Are We Paying Some Developers to Develop Less?

Posted on by Patrick Ishmael

Last week the Post-Dispatch reported on a proposed $130 million luxury tower in the Central West End, to be named "One Hundred," that if built would be among the tallest residential buildings in the state, vaulting 36 stories and touting a modern design that will certainly stand out as residents leave nearby Forest Park. But one thing sticks out in the story about the project: it's gotten larger, thanks to fewer tax incentives.

The story begins like so many tales of tax incentives. The building's developers had been expecting taxpayer help with the project, and indeed the project appears set to receive a 15-year tax abatement—a "95 percent tax abatement for 10 years and 50 percent tax abatement for five years." As reported, that subsidy will account for about 8% of the project, translating into a tax incentive of around $10 million. That's serious money.

That abatement, however, was actually less than what the developers asked for, which led to this remarkable revelation in the St. Louis Post-Dispatch's report on the building (emphasis mine):

Mac Properties initially sought 20 years of full tax abatement, officials said. Pushback by city officials prompted the developer to increase One Hundred’s height by seven floors to accommodate about 50 more apartments and spread out the project’s cost, Roddy said.

To repeat: the project is set to receive fewer incentives than planned, and to make the project work, the developer actually increased the size of the building. 

We have often talked about the risk that's put on taxpayers when marginal development projects are underwritten by the public, but the story of the One Hundred building shows another risk we haven't talked about at length: that taxpayers could also be subsidizing the return on investment of private actors to the point that those actors settle on smaller, less risky projects. If a developer can make the same amount of money filling 250 rooms with a subsidy as 300 rooms with a smaller subsidy, a developer would do so. The former is less risky and the return is going to be about the same.

In practice, then, taxpayers may actually be paying some developers to develop less. Maybe it's time not only to emphasize the inequity of putting development risk on the public, but also to start talking about the potential of these subsidies to actively damage the state's growth potential.

When Scoring a 60% gets you $16 Million

Posted on by Graham Renz

Bill DeWitt III, President of the St. Louis Cardinals, let the city know he was “ticked off” when he heard some were criticizing his plans to squeeze taxpayers for another $16 million to expand Ballpark Village, an entertainment district next to Bush Stadium. Several commenters, myself included, were (and continue to be) skeptical of the multibillion dollar corporation’s need for yet another public handout. Remember that it wasn’t long ago that the first phase of Ballpark Village secured $49 million in subsidies.

I am surprised there aren’t more skeptics, especially given how poorly the city’s development department, the St. Louis Development Corporation, assessed the Cardinals’ incentive request (despite later endorsing it). The second phase of the Ballpark Village development scored a 24 out of a possible 40 points on the city’s incentive rating system. In other words, the request for incentives received a 60% grade. Nevertheless, the incentive is moving ahead through the approval process.  

Proponents of the project might respond that the city and school district are forecasted to see increased revenues even after accounting for the incentive package, so the subsidy won’t have negative impacts like TIF and abatements have. But this objection misses the mark in two ways. First, the initial phase of Ballpark Village received TIF, so it has already negatively impacted taxing jurisdictions. Secondly, the revenues for the $16 million will be generated by a kind of special sales tax district known as a community improvement district (CID). That means ordinary folks like you and me—consumers—are going to pay extra taxes so that the city doesn’t take a financial hit . . .  and the Cardinals don’t take a financial hit. But who should public policy be crafted for: the government, wealthy corporations, or the people?

As the incentive proposal moves through the legislative process, the St. Louis Board of Aldermen should weigh the costs and benefits of subsiding yet another pie-in-the-sky, “transformative” development. The research tells us these incentives don’t boost the economy. Why don’t city aldermen pay attention to their own Development Department’s ratings?

Holy Smokes! Andy Puzder, a Free-Market Advocate, to Run the Labor Department?

Posted on by Andrew B. Wilson
One of the first tenets of free-market thinking is that nobody owes anybody else a job – much less a minimum wage or the right to double-time pay for working more than – say – 40 hours a week.
 
In a genuinely free market, all job security and remuneration ultimately depend upon the ability to satisfy a paying customer – whether that is the employer or (for the owner or owners of the business) the people buying the final product, whatever that may be. As the economist Ludwig von Mises put it, the marketplace acts as “a daily referendum of what is to be produced and who is to produce it.”
 
No one understands all this any better than Andy Puzder, the chief executive of Saint Louis-based CKE Restaurants, Inc. and Donald Trump’s selection to become Secretary of Labor, as demonstrated in the lecture above, delivered at the John Cook School of Business at Saint Louis University on October 18, 2011.
 
The Show-Me Institute partnered with the business school in sponsoring the event. In his lecture, Puzder showed how increasing regulation in labor markets had stifled entrepreneurship and undermined job creation.
 
Puzder put it quite clearly: Reduce regulation, and watch unemployment drop and businesses grow.
 
The Show-Me Institute has been tracking those same issues in many articles and blog posts by our own writers and policy analysts.  Go here and here for articles of mine in the Weekly Standard – the first (“Jobberwocky Lives: You can’t keep regulating the workplace without killing jobs,” Sept. 7, 2015, issue) and the second (“Killing the Golden Goose: How Walmart’s left-wing critics destroy jobs,” Nov. 30, 2015, issue).
 

Video: Kansas City: Genuinely World Class

Posted on by Wendell Cox
The climate is so-so, there’s no nearby ocean or mountain range, and the metro area population has climbed only modestly over the past 3½ decades. But Kansas City appears to be better positioned than other comparably sized U.S. cities for future growth and prosperity.
 
Urban policy expert Wendell Cox counts the ways. Housing is affordable – in part, he says, because land-use restrictions are minimal – and the overall cost of living is low. With an extensive freeway and arterial system and relatively uncongested traffic, people can get around. KC consequently attracts more “domestic migrants” than it loses. Cox details all of this in his essay Kansas City—Genuinely World Class.
 
Cox, the principal of Demographia, a St. Louis-area public policy and demographics firm, walks through the advantages and what Kansas City needs to do to preserve them in this presentation.

When Kansas City Leaders Got It Right

Posted on by Patrick Tuohey

We often use this blog to criticize city leaders for their bad ideas. City leaders rush to spend public funds on airports and convention hotels and streetcars. They pursue economic development policies that enrich developers while diverting city funds away from important basic services.  But a new study from Wendell Cox suggests that the greatest thing Kansas City leaders ever did was… nothing.

More specifically, Kansas City leaders have not adopted land-use policies that have made cities like Portland and Denver so expensive. To demonstrate the impact of these regulations, Cox uses a “median multiple,” which he calculated by dividing the median house price by the median household income:

In 1990, the three metropolitan areas [Denver, Portland, and Kansas City] had similar housing affordability. The median multiple in both Denver and Portland was 2.4. Kansas City’s median multiple was 2.3. By 2015, the median multiples in Denver and Portland had more than doubled to 5.1. By comparison, the increase in the median multiple was much less in Kansas City, at 2.9.

Other cities also saw housing prices rise without a commensurate increase in median household income:

Sydney, Australia, which was among the earliest to adopt urban containment policy, now is among the least affordable housing markets internationally, with a median multiple of 12.2 in 2015, while San Jose and San Francisco have median multiples of 9.7 and 9.4, respectively. In these metropolitan areas, which had median multiples of under 3.0 before adopting strong land-use regulation, residents now face median multiples that are more than three times as large as those in Kansas City.

Kansas Citians are constantly told that we need to be like Portland and Denver by streetcar aficionados,  Dallas for folks who want a new airport, or Indianapolis by people pushing a new convention hotel. But Kansas City is not those places, thankfully. And our greatest strength—housing affordability and the cost of living it allows—exists exactly because we didn’t follow their lead on land use regulation.

Kansas City needs to be Kansas City, and Cox’s paper is required reading for anyone who wants to understand how we can promote ourselves to the world.

State Audit Reveals Transparency Problems

Posted on by Michael Highsmith

When it comes to the workings of the government, the more transparency the better.  Missouri’s Sunshine Law is intended to help citizens keep their government accountable and see how tax dollars are being used.  In reality, the law is not working.  

In November, Missouri’s State Auditor’s office ran a test.  It randomly delivered 309 letters to political subdivisions in its database.  Each of these public entities (cities, school districts, special taxing districts, etc.) was sent a very simple, anonymous sunshine request, and the responses were then monitored.  The results were dismal.  More than two-thirds of public entities failed to fully comply, and roughly one in six failed to respond at all. 

A few political subdivisions even refused to provide information unless they were told who was requesting it, even though nothing in the Sunshine Law requires that proof of identity accompany a request for information. 

The point of the exercise was to learn what the average citizen deals with when checking on a public body, and the results show that the process is often overly burdensome.  Some responses asked for payments as high as $80 for easily attainable documents like minutes from 2015 meetings. Show-Me Institute analysts have submitted our fair share of sunshine requests and have at times been met with outrageous demands.

It’s possible that some of these failures come from a lack of understanding of the law. If this is the case, then public servants need to be brought up to speed on their duty to the public. When government entities aren’t open to public scrutiny, there is reason for concern.  There’s nothing unreasonable about demanding that public information be public.

Parking Fees Alone Cannot Fund MetroLink Expansion

Posted on by Graham Renz

Saint Louis City Mayor Francis Slay wants to spend $2.2 billion on a new north–south MetroLink line, originally reported at 17 miles long and now coming in at a whopping 31 miles. The Mayor has been enthusiastically pushing the expensive project, but the plan is light on funding details. The plan assumes the federal government will contribute $800 million, but local taxpayers will still need to come up with $1.4 billion for the project to move forward. For context, the Saint Louis Cardinals were valued at $1.4 billion last year.

So far, Mayor Slay has mentioned raising the city’s parking fees to fund the expansion. While this suggestion may appeal to transit activists, parking fees won’t be nearly enough to pay for 31 miles of new MetroLink track. The city’s entire parking division collected just over $16 million in revenue last fiscal year. But the City and County dish out more than $120 million a year just to keep MetroLink running. Even if parking division revenues doubled (or tripled, or quadrupled), expanding MetroLink would still be far out of reach.

The math on parking fees is indisputable, and points to the possibility that the city will be counting on the rest of the region to make the MetroLink expansion happen. The city is looking to Saint Louis County taxpayers, and perhaps others around the region and state, to help pay for the expansion. In fact, the expansion likely cannot move forward unless county taxpayers pay more. But much of the north–south route is far from many county residents, and the county already contributes roughly four times [see p. 67] what the city does in terms of transit funding.

What will it take to expand MetroLink? Assuming Metro, Saint Louis’s transit agency, issues 30-year bonds at current interest rates, expanding MetroLink will require roughly $60 million each year (not including increased operating expenses). To come up with that much money, the city would need to increase parking fees, and both the city and the county would need to impose an additional sales tax, likely of 0.5%. Such an increase would put many local sales tax rates far above 10%. While the mayor and rail proponents may not want to mention such large taxes increases, it’s difficult to see how Metrolink expansion can move forward without them.

As the City pushes big transit plans, taxpayers throughout the region should ask themselves if expanding MetroLink is really worth the cost. Despite the unfounded claims of transit activists, MetroLink has failed to spur development, create jobs, or turn our region into a magnet for the “creative class.” Can we really afford another $1.4 billion?

Subsidies in St. Louis, Part 4: Accountability and Clawbacks

Posted on by Michael Highsmith

Supporters and opponents of tax subsidies disagree over one key question: Do the jobs and economic activity generated by a development justify the tax subsidies awarded to the developer? Answering that question requires accurate reporting of job creation/retention, so taxpayers can see what they’re getting for their money. Unfortunately, in Saint Louis that reporting is hard to obtain.

A recent study commissioned by the St. Louis Development Corporation (SLDC) found that the lack of aggregate information available from developers has made analysis of projects difficult. The study was intended to measure the impact subsidies have had on job creation, but the researchers found that no data was available regarding payroll information. The SLDC subsequently recommended additional reporting from incentive recipients.

Currently, municipalities must submit project details to the Missouri Department of Revenue every year or face losing TIF privileges, but municipalities get their information directly from developers (who self-report), and often reports are incomplete or inaccurate.  In a few cases, such as the construction of a seven-story multi-use building on Tucker Blvd., developers have even listed their anticipated project costs at $0! (see “Nadira’s Place”).

Inaccurate reporting is also an obstacle to accountability, allowing developers to receive taxpayer dollars without being held to the promises they made regarding job creation. When projects fail, there are no consequences. Worse yet, without information about what (or how badly) things went wrong, we can’t learn from the failure and be more selective about future subsidies.

Increased accountability would not limit the use of subsidies where they may be appropriate, but it could help us make better decisions about how they should be used. The SLDC report contains several policy proposals, including the use of “claw back” provisions that would require developers to pay back money they received as incentive for developments that failed to produce their promised job-creation or revitalization outcomes. Given that the story of development subsidies in Saint Louis has hardly been a tale of rousing success, area leaders would do well to take note of the SLDC report and consider its recommendations.

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