Archive for February 16th, 2009

I’m a new author to this blog and appreciate the outlet to set some facts straight. I’m concerned that the local media is missing the mark on some of the Rio Nuevo issues and thought I would take a moment and bring the readers another viewpoint. There was a meeting last week at the State Legislature Finance Committee on the future of Rio Nuevo TIF funding. You can catch the video HERE.

 

Want to see how a real city has used TIF as a professional economic development tool, to leverage enormous commercial growth in its downtown?  Let’s look to our nation’s capital, of all places, where Downtown D.C. has experienced a renaissance in recent years.  

 

Check out this Power Point presentation that explains how a TIF has been used to stimulate significant investment of hotels, retail, and a museum that is part of a mixed-use development, in the District of Columbia.

 

 

Click on “TIF Case Studies_Washington D.C.ppt“.

 

With the recent acceleration in criticism of Rio Nuevo and its possible termination at the hands of the state legislature, I have heard and read many misconceptions about how the Rio Nuevo TIF works and what the City did wrong in creating this mess.  The City did a lot of things wrong, strategically and tactically, with things done and not done, and unfortunately some of the things it did right have been too little, too late to save it from its likely fate at the state capital.  

 

But the trouble started with how the district was drawn back in 1999, four years before the City even started collecting TIF revenues from the State of Arizona.  Last week Rio Nuevo Director Greg Shelko was bothered that the Senate Finance Committee brought up how the district was drawn—again—but to bring this up is not just dredging up the past, or about revisiting outdated criticisms or old grudges.  The way the boundaries were drawn is more than an inconvenient truth about Rio Nuevo.  It is the fundamental truth about Rio Nuevo and why it hasn’t lived up to its enormous promise.  

 

Rio Nuevo was handicapped before it even began by decisions that were made several months before the voters approved the project in November 1999.  The City decided to draw up a district that included property from “A” Mountain all the way down Broadway to what was then called Park Mall.  

 

Some Tucsonans have defended a downtown development district that takes in all of the TIF generated at El Con and Park Place as Tucson’s way of achieving payback for the State revenue-sharing inequities that Pima County suffers relative to other areas of the state.  However satisfying this offset of a perceived injustice may be to Tucsonans, the reality is that the gerrymandered TIF district—drawn in the shape of a very long rifle—has been a hindrance to development, regardless of how much money it kicked back to Tucson.  

 

It has been a hindrance because it has skewed the City’s incentive structure for how to plan and finance revitalization.  The boundaries as they were drawn gave the City access to huge sums of state sales taxes from The Home Depot, Circuit City, Mervyns, Dillard’s, Macy’s, two Targets and many other stores and restaurants, but this largesse motivated the City to use TIF as a big piggy bank that replenished every month, rather than as an economic development tool that depended on their wise use of the opportunity to generate retail growth in Downtown.   With so much money coming in from existing and new sources along Broadway, and a large wish list that included an aquarium, several new museums, a re-creation of the Mission San Agustin complex, a restored Fox Theatre, and several other projects, the City chose to view all that free money from the east end of Broadway as a piggy bank.  It was as if any TIF generated in Downtown itself was a bonus.  When you don’t have to work for something, you don’t value it.  The TIF money was free, so Tucson didn’t make a commitment to generating more of TIF in the area that should have been producing it.  

 

The fact that Downtown business was moribund in 1999 was actually a great thing from the tax-increment standpoint.  The state sales taxes from any new development, any net new business activity, would have been 100% incremental compared to the base year of 1999.  If Hotel Congress increases its sales by 10% over 1999, the corresponding 10% increase in state sales tax is the tax-increment for that property.  But if the empty lot down the street (and some or all of the other 30 empty lots) gets filled in with new businesses (with offices, apartments or condos on top, of course), then whatever sales taxes are generated there are 100% “increment”.  So the fact that downtown is/was dead is an advantage with the TIF scheme;  it creates an opportunity to enjoy a huge windfall if you actually invest in projects that generate new sales tax in Downtown.  

 

When the City issued its 1999 RFP for Rio Nuevo, a California developer responded to it with a proposal to build lots of retail on the west side of I-10, on the south side of Congress.  It was this developer, NOT the City, that proposed using TIF to fund the construction of attractions and infrastructure.  The developer envisioned a master-planned area with the Sonoran Sea Aquarium, Museum of the American West, and the Universe of Discovery (I’m not making these up; these were the names of the museums that were proposed in 1999), and a Regional Visitor Center serving as the anchors of a mixed-use development that would include 500,000 square feet of outlet stores.  The new sales taxes from this retail center would have all come back to Tucson, as the 1999 sales tax base on the land where it would have been built was Zero.  

 

That particular developer didn’t have its act together, and probably couldn’t have pulled the project off, but the City could certainly have found one that did, let’s say Forest City or General Growth.  If the City had chosen to stand up to Menlo Park neighborhood, which didn’t want a lot of retail on that corner, OR, if the City had said, “okay, we’re not going to put the retail there where the neighborhood doesn’t want it, but we’ll put it on the east side of the freeway”, we could have created a TIF district that didn’t need to extend its boundaries beyond Downtown.  A TIF district that was limited geographically to Downtown would have allowed the City to invest in the infrastructure to support that retail center with a repayment plan based on the new sales taxes generated there and that would not have been generated otherwise.  Whatever sales taxes that retail center would have generated would have come back to Tucson, 100% OF IT.  

 

Instead, the City Manager’s office, led by city manager Luis Gutierrez and assistant city manager John Nachbar (who left Tucson shortly thereafter for Kansas) put together the rifle-shaped TIF district with no public input in the summer of 1999.  Nachbar knew that El Con and Park Mall were planning redevelopment and growth.  It seemed like a clever way to get funding to build the museums while not forcing retail development on an unwilling neighborhood.  Tucson had just a few months to get voter approval for a TIF district before the enabling legislation terminated. The City Council approved the plan 5-2, and then the voters of Tucson and South Tucson (the state law required a partner city to vote for the project, and Tucson promised South Tucson $1 million for its trouble) approved Proposition 400 in November 1999 with over 60% of the vote.

 

The City then spent $600,000 on a master plan that was subsequently revised at great cost; it created a governing board, a citizens advisory committee, and began essential environmental remediation work on the west side of the Santa Cruz.  The TIF revenue stream did not begin until 2003, when the City decided the time was right to maximize the flow of sales taxes being generated in the district.  Park Place’s renovation was nearly complete and El Con had opened a Home Depot store.  

 

In order to fund the planning, consultant fees, land acquisition, staff costs, and other expenses prior to the time when the TIF funds started coming in, Rio Nuevo borrowed over $14 million from the City of Tucson.  Unfortunately it did not pay any of this back, and now a significant part of the recent bond issue proceeds will be used to repay this loan to the City, which is reeling from huge shortfalls in projected sales tax revenue.  In order to initiate the district, state law required an investment in the “primary component”, which was the Tucson Convention Center.  Consequently, the first completed Rio Nuevo project was the new box office at the TCC, which cost about $700,000.

 

A TIF district is supposed to be revenue-neutral; in other words, the governmental entity that is losing the taxes should not miss them because it never would have received them anyway but for the project.  Funds are supposed to be invested in “but for” projects; those that would never have been built “but for” the investment.  The incremental sales taxes should come only from areas benefited by the public investments.  

 

But Tucson grabbed sales tax increment that was generated outside of Downtown, and that would have absolutely gone to and stayed with the State of Arizona.  The malls on Broadway were redeveloping regardless of what Tucson did with its downtown.  The motivation for that redevelopment was totally unrelated to the destination of the sales taxes that would be generated there, and it certainly had nothing to do with Downtown.  As such, the sales tax increment generated east of the Snake Bridge was 100% diversion of State money.  It was an increment, yes, and therefore it was diverted back to Tucson for Rio Nuevo, but it was an increment that was the fruit of other investments made by private developers, and it should have stayed with the State of Arizona.  Tucson did not invest TIF dollars earned at El Con back into infrastructure improvements at El Con Mall (and I’m not arguing that it should have);  it spent them on studies, consultants, and plans for projects Downtown.  (Some have seen this as a delicious irony as well, that the mall that signaled the demise of downtown’s department stores and retail base in the 1960s is now being used as an engine to restore Downtown.)

 

One can argue that that is a good thing because it helps balance out other revenue-sharing inequities that leave Tucson on the short end relative to Phoenix, but it cannot be argued with a straight face that it is a proper way to set up a TIF.  

 

If Tucson had drawn a TIF district that was self-contained in Downtown, there would have been no diversion of extraneous State sales tax-increment that it wasn’t really entitled to.  The City of Tucson has looked at the fairly predictable revenue stream coming down Broadway as a source of income that it is entitled to spend Downtown.   With a real TIF, you wouldn’t have a budget of anticipated revenue unless you sold bonds to leverage development that created the sales taxes.  In other words, you wouldn’t say, “we’ll have $600 million coming in over the next 20 years;  how can we spend it?”  

 

You would say, “what opportunities for development are out there that the City can invest infrastructure dollars to support?  What fair and understandable process can we create that lets developers and retailers know what the rules are for applying for a share of this public investment?”  Then, be ready for, or actively recruit, developers who see market potential to build projects that generate enough sales tax increment to cover the public investment.  And since there is no initial money coming in, you have to bond to get the money to build the infrastructure to make these projects work.  

 

Let’s say a developer wants to build 200,000 square feet of retail.  (I picked that number because one of the City’s many studies—the 1995 City Center Strategic Vision Plan—stated that Downtown should be able to absorb 200,000 square feet of retail, and the City should try to achieve that.)   The City evaluates the feasibility and risk of partnering on this deal, and if it decides to go forward, it might agree to pay for something like the construction of a public parking garage underground or above the street-level retail.  Without it, the project doesn’t happen because other costs of doing development in Downtown give the developers incentive to continue building strip centers in the suburbs or on raw desert.  With it, you generate jobs, sales taxes, vitality, and momentum for continued growth and investment.

 

200,000 square feet of retail kicks off a LOT of sales tax, and if Tucson had built such a center on an empty Downtown lot when the economy was growing, every penny of the new sales tax would have been increment that would have paid a large and ever-growing increment, year after year until the district expired.  All of these sales taxes would have been rebated to Tucson, and used to repay the bonds that would have been sold to finance that parking garage.  There would have been money left over to create a fund that you could use to stimulate new development.  Or build a “world-class” museum.  

 

More realistic than the notion that something so large as a 200,000 sq.ft. retail center would have been built in Downtown Tucson in, say, 2003, would be smaller mixed-use projects with 10,000 or 20,000 sq.ft. of retail, restaurant, or entertainment space.  Incremental and sustainable development, creating 100% incremental sales tax growth.  As an example, if Bourn Partners’ The Post had been built as planned, it would have created 10,000 square feet of new retail space. If you built several such projects with housing components and created some momentum, Downtown might be able to absorb a bigger retail project, especially one associated with an entertainment destination, hotel, and a thriving convention center.  A new hotel would generate an enormous TIF because of its high sales and the fact that the sales taxes would be 100% incremental over 1999.

 

The sooner such developments could be completed, the sooner they would start paying the City back for its investment of TIF, and the more TIF could be earned over the course of a finite period.  

 

Rather than giving public land away for free, which guarantees that there will not be comparable land values for banks and lenders to use to finance future projects, you would value the land appropriately and sell it at market value.  Then, if you want to offer incentives to stimulate development, you do that another way.  But you don’t give away land.  

 

By simply budgeting the expenditure of free money that was generated at Park Place and rebated to Tucson courtesy of the taxpayers of the entire State of Arizona, there was no incentive on the City’s part to actually use the power of TIF to create new commercial development and new sales taxes in downtown.  Since the money was going to flow in regardless, there wasn’t even any urgency about using it for the museums and other non-sales-tax generating projects.

 

The structure that the City created for the TIF district virtually GUARANTEED that little private investment or significant revitalization happened, or would do so in a timely manner.  Actually there was no structure.  There was no “program”.  Rio Nuevo officials wondered, in the early years why no developers showed up.  That was because there was no economic development program to respond to.  The City’s plan was simply to build attractions that would draw visitors to Downtown, and to hope that developers would invest in housing or other development in Downtown in response to the increase in visitation to the area.  Build a museum on the west side of the river, and hope that it would inspire a developer to build condos on Congress Street.  That was basically the plan.

 

These foundational mistakes only doomed Rio Nuevo to failure because the City never fixed them—there was nothing stopping the City from changing its initial approach.  In fact, had the City used the TIF generated at the malls as seed money for jump-starting its downtown TIF-generating plan, it would have been even more powerful.  Combining the free money from the east end of Broadway with new TIF generated in Downtown would have been a tremendous advantage for Tucson.  But the City chose to simply take the free money and spend it on projects that don’t generate sales tax in Downtown.

 

The Depot Plaza project is being developed in a manner that is close to the model that should have been used from the beginning.  TIF is being used to build an underground parking garage, below two planned residential buildings with retail space along 5^th Avenue and Congress Street.  The problem is that there is no program that would inform another developer that such a model might be used on another Downtown project.  The Rio Nuevo website gives no indication as to how a developer or investor might respond to the Rio Nuevo Economic Development Program, if there were such a thing.

 

Rio Nuevo has collected over $58.3 million in TIF between July 2003 and November 2008 (the last month for which Rio Nuevo has published its TIF revenue on its website), and it has spent much more than that.  

 

But soon it won’t have any money to spend, other than what it generated in its December bond sale—the repayment of which is in question because of the state legislature’s interest in stopping the TIF payments.  A February 15 article in the Arizona Daily Star claims that the bonds were backed by the General Fund, which if true, will certainly lead to more controversy.  Not only is the hard-fought TIF extension (2013 to 2025) likely to be wiped out, but so will the last four years of the original ten-year Rio Nuevo District, triggered in 2003 and projected to generate over $120 million.  

 

What A Pity!

 

 

After 3 years of zero results, it’s time to say goodbye to Tucson City Manager Mike Hein.  After aborting a national search, the City Council fast-tracked him to his present position.  Sad to say, it also looked liked local restaurateur Bob McMahon started him on that fast track.  Looking back, I bet Bob is regretting that decision.  Bob’s a businessman and probably thought he had an understanding of Hein, which he wouldn’t have with an out-of-state stranger.  Sad to say, Bob was wrong. I believe that the last 3 years of Hein has made Tucson even more business-unfriendly than ever. 

Businesses are complaining even more about how hard it is to do business in the city.   Last year, the Arizona Small Business Association named Tucson the most unfriendly municipality to do business in.  His development services department’s reputation is so bad, it make Oro Valley’s look friendly and helpful.

Rio Nuevo.  His mismanagement of this has reached legendary status the last month or so.  How does Shelko keep his job?  His arrogance combined with ignorance makes him the “Baghdad Bob” of downtown redevelopment.  Hein (and stooge Jaret Bar) also flubbed the hotel deal.  The smart thing to do was to the Hotel Arizona deal. It’s location is better for all of downtown and helps improve an existing location.  Hein was never going to do it because he does not like Bert Lopez.  This is not a reason for making decisions on behalf of the people of Tucson.  His blue ribbon panel was swamped with city staff who overran the decision making process.  So, we now have the Garfield Traub-built Sheraton.  Hein buys the bonds too soon, so he can beat the State’s ax.  Which in turn, will cost the people of Tucson about another $10 million.  The news never gets better.

Hein should just selling some land at discount to capitalists with some tax incentives and get out of the way, but he’s not built that way.  This guy went to school for Public Administration and has been a bureaucrat ever since.  The last time he acted as a capitalist was when had a newspaper route in Wisconsin.

Hein then restructures the Downtown Partnership so it becomes an unofficial department of the City of Tucson, but appears to retain its independence.  He hires Glenn Lyons from Calgary with no money in the budget to do so.  He has his puppet Hecker and Lynn say they are going to get that money from the private sector, which, of course, never happens.  He then has Don Durband fired as the director of the DTP and replaces him with Nina Trasoff’s chief of staff’s wife.  Get your scorecards out keep track of all this. 

There are other things to talk about(lack of oversight on TREO and Visitors Bureau, but I digress), but this blog can only hold so much.  I have heard others say that he is at the will of group of 7 dunderhead council people.  There is some truth to that.  The proper thing to do for Hein to do is provide a vision, a plan and the will to get things done.  If the council keeps shooting you down, so be it.  Then, it’s truly all their fault.  The way it looks now he is complicit in their poor actions.  He’s supposedly the freaking expert. Start acting like one.  Actually start earning your $200,000 plus salary! Tucson will always be second rate, if the City actions are solely based on Mayor Bob and his cast of clowns.

I don’t see that happening anytime soon.  The best thing for you to do, Mr. Hein, is leave.  Sorry, your dreams of being the Super Chuckleberry of Pima County are over.  Please get on your custom Harley Davidson and drive out of Tucson’s life now.  It’s for the best.