In Pursuit of the Free Lunch

It’s an enduring verity among economists that there ain’t no such thing as a free lunch. Somebody always has to pay for the benefits we seek. But when it comes to redevelopment, the woods are full of well heeled, high-level hustlers out to make a mega-buck or two at someone else’s expense. How do they do it? Simple. Modern redevelopment rests on two pillars: first, shortchanging the condemnees whose property is taken for redevelopment projects by paying them only partial compensation and acquiring their land on the cheap, and second, issuing tax-free bonds with which to finance the whole private profit-making shebang in the name of “public use.” That’s bad enough under any circumstances but it becomes obscene when the beneficiaries are mega-jillionaires who own professional athletic teams but who come schnorring to cities and get them to finance (read “pay for”) their multi-hundred-million dollar stadiums.

Case in point, the Los Angeles hustle where, in the words of the Los Angeles Times, “State officials . . . earmarked $30 million in voter approved housing bonds for a group with ties to Staples Center owner Philip Anschutz, for sprucing up the street next to his multibillion-dollar entertainment projects in downtown Los Angeles. . . . The funds come from a pot of $2.3 billion that voters gave the state permission to borrow for affordable housing in California.” (Patrick McGreevy, Subsidies May Aid L.A. Live, June 14, 2008, at p. B1). In case you are not a California real estate maven, maybe we should mention that “affordable housing” in these parts is an oxymoron.

And in New York, we learn from today’s New York Times (Charles V. Bagli, A Question Mark Looms Over 3 Expensive Projects, June 14, 2008, at p. A17), that the promoters of Barclays Center, “expected to be the most expensive arena in the world,” and surprise, surprise, the folks behind the Atlantic Yards project in Brooklyn (see our blog of March 22, 2008,  Another Big Redevelopment Project Down the Tubes?) are getting bent out of shape because — are you ready? — Uncle Sam, meanie that he is, is no longer enamored of letting them finance their multi-hundred-million-dollar stadiums with tax free bonds, and is contemplating new regulations that would make interest on bonds used to finance such projects taxable, the same as interest on all other private bonds. Which means that if Uncle gets his way, the owners of big-league sports stadiums may actually have to pay for their own ball parks. Oh the horror of it!

Not to be outdone by the Brooklynites, the Bronxites are at it too. The New York Yankees, who are building a new stadium on what used to be a park, “are being helped along by hundreds of millions of dollars in taxpayer subsidies, and may be heading back to the public trough for more.” Editorial, Green Thievery in the South Bronx, N.Y. Times, June 14, 2008, at p. A26.  As of now, this caper will save the Yankees a cool $190 million over the 40-year life of their tax free bonds. And how can we leave out the Mets? They have lined up $547.35 million in tax free bonds for their new CitiField stadium, to say nothing of the City’s subsidy of $166.1 million for new parking.

Here is how the redevelopment scam works. Typically, though not always, a would-be redeveloper with connections in City Hall  persuades the city to  declare an area that he covets as “blighted” which it may or may not be. Often, as MIT Professor Bernard Frieden put is, what these guys are after is not genuine blight that is a proper candidate for cleaning up, but rather “blight that’s right,” meaning an area that is just sufficiently downscale to inspire a colorable claim that it is blighted, but actually is sufficiently upscale so that upon its redevelopment it will be attractive as a site for fancy shopping malls and such.  Then the city redevelopment agency proclaims that the “blight” must be eliminated by acquiring the private property within the project area and reselling it at a subsidized price — or giving it gratis — to the chosen redevelopers. So far, so bad. But it gets worse. All that wheeling and dealing takes money, so the city redevelopment agency issues bonds and uses the proceeds to finance the acquisition of the “blighted” land so the redevelopers — poor babies — don’t have to pay the going market rate for it. Since those are revenue, not general obligation bonds, the city gets to skip any voter approval before issuing them. Neat, eh?

Ah, but if you borrow money, whether your indebtedness is bonded or not, you have to pay it back. Or at least that used to be the theory before the recent orgy of seemingly sane bankers lending huge sums of money to people plainly unable to pay it back, if you’ll pardon a digression.

So to pay off those redevelopment bonds, cities use Incremental Tax Financing, known as TIF. Under this scheme all the property tax revenues in the redevelopment project areas are “frozen” and become the base of future taxation. Actually, nothing is really frozen — property taxes continue to be paid and continue to be raised. What happens is that the increment of those taxes, over and above the “frozen” amount doesn’t go to the usual municipal taxing authorities that pay for schools, fire and police protection, etc., but rather is diverted to the redevelopment agency which then uses that money as a grubstake for redevelopers who get the land they want but don’t have to pay for it themselves as the taxpayers save them that inconvenience.  Your tax dollars at work, as it were.

This is sophisticated stuff, so the general public is largely unaware that this sort of thing goes on. In the meantime, bonded municipal debt accumulates as new redevelopment projects are created. In California that debt went from $5 billion in 1985 to $61 Billion in 2004 — and counting. Someone will have to pay off that debt, and we leave it up to you to figure out who that someone will be — hint: if you’re having problems doing that, look in the mirror. And as long as you are looking in the mirror, guess who gets stuck with the bill when a redevelopment project fails and is unable to pay its debts?

And as these rivers of public funds are diverted from publicly beneficial expenditures into the pockets of redevelopers, redevelopment agency lawyers (and condemnors’ lawyers generally) are in court, whining to sympathetic judges (who are often former government lawyers themselves) that, gee golly, Your Honors, we just plumb can’t afford to pay property owners whose land is taken, full compensation for all their demonstrable economic lossess, because if we do that it will be curtains for the civilized society as we know it, or at least, as the California Supreme Court once absurdly put it, an embargo will have to be declared on desirable public projects. And so it goes.

So you may agree with Milton Friedman that there is no such thing as a free lunch, but the big boys in the redevelopment game know better — at least the lunch is free for them. As for you, the revealed wisdom from on high is for you to keep your mouth shut and pay your taxes — which, as the ongoing campaign rhetoric has it,  the forces of “change” can’t wait to increase. And that folks, is what the U.S. Supreme Court calls a “public benefit.”

Have a nice day.

UPDATE. If you are interested in the details of TIF financing in redevelopment, see a new article by Alan Woolever, Tax Increment Financing, Government Grants, and Developer Tax Consequences: An Analysis of Statutes, Regulations, Case Law and Related Policy Considerations, 40 The Urban Lawyer 299 (2008). It turns out that redevelopers not only get to enjoy a free lunch vis a vis the condemnees and the hapless city inhabitants who rarely know what is going on, but they also get a break from Uncle Sam. Their city grants may be excludable from income when the time comes to pay federal income taxes. How sweet it is! 

SECOND UPDATE. Don’t miss the article by Charles V. Bagli, in the NY Times, Sep. 17, 2008, at p. A23, entitled Report Questions Use of Bonds for Yankees. It appears that New York Assemblyman Richard L. Brodsky has issued a report charging that New York City’s and the Yankees’ use of $943 million in tax-exempt bonds is illegal. This is being denied by the city and the Yankees, but it appears that the Yankees will save $181 million over the life of those bonds due to their tax-exemot status and correspndingly lower inrerest rates. We also learn from this article that “the city and the state agreed to provide the Yankees with more than $300 millionin cash subsidies for gaarages, a Metro-North train station, replacement parkss and road work. But the teams do not pay rent for playing on city land, nor do they pay property taxes.”

Your tax money at work.

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