Kentucky

How Council Voted to Defraud Investors to Benefit the Webbs

Call it "CentrePointe Fatigue".

After six-and-a-half years of bulldozing, promises, broken promises, half-truths, and outright lies on the CentrePointe project, folks are just plain tired of talking and thinking about CentrePointe. They're tired of waiting. They just want something, anything to be built on the long-empty block in the center of our city.

And I get it. After writing over twenty posts examining the business model, architecture, and politics of CentrePointe (see here and here for a sampling), I got tired of talking and thinking about it, too. The interest and outrage was hard to sustain (even if thoroughly justified). 

You can see it in online conversations. You can see it in the newspaper1. You can see it in Urban County Council meetings. The coverage and the questions got lazier. At some point, the fatigue just took over. People lost the will to keep investigating and to keep fighting, especially as the project stalled repeatedly.

And that's precisely what the developers have counted on all along.

If they just waited us out and wore us down, they could walk off with their bonanza payout financed with our tax dollars, and we'd all be too tired, too exasperated, or too relieved to notice.

Against this backdrop of CentrePointe Fatigue, Lexington's Urban County Council voted 15-0 last Tuesday to approve a new scheme to finance a $32 million parking garage for CentrePointe.

But what really happened was deeply disturbing: The Council unanimously approved a scheme which is designed to defraud investors for the benefit of the developers.

Is 'fraud' too strong a term? 

Let's dig in and find out.

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With any economic development initiative, governments hope to foster increased economic activity in a particular place. The increase in activity is sometimes called an 'increment'. Tax Increment Financing (TIF) is an economic development scheme where the projected future taxes generated by the new economic activity - the increment - are used to pay for 'public' infrastructure improvements.

In CentrePointe's case, these 'public' improvements included a $31.9 million underground parking garage, as well as improvements to sidewalks, sewers, streets, and the rapidly-deteriorating Old Courthouse. In all, CentrePointe includes about $45.5 million in so-called2 public infrastructure.

The CentrePointe TIF proposed financing the infrastructure by issuing bonds to investors, and paying those investors back - plus interest - over the next 30 years with the 'tax increment' generated from the project. 

Would CentrePointe be able to generate enough in new taxes to pay bond investors?

That was the central question of a 2013 report [PDF download] commissioned by the Cabinet for Economic Development and written by AECOM Economics, a Los Angeles based consultancy. 

The AECOM report stands as the only comprehensive evaluation of the economic impacts of CentrePointe in its current incarnation. 

AECOM's report is deeply flawed3. It uses non-standard valuation techniques which tend to dramatically overstate how much CentrePointe is worth to the community.

Despite its flaws, AECOM's evaluation is still instructive: it raises significant doubts about the viability of the CentrePointe TIF. It also contains what state and local officials knew (or should have known) about whether the TIF could be successful.

There are two key tables in the 52-page report which should have set off alarm bells for the Cabinet for Economic Development and for the Urban County Council.

In the opening pages of the report, AECOM sizes CentrePointe's tax increment: $48.8 million. Compared to what was there before, AECOM claimed that CentrePointe would be expected to generate nearly $49 million in new taxes over the next 30 years.

CentrePointe Tax Increment
CentrePointe Tax Increment: $48.8 million (AECOM Report, June 2013, p.3)

 

So, would that be enough to pay back bond investors?

No.

A little deeper in the report, AECOM summarizes the public costs of the CentrePointe infrastructure bonds. While the 'public' infrastructure would cost $45.5 million, the interest payments (called 'financing costs' in AECOM's report) on the infrastructure bonds would pile up another $47.7 million. Over the next 30 years, then, the infrastructure bonds would cost a little more than $93 million.

CentrePointe Bond Cost
CentrePointe Bond Cost: $93.2 million (AECOM Report, June 2013, p.10)

 

How can $49 million in new taxes from CentrePointe pay off $93 million in debt and interest for the infrastructure bonds?

It can't.

And therein lies the central fraud of the CentrePointe TIF. There will never be enough economic activity on the CentrePointe site to pay off the debt and interest on the infrastructure. That's what the only credible, comprehensive analysis of CentrePointe says.

The Cabinet for Economic Development should have known this. (It was their report.) The Urban County Council should have known this. (They were provided the AECOM report before approving the CentrePointe TIF).

Despite knowing that the CentrePointe TIF could never pay for itself, in July 2013 both the city and state approved this audacious scheme to offer fraudulent bonds to investors which they knew could never pay what was promised.

And they approved this scheme all for the benefit of the developers, who get a 'free', taxpayer-financed parking garage.

Pretty bad, huh?

Wait, it gets worse.

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For the CentrePointe TIF, the state will set aside the new, incremental taxes generated by CentrePointe, in order to repay the public infrastructure bonds. The state will hold on to those taxes until at least $150 million in capital is spent on the CentrePointe site. (This is a requirement of Kentucky's 'Signature TIF' law.)

Once the state and city approved the CentrePointe TIF scheme, the developers began to dig and blast for the development's $31.9 million underground parking garage.

After the developers completed most of the digging last month, they returned to the city and the state with an even more audacious scheme. They asked the city and the state to issue bonds for the parking garage now - before they had spent anywhere close to the $150 million required to release the incremental taxes for repaying the bonds.

The state Cabinet for Economic Development refused the request, and claimed that it was more appropriate for the city to issue the parking garage bonds.

The Urban County Council debated the request, with many council members (appropriately) expressing reservations about the liability for the city in issuing bonds before anything was built which would generate the funds to repay them.

Last Tuesday, the Council heard - and approved - an even more convoluted proposal. (This GTV3 video captures the entire 40-minute meeting.)

The Kentucky League of Cities (KLC) - a non-profit association of Kentucky's cities - offered to act as a conduit to issue the parking garage bonds under its authority. In order to do so, Lexington would need to enter into an interlocal agreement with another Kentucky city (in this case, Midway) to form a new non-profit corporation which would issue the new bonds. Lexington would pledge its portion of the TIF revenues to KLC for the repayment of the bonds.

While there were a few pointed questions from council members about the project, the overall mood in the room seemed to be a palpable sense of relief - something, anything was finally happening. There was also palpable relief that this whole issue would soon be someone else's liability.

The council voted 15-0 to pursue using KLC to issue the parking garage bonds. Most of the participants congratulated one another on the ingenuity of this new scheme.

They shouldn't have. Their hands are far from clean.

By inserting additional layers into the already-labyrinthine CentrePointe TIF scheme, the Urban County Council unanimously voted to make it nearly impossible for bond investors to understand that they will never get their money back.

During last Tuesday's Council meeting, Roger Peterman - a partner at Dinsmore and Shohl who consults with the city on bond issues - claimed that the potential bond investors "are sophisticated investors [who are] willing to analyze more difficult credits like these."

Let's parse that a little. As a so-called 'sophisticated investor' myself4, I wondered about how other sophisticated investors would get access to information on the CentrePointe TIF.

When I contacted the Cabinet for Economic Development to obtain a copy of the AECOM report, for instance, I was told "The consultant’s study is protected from public disclosure by state law." Remember, this is the only credible report on the CentrePointe TIF, and the public agency which commissioned the report was refusing to release it to the public.

I managed to obtain the report through other channels, but I wonder whether the average bond investor would have had the ability and the network to discover it.

Most of these bond investors would deal directly with KLC's proposed "Lexington-Midway interlocal non-profit bond-issuing shell corporation"5. Very few would have visibility into the convoluted TIF program, much less the precise financial details of the CentrePointe TIF. Even if they knew to look for the AECOM report, how many would press further after being stonewalled by the Cabinet for Economic Development?

'Sophisticated investors' also bought the AAA-rated bundles of mortgage-backed securities and collateralized debt obligations which supercharged the subprime mortgage crisis in 2008. Calling them 'sophisticated' doesn't mean that they have a clue about what they are investing in.

But the Urban County Council does know what they are doing: They are using KLC to issue bonds which they know can never be paid back. They are assisting in perpetuating the CentrePointe TIF fraud6.

Wait, it gets even worse.

::

Because the state will hold the incremental taxes from CentrePointe until $150 million is invested in the site, that means that there will be no funds available to pay back bond investors until the project reaches that $150 million threshhold.

But if KLC issues the parking garage bonds through their shell corporation today - when only $5 million of capital has been invested - how will bond investors be paid?

What assurances do bond investors have that anything else will be spent, and that the parking garage bonds will ever begin to be paid back? Only the blithe assurances of the developers. And six-and-a-half years later, those assurances carry very, very little weight.

If the project stalls after the parking garage is built, then what?

Wait, it gets even worse still.

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There's one more aspect of what the Urban County Council did last Tuesday which should alarm us: They prioritized the CentrePointe parking garage over the stuff that's truly public: sidewalks, streets, sewers, and the Old Courthouse.

Remember how the CentrePointe TIF application filed by the developers called for $45.5 million in 'public infrastructure', including the $31.9 parking garage?

What was approved on Tuesday was a scheme to fund the parking garage alone.

What happened to the other $13.6 million of infrastructure? When and how will bonds be issued for that? Will those bonds be prioritized behind (i.e., paid after) the parking garage bonds? 

It was disturbing to see how eager the Urban County Council was to set up financing for the stuff which benefits the developers (the parking garage) without advancing the stuff which is truly public in nature.

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If the KLC scheme for the CentrePointe TIF proceeds, the net effect of all of these maneuvers is that only one party involved with the CentrePointe TIF comes out ahead: The Webb Companies.

Bond investors are likely to lose about half of their investment - and that's if the project is ever completed as planned.

Lexington and Kentucky taxpayers will have earned the right to have their future taxes skimmed for the next 30 years to pay back part of the obligations to those duped bond investors, while incurring the additional legal liability for our city officials and KLC having set up a fraudulent bond offering.

The Webb Companies, however, come out way ahead.

By waiting until the public no longer noticed, The Webb Companies get a 'free' parking garage financed with our future tax dollars, while incurring none of its associated costs or risks.

If the rest of the project can never be built - and bondholders can never be paid - The Webb Companies still got a brand new underground parking garage (which they never paid for) on their land.

If they do happen to complete the project, their development will be much more attractive to tenants because of the taxpayer-financed parking garage.

The Webb Companies come out ahead whether the development gets built or not.

In the process of using this taxpayer-funded scheme, the Webb's have likely more than doubled their profits at our expense7

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By taking advantage of CentrePointe Fatigue, the developers have once again privatized gains while socializing their risks to the rest of us - as they have done repeatedly over the past 40 years.

Along the way, they have convinced city and state leaders to use our good names (and credit ratings) to defraud bond investors in order to benefit The Webb Companies.

After six-and-a-half years, I know that it is hard to sustain outrage and interest in CentrePointe. But it has never been more critical to be outraged at shameless hucksters who line their pockets with our money.

 

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Continue reading "How Council Voted to Defraud Investors to Benefit the Webbs" »


Moving the Goalposts on CentrePointe

In 2009, an analyst hired by Kentucky's Cabinet for Economic Development evaluated the CentrePointe development project in downtown Lexington.

The analyst looked at whether the Tax Increment Financing (TIF) that the developers proposed using made any sense. At the time, CentrePointe was slated to be a $298 million project, and the developers wanted to use Kentucky's new TIF law to help subsidize the project.

Under TIF, the state and city would issue bonds to investors, and pay those investors back (with interest) by using the incremental taxes generated by the new development over the next 30 years. The TIF law stated that projects like CentrePointe needed to invest a minimum of $200 million in capital to qualify.

The analyst expressed skepticism about projects like CentrePointe - the real estate market was imploding in 2009. CentrePointe's developers assured the analyst that the project was a sure bet: there was a mystery overseas financier willing to front all of the cash needed to build the project; there were top-notch tenants lined up ("Hard Rock Cafe", "J.W. Marriott"); 65 of the 91 million-dollar condos had already been sold in handshake deals; the office and hotel spaces would have exceptionally high occupancy rates (even though they would also have exceptionally high prices).

Taking all of the developers' assurances into account, the analyst thought the project would generate about $93 million in new taxes for the public. Sounds great, right?

Except that the same analyst found that CentrePointe's bonds would also cost the public about $96 million to finance.

Even with all of the developers' optimistic "best case" assurances - all of which eventually proved to be false - the Centrepointe bonds would still lose $3 million. [Updated*]

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CentrePointe, Version 12
Visions of CentrePointe, 6 1/2 years later...

As CentrePointe repeatedly evolved over the ensuing years, it also repeatedly shrank. From the nearly $300 million sizing used for the 2009 assessment, the project shrank to $250 million, then $200 million. CentrePointe was shrinking to the point where its TIF funding was at risk.

Then, early last year, CentrePointe's developers successfully lobbied the state legislature to lower the minimum capital investment needed to qualify for TIF to $150 million. In June 2013, the developers re-applied for TIF subsidies with a new, scaled-down CentrePointe.

The state hired the same analyst to evaluate CentrePointe, which was then estimated at $193 million (over $100 million less than in 2009). In their estimates, the analyst now estimated that the new Centrepointe Jr. would generate about $49 million in incremental taxes - about $23 million less than in the 2009 estimates.

This makes sense. As the size of the project shrinks, the incremental benefit also shrinks.

The problem? The new proposal still required an investment of $93 million to finance the CentrePointe bonds.

According to the state's own analyst, the CentrePointe TIF bonds would be an extraordinarily bad investment in which bond investors would hand over $93 million, only to lose $44 million in the process.

Despite this extraordinarily negative analysis, the state and city decided to approve the TIF application for CentrePointe anyway.

::

Earlier this year, the developers began digging and blasting for a proposed $32 million parking garage on the site.

With the huge hole nearly complete, the developers have returned to the state and city to request that the TIF bonds for the garage be issued now - before the developer has spent anything close to the $150 million capital investment that is required to qualify for TIF.

In essence, the developer is requesting that the city and state take on a $32 million bond commitment (with an additional $33.5 million in financing obligations - $65.5 million total) on the dubious promise that the yet-to-be-built CentrePointe will someday generate enough new taxes to pay off bond investors.

This simply isn't how TIF works. You don't get the tax-funded financing before you build the thing which generates the taxes.

::

The state's economic development analyst says that CentrePointe bond investors will never get paid back. And the analyst is undoubtedly correct.

The developers and their representatives repeatedly contend that TIF financing holds no risk for the city, the state, or taxpayers. (I don't believe this assertion, but let's run with it...)

If there really is no risk to taxpayers, then why do the developers need the city's help in issuing TIF bonds? Why involve the city at all? After all, the developers could always pursue financing through normal real estate investment markets.

The reason is that they need the city's help in creating the impression that the bonds are a safer investment than they really are.

But CentrePointe bonds aren't a safe investment at all. In fact, they are likely to lose money for bond investors, because the project will never produce enough new taxes to pay investors back.

But the developers can't let investors know that. Savvy investors would look at the risky business model of CentrePointe and refuse to fund it.

So the developers want to use our good name and credit ratings to help them deceive and defraud those investors, to assure them that the public stands behind those bonds and that the bonds are safe.

Today, the Lexington-Fayette Urban County Council will consider whether to ask the Kentucky League of Cities to issue TIF bonds for CentrePointe. While this move ostensibly shields LFUCG from liability when bond investors aren't paid back, it is really a shell game. The League of Cities is a non-profit which consists of Lexington and other Kentucky cities, and lobbies on their behalf. Whether the League or the city issues CentrePointe TIF bonds, the reality is that taxpayers are still ultimately liable when the bonds fail. (And they will fail.)

The developers have attempted to maintain a veneer of respectability in our community - frequently pointing to their many, many development projects around Lexington as proof of their virtue. And CentrePointe fits the developers' well-worn modus operandi of privatizing gains while socializing risks throughout those projects.

CentrePointe represents the very worst of corporate cronyism. By using an obscure and ever-shifting financing scheme, the Webb Companies are attempting to commit state-assisted fraud, while lining their own pockets and hoping that no one notices.

They've hoodwinked the Cabinet for Economic Development. Twice. They've hoodwinked the Urban County Council. At least two times. Now they want to hoodwink the Kentucky League of Cities.

These aren't the actions of upstanding citizens. These are the actions of con artists and swindlers. They should be treated as such.

* An earlier version of this post included a smaller, state-only estimate of the impacts of CentrePointe from the analyst's 2009 report. I've updated the post to reflect the full impacts to both the state and city. (This correction resulted in an even bigger shortfall for the TIF funding.)


Kentucky's Regressive Tax Reform

I was pleased to be asked to comment for today's story by Jack Brammer and Janet Patton for the Herald-Leader on the Governor's tax proposals. They did a great job accurately representing my views. This post helps elaborate on my perspective.

Dubbed "Kentucky Competes", Governor Steve Beshear's tax proposal consists of more than 20 changes to our state's tax code. The proposal contains a number of troubling components which place a disproportionate burden on Kentucky's poor, while providing large annual tax breaks which are skewed toward businesses and the wealthy.

I have three major objections to Governor Beshear's tax reform plan:

  1. It is a taxpayer-financed corporate tax giveaway.
  2. By relying on sales taxes, the plan hits the poor and middle class harder than wealthier citizens and businesses.
  3. By choosing which kinds of labor to include (and exempt) from the sales tax, the plan hits the poor and middle class even harder.

Let me step through each one in turn.

1) Corporate Tax Giveaway

Overview
Click to enlarge

Governor Beshear's proposals would generate an additional $210 million for the state. But like many tax reform initiatives, Beshear's plan contains a mixture of new taxes and new tax breaks.

The Governor's plan contains approximately $487 million in new annual tax breaks, more than offset with about $697 million per year in new taxes.

That's nothing especially disturbing, given that the reform plan is supposed to put the state on sounder financial footing, and raising taxes is one way to do that.

What is disturbing is how the mix of breaks and taxes are allocated. Nearly half of the Governor's tax breaks go to businesses (amounting to $234 million per year). So what's their share of the new taxes that Beshear proposes? Nearly zero:

 

Who benefits and who pays?
Click to enlarge

 

Businesses pay a lot less...

I say 'nearly' zero because there will be some businesses which pay the new sales taxes for covered categories like auto service or computer repair. But given the exemptions and restrictions on these new sales taxes, the business share of the almost $700 million in new annual taxes will likely be very, very small. 

So businesses (some of them, at least) will get a collective windfall of more than $234 million per year under Beshear's plan, while simultaneously contributing no new taxes to the state.

Throughout the documents Beshear's office released yesterday, there is the notion that this corporate giveaway will help Kentucky "compete for quality jobs." The underlying assumption is that if "job creators" are given enough tax cuts, that they'll hire our way to prosperity. This notion is, at best, misguided; at worst, it is an outright lie.

As I have written before (more than once, in fact), business owners do not hire because they have extra tax-cut money lying around. We hire because we have work to do, and we need someone to get it done. We hire when there's more demand.

...while Kentucky families pay a lot more.

Meanwhile, because businesses wouldn't pay these new taxes, the burden is placed squarely on Kentucky's families. When paired with the tax breaks for individuals, Kentucky households would pay about $444 million more in new taxes each year (or approximately $260 per household.)

While the Governor trumpeted the 'relief to every working Kentuckian' yesterday, the hard truth is that his scheme raises taxes on nearly every working Kentuckian in order to fund an enormous tax giveaway to select (usually large) businesses. This plan is a stunning, brazen, and inexcusable attempt to redistribute wealth from those who can least afford it to the already-wealthy.

2) Sales Taxes

Sales taxes are an incredibly regressive tool for raising money for Kentucky. They are regressive in the sense that sales taxes hit poorer people harder than wealthier ones.

Why are sales taxes especially burdensome for the poor? Because the extra tax takes up a greater portion of their income for the same product or service. The extra tax just hurts more.

Even though the Governor's proposal includes some $72 million in Earned Income Tax Credits (credits for the working poor - generally a good contributor to the economy and job production), he bleeds those benefits away with new sales taxes.

And the proposed sales taxes are almost exclusively in consumer services, while sales taxes for business services are largely exempt.

Ordinary Kentuckians would not benefit under Beshear's regressive plan.

3) Different Kinds of Labor

The Governor's plan also targets only certain kinds of labor for sales tax expansion. In particular, it chooses to apply sales taxes to labor involved in the "installation, maintenance and repair of taxable personal property." In other words, the repair and service of personal items (like cars or computers) would be taxed under Beshear's plan.

But not all service labor is equal, under the Governor's scheme. Other kinds of labor - say, accounting or legal services - would be exempt from the new taxes. And who disproportionately uses a lot of those exempted services? Businesses and the wealthy, of course.

Even within the "installation, repair, and maintenance category", there are exclusions. Because these new taxes apply to 'personal property', they exclude repair and maintenance services for machinery, farms, and real estate properties -- the kinds of services consumed in greater amounts, once again, by businesses and the wealthy.

By steering the new taxes away from services which impact the wealthy, Beshear hits ordinary Kentuckians especially hard.

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Governor Beshear's new tax proposal is an audacious attempt to take wealth from Kentuckians who are hardest hurt by our economy, and attempts to transfer that wealth to the already-well-off.

It is a colossally bad idea which will leave millions of Kentuckians worse off. And we shouldn't let him get away with it. 

After the jump: Backstory

Continue reading "Kentucky's Regressive Tax Reform" »


The 1345

McConnell
Mitch McConnell
Yesterday, despite having support from a majority of the Senate, the $60 billion Rebuild America Jobs Act was blocked from even being debated on the floor of the Senate by Kentucky's own Mitch McConnell and Rand Paul - along with every other Republican senator.

The Act included $50 billion in direct spending for roads, bridges, and other infrastructure, as well as $10 billion towards starting the National Infrastructure Bank.  Both ideas have traditionally enjoyed bipartisan support.

The bill would be paid for by a 0.7% surtax on incomes over $1 million.

The Department of Transportation estimated that the Act would create about 800,000 new jobs.

McConnell was unapologetic for blocking debate on the bill:

"The truth is, Democrats are more interested in building a campaign message than in rebuilding roads and bridges," said Senate GOP Leader Mitch McConnell of Kentucky. "And frankly, the American people deserve a lot better than that."

800,000 jobs seems like more than a campaign message.

But these national numbers are a bit hard to get our arms around.  

It's worth evaluating the impacts of this bill on a more local level.  What would the Act do here in Kentucky?

Over 200,000 Kentuckians are out of work.  That's nearly 10% of the labor force.

And since September, one of two major bridges crossing the Ohio River in McConnell's hometown of Louisville has been shut down after inspectors found cracks. Another bridge between Kentucky and Cincinnati has been deemed "structurally deficient".

Paul
Rand Paul
The bill McConnell and Paul voted against would have spent over $450 million on roads and bridges in Kentucky, and would have created 5,900 jobs.

Why would Mitch McConnell and Rand Paul reject 5,900 jobs for Kentucky? Why would they oppose fixing Kentucky's infrastructure?

Maybe they're concerned with raising taxes.  As McConnell said on Meet the Press, "We don't want to stagnate this economy by raising taxes" on those who make over $1,000,000, who Republicans are fond of calling "job creators" and "small business owners".

So let's take a look at who makes over $1,000,000 in Kentucky.  According to Citizens for Tax Justice [PDF Link via Greg Sargent] out of Kentucky's 4.3 million citizens, there are 1345 Kentuckians who would be affected by such a tax, and they make an average of nearly $3.5 million.

And it's worth noting that The 1345 are folks who don't just have $3.5 million - enough to qualify them as multi-millionaires.  These are people who clear $3.5 million per year.

The 1345 are the ultra-wealthy.  And businesses which help their owners reap $3.5 million per year are not ordinarily considered "small".

And what is the onerous burden the "millionaire's tax" would place on The 1345?  

Out of their $3.5 million in income, The 1345 would pay $17,409 more to fix Kentucky's roads and bridges which they undoubtedly benefit from more than Kentucky's other 4,338,000 citizens.

So: McConnell and Paul blocked the creation of 5,900 jobs and the improvment of roads and bridges for all Kentuckians in order to protect The 1345, a tiny group of ultra-wealthy Kentuckians who would pay only $17,409 to rebuild the infrastructure they use more than anyone else.

McConnell claims he doesn't want to "stagnate the economy" by taxing The 1345, which raises the question: What have these ultra-wealthy "job creators" been doing with this money while they've kept it?

Because they certainly haven't been creating jobs.

Mitch McConnell and Rand Paul chose to protect The 1345 at the expense putting 5,900 Kentuckians back to work.  At the expense of our crumbling roads and bridges.  At the expense of the other 4,338,000 Kentuckians.

And frankly, the American people - and Kentuckians - deserve a lot better than that.