Credit Mobilier Redux

November 28, 2017

by Jason Arp to the American Principles Project, Nov. 29 at the Mayflower Hotel in Washington, D.C.

Thank you all for having me. I can’t tell you what a thrill it is to be here today. I blather on about free enterprise and the importance of private property rights all the time back in Fort Wayne. It is so nice to have an audience (besides my dear wife) that is in agreement with me that FREE markets work best. It’s such a welcome change from the scowls of disapproval that is so typical of the attendees of a City Council meeting.

My friend Erin Tuttle approached me this summer about writing a piece related to the impact that Federal grant programs have on local government. Erin was seeing the impact through DOT funding for bus lanes in Indianapolis, where the Feds were dictating fair housing mandates as a condition for the transportation funding. I have written a few op-ed pieces about the distortions in local economies and governments created by the Regional Cities program implemented by the Indiana Economic Development Corporation. This program required that county governments come together and form Regional Development Authorities. In northeastern Indiana our RDA is comprised of 11 counties. The RDA has the power to give grants from funds it received from IEDC. This is was what got the counties to jump on board. Our region got $42 million of “free” money to distribute to projects of their choosing. The state legislature also gave these Regional Development Authorities the ability to borrow, lend, collect taxes, and use eminent domain. Scary stuff if you ask me… HOWEVER it was not the stuff that Erin was asking me to write about.

What I had been confronting on city council for the last year was a weaponized chamber of commerce / economic development corporation that had a myriad of tools at its disposal. Our county has the only chimera of this sort in the state, where the chamber of commerce and the city and county’s economic development corporations were merged into a single entity that could act as the gate keeper to tax abatement, building permits, tax increment financing and other economic inducements, as well as collect dues from members and lobby the city and county governments for higher taxes to pay for more economic development projects. This thing is quite a beast.

It had just happened that my wife and I had been watching an AMC original series on Netflix called “Hell on Wheels”. This semi-historical / semi-hysterical depiction of the construction of the Transcontinental Railroad got me thinking about the correlation between what I was seeing on council and what this show was reenacting.

In the 1860s America was at war with itself. Washington was in search of a unifying accomplishment, something to reiterate the manifest destiny of continental expansion. To accomplish this, the Union Pacific Railroad was created by Congress to construct a transcontinental railroad. The Union Pacific issued shares at par through Credit Mobilier who then sold the shares at a loss to investors that included several members of Congress. Credit Mobilier was the sole provider of services to Union Pacific who in turned billed the United States government on a cost plus overhead arrangement. In the end the Union Pacific Railroad, a privately owned company, owned a transcontinental railroad that the taxpayer paid $100 million to Credit Mobilier to construct for $50 million.

Congressmen resigned in shame, as they had personally bilked the taxpayer while supposedly pursuing the unassailable aim of rapid coast-to-coast transit. Although Ulysses S. Grant was never indicted, his reputation, and that of the office of the presidency, was permanently damaged by evidence that he knew of the Credit Mobilier scheme and did nothing to stop it.
Today we have new unassailable goods to pursue. The mantra of sustainable development has become an all-encompassing dictate of governmental departments all over the globe, including the United States Treasury Department.
In the final year of the Clinton administration, Vice President Al Gore began marketing the Community Renewal Tax Relief Act of 2000. This would usher in a change in the way public housing investment would be done, through public/private partnerships driven through Treasury Department incentives to banks. The Bush administration was the first to administer the new tool to redirect tax money to local governments to the projects of their choosing. New Markets Tax Credits are awarded to Community Development Entities within city or county governments. $2.5 Billion was distributed in the first two years (2001-2002). In total the treasury has distributed $50.5 billion as of fiscal year 2016 to the New Markets program, ostensibly for the purpose of providing low income housing in underserved urban areas.

According to the Office of the Comptroller of the Currency (our nation’s primary banking regulator) the New Market Tax Credit program “… provides a tax incentive for private sector investment into economic development projects and businesses located in low-income communities.“ “The program is overseen by the United States Department of the Treasury and is directly administered by the Community Development Financial Institutions (CDFI) Fund.” “NMTCs are allocated by the CDFI Fund to community development entities (CDEs) under a competitive application process.”

While this program was an instant success in more urban settings, it just wasn’t catching on in rural America.
Enter Richard Florida PhD. Florida achieved fame in 2002 with the release of the Rise of the Creative Class. Dr. Florida’s prescription was hefty doses of public funding on “quality of place” initiatives to “attract and retain talent”. Supposedly small and mid-sized cities across America were losing their young talented people to San Francisco and New York. These became the marching orders and the perfect rational to make the most of the New Markets Tax Credits.

In our town we have had several of these “quality of place” projects. A quick glance at this enhanced Google map of our downtown reveals that nearly half of the property is either owned by the government or being funding with government dollars. The green is government property, including our $75 million single-A baseball park complex, several parking garages, a $50 million convention center, $85 million library, as well as the jails, courthouses and offices that one expects.

The dark bluish purple plots are non-profits, mostly churches and civic performing arts centers. The pink are those private properties that have received substantial public money through our economic development efforts. Lastly the red areas are those properties that are proposed to get arenas, river-front promenades and commercial redevelopment with government assistance.

Allow me to describe to you the most egregious quality of place project I have seen to date. It is called “The Landing”. This project will be the rehabilitation of a block of underutilized buildings adjacent to the parking garage for the police station and the county jail. Many years ago it was the place where a traveler on the Wabash-Erie Canal system could find a warm brothel and a cold beer. It’s not a whole lot different today.

“The Landing” will have 72 housing units and 22 commercial units when completed, according to the developer’s pro-forma submitted to the various government entities they are applying for aid from. This affordable housing option will offer residential units that will rent for up to $1,100 a month, with an average just over $900 a month. This is 50% more than the average rent in Fort Wayne! However, the commercial units will be heavily subsidized, renting for $6 per square foot while the average commercial tenant in downtown pays over $12 per square foot. This will likely put heavy pressure on the property owners nearby.

“The Landing” has a menagerie of financing sources, nearly all of them deriving their existence from a government program. The total “Capital Stack”, which is the eco-devo parlance for “funding sources”, comes to $34.7 million. $10.7 million is from New Markets Tax Credit financing. Another $5 million comes from federal government sources by way of $4 Million in Historic Tax Credits and $1 million in a low income housing loan from HUD. The Indiana Economic Development Corporation seed money into Regional Cities is accounting for $7 million. The City of Fort Wayne has found a variety of pockets to come up with $8.75 million. Finally the developer is putting up $3.25 million in equity. The developer has achieved getting $10 of government money for every $1 they have contributed to this project that they will own.

Who would ever agree to this? Well, as you can see in our next slide, that is not the way it was sold. The developer then took a presentation around to the various entities showing that over 60% of the funding was being provided by private sources. For all local and state entities the federal funding from New Market Tax Credits and Historic Tax Credits are characterized as private. The City’s Legacy Fund is characterized as a “private” source, despite it requiring a majority vote from city council for appropriation. The Downtown Development Trust’s loan is characterized as private despite DDT being funded from Legacy and having the deputy mayor on its board of directors.

A closer inspection of the Sources and Uses document enclosed in the application exposes that there really is NO private capital in the project, only private ownership, as the developer gets 100% of its equity investment back, up front, as a “developer’s fee”.

Also objectionable is the fact that nearly 20% of the New Markets Tax Credit financing is spent on the administration of the funds, nearly $2 million. Perhaps, the most repugnant thing about this project is the projected valuation of completed facilities. Taking the pro-forma financial statement provided to council for evaluation of the Legacy Fund loan, one finds that the expected cash flows discounted at a generous 6% discount rate projects a market value of about $11 million dollars. That’s about one third of the development costs!

At the end of the day, taxpayers will pay three times too much to construct low-income housing that will sport rents 50% above the market to be owned by a firm that has zero money invested in the project. This is all being done, supposedly, in the name of attracting and retaining young people to the former red-light district. Three to one. That’s a ratio that would make the Credit Mobilier perpetrators blush!

I think it behooves us to ask the question, as Cicero would have, “cui bono?” or “who benefits?” I see us putting on our best Colombo impersonation in doing this.

The obvious beneficiary is the developer, but we must go beyond just that. In order to get seven of nine city councilmen to vote something like this, there has to be a broader group of beneficiaries than a developer who is based out of Cincinnati, some 150 miles away. The boosters of this project of course were the economic development corporation/chamber of commerce combo, the local media, and the mayor’s administration. We have to peel back the onion a bit to see that the publishers of the two daily newspapers are on the boards of directors of the EDC/Chamber combo and the Downtown Development Trust. We also see that the legal representation, architects, engineers and construction manager are all board members of the EDC/Chamber combo. The Chamber and its prominent members have great influence on the media and campaign finance in our fair town. Those are things the councilmen care deeply about.

Since the mayor’s administration control’s the lead Community Development Entity in our city, it has control over the New Market Tax Credits once they have been allocated to the project. This buys a lot of political influence over the Chamber Chimera and the media.

What we lose in all this is free enterprise and the concomitant innovation and efficiency that come with it. Rather than allowing price discovery and resource allocation decisions be done privately, we have the United States Treasury using tax money to create political capital for the incumbents and the entrenched powers in local communities. The local mandarins then add to the pinch with local and state matching funds. The public is then left with their money going to private interests to overpay for projects they the market didn’t find attractive at going prices. If this was a worthwhile project, was there not someone willing to pay for it with their own capital?

The retort I generally get to free enterprise lectures is simply; “WELL, What’s your plan?”

I have already introduced my plan, published in Winter 2016 edition of the Indiana Policy Review. It’s called “Getting out of the Way!” I laid out a plan of simply picking the one tax that is the single biggest obstacle to business expansion and eliminating it. I have outlined the benefits and costs as well as the other steps that would need to be taken, such as halting all further governmental economic development and business inducement activity.

As I was preparing for this lecture we conservatives received something we seem to rarely get: GOOD NEWS! The U.S. House of Representatives passed a tax reform bill that reduced business tax rates while eliminating many of these tax credit schemes. Including the New Markets Tax Credits! IF, BIG IF, the Senate is able to hold the line on this, it will go a long way toward restoring sanity to local governments and getting them out of the real estate development business.
You have been a wonderful audience. Thanks for all you do to restore Liberty to our great country.

Jason Arp represents the 4th District on the Fort Wayne (Indiana) City Council.


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