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Thursday, October 9, 2014

The Redevelopment Racket


The growing trend of public redevelopment has increased cronyism, land confiscation, and waste. At best, these programs favor well-off businesses that would have located in an area anyway; at worst, they subsidize ones that don’t fit anyhow.
The justifications that governments give for subsidizing private developments are often dubious, but this was particularly so for a recent New Jersey deal. This summer, the state granted $82 million in tax credits to the Philadelphia 76ers to build a practice facility in Camden. Although it will create only 50 jobs and be closed to the public, officials believe that its waterfront presence will uplift the city. The credit was granted by a heavily indebted state to the team's billionaire owner, for a city that suffers 16 percent unemployment and 42 percent poverty, and recently cut half of its police force.

While this facility seemed like a misallocation, it mirrored various others that have been subsidized nationwide. In this respect, it was but one example of a public redevelopment trend that has increased governments' capacity for cronyism, land confiscation, and waste.
Government's involvement in redevelopment greatly increased after World War II, when America's middle class flocked to the suburbs. This left surpluses of older buildings, causing many cities to demolish them and build modern structures. In 1949, this "urban renewal" was assisted by Title I of the federal Housing Act, which allocated billions of dollars to city and state governments. New projects included common infrastructure, along with commercial buildings like stadiums and cultural centers, and were generally constructed by local public corporations. Although the projects modernized cities, they also displaced thousands of families in favor of large and often inadequate developments. Title I ultimately became so unpopular that Congress ended it in 1974, diminishing the federal government's role in redevelopment. However, many public corporations found new revenue sources and continue similar policies.

These sometimes include granting tax breaks to companies, like the one New Jersey's Economic Development Authority gave to the 76ers. A 2012 New York Times investigation determined that $80 billion of the annual $170 billion in tax breaks handed out nationwide come from local and state governments.
The practice has grown, with annual TIF bond sales nearly doubling from $1.7 billion to $3.3 billion from 1990 to 2010.
But the policy more specific to urban redevelopment has been tax increment financing (TIF). Since 1974, TIF has replaced Title I as the main tool for enacting urban renewal, having become legal in every state but Arizona. Although laws vary by state, they generally allow government corporations to create zones that are targeted for redevelopment via various incentives. To court anchor businesses, the corporations sell bonds to generate revenue, which can be used for subsidies — such as buying land that is given to the developer, improving infrastructure, or demolishing older buildings. The funds can also be given directly to developers as cash. Any added tax revenue within the boundary resulting from the development —  which is usually collected through sales or property taxes, and known as the "increment" — is then returned to the government corporation. The public corporations then use this revenue either for servicing debt or funding new projects. These bond-funded redevelopment schemes are used to build not only stereotypical targets of government largesse, like stadiums and convention centers, but malls, condos, and big-box retail. Overall, the practice has grown, with annual TIF bond sales nearly doubling from $1.7 billion to $3.3 billion from 1990 to 2010. For example, much of the ballyhooed stadium, hotel, retail, and condo development around downtown St. Louis, Detroit, and Cleveland came thanks to such subsidies. When Chicago Mayor Richard Daley left office in 2011, TIF districts accounted for nearly one-third of that city, and, by collecting $500 million in annual revenue, one-sixth of its budget. Daley's successor, Mayor Rahm Emanuel, entered office suggesting reform, but has since earmarked $55 million for a hotel to be built alongside DePaul University's new basketball arena. When Governor Jerry Brown shut down the roughly 400 redevelopment agencies in California three years ago, they were sucking $5.7 billion from the state budget and had accumulated $29.8 billion in debt. Brown's move appeared to be a temporary means for shoring up that budget, however, since he is considering a bill that would reinstate the agencies with even greater power.
These programs are popular because they are seen as a way to spur development, particularly in areas suffering from underinvestment. But they come with moral hazards.
First, they encourage crony capitalism, as certain businesses lobby for benefits not enjoyed by competitors. For example, Chicago's sprawling TIF apparatus had initially been used by Mayor Harold Washington to create jobs in struggling south- and west-side neighborhoods. But Mayor Daley used it to advance funds to connected developers who built in upscale areas, and to withhold funds from rival aldermen.
When Mayor Richard Daley left office in 2011, TIF districts accounted for nearly one-third of Chicago.
TIF also contributes to governments using eminent domain to seize private property for other private uses. Among examples, Los Angeles used its Community Redevelopment Agency to seize Hollywood buildings, containing 30 businesses, to build a luxury hotel. Other examples abound nationwide, and only seem to have increased since the 2005 Kelo v. New London Supreme Court ruling strengthened the legality of such expropriation.

"TIF is eminent domain's little-known partner," writes economist Randal O'Toole. "Without TIF, few cities could afford to use eminent domain."

Lastly, these publicly funded development projects are often advertised as paying for themselves, since the bonds that fund subsidies are serviced by added tax revenue from the new development. But this is a sleight of hand: new developments don't just create value, but also exact costs — to police, school, fire, and utility services. TIF programs funnel tax revenue from development projects back into public corporations, not toward the basic services, so that those costs are shouldered by those outside the district.

These subsidized schemes can also encourage businesses to locate in areas where there is little demand. Thus, anticipated tax revenues fall short, and taxpayers must make up the difference. The use of TIF in Portland, Oregon, on underperforming condo and stadium projects forced basic service cuts to public safety and health throughout the 2000s. That same decade, Kansas City sold $295 million in bonds for an entertainment complex that was built adjacent to a publicly subsidized arena. But these projects were hurt by the city's inability to land a professional team, and now $20-30 million is diverted annually from the general fund to pay the debt.

TIF may even negatively impact growth, according to economists David Merriman and Richard Dye. Their study determined that such programs in the Chicago metropolitan area helped targeted districts —  as might be expected of a subsidy — but lessened performance in surrounding ones. "Municipalities that adopt TIF grow more slowly after adoption than those that do not," they wrote. The reason, said O'Toole in a phone interview, is that enabling certain businesses to freeload leads either to higher taxes or reduced services for everyone else.

"It's a zero-sum game," said O'Toole. "You take money from a lot of taxpayers and you give it to a few developers, and there's no net increase in wealth."
But does TIF at least produce new development? This is unlikely, determined one study by Iowa State University. It found that businesses receiving subsidies often would have located in an area anyway, although not necessarily within the designated boundary.
These laws contributes to governments using eminent domain to seize private property for other private uses.
This doesn't mean that redevelopment programs can't be done properly. Generally, the best projects have voter support and avoid unnecessary condemnations, with revenue streams isolated from basic services. One example would be Oklahoma City's MAPS public works program, which was funded through a voter-approved sales tax increase and paid for projects as revenue arrived, to avoid long-term debt. Now in its third phase, the program produced a new arena, convention center, main library, and waterfront park, and has been widely credited for reviving the city's once-empty downtown.
But overall, public redevelopment policies — with their mixed bag of tax breaks, land seizures, and cash giveaways — rest on shaky foundations. They work from the premise that public corporations understand better than private ones where development will work. At best, these programs favor well-off businesses that would have located in an area anyway; at worst, they subsidize ones that don't fit anyhow.
Scott Beyer is writing a book about revitalizing cities through market urbanism. His work is found at

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