Saturday, September 25, 2010

Two Edgewater TIF votes in One Week? Oy.

On Monday, the MMSD school board will cast the votes that will direct my vote on the Joint Review Board. On Wedneday evening, the Joint Review Board will vote on whether to accept or reject the proposal to expand TID #32 in order to loan $16 million to the proposed Edgewater project.

What IS This Obscure Little Committee?

Called an 'obscure committee' by the Wisconsin State Journal, The Joint Review Board is in fact a legislatively mandated committee that gives all affected taxing authorities a vote on whether to forego property tax revenues in order to invest in TIF projects. (For those of you who want to know more, the Department of Revenue has an on-line manual that is very helpful in explaining everything you would need or want to know about the TIF process.)

The Joint Reveiw Board is composed of: Gary Poulson, former alder and citizen member, chair; David Worzala, Dane County Treasurer representing Dane County, Roger Price, representing MATC, Dean Brasser, City of Madison Comptroller representing the City of Madison, and me, representing Madison Metropolitan School District.

Will the TIF Pass?

TIFs and TIF expansions have typically moved forward with a unanimous vote in support. This time around, anything could happen. While there is intense political pressure to approve the TIF, in a slam dunk process, the proposal has generated mounds of analyses by all sorts of groups, and in the end has created more twists, turns, and spin cycles than Mr. Toad's Wild Ride.

This past week, MMSD administration Administration recommended that the Board direct my JRB vote against the TIF Proposal and it is reasonable to expect that the board will vote in this way. Ed Hughes has written about his reasons for casting a reluctant vote to reject the proposal, and my thoughts that the TIF would be a bad deal for Madison's public schools have been on record for some time. There are five other opinions and votes among board members, but it is very possible that the group will come together to direct me "just say no" to expanding TID #32 when the JRB meets on Wednesday.

But the MMSD vote is just one among the five votes cast by members of the Joint Review Board. Whether the other review board members believe that the propsal is a good deal from the perspective of their taxing authorities and constituents will be known on Wednesday.

Why Reject the Proposed Amendment to TID #32? 
Or, the Giant Sucking Sound Coming From the Shores of Lake Mendota

There are many reasons to take a pass on this investment opportunity. The most obvious have to do with the financial impact of deferring tax revenue from the existing and highly successful properties in the district. Adopting the amendment means that the district will stay open longer, and that the taxes on the rising values in those properties will be used to pay off the $16 million loan to the Edgewater project. (The Edgewater project will not generate the revenue to pay back the loan on its own. That is why it cannot be a separate project or an anchor for a project.)

On the eve of the vote, the biggest issue for me relates to proponents claims of increased property values, jobs created, and revenue that will be generated by loaning $16 million to Edgewater.

I believe that credible information has come forward in recent weeks that casts serious doubt on the revenue projections claimed in the developer's documents. That information creates two key problems, that are, for me, consistent with the criteria for deciding the TID and, for me, cast the expansion as a very risky public finance move if it goes forward.

1)Will hotel revenues and property taxes come in at the levels projected in the proposal? Setting aside the questions raised by Edgewater developers' use of projections that are out of whack with any Madison area hotels, Milwaukee's Pfister Hotel, or Kohler's prestigious American Club, we have the cautionary experience of the gap between projections and actual revenues generated through the proposal that helped to finance the Monona Terrace Hilton. According to a recent Cap Times article using research conducted by local resident John Jacobs:
The resolution from 1998 projected tax revenue from the hotel of $536,422 in 2002, increasing to $682,479 in 2009. In reality, the Hilton paid $434,237 in 2002 and $421,899 in 2009, and most recently saw its assessed value drop from $20.4 million in 2009 to $18.8 million for 2010.
In the absence of either numbers that align with the local (or regional premiere) hotel market, or arguments and data that support a case for much higher returns than might be expected locally or nationally, it is hard to believe that the project will yield anything close to the returns that are being promised in the proposal.

2) My second red flag has to do with hotel, occupancy rates, and the impact of occupancy rates on hotel room tax collections and property values for hotels. Simply put, I suspect that adding more hotel rooms to a market that is rumored to be at less than 60% occupancy, could do more harm than good. 

I apologize in advance if I am getting my understandings scrambled. But. To the extent that hotel property values are linked to occupancy rates, lower occupancy creates translate into lower property values. It seems to me, then, that adding hotel rooms in a market that already has more rooms than guests, adds to -- rather than alleviates -- problems of lower occupancy rates.

In my thinking, then, the risk is that adding the hotel rooms creates two related risks: 1) that the Edgewater will have an occupancy rate that is low enough to keep its property values below the levels projected by developers, and, 2) that the refurbished Edgewater will exacerbate low occupancy rates at other hotels, to the extent that it draws guests away from other hotels that already are struggling with low occupancy.

The "If you build it they will come" Phenomenon Is Unlikely to Work Here

I'm still trying to get my head around the argument that we have a critical need for more hotel rooms, especially for the conference and convention market. I know what the recession has done for business travel; as a state employee, I am aware of how budget cuts have gutted travel for government employees. Indeed, there have been times when state employees were prohibited from traveling even when using gift or grant dollars.

So the arguments that we needed a big big luxury hotel to attract conventions didn't quite align with what I've seen, experienced, and heard from friends in the private sector. A recent column by Mike Ivey, also Cap Times, reassured me that I wasn't just a naysayer. Titled, Recession Taking a Toll on Alliant Center, Monona Terrace, the article begins:
Madison's two major convention venues are feeling the pinch of the recession.
Both the Dane County-owned Alliant Energy Center and the city-owned Monona Terrace have seen revenues fall sharply over the past year, forcing officials to juggle their budgets and hold the line on staffing.
 And it gets gloomier from there.

So, What are the Odds...?

In full disclosure, I need to say that I am fiscally cautious. I am not opposed to TIF, and believe it can be and has been a very positive tool for local economic development.

But I also feel the responsibility of choosing wisely on this one. Choosing poorly is more than a little "uh oh" and then you move on. Choosing poorly raises the specter of living with an investment that yields poor returns, takes longer than expected to recover investment costs, and, in this case, possibly yielding unanticipated negative consequences for the local economy.

That doesn't feel very good.

There may be circumstances where such a high risk proposal would look appealing. But this isn't one of them. Maybe one of the people who keeps writing to me about the money that I can help them to recover would like to invest in this one?

1 comment:

Steve said...

Lucy - The $16,000,000 is not just a loan. About $10,000,000 of it will not be paid back by the developer. Instead, that amount will come from excess increment generated by TID #32. So, in fact, the $10,000,000 is literally a handout for the developer. It's a shame that the folks that handle TIF policy in city hall are willing to break all the rules and play fast and loose with our money.