Baltimore's development boom leads to loss in school aid

Is it time to change state education formulas?

With development booming in Baltimore, the city's property wealth grew by more than $1.3 billion last year — by far the fastest rate in Maryland.

But those gains have come with a cost: deep cuts in state aid to city schools.

The proposed state budget for next year cuts aid to Baltimore public education by $35 million, in part due to a funding formula that now assumes the city is rich enough to pay more toward its schools. The cuts have left city officials crying foul and schools CEO Gregory E. Thornton warning that he could have to lay off 393 teachers.

"The city's growth outpaced the rest of the state significantly," says Baltimore budget director Andrew Kleine. "Our growth strategies are working. Our property values are rising. That's all good news. Yet we're penalized under this formula. Even the fanciest formulas miss a lot of important facts."

One of those important facts: Some of Baltimore's most valuable buildings pay little or no property taxes to help close the gap.

Arguing that economic development needs the boost of public assistance, city officials have approved a wide range of tax breaks for projects built on vacant or under-utilized land. But the resulting cuts to Baltimore schools in next year's budget has renewed debate over whether city subsidies have been too generous — and whether the same practices should continue for future deals.

Some examples:

•Valued at $155 million, Harbor East's Baltimore Marriott Waterfront hotel cost city schools more than $1.4 million in state aid for next year through the funding formula. Meanwhile, under a deal the city inked in 2000, the hotel pays just $1 a year in lieu of property taxes for 25 years.

•Assessed at $58 million, downtown's Lockwood Place — home of the Capital Grille restaurant — is costing city schools hundreds of thousands in state aid. It gets a tax break of up to $1.5 million a year from Baltimore until 2024.

•Worth $40 million, the Zenith luxury apartments on West Pratt Street also cost the city hundreds of thousands in state school aid. It pays what amounts tojust 15 percent of its property taxes under a deal that phases out after 15 years.

Baltimore officials acknowledge that they hadn't considered the loss in state aid that can come from pricey development when they granted breaks slashing what the projects pay in local property taxes. Kleine said this is the first time the city has incurred such a loss by outpacing the rest of the state in property growth.

In awarding tax breaks, officials have consistently argued that projects would not have been built without them, and that each is preferable to vacant property that contributes nothing to the economy. They also note that the developments create jobs and often contribute other tax revenue to city government, such as hotel, parking and income taxes. And eventually they pay full property taxes.

City Councilman Carl Stokes, an outspoken critic of tax breaks for businesses, calls the city's economic boom "false wealth." He notes that the income of city residents rose just 1 percent last year while property values jumped almost 4 percent.

"Yes, we have the greatest wealth growth. But because we've given away so much money, we're not actually collecting the taxes," Stokes says. "We have a false wealth rise. It has boomeranged on us this year with the loss of school aid."

Administration officials say the problem is not the property tax breaks. Instead, they argue the state formula is flawed and is punishing the resurgence of the Maryland jurisdiction that still faces greater challenges than any other as it tries to overcome deep-rooted poverty and crime.

"We're doing the things the governor says he wants to see for the state: growing the economy," says Mayor Stephanie Rawlings-Blake, a Democrat. "We're still dealing with vacant houses. We're still dealing with public safety and we're fighting hard. Formulas don't catch everything. ...

"The fact that we're being punished for our success is a problem that needs to be solved."

The main state education funding formula, set by law more than a decade ago,distributes aid based on a jurisdiction's relative wealth. It takes into account both property value and income, but property value dominates.

Faced with a budget shortfall, new Republican Gov. Larry Hogan reduced funding from two other formulas. He froze an inflation adjustment for school aid and cut in half a funding stream based on the geographic cost of education.

The result is 11 Maryland school districts are slated to get less in state aid than this year, but none is seeing a cut of greater than $5 million — except Baltimore. By contrast, 13 jurisdictions are seeing a rise in education funds, although not as much as local officials had expected. Prince George's County schools are getting an increase of nearly $30 million.

David R. Brinkley, Hogan's nominee for state budget secretary, said Baltimore was hit the hardest in the budget because of its robust growth in property values.

"Baltimore City had nowhere to go but up," he said. "The bulk of it is the high-end development around the harbor."

Brinkley noted that both the Horseshoe Casino Baltimore, valued at $360 million, and buildings in the Canton Crossing development, valued at $65 million, were added to the tax rolls in the past fiscal year, contributing to the boost.

At the same time, Baltimore schools saw almost no growth in the student population, and counted fewer students who qualify for free or reduced-price meals or special education services. The state has dedicated funding streams to support such students.

Brinkley noted that the city receives more state aid per pupil than any other jurisdiction in the state — nearly $12,000, about twice the state average. Baltimore still receives about $945 million in state aid for its annual school budget of roughly $1.3 billion. Only Prince George's County gets more.

Brinkley added that the state wealth formulas do not distinguish between commercial properties that receive tax breaks and those that do not.

"If they do a special deal for tax incentives, that's treated the same for every jurisdiction," Brinkley said.

Charging the state's highest property tax rate, Baltimore has long used tax incentives to spur development and attract homeowners. Each year, the city awards about $100 million in tax credits for owner-occupied homes, rehabilitations of historic properties and development in impoverished or formerly contaminated areas.

The city also has 12 active payment-in-lieu-of-taxes (PILOT) deals with commercial developers, in which projects pay a relatively small fee instead of property taxes. Those deals cost the city about $13 million a year. Two more such deals have been crafted for two planned West Side projects, the Superblock and State Center.

Baltimore also has 10 active tax-increment-financing (TIF) deals, in which a developer's taxes are used to pay for streets and other necessary infrastructure for the project, not general city needs.

Developers say the incentives are needed to compensate for the city's high tax rate and the high costs of building on long-abandoned sites.

"It's one of the main reasons the city has been able to attract new retail and new residents," said Tom Balentine, vice president of the Maryland arm of the Commercial Real Estate Development Association. "They're paying a lot more in taxes than when the property was vacant."

But in 2011, a Baltimore City Council task force made up of business and academic leaders studied the subsidies and warned about the loss in state education aid to city schools.

"State aid is based on the total assessed value of all real property; therefore, Baltimore 'looks' like a very wealthy jurisdiction," the report said. It recommended that Baltimore officials "work together to introduce statewide legislation to have the formula changed. Until this formula changes, the lost taxes should be incorporated into the analysis of the fiscal impact of any financial incentive offered by the city."

Ronald Kreitner, a former state planning director, raised this concern in 2013 as the City Council awarded a $107 million TIF to the $1.8 billion Harbor Point project slated to break ground this month near Harbor East. Kreitner, head of the nonprofit Westside Renaissance, said Harbor Point could result in $200 million in lost state aid for schools over its lifetime.

"The city is really impacted in multiple ways by its development policy of granting TIFs and PILOTs," Kreitner said last week.

"First, the general fund doesn't receive money for basic services. Secondly, the loss in state aid for the existing school population is substantial. The third thing is that [other] properties that are paying into the general fund are frequently devalued — because their tenants are moving to the properties that don't pay taxes.

"It's a very, very significant issue for the city to consider," Kreitner said.

The state's Department of Legislative Services conducted an analysis of how TIFs affect state education funding and found Baltimore could have gotten $1 million more in state education money last year if those projects weren't counted as part of the city's wealth until they paid taxes into the general fund.

Kleine said he believes it would be almost impossible to run projections about how city tax subsidies will affect state aid years in the future. State aid formulas distribute money based on relative wealth — meaning Baltimore's deep cuts this year are in part because economic growth was flat elsewhere as it spiked in the city.

The Department of Legislative Services estimates that in the budget now under discussion for the year that begins July 1, Baltimore lost $2.3 million in school funding for every $250 million growth in city property value.

Kleine said two changes to the state's main education-aid formula could help Baltimore: considering wealth per capita instead of per pupil and giving more consideration to the high tax rates paid by city residents.

"We're first by far in tax effort," Kleine said. "We're taxing a weak tax base as much as we possibly can and more than we probably should, and yet we're penalized under this formula."

William H. Cole IV, director of the Baltimore Development Corp., the city's business arm that makes many of the tax deals, said city officials have taken a long-term view of economic growth. They are willing to grant tax breaks up front — getting major projects built — to realize the full benefit of the taxes years later.

State funding formulas should not rely so heavily on a jurisdiction's property values when determining how much aid it needs for its schools, Cole said.

"The formula punishes progress in economic development," Cole said. "It is a disincentive for growth. We need to address a punitive formula that's punishing our kids."

Economist Anirban Basu, who was a member of Hogan's transition team, agreed.

He noted that in the formula, Baltimore's property values are twice as important as wages in calculating Baltimore's relative wealth.

"If this is about addressing the needs of low-income households, then income should be dominant in the formula," Basu said. "Real property values do different things that are not a function of what's going on at the household level."

Basu, who runs the Baltimore-based consulting firm Sage Policy Group, said he believes the city should stay the course with its economic development incentives.

"Ultimately, the city is going to have a much larger tax base that is ultimately taxable," he said. "We know that Baltimore is not going to be rebuilt in a day. The best plan is to establish long-term growth, and one day, therefore require perhaps no subsidy from Annapolis."

lbroadwater@baltsun.com

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