• Title: Development Finance in the Real World: Questions East Lansing Citizens Should Be Asking
  • Author: Eliot Singer
  • Date: 10/31/2011

Development Finance in the Real World: Questions East Lansing Citizens Should Be Asking

Development Finance in the Real World: Questions East Lansing Citizens Should Be Asking

The Broader Development Agenda

• The traditional role of local government has been to protect public safety and provide public services. East Lansing has been much more active than other local governments, except possibly Lansing, in taking a major role in building and economic development, with aggressive use of public-private partnerships and tax incentives.
• One important original goal was to produce new revenues to allow for tax cuts. Later this became to produce new revenues to prevent service cuts without raising taxes.
• Recognizing how the economic downturn has wrecked havoc with local government finances, has East Lansing’s pursuit of development enhanced revenues for public services more than it has added to costs for public services?

• In an off-guard moment, the late City Manager declared East Lansing to be well on its way to becoming “the next great city in the Midwest.”
• The city promotes the Northern Tier as a “financial district,” making the headquarters a couple of local banks sound like an emerging Wall Street. A freelance videographer is talked up as a high tech entrepreneur. FRIB, a nuclear research facility, which assuming it gets funded will not be on line for years, is treated as the Second Coming of Silicon Valley, although there is no reason to believe it will produce any more high tech spinoffs than the Cyclotron or the already top notch MSU nuclear physics department. The new MSU art museum is imagined as a major tourist attraction and a stimulus for “arts entrepreneurship.” There seems to be an obsession with getting federal funding for renovating the train station and ultimately transforming it into a “transportation hub,” despite repeated reminders that the Bluewater Limited is on life support, that few travelers spend much time at the station, that it is a poor location for a local hub, and that Battle Creek is a much better location for a regional hub.
• Revenue growth is bragged about without controlling for inflation. A small population increase is bragged about without factoring in annexation. This kind of exaggeration and abuse of statistics has gone on for years.
• Has hype and spin gotten in the way of objectively looking at where East Lansing really is headed economically and which approaches to economic development are or might be truly effective?

• How much has East Lansing spent on planning and hiring consultants for hugely ambitious development projects that have been significantly scaled back or for all intents and purposes abandoned (except, of course, on the city’s web site): Stonehouse Village, the Northern Tier, West Village, East Village, Museum Place/City Center II, Albert Grove, “transportation hub”?

• Should City Council undertake a thorough, objective, public review of all development projects, built or not, including costs, revenues produced, original financing plans versus actual financing, and original scope and intents versus results?

• Officials often refer to the city’s master plan for development.
• What are the implications of the closing of Barnes and Noble, the glut in the downtown and overall real estate market, the internet’s replacement of storefronts and offices, the downsizing of employment at MSU and state government, the downsizing of disposable income, declining property values etc. for the master plan?

• Have development projects harmed the lifestyles and property values of neighbors and neighborhoods, and if so is this justifiable?

• Have development projects exacerbated the glut in residential and commercial real estate and helped drive down property values, added to the empty offices and storefronts, and made it even harder for homeowners to sell?

Government Sponsorship of Development

• The original expectation of public-private development projects and the use of tax incentives was that this would jumpstart growth and development, with the private sector taking over, new jobs being created, new residents buying homes, and new revenues flowing into East Lansing’s coffers. This has not happened. Instead the city has become even more aggressive in its use of public-private development projects and its use of tax incentives.

• Has government sponsorship of development, including of big development projects, become counterproductive, substituting for development that would produce new revenues?

• Has the city’s eagerness to seek and provide tax incentives and grants for developers and businesses made it a place where developers and businesses expect handouts to maximize their returns?

• Is the city giving sweetheart assessments and other sweetheart deals to developers, either to push or hurry development against real world markets or because of conflicts of interest?

• Should city staff be given incentive bonuses for bringing in development?

• Do developers have too much political influence in City Hall?


Debt Financing for Development and “Capital Improvements”

• The Fitch agency’s report on East Lansing, giving it an AAA bond rating, has been used by supporters of the status quo as evidence for good fiscal management by City Hall. People familiar with municipal bond ratings know agencies almost entirely rely on information provided by municipalities, so they are not truly sources of independent judgment, and there is much in the Fitch report that reflects the rosy picture for the future local economy preferred by City Hall.
• Fitch likes that the budget was cut to deal with decreased revenues, but that doesn’t mean the cuts were well done or that public services are being delivered more cost-effectively rather than just less public services. All a bond rating agency cares about is whether bond investors will get their money. Some genuine budget cutting measures, such as moving new employees off defined pension plans and requiring retirees over 65 to enroll in Medicare, have become standard and are not something for which a government deserves a pat on the back.
• The report is also misleading to those unfamiliar with municipal debt, because much of the reduction in East Lansing debt comes from the bonds citizens voted on for Hannah renovations and the Aquatic Center, backed by a specified millage, not the bonds voted by Council for development projects and “capital improvements.”
• The key passage from the Fitch Report says, “[Maximum Annual Debt Service (MADS)] as a percentage of combined general and debt service fund expenditures is extremely high at 28%; however, 76% of the direct debt obligation is self-supporting. MADS anticipated to be repaid from taxes is a more manageable 13% of combined expenditures.” Fitch takes the city at its word that debt service on bonds for specific projects is “self-supporting” without independent analysis.

• “Self-supporting” debt service means that the project for which bonds have been issued is generating enough new revenues to pay for the annual interest and principal on the bonds. (Bond investors do not receive the principal until the bonds mature, but the city sets aside money each year to cover the lump sum principal payment at maturity, although it is legitimate for a “self-supporting” “debt service schedule” to ramp up a little slowly to allow for revenues to come online, as long as the city has sufficient cash flow.)
• Revenue sources, which are specified at the time bonds are announced, may include tax increment on the development and/or fees and rents, such as parking or sewer fees.

• For each specific project funded by bond proceeds, is debt service truly self-supporting from new tax and fee/rent revenues generated by the project, or is debt servicing being subsidized from elsewhere, with budgets manipulated to give the impression of self-financing?

• The biggest risk to self-supporting debt service is “failure to complete.” Put simply, if bonds are issued and the project is unfinished, on indefinite hold, or abandoned, there will still be debt service on the bonds but no (or grossly insufficient) new tax (“tax increment”) or other revenues generated to pay for debt servicing costs.
• This is what has happened with Avondale Square, where it appears only interest payments of $138,900 on the $2,365,000 long-term taxable bonds (2010 Limited Tax General Obligation Bonds Series A) are being budgeted, to reduce the current shortfall, which will mean budgeting more for principal in the future.
• This is also what has happened with the $5.495 million in Bond Anticipation Notes, with annual interest-only debt service of $192,825, and principal due at maturity on April 1, 2011, for City Center II.
• This why there is so much worry about further issuing of bonds in advance of completion of City Center II, especially given the developer’s history.
• Some approaches to reducing risk from “failure to complete” would be using short-term “revenue bonds” (not backed by full faith and credit of the city) until projects are generating sufficient revenues for self-supporting debt service, promising to replace private financing for certain project expenditures but only after completion, and requiring the developer to obtain a “performance bond” from a major insurer to cover all potential losses, including debt service costs.

• Should East Lansing be taking stronger measures to guard against “failure to complete,” even if this means adding to the cost of financing for development projects or makes some desired projects impossible, because the private sector balks at the risk?

• Self-supporting debt service plans make assumptions about increased property tax revenues (tax increment financing or TIF) and about other revenue sources, if included in the plan. If assumptions are overly optimistic about revenues, the debt service plan will not be met and revenues will need to be taken from elsewhere in the budget.
• Avondale Square has failed to produce much in the way of tax increment financing and sale of lots (over-budgeted year after year) have been moribund after initial interest in late 2008-early 2009.
• In 2008, the city purchased the 122-space Albert Place parking ramp from the developer for $2.73 million, for which (according to the City’s 2009-2010 annual financial report) the Automobile Parking System Fund issued $3.7 million in bonds for the purchase and other purposes, with much of the debt service expected to come from tax capture (TIF) on the Albert Place condos by the Brownfield Redevelopment Authority.
• Brownfield tax capture has been inadequate for debt service due to the slow uptake on condo purchases (the condos still owned by the developer are taxed at about half the taxes on sold condos) and slumping property values.
• University Place, which shifted ownership after 1991 foreclosures, has had trouble meeting its tax increment financing plan, although apparently the state has made up the difference.
• City Center I did produce significant tax increment revenues, about half of which has gone to schools (it is not a brownfield which allows for school tax capture). However, the larger City Center I project envisioned when the $12.5 million in bonds for the parking structure and infrastructural improvements were issued in 2000, was not completed, and slumping property values have reduced anticipated increases in tax increment. This means almost certainly the tax increment from City Center I has been inadequate for debt service on its bonds and tax increment from unrelated properties in the DDA TIF district has been needed to supplement.
• Less than expected revenues from parking fees and rents has also led to a shortfall whether directly or indirectly included in debt service plans.
• Some states require that no more than 50% of projected tax increment and other new revenues from developments be allocated for debt service.

• If there are future development or public works projects that are supposed to be self-financed for debt service, should East Lansing be much more conservative about the percentage of debt compared to projected revenues to better guard against shortfalls, even if this means some desired projects will not be possible?

• Debt service also sometimes makes certain political and external funding assumptions. If political or economic circumstances change, funding expected for debt service may dry up and need to be replaced at the expense of what most citizens consider higher priorities.
• In 2006, East Lansing obtained a HUD Section 108 loan of $1.5 million for Avondale Square. Annual debt service of about $140,000 per year is being taken from the Community Development Block Grant Fund. (The FY 2008-2009 budget also shows $170,000 for Virginia Avenue/Avondale Square infrastructure from the Community Development Block Grant Fund.)
• With federal cutbacks to revenue sharing programs and with city budget cuts placing new demands for what remains of Community Development Block Grant money, this debt service payment becomes more burdensome.
• If state lawmakers eliminate business personal property taxes as a source of revenue for the city, as it appears likely, tax increment financing plans that partly rely on these will fall further short.
• In general, debt service, personal, business, or government, presumes expanding incomes and becomes more difficult when budgets are contracting.

• What measures should citizens take to insure city officials do not make “fat-year” commitments that will prove destructive to finances if years turn lean?

• When voters approved sale of the old Department of Public Works site in 2002, the expectation was that it would sell for $2.73 million and that a new site would cost $4 million. “Construction on a new property, which will be north of Lake Lansing Road, cannot start until a buyer has been sought for the [old DPW] property.” There were assurances no bonds would be necessary to fund the new site, although Councilwoman Baten knew better.
• The old DPW site was not, in fact, sold until 2011 to Spartan Technologies for $350,000 (much of it).
• “In fiscal year 2003, the City borrowed $6,800,000 to purchase land and build a new public works building. Due to soil conditions and rising steel and other construction costs, a second borrowing of $2.5 million was issued on November 19, 2004.”
• The city chose not to go to the voters for a separate millage to pay for debt service on the bonds (a.k.a., raising taxes). It appears the debt service is taken from an “internal service fund” called the “Garage and Public Works Service Fund,” which obtains most of its revenues from building and equipment rentals to other departments, which is to say indirectly from general fund taxes.
• From whatever fund debt service is taken, nothing changes the fact that instead of a new DPW at a cost of $1.27 million after sale of the old with no bonds, taxpayers need cover debt service for $9.3 million in bonds plus interest. The revenues coming into the Garage and Public Works Service Fund could otherwise be going to pick up the trash.

• The Automobile Parking System is a “business-type activity” and is supposed to generate revenues for the city that could go to the general fund.
• Instead, because of its heavy direct and indirect debt service load and its grossly underutilized parking ramps, the Automobile Parking System Fund has to be subsidized with cell tower rental fees and, last fiscal year, about $300,000 in court ticket revenues that could be going to the general fund.
• The Automobile Parking System Fund has also had to have new bonds issued or has piggybacked on new brownfield projects to pay for maintenance.
• All this is in addition to debt service on parking ramps taking up all the local tax increment (and more) on earlier major downtown development projects (University Place, City Center I) and brownfield tax increment for newer developments.

• Does the complicated use of many distinct funds in the city’s budget serve to cover up debt for projects whose finances have not been what advocates promised?

Brownfields and Public Works

• The original purposes of brownfield tax incentives were to clean up toxic and former industrial sites and to jump start redevelopment in areas of true blight where no private developer would venture alone. They were also intended to make the costs of urban redevelopment competitive with sprawl development to prevent further sprawl. Over the years almost everything has been declared a brownfield site, from a cornfield for a Walmart to any “obsolete” building. There are restrictions on “qualified brownfield expenses,” but in addition to actual “abatement” of environmental hazards and destruction and removal of existing structure, these include site preparation and infrastructure improvements, which often would be more expensive in a sprawl development, and various public works.
• For most projects, toxic cleanup is only a small fraction of total qualified brownfield expenses, and sometimes, as in the St Anne Lofts project, on the site of a former drycleaner, the environmental abatement expenses, the excuse for being declared a brownfield site, are dropped from the list of expenses covered in the “tax capture” plan, since it is more likely grant funding can be obtained for these than for public works.

• City officials, in East Lansing and elsewhere, treat tax increment and other development related new revenues as free money to do with as they please; after all, if the development was not built, there would be no new revenues from it.
• Some infrastructural improvements (streets, sidewalks, sewers, utilities) are integral to the development, whether “tax capture” (tax increment) goes to the developer or to the city for debt service. However, traditionally these would have been paid for by the developer.
• Other city-owned aspects of developments are simply public works projects without the label, albeit they are supposed to be self-financed by new revenues from the development. In East Lansing these have mostly been parking structures, but also things like sprucing up plazas.
• For St. Anne Lofts, instead of abatement of drycleaner chemicals, the limited amount of brownfield tax capture available has been earmarked to build an amphitheater at Ann St. Plaza. For City Center II, if it were ever to be built, brownfield tax capture is budgeted for a performing arts theater and exhibit space, as well as a ~$16 million parking structure.
• Although advocates of piggybacking public works onto new developments are loathe to admit it, diverted revenues could instead be used for public services or from infrastructural needs elsewhere in the city. (An amphitheater is not necessary for the developer to build St. Ann Lofts, the Albert Place developer could have built its own parking for residents, or they could have parked in a half-empty lot a couple of blocks away.)

• Since traditionally citizens are asked to vote on public works, should all public works intended to be self-financed by new developments be put on the ballot?

Downtown Development

• The East Lansing Downtown Development Authority’s Tax Increment Financing District was created in 1991 to encompass the main downtown area. In 1999 it was expanded west along Grand River and recently expanded again along Grand River east to Hagadorn.
• The DDA “captures” (i.e., diverts) “local” tax increment in its district since 1991 (or the later expansion dates), “local” being millages for East Lansing, Ingham County, LCC, and CATA, but not school millages (some of which do get captured in brownfield projects).
• This means the DDA receives all increased tax revenues whether due to simple inflation of existing property values, higher taxable values released from Hedley through sales, redevelopment in which the DDA had no hand, and redevelopment it sponsored.
• The DDA uses its diverted tax revenues for its own projects and programs outside the main city budget, although the DDA budget is supposed to be approved by City Council in public session (it has not been). Any money the DDA cannot put to good use is required to be returned to the taxing bodies from which it has been diverted. So, wasteful or low priority spending by the DDA is no different than wasteful or low priority spending from elsewhere in the city budget.
• The DDA does not have its own assets to cover bonds issued on its behalf by the city, just its diverted tax revenues.
• According to state law, the DDA board is required to have a majority of members with downtown business interests, which could include shopkeepers or professionals renting storefront or offices. East Lansing has interpreted this to mean owners of downtown properties (whose interests are very different than business renters), and the appointment process has largely excluded any representation from those in the neighborhoods who might not be enthusiastic about using money on downtown projects.

• Over the last 20 years, has the Downtown Development Authority met its state mandate “to correct and prevent deterioration of business districts; promote economic growth and revitalization; [and] encourage historic preservation”?

• With cutbacks to public safety, public services, and neighborhood maintenance, is earmarking funds for downtown development still justifiable?

• Has the DDA been allowed to operate as a kind of unsupervised shell company for special projects and programs that would not pass muster under the general fund budget?

• Should the city be taking on the roles of marketing and promotion and of sponsoring events for the downtown business district, or would these better be done by the chamber of commerce?

• Could economic development programs, such as an “incubator” for software and internet startup companies, be undertaken for much less cost if distanced from the DDA’s other mandate of enhancing the downtown business district?

• The Technology Innovation Center, the DDA’s main economic development program, is running a much higher deficit than advertised, because debt servicing on bonds and personnel costs are not included among operating costs in the budget. Given cuts to public services, is a subsidy of probably about $15,000 per year for each of the 15 TIC business tenants justifiable?

• One of the few legitimate TIC “success stories” sold his business to an out of state company. Should the TIC and other taxpayer subsidized business development programs have mechanisms to insure the city obtains a return on its investment?

• Instead of vague goals, such as “encouraging entrepreneurship,” should the TIC have measurable objectives and assessment to determine success?

• In general, should all East Lansing economic development projects and programs have concrete goals, measurable objectives, and objective assessment procedures, with annual public review, to ascertain if they are an effective use of taxes not just pet projects of which city officials do not want to let go?
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