will be able to expand services to sprawling communities. Also, as we blogged about on Monday, the compact form of urban areas plays a key role in limiting greenhouse gas emissions.

As gas prices push more Americans out of their cars, it grows increasingly obvious that we have to more adequately fund public transit but also plan for dense cities where effective public transit is feasible.

And the really good news is that it’s not just environmentalists and smart growth wonks who think that way! In an October 2007 poll, sponsored by the National Realtors Association and Smart Growth America, nearly 90 percent of respondents believed that our communities should be designed so that we can walk more and drive less and that public transportation should be improved and accessible.

Northeast Ohio Mayors Set Sights on Shared Regional Prosperity

May 29, 2008

Frustrated by years of “go-it-alone” interregional competition for jobs and economic development, mayors from the 16-county Northeast Ohio region (including Cleveland) voted recently to pursue a new regional agenda. The plan will include a regional tax sharing agreement and joint land use planning.

This came on the heals of a new report, the Northeast Ohio Economic Revenue Study, authored by the Lorain County Community College and Amerigis, a private research firm led by regional-governance guru Myron Orfield. It found that the region’s cities and suburbs are overwhelmingly struggling with weak tax base, slow growth and growing social needs. Moreover, the way the region is currently growing means that these issues will only get worse.

Smart regional planning is crucial to Northeast Ohio; an area whose population is not growing, but is sprawling further and further from the central cities and inner-ring suburbs. Also, the study finds that tax sharing would allow two-thirds of the region’s residents to get better services at less cost. A portion of tax revenues (40 percent of property taxes and 20 percent of income taxes) from new commercial and industrial projects would be shared among the region.

The Twin Cities Metropolitan Region is a pioneer in regional planning with a regional governance system and a metro-wide tax revenue sharing agreement. Montgomery County, Ohio and Allegheny County, Pennsylvania also adopted revenue sharing agreements.

North Carolina Group Calls for More Sunshine on Tax Breaks

May 15, 2008

The Corporation for Enterprise Development (CFED) is making hay with a new calculation that 90 percent of economic development spending in North Carolina last year was funded through tax incentives. That’s up from 77 percent in 1995/96. Moreover during the same period, the state’s outlay for economic development has about doubled, growing to $1.29 billion.

Tax breaks for economic development are huge in most states; it’s no exaggeration to call appropriations the tip of the iceberg and tax expenditures the bottom. However, since tax spending is often poorly accounted for, legislators often continue to approve more of it while cutting outlays to other programs, even when states struggle with deficits. In At What Cost? North Carolina’s “Budget” for Economic Development, CFED recommends increasing accountability standards for state tax expenditures.

CFED obtained the data from a one-time report released by Fiscal Research Division of the North Carolina General Assembly. CFED recommends that the state continue to publish these reports on a regular basis and adopt universal performance measures on which to judge all subsidy programs. To date, only a few states have institutionalized regular reports (called Unified Economic Development Budgets or UDBs) on spending line items for economic development, including the cost of subsidies.

However, several state watchdog groups have created their own UDBs. In Kentucky, the Mountain Association for Community Economic Development published an exemplary UDB in 2005. However, watchdog UDBs are not a permanent solution, since it is ultimately too much work for a non-profit and should be the states’ responsibility.

UPDATE: Minnesota State Senate Votes to Axe Rural JOBZ Program

April 17, 2008

The Minnesota State Senate passed legislation two weeks ago to axe Governor Tim Pawlenty’s signature rural economic development program known as the Jobs Opportunity Building Zones (JOBZ) program. This is the latest development since GJF blogged in February about the state Legislative Auditor’s report concluding that the subsidy program is unaccountable and ineffective.

JOBZ subsidizes companies located outside the Minneapolis-St. Paul metro area and has granted $46 million in tax breaks to 350 businesses since 2004. However, two-thirds of businesses admitted to the Auditor that they would have expanded without the subsidies – including 11 percent which admitted they would have made the same investment in the exact same location.

Still awaiting action by the House, the Senate legislation is part of a larger omnibus tax bill. The bill would not allow new JOBZ agreements after May 1 but would preserve existing ones. The entire package would increase state revenues by $150 million in the 2008/09 fiscal year.

The Senate vote is linked to an ongoing fight between the Democratically-controlled Legislature and the Republican Governor on how to balance Minnesota’s growing deficit. Last week, Pawlenty vetoed funding for a Minneapolis-St. Paul light rail project that he has previously supported. Local observers believe the governor may use the light rail funding as a bargaining chip in exchange for continued funding of the JOBZ program.

Competing legislation that would reform, but not eliminate, the JOBZ program has been referred to the Senate Committee on Taxes.

Canadian Aircraft Manufacturer May Fly South for Subsidies and Cheap Money

April 3, 2008

Missouri lawmakers have fast tracked legislation that creates a new state income tax credit program to lure Ottawa-based aircraft manufacturer Bombardier Aerospace to Kansas City.

If Missouri’s package passes, the $375 million aircraft assembly plant will receive an estimated $300 to $400 million in “Enhanced Enterprise Zone” credits over 22 years. However, it was the weak American dollar (which has lost about a third of its value versus the Canadian dollar over the past five years) rather than the subsidy that prompted Bombardier executives to consider relocating to the U.S.

Both Kansas City Mayor Mark Funkhouser and Kansas City Star columnist Chris Lester, frequent critics of subsidy giveaways, are in favor of the deal. That’s because this is not a typical subsidy deal. World Trade Organization regulations forbid aerospace companies from receiving subsidies, so Bombardier would have to pay back the tax credits through fees charged to buyers of jets assembled at the plant.

Meanwhile, Canadian officials are teaming up to offer a $488 million incentive package to keep the expansion site at home. While it’s unclear if the bigger subsidy will be enough to overcome the weak American dollar, one industry analyst questioned whether Bombardier is using the Missouri offer as leverage in its talks with Canadian officials.

In other jet-set subsidy news…

Michael Scheeringa, CEO of Cuyahoga County, Ohio-based FlightOptions LLC wants a big tax break. After all, it would only be fair.

That’s after it was announced in March that NetJets Inc. would receive about $68 million in state and local subsidies to assist in the $200 million expansion of its Port Columbus Airport aviation campus. FlightOptions and NetJets are direct competitors in providing private flights to corporate executives and, Scheeringa points out, the subsidies give NetJets an unfair competitive advantage.

Malling America

March 19, 2008

Mall subsidies have been making headlines across the country recently. Increasingly, developers ask for massive pubic subsidies when they build mega-retail outlets and, unfortunately, officials often concede.

MINNESOTA: Mall of America (MOA) is at it again. Last year, Minnesota Gov. Tim Pawlenty vetoed a $180 million subsidy package for a $1.7 billion expansion of the mall. Now MOA owners, the Triple Five Group, are asking for about $350 million to finance a parking ramp and infrastructure improvements as part of the expansion, which would more than double the mall’s size.

Rep. Michael Nelson will introduce legislation exempting MOA from the seven-county region’s fiscal disparities program, which requires all communities to share 40 percent of their commercial and industrial tax base growth. MOA’s contribution would have to be made up by other pool contributors. Downtown retailers, which have to compete with MOA, are strongly opposed to the use of tax dollars for the mall expansion.

DISTRICT OF COLUMBIA: DC USA, an urban mall in the rapidly gentrifying Columbia Heights neighborhood, opened with much fanfare by district officials and the media. The Washington Post hailed it as a “rapid renaissance” for a blighted neighborhood, but many local residents and long-term business owners questioned the fairness of the $42 million subsidy DC government awarded the project.

In a March 16th editorial, small business owners Andy Shallal and Kim Weeks of Think Local First (a DC area local business alliance) complained that local businesses were left out of neighborhood redevelopment negotiations. Only 3 percent of 500,000 square foot mall was allocated for locally owned enterprises and existing businesses will receive only $2 million in additional public assistance – pennies for independent businesses that will now have to compete with mall anchors Target, Best Buy and Bed Bath & Beyond.

ARIZONA: George Will has joined the growing chorus critiquing subsidies for malls and retail. In his bi-weekly column, the conservative editorialist blasted a $94.7 million subsidy the City of Phoenix provided to a 144-acre retail, residential and office development called CityNorth, labeling it “booster socialism” and “corporate welfare.” Last summer, on the heels of the CityNorth giveaway, Arizona Governor Janet Napolitano signed a new law banning Phoenix-area cities from providing new retail subsidies.

Now, with the assistance of Arizona’s conservative Goldwater Institute, six Phoenix-area small business owners are suing the city. Arguing that the CityNorth deal violates provisions of the State Constitution, they are seeking to block future payments to the developer.

Wisconsin Upgrades State Subsidy Disclosure

March 11, 2008

Facing pressure to improve the accountability and transparency of state subsidy deals, the Wisconsin State Legislature passed meaningful subsidy disclosure legislation (Assembly Bill 741) last week.

The bill requires eight state agencies (including the Wisconsin Department of Commerce) to disclose subsidy details for economic development grants and loans over $100,000 online and allows the agencies to claw back subsidies from recipients that don’t live up to their job creation promises. Unfortunately, the new reporting requirements do not cover tax breaks or tax credits.

Last summer, the Milwaukee Journal Sentinel examined 25 Wisconsin subsidy deals that were awarded $80 million in subsidies and found that, overall, companies fell about 40 percent short on their job creation promises. AB 741’s changes, however, are based on the recommendations of an August 2006 Joint Legislative Audit Committee report that was also critical of the state’s subsidy reporting practices.

Wisconsin scored an “F” in subsidy disclosure in our Fall 2007 report, The State of State Disclosure, which graded all 50 states on their online disclosure of subsidies, state procurement contracts and lobbying.

The Wisconsin Public Interest Research Group (WISPIRG) championed the bill through the legislature. Wisconsin Governor Jim Doyle is expected to sign the legislation.