Taxes

The Great CentrePointe Parking Garage Mystery

IMPORTANT: Following my initial post yesterday, I found new and different information on parking costs for underground garages. Please see important updates at the end of this post.

Why does it cost twice as much as normal underground garages?

Over the past 7 years, I have publicly challenged many aspects of the CentrePointe project in downtown Lexington, with a particular focus on how the 700-space CentrePointe parking garage would be financed:

  • I used a fable to illustrate the absurdity of funding the parking garage with tax-increment financing (TIF), and showed how the public financing scheme could be the biggest windfall for CentrePointe's developers;
  • I looked at how the shrinking size of the CentrePointe project endangered the TIF funding for the garage;
  • I chronicled how the our council approved a scheme designed to defraud garage bond investors;
  • Last week, I contended that the trouble that developers were having in issuing the garage bonds portended bigger problems for the CentrePointe project as a whole (regardless of whether the new mystery partner works out). 

But despite all of my criticism of the financing for the garage and the viability of the entire project, I never thought to look at the cost of the CentrePointe garage itself.

I apologize.

::

CentrePointe Nothing
CentrePointe: Nothing Happening, 5/12/15

A couple of weeks ago, CentrePointe developer Dudley Webb addressed the Urban County Council [video link] to argue that the developers should not be forced to fill in the pit at CentrePointe. (His commentary begins at 26m:49s in the video. If you want to have a little fun before reading on, my response to Mr. Webb begins at 2h:12m:00s.)

In the course of his comments, Webb shared intriguing details about the finances and the challenges for CentrePointe.

In justifying the pursuit of TIF funding for the parking garage, for example, Webb casually dropped that the CentrePointe garage would cost $50,000 per space (largely driven by the requirement for underground parking). He claimed that "those numbers don't work".

At 700 spaces, that adds up to about $35 million for the entire parking garage.  

CentrePointe Garage Cost
CentrePointe Garage Cost, AECOM Report, June 2013

That figure seems roughly consistent with other estimates on CentrePointe: The most recent publicly-available figures [PDF link] put the parking garage at $31.9 million, which worked out to about $45,500 per space.

The $50,000-per-space figure fits with the developer's propensity to throw out big, round numbers, but it isn't that far from what they've previously claimed.

So I didn't pay that much attention to it.

::

Yesterday, I was engaged in an online discussion about CentrePointe, and one participant asked me a number of pointed questions about how the parking garage worked. 

That was when I realized that, while I knew quite a bit about the scheme to pay for the garage, I knew very little about the business model of the garage itself.

As I began to dig, I started to see that CentrePointe's parking garage is wildly overpriced.

As I looked at parking garage studies and parking garage construction from around the country over the past 5 years, one particular figure popped up again and again for the cost of an underground garage: $20,000 per space.

From Boston to New Jersey to San Diego [PDF Link - Outdated 2002 Study], local reports put the cost-per-space of underground parking garages at about $20,000. (One went as high as $21,000 per space.) [Please see updates to these figures at the bottom of this post.]

These garages had about the same depth as CentrePointe. They had about the same capacity as CentrePointe. Nothing in the way that CentrePointe's garage has been described makes it sound especially unusual compared to other underground parking garages around the country.

And yet, the CentrePointe garage appears to cost over twice as much as standard underground parking garages.

How can that be? 

It can't.

::

If CentrePointe used a more realistic $21,000 per space, then its 700-space garage should cost only $14.7 million. 

But the CentrePointe documents show the parking garage costing $31.9 million....

Where did that extra $17.2 million come from? Welcome to the Great CentrePointe Parking Garage Mystery.

As far as I can tell, there's never been a detailed public accounting of the costs of the garage, so I can't tell you where these phantom 'costs' came from.

But I can speculate. There are a couple of likely candidates:

  1. The garage costs were simply inflated. A lot. And the developer hoped that no one would notice.
  2. The property costs (or some other non-public-infrastructure cost) were rolled into the garage costs. And the developer hoped that no one would notice.

And for over seven years, it seemed that no one noticed.

In either case, however, the result would be the same: The developer would get to pocket an extra $17.2 million funded with our tax dollars. 

But why does that really matter?

Two reasons.

  • First, the developer would get an unearned windfall skimmed out of public taxes. (He doesn't need the welfare. We do need the tax dollars.)
  • Second, overpaying for the garage crowds out funding for truly public infrastructure. Renovating the old Fayette County Courthouse, in particular, was supposed to be part of the CentrePointe TIF, but seems to have dropped out of the most recent TIF funding efforts. We should put it back in.

It is time to ask the developer sharper questions about the cost of his parking garage.

IMPORTANT UPDATE: The $20,000 per-space amount is not as universal as I initially found. Other studies show per-space costs for underground parking ranging from $25,000 to $35,000 per space [Both PDF Links]. (It is worth noting that the author of the latter study has made developer-friendly arguments campaigning against off-street parking requirements - i.e., parking structures like CentrePointe's garage.)

I apologize for not finding these sources before the original post. I don't want to mislead anyone. I do want to understand these costs better.

While these amounts would change the magnitude of the amounts I calculated above, they don't change the core critique of the parking garage for CentrePointe.

Factoring in these new amounts, it seems that CentrePointe's parking garage is still overpriced by between $10,000 and $20,000 per space, which amounts to extra costs of between $7 million and $14 million across the whole project.

Asking the developer sharper questions is still warranted.


CentrePointe is Still in Trouble

CentrePointe Version 8
CentrePointe, Version 8

Over the past couple of weeks, the Lexington-Fayette Urban County Government and the developers of CentrePointe have traded barbs over the direction of the perpetually-troubled $180 million retail, office, residential, and hotel project.

Citing a lack of work over the past 60 days, the city triggered a provision in their agreement with the developers which would require the developers to fill the gaping hole the project has left in the middle of downtown Lexington. 

The developers responded by claiming that the city was wrong - work had indeed been done on the site in the past 60 days. The developers then threatened to sue the city if they did not rescind the requirement to fill the hole.

Late this week, a deal was struck between the city and the developers to postpone the confrontation.

In a joint press release, the city and the developers claimed that a new, unnamed development partner has emerged. City officials expressed confidence in the new mystery partner's ability to develop a project of CentrePointe's magnitude. The new partner just needs 90 days to determine whether they will proceed.

It probably won't work out.

The problem isn't that we've heard all of this about CentrePointe before. Although we have. Mystery white-knight savior? Plenty of those. Promises to resolve everything, something, or anything in 30, 60, or 90 days? We've lost count. City officials positive about the financing? Yep.

No, the real reason the new partner won't proceed with CentrePointe is the lowliest, least exciting part of the project.

CentrePointe is in trouble because no one will buy the publicly-financed bonds for its parking garage.

::

Why the parking garage?

Because the public financing of the garage bonds promises to be the most profitable part of the project for the developers - perhaps more profitable than all of the other components of CentrePointe combined. (See here for why the parking garage generates so much profit for the developers.)

Back when the Urban County Council approved the convoluted $30 million garage bond scheme in September 2014, I called the plan fraudulent. CentrePointe's developers were planning to use the city's good name to offer bonds which were virtually guaranteed  to lose money for investors. There was even a strong possibility that investors would lose all of their money.

If the developers were able to assemble a bond offering, it would have been fraudulent.

But they haven't proven competent enough to defraud investors. Yet.

At that meeting last September, councilmembers were told that a bond offering statement could be prepared in the next week, and the bonds could be offered for sale in a month or two.

That was eight months ago, and the bonds have yet to be issued.

Roger Peterman, an attorney who consults with the city on bond issues, told the council that a bond underwriter had been retained who "assured us that there's a market for these bonds." In fact, the underwriter was so enthusiastic that they were interested in purchasing and reselling the bonds themselves (rather than simply identifying purchasers), which Peterman characterized as a "much stronger commitment". 

So with all of this "enthusiasm" and "commitment", why weren't the developers able to issue the bonds? Why can't they find willing underwriters and investors?

Because the bonds are inherently toxic.

The garage bonds for CentrePointe carry huge risks, and investors are balking.

::

The primary "showstopping" risk is that the bonds won't begin to pay out until at least $150 million in new capital has been invested in CentrePointe. This is a requirement of the state statute governing the type of tax-increment financing (often called TIF) used for CentrePointe, and it means that investors wouldn't receive any money until CentrePointe is almost complete.

Understandably, investors aren't thrilled with the prospect of waiting that long.

That's what makes this risk a showstopper: Developers want money from investors now, but investors have no guarantee that $150 million will ever be spent. Investors have no guarantee that they would get any of their money back. So potential investors are recoiling.

And developer Dudley Webb admitted as much last week when he spoke before the Council.

"We are so close. But also I want you to understand the difficulty in getting this thing to the closing table.

"We have the prospects who will buy the bonds, and they want to be sure that the project is built, because there is a $150 million spend requirement that has to be done on that block before the TIF income comes.

"So getting all six of these people, these lenders, to the table at the same time to close, along with the equity [i.e., bond] investors has been very difficult. 

"...You have to also get the hotel people to come and bring their cash to the table at the same time of the closing of the bonds. The problem with that is that the hotel people came back and said 'We want to invest, but we're not gonna invest and put our money up until you deliver the garage.'

"So it's which [comes] first, this chicken-and-the-egg concept."

CentrePointe Version 8
CentrePointe, Version 8

Because the developers have pursued a piecemeal approach, with each of the project's six components funded separately, they admit that they are unable to get their investors and lenders on the same page. The lenders for the buildings want assurance that the parking garage will be in place, while the garage bond investors want assurance that all of the buildings will be built.

This "chicken-and-egg" standoff is unlikely to be resolved unless the developers can identify a single lender or investor willing to front all of the cash needed to complete development of CentrePointe. Then, perhaps, the bond investors would have enough confidence to purchase the garage bonds.

But for the past seven years - across eight different CentrePointe concepts - the developers have repeatedly failed to identify just such an investor. (I'm betting that's why they fell back to their piecemeal approach in the first place.)

And even if the developers found such an all-cash savior, the garage bonds wouldn't begin to be paid off until CentrePointe was nearly complete - which further deters garage bond investors, who want to start getting paid back right away.

::

Even if the developers can contrive a way to fully fund CentrePointe, there is another unavoidable risk for bond investors: The bonds can never pay for themselves (much less make any sort of profit).

When I referred to the garage bond scheme as fraudulent, this is what I meant. The developers' own analysis shows that CentrePointe will never generate enough taxes to pay back bond investors, even if the project is completed as planned. (I won't go into all of the details in this post, but you can get the full analysis here.)

This means that any investor who buys garage bonds is practically guaranteed to lose about half of their money. CentrePointe's bond scheme is as if I asked you for $100 today, and promised that I'd pay $50 back to you over the next 30 years. Interested?

This is perhaps another reason the bond offering has been delayed. In order to sell the bonds, any bond offering statement would need to obscure the fact that the bonds would never pay off. And if they didn't obscure that fact, then no sane investor would buy them.

Together, these two risks for garage bond investors pose an insurmountable challenge to CentrePointe's developers: They can't get investors unless they complete the project first AND they can't get investors if the investors realize that they'll lose their money.

And that's the central reason that CentrePointe is in trouble: Once they are deprived of the ability to dupe investors, the developers are also deprived of the profit-making potential in the garage bond scheme. 

Even if the newly-minted mystery development partner is real, investors will remain rightfully wary of buying the garage bonds before CentrePointe is complete.

Even if the mystery development partner fronts all of the money to complete CentrePointe, the development won't generate enough taxes to pay bond investors back. Ever.

So, even if the players change and even if CentrePointe gets built, the garage bond scheme is still a fraudulent scheme.

And if the mystery partner can't goose their profits with the garage bond scheme, then they probably won't proceed with the project.

::

The developers and their partners have sometimes characterized themselves as "doers" and their critics as "complainers" who cheer for the failure of CentrePointe.

And they're absolutely right.

As long as what the developers are "doing" is attempting to defraud investors, it is the duty of critics to "complain" loudly and often.

As much as I'd like to see something built in the gaping maw of CentrePointe in the very heart of our downtown, I don't want to see it built with further fraud and deception. 

So unless the fundamental financial structure of CentrePointe changes, I am cheering for its failure. No apologies.


A Simple Guide to Defending CentrePointe

With my post on the Urban County Council's questionable-but-unanimous decision to support a fraudulent new financing scheme for CentrePointe, I hoped to raise important questions about the wisdom of proceeding with public funding for the long-stalled project in downtown Lexington.

To some degree, that effort succeeded. That long article is now the most-read post in the short history of CivilMechanics. (Thank you!)

A Webb Companies DevelopmentWhat remains is to get answers for the questions raised there. I expect that council members, developers, Tax Increment Financing proponents, and their allies will face much more challenging questions as citizens and the local press begin to look for those answers.

I have attempted to explain why I think CentrePointe is a bad deal for the public and for investors. But I don't have a monopoly on information about CentrePointe and its most recent developments. Despite my best efforts, I may have made mistakes or missed important details. So I welcome information which helps clarify matters. But 'clarifying information' hasn't always been easy to get with CentrePointe.

Given past interactions with CentrePointe defenders, and in the spirit of fostering fair and healthy debate, I offer this helpful guide to defending CentrePointe.

Hopefully, these useful suggestions will help anyone sympathetic to CentrePointe formulate better, more thorough, and more effective answers than they have contrived in the past.

For all of you CentrePointe defenders out there, enjoy!*

:: 

A Simple Guide to Defending CentrePointe

1. Refuse to attack your critics.

Although those rascally critics might infuriate you, try not to attack their character, their motives, their style, or their knowledge. Some examples:

  • "Mr. Morris has been against this project from the very beginning..."
  • "What Mr. Morris fails to understand is..."
  • "Mr. Morris feels that he is entitled..."
  • "Mr. Morris may be a competent businessman in his field, but obviously he knows little..."
  • "Mr. Morris said mean | slanderous | libelous things about us..."
  • "Mr. Morris is a crazy, no-good, rotten, dirty scoundrel obstructionist, who..."

If you find ourself beginning to respond with any variant of the above, stop immediately. 

While all the above assertions may be true, attacking your critics in this manner (or assuming that you know what they think, feel, or understand) sounds condescending.

It also betrays your lack of more substantive responses to legitimate questions.

2. Avoid resorting to 'privileged information'.

Secrets fail to bolster your case.

Referring to privileged information - secret plans, documents, financiers, underwriters, bond offerings, etc. - reinforces the impression that you are hiding something, and undermines the notion that you have a viable and legitimate plan. 

After last week's vote, we're all in this mess together now. So you might as well share all of that special, super-secret stuff that only you know.

Don't try to win the argument by referring to McCarthy-esque secret documents. In the end, everyone will know that you're bluffing.

3. At all costs, refrain from bullying and intimidation.

Don't pull $20,000 in advertising from publications which ask legitimate questions about your project. Don't berate critics in the newspaper. No. Really. Don't berate critics in the newspaper. And try not to imply that you may resort to legal action against your critics. 

Such desperate attempts only reveal how tenuous your position really is. (Besides, the discovery process of an actual legal case could get really messy. Lawsuits don't help you preserve secrets.)

People in true positions of strength don't issue such weak threats.

4. Try not to say 'private property' or 'private development'.

While these phrases have been quite effective for you in the past, they have worn whisper-thin.

By now, everyone understands that you are using public financing to help fund your development. Everyone knows that you are requesting that public agencies issue bonds to be paid back with public tax revenues.

So don't try to maintain the elaborate charade of privacy. Everyone knows it is a charade.

5. Suppress any impulse to play the victim.

You are powerful people who make big, important decisions. Most of you get paid very well (I'm excluding council members here). Pretending you are some sort of victim - especially a victim of bloggers and other commentators - is unbecoming of someone of your stature.

Besides, everyone now knows that you plan to be the recipient of a huge taxpayer-funded payday | bailout | bonanza. So lose the 'poor me' act.

If you are losing the war of words and ideas, try using better ones. 

6. Use facts and logic to support your case.

Believe it or not, this might be the most effective tool you have in your arsenal!

If your critics are wrong, use detailed facts and impeccable logic to spell out why. If you've got secret information which proves your critics wrong, start sharing it now.

Your critics have spelled out their cases. Now be detailed, thorough, and crystal clear in yours.

::

Hope this helps!

Love,

Rob

* The rest of us can use this as a simple guide to separate the CentrePointe nonsense from the CentrePointe substance - our very own B.S. detector!

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.

::

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.

::

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.

::

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.

:: 

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

::

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.

 

 :: NOTES ::

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*]

::

 

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.

::

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" »


Anatomy of a Con

Imagine, for a moment, that you build houses.  

You're a competent - and pretty crafty - builder, so you earn a profit of 10% of the sales price on each house you build.

You've found a cheap lot on the edge of town which is a decent prospect for a $125,000 home design. At your 10% margins, you'd usually stand to make $12,500 on this house.

Trouble is, your land is in the middle of nowhere: the nearest street dead-ends before it even reaches your lot.  You know that paying to extend the street will cut into your profits by $5,000, and you definitely don't like that.

As you're thinking really hard about how to avoid having to pay for the street extension, you hit upon a really crazy scheme: What if, you think to yourself, I could not only get our town to pay for the street extention, but I also got them to finance the house's two-car garage!

But how could you possibly convince the townsfolk to fork over the $25,000 needed for the street extension and the garage? The town is already struggling with its finances, and you know your proposal won't go over well. Why should the town pay for a private garage?

And here is where you get your craftiest.

You decide to focus more on what the town gets than on what they spend. So you play up 'benefits' the town stands to gain from your 'economic development initiative'. Here's your basic approach:

  • Building the house will generate higher property taxes for the town over the next few decades, where today there is just a vacant lot.
  • The construction will increase economic activity for the town as you pay for supplies and labor on the site.
  • The house will bring in working residents, who will generate new payroll taxes for the town.
  • The garage and street extension - 'public infrastructure', as you now call the garage and road that you need more than anyone - are essential to this future tax revenue.  You'll point out that no one will buy a new house without a garage; and without the garage, the town won't get the benefits of this project.
  • Yes, the town would have to borrow the $25,000 (and, over the years, pay another $25,000 in interest) to help fund the 'infrastructure', but you'll point out that the new property and payroll taxes will offset those costs.
  • Finally, to sweeten the pot, you artificially inflate the price of your house by 20% to $150,000.  You know the project is really only worth $125,000, but boosting the price by 20% has the nifty effect of inflating the estimated 'benefits' by 20%, which makes the whole scheme easier to sell.

You know you are way out on a limb with this scheme, but - who knows - maybe the town will go for it. 

And why would they? Because you've done the math, and you're betting that they haven't.  

If you had paid for the street extension on your $125,000 house, you would have spent $117,500 and pocketed $7,500 - a tidy 6% profit. Not what you usually make, but a profit nonetheless.

But if you can get the town to finance the street and the garage, that removes $25,000 from your cost. Now, you can build the $125,000 house for just $92,500 out of your pocket (and another $25,000 out of the public purse), and you make a cool $32,500 profit for a 26% margin.

If you can get the town to go for your scheme, you've 'magically' quadrupled your profits.

::

So you package up your scheme and present it to the town's economic development manager.  You brace for her to laugh you out of her office, but have decided that you can live with a little ridicule in exchange for the chance - however remote - to quadruple your income.

Instead, she just smirks.

She knows that you need the garage and the street extension more than anyone, and isn't sure what valid public interest the town has in helping with the house you want to build. She know that you need to build something on the lot anyway even if you don't get the town's financial support. She's not sure she believes that your project is really worth the $150,000 you are claiming.  Even if it is worth $150,000, she thinks your estimates on how much the town stands to benefit are extremely exaggerated.

She appreciates the ingenuity of your argument, but the whole scheme strikes her as farcical and not really worthy of being called an 'economic development initiative'.  

And yet, she also knows that you are close to several members of the town council. She seems to recall a picture of you with your arm around the mayor in the local paper. She suspects that you have contributed to several local political campaigns.

These connections intimidate her. So she decides to pass the whole suspect bundle (and the decisionmaking) along to the town council.

And to your delight, the council routinely passes your scheme with only modest resistance. They simply require that you spend at least $100,000 on your project to qualify for these incentives.  

::

Just as you rub your hands in glee at the prospect of making so much money, the economy takes a nosedive. Banks aren't willing to lend for housing construction, even for a 'sure thing' like your project.  

After a long delay in lining up financing, you return to the town council with a proposed amendment to your initiative. You ask for a 'hardship exemption' to lower the total amount which needs to be spent on the project to just $75,000, even though you initially justified the town's financial involvement based on the inflated $150,000 amount.  

You hope that no one notices that a half-sized project would only generate half-sized benefits.

And, sure enough, the town council unanimously approves your amendment without debate. No one noticed. Or, more accurately, no one publicly objected.

At this point, another important revelation strikes you: The smaller your project gets, the more you come out ahead.

You now figure that you can finance and build an $80,000 house on your lot.

If you had built on your own, the house would have cost you $72,000 to build, plus $5,000 for the street improvments, which would have left you with about $3,000 in profit. At just under 4%, the margins are substantially less than you usually make, but the project is still profitable.  

But the town is still on the hook for the same garage and street extension - even though the overall house has shrunk.  So you'll really spend $52,000 to build your $80,000 house (while the town still pays $25,000), and you'll clear a neat $28,000, or over 9 times as much as if you built the project on your own

The town's 'public infrastructure' commitment lets you multiply your profit as the overall project shrinks. You put in less money and get higher return on investment.

You are quite crafty, indeed. 

::

Yes, this thought experiment is ludicrous, if intriguing. And no town would ever support such a ludicrous scheme.

Right?

Except that they already have.

The above fable is true. Mostly.

It's just 2,000 times too small.  

Multiply all of the dollar amounts by 2,000, and you have the fiscal outlines of the CentrePointe project in Lexington.  

Just substitute 'town' with 'The Commonwealth of Kentucky' and 'Lexington'. Then substitute 'you' with 'The Webb Companies'. Substitute 'house' with 'CentrePointe'. And substitute 'incentive' with 'Tax Increment Financing' or 'TIF'. 

CentrePointe started as a $250 million project in 2008. As it sought state and local support for $50 million in 'public infrastructure' (including a $30 million parking garage), CentrePointe's cost ballooned to $300 million. After getting approval for Tax Increment Financing incentives from the state - based on that $300 million price tag - CentrePointe still couldn't get financing, and stagnated.

CentrePointe, Version 5.0
After continual financing troubles and multiple revisions, last week CentrePointe's developers got unanimous approval from both houses of the state legislature to drop the overall project size to just $160 million - while still receiving the full TIF incentives of the inflated $300 million version of the project.  

In other words, no one noticed that a half-sized project only generates half-sized benefits to the state and city. No one recalibrated the incentives when CentrePointe shrank.

In the process, The Webb Companies multiply CentrePointe's profitability with no additional risk to themselves.

::

We've often called Tax Increment Financing (or TIF) a scam or a con. While this sounds like hyperbolic exaggeration, we think what's actually happening is sleazy enough to merit these labels.  

TIF's scamminess stems from several interrelated components:

First and foremost, the developers shouldn't need public help. They benefit from this 'public infrastructure' more than anyone else, but have no financial stake in it. The theory of TIF is that the taxes stemming from new economic activity will pay for the infrastructure.  In return, the city gets the benefits of increased economic activity. That's the theory.

But the reality is quite different.  The most aggressive, best-case scenario from the state's economic development consultant showed the city and state tax increments not quite breaking even after 30 years. 

All of the incremental benefits that the project is supposed to bring are plowed right back into debt and interest payments which benefit the developers.

So in return for taking on $50 million in debt and $50 million in interest on behalf of the developers, the public gets nothing after 30 years. Nothing.

And that was the best case? 

Wait. It gets worse.  The consultant's 'not quite breaking even' case was based on CentrePointe at its bloated $300 million apex.  Now, CentrePointe is a half-sized $160 million project. At this reduced size, CentrePointe can never pay the city and state back for the infrastructure investment.

The developers need the parking garage. The developers would benefit most from the parking garage. Even so, the developers have managed to offload their parking garage costs onto others, using public taxes to do so.

Second, this means that TIF allows The Webb Companies to socialize the many risks of CentrePointe while privatizing the gains. Bondholders and the public take on the risks that CentrePointe might fail to live up to the promised (and unlikely) stream of tax revenues, while the developers avoid (and pocket) the costs of a $30 million parking garage.  The developers get the benefits of a parking garage to serve CentrePointe, while someone else gets stuck with the tab.

Will bondholders or the public ever get paid back? Maybe. Maybe not. We're pretty sure that they won't. In any case, none of this is the developers' concern. They get a big parking garage - essentially for free.

From a developer's point of view, TIF offers all upside with no downside.

Third, this asymmetry in risk rewards the developer for, in essence, making stuff up. In order to win the profit-multiplying $30 million upside of TIF approval, the developers can (and did) say anything. "We're building the state's tallest building!" "We've got all-cash financing!" "We're building a $300 million development!" "We've got handshake deals for 65 condominiums!" "Construction starts in 60 to 90 days!"

The fact that all of those statements were false is beside the point. There was little downside to lying or being profoundly wrong. And the developers were repeatedly, incredibly, and thoroughly wrong.

With no downside, their multi-dimensional wrongness helped the developers secure a $30 million windfall at public expense.

Fourth, as the nature of CentrePointe shrank and changed, the TIF funding stayed the same

CentrePointe's TIF was approved when the developers were proposing a $300 million project.  At that time, the developers also promised that they had financing in-hand. They promised 91 residential condominiums at a $1 million average price. They promised to begin construction in March 2009.

None of these overly optimistic assertions turned out to be remotely true. The project shrank to half its approved size. The size and mix of residential, retail, hotel, and office activity changed dramatically. The project slipped 4 years (and counting) past its promised construction start date. But none of these facts changed the city's or state's TIF obligations.

CentrePointe is a fundamentally smaller and different project than when it was proposed. Yet the developers' rewards remain the same: The developers still get a $30 million parking garage, at public expense.

There appear to be no mechanisms at the state or local level to revisit the TIF commitments when a project fails to live up to its rosy projections. And CentrePointe certainly failed to meet those projections.

Worse, TIF actually rewards the developers for shrinking the size of the project: The smaller the project gets, the greater the developers' return on investment.

The Webb Companies appear to be able to alter the project on every whim of the developers. They can and have overpromised and underdelivered. And the city and state appear to have no recourse - or desire - to reevaluate their support of the project.

Fifth, state law is maddeningly unclear about what happens if a TIF project fails to deliver on its promises. The law goes into great detail about how to subsidize the developers, but it does not make clear who pays when the project falls short of projections. 

When a TIF project is approved, it allows the city and state to take on debt by issuing special TIF bonds. In return for $50 million from bond investors, the city and state promise to use a steady stream of taxes coming out of the new economic activity at CentrePointe to pay back the $50 million (with another $50 million in interest) over the next 30 years. 

Under the original best-case assumptions from the state's economic development consultant in 2009, taxes from CentrePointe just missed fully paying for the bond payments.  

Since 2009, however, everything changed. The project got much, much smaller. Key assumptions justifying TIF for CentrePointe have crumbled. 

In other words, it is not remotely possible for CentrePointe to generate enough taxes to pay back the bond investors.

Three years ago, we re-ran the consultant's analysis for CentrePointe using (in our judgment) generous-but-realistic assumptions.  The result: Taxes from CentrePointe only generated 20% of what was needed to pay bond investors. 

And that was before the project shrank another $40 million - rendering even our dreary projections too optimistic.

So the state and city issue TIF bonds. And the CentrePointe TIF can never pay the bond investors. Then what?

If the city and state default (i.e., fail to pay) on the bonds, whose credit rating takes a hit? Who is responsible for the shortfall? 

Some analysts assert that bondholders would be on the hook for any shortfall. But then, any bond analyst looking at CentrePointe would recognize that they'd never get paid, and investors would flee. Then where do the TIF funds come from?

It is hard to look at the CentrePointe TIF without realizing that there is great risk of loss to state and local taxpayers, as well as bond investors.

It is also hard to look at the CentrePointe TIF without realizing that The Webb Companies incur no risk at all.

Finally, the fact that the city and state sanction TIF for CentrePointe doesn't make TIF more legitimate; It makes TIF more despicable.

TIF is the worst kind of reverse-Robin-Hood welfare scheme for developers. At a time when the state and city are starving for money, TIF uses public tax dollars to help reduce the developers' expenses and helps line their pockets. It transfers risk away from the developers and to the public and to investors. It literally takes from the poor and gives to the rich.

The CentrePointe TIF is a con.  The fact that the city and state assist in the con doesn't make it any less of one.

::

We've often had fun at the developer's expense with CentrePointe, pointing out their serial incompetence and their tendency to lie and exaggerate.

But the truth is that their 'incompetence' and mendacity have served them quite well. It has helped them dramatically compound their profitability and reduce their risk. All at public expense.

Quite crafty, indeed.


2012 and the Local Economy

I was privileged to be surveyed late last week by the Herald-Leader's Tom Eblen for today's column on the state of Lexington's economy for 2012.

I don't envy Tom: distilling the often-disparate views of eight different business owners into 800 words or less must be tough.  (As regular readers might imagine, my views didn't exactly align with many of my peers.)

My response alone was over 1000 words, so the understandable - and necessary - result was that some context was stripped from my comments.  

Still, Tom asked very thoughtful questions, and I liked some of my answers.  So I thought it might be worthwhile to share them here on CivilMechanics.

And if you haven't read Tom's column, go check it out here.

(Note: I wrote these answers early Friday morning.  Some local events have already outdated at least one answer...)

1. Are you optimistic or pessimistic about the economy this year. Why?

I'm kind of bipolar on the economy.  For the first time in 4 years, I'm seeing signs of strength in our business, in our customers and their ability to buy our services, and in the national economy.  

At the same time, I see two major "storms" on the horizon: the apparent willingness of Republicans in Congress to scuttle the economy for political advantage (and I don't think this is a "both sides" thing - see this, for example), and the apparent unwillingness (or inability) of Europe to deal effectively with their debt crisis.

In my view, both storms are fueled by wrong-headed drives for austerity - forcing governments to spend less when no one else is spending, and further drying up demand.

2. How is your business doing?  How are business conditions better or worse for you than they were a year ago?

Our business is still weaker than I'd like in the wake of the recession, but it is growing.  Sales are up about 3% over last year, but some of the underlying fundamentals still aren't where they need to be. While we've seen some improvement, many of our customers are still delaying basic maintenance on their cars because they can't afford it.

3. What’s your biggest business concern for the coming year?

I've hired two new technicians in the last 9 months, including one last week, bringing us to six mechanics in total.  Having more technicians will help us enormously in the busy spring and summer months.  But the winter is typically our slowest time of the year, so bringing on an additional employee now is a bit of a risk: Will there be enough work to keep everyone busy and happy? Will there be enough business for me to make a profit while paying them?  

Getting through the next few months with a bigger staff is my biggest current concern.  Keeping them busy throughout the year by bringing customers through the door is my biggest concern for 2012.

4. What do you see as your biggest opportunity for the year?

Having a larger staff will allow us to serve more customers more quickly.  Toward the end of 2011, we were frequently scheduling appointments up to a week in advance because we were too busy to get customers into the shop sooner, and we lost some business because we couldn't get them in right away.  We want to improve our service and accommodate our customers more quickly in 2012, and the additional employees will help us with that.

5. What would you like to see the president and/or Congress do to improve the economy?

I'd like to see another massive stimulus package.  

120106_privatejobs

While it may not be popular with your readers, there is no doubt that the early 2009 stimulus worked.  (See chart of private-sector job losses and gains at right, stolen from the estimable Steve Benen.)  We were losing hundreds of thousands of jobs every month and the economy was imploding.  Immediately after the stimulus, the economy stabilized and the jobs losses dropped dramatically, and jobs have been growing slowly and steadily since early 2010.  But a stable and slow-growing economy isn't enough.  I'd like to see another stimulus to help jump-start a more dynamic, fast-growing economy.

A lot of folks will say that we need to cut taxes and regulation in order to get the economy growing again.  That's a head-scratcher for me.  Lowering my taxes and putting a little extra money in my pocket won't help me create a job.  Neither would letting me pollute more.  

I've hired two new employees in the last year (growing 25% from 8 employees to 10), and the decision to hire them was driven by customer demand for faster and better service - which had nothing to do with my taxes or regulations.  Customer demand drives hiring; giving business owners extra money or convenience really doesn't.

I like President Obama's American Jobs Act as a starting point for a stimulus - investment in infrastructure, schools, and public safety is a sound way to grow economic demand.  But I'd like to see even more investment in other areas, such as energy research and American manufacturing, and I'd like to see a stimulus closer to $1 trillion to really get the economy growing again.  

That's what I'd like to see.  I see zero chance of this actually happening with this Congress.

6. Will this year’s presidential election make the economy better or worse? Why?

I fear that it will make things worse, at least for the short term.  It is hard to imagine how our political system could be more gridlocked than it was in 2011.  Still, as congressional Republicans obstruct any initiative which might make the President look good, I worry that they'll sacrifice the economy on the altar of politics.

As for the race itself, I see a worrying thread of extremism from the GOP candidates.  Even the supposedly-moderate Mitt Romney is proposing extreme policies which benefit the wealthy even more and skewer the middle class and poor even more (thereby skewering most of my customers).  I worry that the austere policies a Republican President might attempt to implement would decimate my customer base and my business.  

7. What is Lexington’s biggest asset during these economic times? It’s biggest problem?

I think our schools - particularly UK - are our biggest asset.  They provide our city with well-educated people, great research to improve our lives and build businesses upon, and a vibrant "student economy" which spills over into the rest of our city. 

I see two big problems for Lexington.  First, if the proposed redistricting is approved by Governor Beshear, a huge chunk of our city will not be represented in the Kentucky State Senate for two years.  Proper representation in Frankfort is vital to protecting Lexington's interests and to protecting UK, and these undemocratic redistricting plans would deprive one-third of our city of its vote.  I worry about the impacts of Lexington not being represented in Frankfort.

Second, I think our city, our state, and our schools are under-funded.  I appreciate all of the efforts Mayor Gray has made to trim Lexington's budget, but at some point, we citizens need to fund all of the services and infrastructure and improvements we've come to expect.  

I want nice roads for me, my customers, and my employees.  I want them to be plowed and salted when nasty weather strikes this winter.  I want the best schools for my son and for my employees' families.  I want the best fire and police protection.  I want a beautiful and safe city to live and work in.  But those benefits come at a price.  And we're responsible for funding all of those "nice things".

It won't be popular, but I think we need to start a frank conversation about raising taxes to fund our city's (and state's and schools') obligations.  We need to pay for the great things we want to do together.

8. What else should readers know that I haven’t asked about?

I hope they'll go out of their way to buy local goods and services when possible.  That will keep more of Lexington's money in Lexington, which helps foster a more vibrant local economy.


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.


Confessions of a Job Creator

I'm a job creator.  And job creators are important.  

At least that's what we've been hearing from Republicans lately.

House Speaker John Boehner cited "job creators" and "job creation" 26 times in a speech about the economy last week.  

And in that speech, the Speaker invoked us job creators to attack the Republicans' Unholy Trinity: taxes, regulation, and government spending:

Private-sector job creators of all sizes have been pummeled by decisions made in Washington.

They’ve been slammed by uncertainty from the constant threat of new taxes, out-of-control spending, and unnecessary regulation from a government that is always micromanaging, meddling, and manipulating.

To hear Boehner's version of events, the government stands as the sole obstacle to us job creators as we valiantly attempt to create more jobs.

Indeed, the entire Republican establishment keeps talking about the special role we job creators play in our fragile economic recovery.  

In their "House Republican Plan for America's Job Creators" - a 10-page, large-type tome [PDF link] about the same length as this blog post - the House Republican leadership repeatedly promise to slash the Unholy Trinity of tax, regulation, and spending.  On Sunday talk shows, more of the same.

If only we job creators paid less money in taxes, Republicans say, we would hire more.  

If only we were free from government regulation, we would hire more.  

If only we were less concerned about government spending, we would hire more.

As much as I appreciate Republicans' apparent concern - their willingness to dump money in my pocket, their longing for my freedom to pollute with abandon, their eagerness to drive the nation to the edge of default to keep government spending in check - here's the thing:

Their efforts won't help me create a single job.

Not one.

In fact, Republican attacks on taxes, regulation, and spending do quite the opposite, because Republicans are thoroughly wrong on the mechanics of hiring.  

I don't hire because I have extra jingle in my pocket.  I don't hire because I can avoid complying with some regulation or tax.  I don't hire because the government is spending less.  I hire because there's more work to do

No responsible businessperson is going to hire simply because they have extra money lying around or because they can dump motor oil in the sewer. As generous as I might be, I won't hire out of charity. 

Entrepreneurs hire because they have work to do, and a new employee can help them get that work done.  They hire to help meet demand. And demand is fueled by customers who have money to spend.

And that's the fallacy of the Republican job creator mythos: Job creators don't "create" jobs.  Our customers do.

And the evidence proves the Republican fallacy. Taxes are at historic lows [PDF link]. Corporate profits are at record highs. Government spending has collapsed.  These are the very conditions under which, according to Republicans, we job creators should be creating jobs.

But we aren't.

Despite these supposedly wonderful conditions for job creators, one in six Americans remain unemployed or underemployed. Income and household wealth has stagnated for over a decade. Instead of hiring in this environment, corporations are hoarding record stockpiles of cash in the face of weak demand.  

No demand, no jobs.

That's not to say that we entrepreneurs - let's just drop the "job creator" garbage - are powerless.  We can foster conditions which promote growth (the right business model, the right service, the right people); but we need customers with a willingness to spend to make our businesses grow and to create an environment where hiring is possible and profitable for us.  

Bottom line: Give me money, and I'll sock it away in the bank.  Give me customers, and I'll give you jobs.