Harbor Point financing has backers – and critics

Mayor Stephanie Rawlings-Blake says the city has nothing to lose and much to gain by borrowing $107 million to pay for new roads, parks and other infrastructure at Harbor Point, a now-empty tract envisioned as a glittering mini-city on Baltimore's waterfront.

Under the city's plan, the money would be repaid from property taxes generated at the site, with the developer responsible for any shortfall. And if the $1 billion project takes off — as a place for thousands to live, work and shop — the city eventually expects to take in an average of $20 million a year in new taxes, even after paying off the bonds and for services such as fire and police.

But some question whether the taxpayer help is needed, especially with Harbor Point already in line for $113 million in tax breaks. The state's former planning director, meanwhile, says the potential impact is much larger than many realize, because tens of millions of dollars in tax revenue would be diverted to pay bond interest.

In addition, projections hailed by the mayor are based on assumptions that might or might not pan out. For example, because a long-range analysis of city revenue is based on an outdated tax rate, estimates are several million dollars too high. And the forecast does not account for the economic hit to the central business district, which is set to lose a major employer to Harbor Point.

This week the spotlight will be back on Harbor Point, as a City Council committee holds a hearing to review the plan to sell bonds to pay for the infrastructure. It's a high-stakes debate over the future of the city's largest open swath of waterfront property — and on what role city incentives should play in fostering development.

The committee's chairman, Carl Stokes, has doubts about the financing plan. He wonders whether it would be better for the city to pay directly for less expensive infrastructure without tying up tax dollars for decades.

Stokes said he's not concerned that the city could wind up having to pay back the bonds if the developer were to run out of cash. If all else fails, he thinks the investors or lenders would step in to avoid losing control of the project.

But he takes issue with a key finding of an analysis done for the city. The report said the $107 million in city borrowing is critical because it would boost the profit for Harbor Point's developer from 10.7 percent to 14 percent, attracting institutional investors and large lenders to finance the deal.

"That's not the taxpayers' role, to increase profits to the developer," Stokes said. He has also criticized Harbor Point's planned use of $88 million in enterprise zone tax credits — a program designed to lift economically depressed areas.

Wednesday's hearing is the newest chapter in the debate over the 27-acre peninsula, which was once the site of an Allied Signal chromium plant and is largely capped to keep buried contamination from spreading. Developing the property would complete the link between historic Fells Point and booming Harbor East.

The $107 million would be borrowed through tax increment financing, or TIF, so called because incremental taxes generated by a project are used to repay bond holders.

The method dates back more than 60 years but picked up steam in the 1970s and '80s, spreading east from California as cities looked for ways to make up for shrinking federal funding. Proponents say it lets new development pay for its own infrastructure through the growth in property taxes on site.

But cities such as Rockford and Park Ridge, Ill., have had to dip into their general funds to make bond payments after anticipated taxes fell short. And TIF revenue dropped 3 percent last year across suburban Cook County, in the Chicago area, even as the number of such districts grew.

California pulled the plug on such financing in 2011 after critics said local governments were shortchanging schools and other vital public services by overloading on debt.

Baltimore, which has financed about a dozen developments through tax increment financing, says the method protects taxpayers from having to make up the difference if the project underperforms. Officials point to the four projects, including Mondawmin Mall, that have fallen short in recent years; in each case, the city assessed a "special tax" to cover the gap, and the project owners paid.

The problem, skeptics say, is that taxpayers can take a hit even when general funds are not tapped. In a study of the Chicago area, two University of Illinois professors found that the practice simply displaced development, with tax base growth in TIF areas offset by declines elsewhere.

Good Jobs First, a taxpayer watchdog group, says such displacement seems likely with Harbor Point. It notes that the only new tenant so far is energy giant Exelon Corp., which will put a regional headquarters there and move employees from offices on Pratt Street downtown.

"There will be a decline in property values downtown ... and everybody else will be paying for it," said Thomas Cafcas, a research analyst at Good Jobs First.

Meanwhile, the new taxes produced by the 23-story Exelon building at Harbor Point would not go into the city's general fund — where it could be spent on police, parks or other needs — because it would be diverted to pay off the bonds, said Greg LeRoy, the nonprofit's executive director.

Robert C. Embry Jr., president of the Abell Foundation, said he generally supports tax increment financing. But he has concerns about Harbor Point. He notes that when Maryland regulators approved Exelon's acquisition of Constellation Energy, they required the company to build a regional headquarters in Baltimore.

The key question for Embry is whether Harbor Point development would occur without the city agreeing to float the bonds and use new tax dollars to pay them off. Embry, a former city housing commissioner, said he doesn't know and thinks there's no way of knowing.

"The people that have to vote on this have to make their best guess," he said, referring to council members.

But the developer says proof exists. Marco Greenberg, who works with lead developer Michael S. Beatty, said the project would sink without city financing assistance.

Greenberg called the profit margin "very, very thin" even with that help. Some potential investors are "walking away from this deal, saying we're not getting involved in that because the risks are high and the returns are low," he said, while declining to provide names.

Experts differed on whether the higher profit is needed to attract investors and lenders. Greenberg noted that the 14 percent figure is the long-term profit forecast not an annual return. City documents estimate the developer's profit at $174 million, compared with $124 million without taxpayer assistance.

The Baltimore Development Corp. did not give Beatty everything he wanted on Harbor Point, said M.J. "Jay" Brodie, who retired last year as president of the city's economic development arm. He said the proposed tax increment financing had been more than $150 million until a parking garage was taken out.

"We were convinced that the project couldn't happen without the incentive," Brodie said. "It wasn't throwing darts at a dart board. Our interest was to get the numbers as low as possible and still allow the development to proceed."

But Ronald Kreitner, state planning director from 1989 to 2000, questions the size of the proposed incentives. "This whole thing is being debated based on an assumption that somewhere it is written that this particular developer is entitled to a profit of X amount," he said.

Kreitner is the longtime head of Westside Renaissance Inc., a nonprofit focused on downtown's west side. The group's chairman is Peter G. Angelos, majority owner of the Orioles and a downtown property owner with a stake in protecting the central business district.

Kreitner thinks the public isn't getting the full story about the bonds. While the principal is projected to be $107 million, BDC documents show that interest charges would add $174 million to the cost — all of it paid out of property tax money that otherwise would be available for city use for other purposes.

He says the public should also realize that one byproduct of Harbor Point development could be a drop in state education funding for the city, based on a state formula that factors in an area's wealth to calculate aid. Kreitner estimates the city would receive $5.8 million less per year.

If so, that would take a bite out of the $19.6 million a year on average that the city projects Harbor Point would produce over 30 years in direct city revenue from income, hotel, property and other taxes — after accounting for bond payments, tax credits and the cost of city services.

The city's figures are drawn from an analysis by MuniCap Inc., a Columbia-based public finance consulting firm. The analysis projects property tax revenue from Harbor Point over 35 years at $839 million.

But because the city has since cut its property tax rate by 2 cents, that estimate would drop by more than $7 million. Rawlings-Blake has said she wants to keep reducing the city's tax rate. BDC spokeswoman Joann Logan said projections would be revised but that there would still be more than enough money to cover the bond debt.

City officials frequently talk about Harbor Point as a source of new jobs, and MuniCap projects 6,611 permanent positions after completion of the nine-building complex. That is based on a ratio of 3.55 workers per thousand square feet of office space. The analysis includes the Morgan Stanley building, which opened in 2010 on the edge of the site and has roughly 850 employees.

While Exelon expects to have up to 1,600 employees in its new building at Harbor Point, most would move from 750 E. Pratt St., said company spokesman Paul Adams.

TIF projections in Baltimore have not always worked out as planned, though city officials say the results show that they are prepared for that possibility.

When the city approved TIF financing for the Clipper Mill mixed-use community in North Baltimore about a decade ago, the project was expected to generate more revenue than was needed to pay off the bonds. Instead, property taxes have fallen short for four or five years because the recession delayed commercial development there and hurt property values, said Stephen M. Kraus, chief of Baltimore's Bureau of Treasury Management.

But the rest of the city's taxpayers haven't had to chip in, he said — even though the original developer lost some of the parcels to foreclosure. Clipper Mill's successor developer has paid a special tax to close the gap, about $116,000 last year. The three other TIFs coming up short have also paid up: the East Baltimore mixed-use redevelopment near Johns Hopkins Hospital ($1.2 million last year), Mondawmin Mall ($438,000) and the Belvedere Square shopping center ($5,000).

The Baltimore convention center hotel is a TIF, too, but its woes aren't due to a shortfall in its property taxes, Kraus said. The problem is, the business isn't making enough money to cover its hotel revenue bonds.

In the other cases, Kraus said, the special tax is a lien on the property that must be paid. "I think if you look at other states and areas that have problems, it's because they don't have that mechanism available to them," he said.

But even when other taxpayers aren't stuck covering shortfalls, critics say they can still be affected, just less directly. Some academics see the TIF tool as a game of municipal musical chairs, giving to one area by taking from another.

"My own work in Illinois suggests that all TIF does is move things around," said Richard Dye, a professor at the University of Illinois' Institute of Government and Public Affairs. "TIF does not increase the tax base."

Dye pointed to other potential downsides. It can be less transparent than other spending, he said, because key negotiations often happen outside the usual public process. Also, because the money is earmarked from the start, there's no debate about whether public money should be spent on, say, a waterfront park or a school.

And it's often hard to tell whether development truly wouldn't happen without the boost, said David F. Merriman, who has teamed up with Dye on property tax research.

"You get into a kind of game theory thing here: Of course the developer has an incentive to threaten to back out if he doesn't get it," said Merriman, associate director of the University of Illinois' Institute of Government and Public Affairs.

Still, David Versel, a George Mason University researcher and former land-use economics consultant, said there's a simple reason cities and suburbs keep turning to such financing: Although they've historically handled the infrastructure, they can't cover the tab as before.

"The mountain of federal funding that used to support infrastructure is gone," he said.

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