I-Cubed: City taxpayers on the hook for developers
loans
Oct 15, 2008 13:00
This is my
latest column in the South End News (you can see my other
recent columns at the South End News
website:
YOU ARE THE BAILERS OF LAST RESORT
Wednesday Oct 8, 2008
The national economic system is collapsing under the weight of nothing: funny-money, clever debt "instruments" backed by, as it turns out, not-so-real estate. Our state government is in big financial trouble, and just inquired about a federal loan because we can’t issue bonds for our own loans. Yet Governor Deval Patrick has happily announced a quarter-billion-dollar (for starters) fund to lend to commercial developers who promise that their projects will pay back the loans. How does the government "free up private-market credit" when it can’t get its own? We’ll soon see.
Under the recently activated "I-Cubed" (Infrastructure Investment Incentive) law, the state will pay off construction loans for selected commercial projects’ "public" infrastructure, facilities serving "essential governmental functions" - including parking lots, landscaping and recreational amenities. The money will come from the project’s state taxes, which would otherwise go into the general treasury. These loans are beyond the state’s bond limit, because they are not guaranteed by the "full faith and credit" of the state, i.e. the taxpayers, but are backed by development revenues. However, in case of project failure to generate the promised state taxes, the city is on the hook. If the city doesn’t find a way to pay, the state can withhold local aid for schools, roads, and services.
So, if the project succeeds, the developer gets all the project profits, while state taxpayers make up for the revenues forfeited to pay his "infrastructure" construction costs. (We also get to own, and pay him to maintain, all the "public infrastructure" we build for his project.) If the project fails, city taxpayers must pay off the loans for failed real estate speculation, and also take care of whatever "infrastructure" is standing. Public risk, private profit, all backed by real estate. Gosh, what could go wrong with that?
So excited is the Administration that Lt. Governor Tim Murray, in a Worcester Telegram story, described the program as "self-funding" between the state, local communities and interested businesses. Before the era of public-private partnerships and other re-interpretations of the "private free market," "self-funding" meant money from private investors and private profits. Now the diversion of taxes to a private project is called "self-funding."
And so eager is Patrick to implement I-Cubed that he has accompanied the public subsidy with the only thing to fear more than fear itself: deregulation. The law’s regulations (public comments due Oct. 15), set numerous selection criteria and also give the Secretary of Administration and Finance discretion to waive any of them for any applicant.
These criteria are rather important. They require proof that the developer will provide all required information, that the project needs public subsidy, that the developer has financing, that the project is financially feasible and environmentally sustainable, that it will produce enough state taxes to pay off the loan, that competitive bidding of qualified contractors will be used, and that it will start in a timely manner after approval. The criteria also stipulate that only two projects will be subsidized per city, that the project wasn’t approved by the city before Sept 7, 2006 (when this law was passed), that the developer won’t get other state subsidies, that individual project infrastructure bonds won’t exceed $50 million, and that the project was approved by the city and the state quasi-public bond-issuing agency, MassDevelopment.
It’s not reassuring that the basic qualifying requirements - already often finessed by applicants and ignored by subsidy-providing agencies, can be totally waived by one political appointee to fill the Administration’s political quota for "job creation" by shifting more risk from the private developer to the taxpayers. The developer simply has to threaten that he will otherwise take his marbles elsewhere (a wink-wink bluff understood by both sides). And the city has to approve any zoning changes needed by the project, undermining comprehensive planning.
So much for transparency and accountability.
My experience with similar subsidy programs indicates that a tip of the hat and a handshake will get a developer $50 million.
If the state or city want public infrastructure to support economic vitality, why don’t they make a general plan, conduct a budgeting process where competing priorities are weighed, and pay for the works directly instead of through these arcane debt arrangements that at best serve only individual projects and at worst encourage chancy real-estate adventures by politically connected developers through public assumption of risk? Perhaps because there’s no political glory for just keeping the state and city in good working order so that everyone, including developers, benefits and we know what our cost burdens will be. Perhaps because there are no announcements at the Chamber of Commerce, no new "partnerships," no new "investments" or "incentives" - and no "job-creation" numbers to claim.
In a 2006 Boston Globe interview, then-gubernatorial candidate Deval Patrick said he would "take a dim view of using state tax incentives as a major tool for attracting business expansion in the state, saying companies whose plans turn on tax breaks probably aren’t worth attracting." He said, "business creates jobs, not government. Governments create a climate where businesses can thrive," and, "a business that makes a decision on the basis of a tax break alone, that’s a business that’s on its way out of business."
But the politics of "business incentives" has prevailed and the Administration invests heavily in corporate welfare, even, as I have witnessed, when the corporation says outright that the subsidy is not part of its decision to build or relocate.
Now, the state, its troubles compounded by another overly-clever debt-shuffling gimmick - the collapsing Turnpike Authority, to which the state shifted the Big Dig construction-cost risk to escape "full faith and credit" bonding - is planning to ask the floundering federal government for financial help. It’s not exactly a bail-out - yet.
In any case, the "full faith" bailer of last resort is you.
Shirley Kressel is a landscape architect and urban designer, and one of the founders of the Alliance of Boston Neighborhoods. She can be reached at shirley.kressel@verizon.net.
YOU ARE THE BAILERS OF LAST RESORT
Wednesday Oct 8, 2008
The national economic system is collapsing under the weight of nothing: funny-money, clever debt "instruments" backed by, as it turns out, not-so-real estate. Our state government is in big financial trouble, and just inquired about a federal loan because we can’t issue bonds for our own loans. Yet Governor Deval Patrick has happily announced a quarter-billion-dollar (for starters) fund to lend to commercial developers who promise that their projects will pay back the loans. How does the government "free up private-market credit" when it can’t get its own? We’ll soon see.
Under the recently activated "I-Cubed" (Infrastructure Investment Incentive) law, the state will pay off construction loans for selected commercial projects’ "public" infrastructure, facilities serving "essential governmental functions" - including parking lots, landscaping and recreational amenities. The money will come from the project’s state taxes, which would otherwise go into the general treasury. These loans are beyond the state’s bond limit, because they are not guaranteed by the "full faith and credit" of the state, i.e. the taxpayers, but are backed by development revenues. However, in case of project failure to generate the promised state taxes, the city is on the hook. If the city doesn’t find a way to pay, the state can withhold local aid for schools, roads, and services.
So, if the project succeeds, the developer gets all the project profits, while state taxpayers make up for the revenues forfeited to pay his "infrastructure" construction costs. (We also get to own, and pay him to maintain, all the "public infrastructure" we build for his project.) If the project fails, city taxpayers must pay off the loans for failed real estate speculation, and also take care of whatever "infrastructure" is standing. Public risk, private profit, all backed by real estate. Gosh, what could go wrong with that?
So excited is the Administration that Lt. Governor Tim Murray, in a Worcester Telegram story, described the program as "self-funding" between the state, local communities and interested businesses. Before the era of public-private partnerships and other re-interpretations of the "private free market," "self-funding" meant money from private investors and private profits. Now the diversion of taxes to a private project is called "self-funding."
And so eager is Patrick to implement I-Cubed that he has accompanied the public subsidy with the only thing to fear more than fear itself: deregulation. The law’s regulations (public comments due Oct. 15), set numerous selection criteria and also give the Secretary of Administration and Finance discretion to waive any of them for any applicant.
These criteria are rather important. They require proof that the developer will provide all required information, that the project needs public subsidy, that the developer has financing, that the project is financially feasible and environmentally sustainable, that it will produce enough state taxes to pay off the loan, that competitive bidding of qualified contractors will be used, and that it will start in a timely manner after approval. The criteria also stipulate that only two projects will be subsidized per city, that the project wasn’t approved by the city before Sept 7, 2006 (when this law was passed), that the developer won’t get other state subsidies, that individual project infrastructure bonds won’t exceed $50 million, and that the project was approved by the city and the state quasi-public bond-issuing agency, MassDevelopment.
It’s not reassuring that the basic qualifying requirements - already often finessed by applicants and ignored by subsidy-providing agencies, can be totally waived by one political appointee to fill the Administration’s political quota for "job creation" by shifting more risk from the private developer to the taxpayers. The developer simply has to threaten that he will otherwise take his marbles elsewhere (a wink-wink bluff understood by both sides). And the city has to approve any zoning changes needed by the project, undermining comprehensive planning.
So much for transparency and accountability.
My experience with similar subsidy programs indicates that a tip of the hat and a handshake will get a developer $50 million.
If the state or city want public infrastructure to support economic vitality, why don’t they make a general plan, conduct a budgeting process where competing priorities are weighed, and pay for the works directly instead of through these arcane debt arrangements that at best serve only individual projects and at worst encourage chancy real-estate adventures by politically connected developers through public assumption of risk? Perhaps because there’s no political glory for just keeping the state and city in good working order so that everyone, including developers, benefits and we know what our cost burdens will be. Perhaps because there are no announcements at the Chamber of Commerce, no new "partnerships," no new "investments" or "incentives" - and no "job-creation" numbers to claim.
In a 2006 Boston Globe interview, then-gubernatorial candidate Deval Patrick said he would "take a dim view of using state tax incentives as a major tool for attracting business expansion in the state, saying companies whose plans turn on tax breaks probably aren’t worth attracting." He said, "business creates jobs, not government. Governments create a climate where businesses can thrive," and, "a business that makes a decision on the basis of a tax break alone, that’s a business that’s on its way out of business."
But the politics of "business incentives" has prevailed and the Administration invests heavily in corporate welfare, even, as I have witnessed, when the corporation says outright that the subsidy is not part of its decision to build or relocate.
Now, the state, its troubles compounded by another overly-clever debt-shuffling gimmick - the collapsing Turnpike Authority, to which the state shifted the Big Dig construction-cost risk to escape "full faith and credit" bonding - is planning to ask the floundering federal government for financial help. It’s not exactly a bail-out - yet.
In any case, the "full faith" bailer of last resort is you.
Shirley Kressel is a landscape architect and urban designer, and one of the founders of the Alliance of Boston Neighborhoods. She can be reached at shirley.kressel@verizon.net.
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