Andrew Rush, Associated Press Any hope of keeping the Penguins in Pittsburgh apparently will require primarily public funding of a new arena. Officials in Kansas City, Mo., are hoping to lure the Penguins with the new Sprint Center, now under construction. Click photo for larger image. Lining up for aid Here in Pittsburgh and across Pennsylvania, taxpayers are being asked to dig into their pockets and come up with: $210 million or so in casino tax revenue for the construction of a new home for the Pittsburgh Penguins; $12 million for new Downtown condos in the Cultural District; A 15-year tax abatement to keep Westinghouse Electric's new nuclear engineering center in its home region; $30 million in state money and $18 million in local aid before construction started on the new PNC tower on Fifth Avenue; At least $11 million for Millcraft Industries for the rehab of Fifth and Forbes; $16.25 million for US Airways if it decides to build a $25 million operations center in the region, preserving 450 area jobs and adding another 150.
	Pittsburgh Post-Gazette archives When Pennsylvania Gov. Richard Thornburgh, left, pulled out all the stops in hopes of landing a Saturn plant in 1985, critics thought the mad scramble might represent the pinnacle of states handing out subsidies to lure development. But as history has shown, mega-packages of public aid have become even more pervasive. Click photo for larger image.
	Darrell Sapp, Post-Gazette Public spending on clearing the old LTV site pave the path to a hopping SouthSide Works. Click photo for larger image.

It might have been Phil Donahue, of all people, who introduced Pennsylvanians and the rest of America to the concept of large-scale development subsidies, the type being offered to the Pittsburgh Penguins for a new hockey arena.

In February 1985, on the heels of a recession and a national downturn in manufacturing, General Motors trotted seven U.S. governors, including Pennsylvania Gov. Richard Thornburgh, on stage during the "Donahue" talk show. Each begged GM Chief Executive Officer Roger Smith to build the company's sexy new Saturn auto plant in his state. New York even offered 100 megawatts of free electricity for 20 years in exchange for up to 6,000 promised Saturn jobs, while Minnesota presented $1.3 billion in incentives.

The bidding war, said Time magazine in June 1985, "has become a distraction and something of an embarrassment to GM." The next month in the Los Angeles Times, an economics expert said politicians would have to reexamine their approach to wooing businesses. "The Saturn decision," the expert said, "may be the last hurrah for such big bidding wars."

Suffice to say that businesses no longer are embarrassed about cajoling for money, if they ever were. If it hadn't occurred to CEOs before 1985, it certainly occurred to them after the circus-like Saturn scramble (Tennessee ultimately won the competition) -- politicians are willing to do just about anything to create or preserve jobs.

Pitting states and even nearby cities against each other -- or even against a city's own sense of vitality and self-image -- is an easy way to draw tax breaks, sweet financing deals and millions in construction grants, at the taxpayers' expense. "Once you get in the subsidy game, everybody else gets in line," said Edward Lotterman, a Minnesota economist. "And some of the people in line would be building that project anyway."

So here are the questions that are still tough to answer, two-plus decades after the Donahue Moment: Are these or any businesses worth such enormous public investments? If not, is it OK to sometimes make bad investments on behalf of the taxpayers if those same taxpayers also derive tangential benefit from the overpriced product? Is it even possible these days to get something built without offering a big carrot first?

And if it's hard to prove public subsidies are ever a really good deal, then why do politicians keep forking over millions? That last one, actually, is pretty easy to answer.

When politicians are cornered by campaign donors, rabid sports fans, powerful business leaders and trade unions that would benefit from the big construction jobs, "They say, 'Look, I'll play along ... And I'll just keep my mouth shut on the economics of it,' " said Andrew Zimbalist, a Smith College economist who has made a name for himself by examining the economic impact of new arenas and sports teams.

There for the taking
These observations come to the fore because Pittsburgh, after years of relative inactivity Downtown, is in the midst of what is undeniably a construction boom, with new office towers, condos, Market Square apartments and possibly a new arena under way or on the drawing board. And it's also undeniable that the boom is being propped up by tens of millions in state and local subsidies.

Why is that? Condo developers suggest that there's a healthy market for condos, but if that's the case, why can't the condos be built at market rates? If PNC Financial Services Group earned $2.6 billion in profits last year, why does it need almost $50 million in local and state aid before it can build a $169.5 million, 23-floor office tower that also will include a luxury hotel and condos?

"If you're a business, you might as well ask," said Robert Lynch, chair of Washington College's economics department who spent 20 years examining studies on the effect of tax cuts and incentives on business decisions. "[And] if you can get a million or $5 million or $10 million, why not?"

His conclusion after all those years of study is that many of the developers and businesses would have decided to build even without the tax breaks and cash. But when in Rome ...

"I wish politicians wouldn't get involved in that game," Mr. Lynch said, citing the economic theory of opportunity cost, which means money spent on one thing means opportunities foregone on other things.

In many cases, he said, giving away cash in the present or deferring a business's tax obligation into the future means the government has less money to spend on services, bridges, roads and schools, all of which he argued are a better investment for a city over the long term.

Sports venues are the biggest drain of all, most economists agree. Stadiums and arenas rarely pay for themselves -- Three Rivers Stadium, for example, cost $35 million to build, and 27 years later, when talks for a new football stadium and ballpark were underway, debt on the stadium was $41.4 million.

And unlike skyscrapers that may be underwritten with public subsidies, public arenas and stadiums almost never go on the tax rolls, meaning the city or county won't recover the costs over time.

In search of value
Of course, there is the hard-to-measure notion that being a "big league" city has some implicit value to the economy.

In a 2000 study, a team of economics professors -- Peter Groothuis of Westminster College, Bruce Johnson of Danville, Ky.'s Centre College, and John Whitehead of East Carolina University -- attempted to do just that by setting out to measure the value of the Penguins franchise to the city.

The trio concluded that the Penguins "do not generate enough public goods to justify complete public financing of a new arena." They said Pittsburgh's population is too small for its residents to make up, via restaurant spending and parking taxes and amusement receipts, the money spent on the arena. And the people who live here don't receive enough "intangible" value from the team, either, to justify a new public arena.

They attempted to place their dollar value on the Penguins' presence in the city by randomly polling area residents and Penguins fans, using a controversial survey-based calculation known as the "contingent valuation method." It's a way of giving value to resources that exist outside the marketplace and aren't directly sold to the taxpayer or consumer (think of the benefit a homebuyer might receive from a Mount Washington view of the city).

The upshot is that the region's "willingness to pay" for the Pens is about $5.3 million a year on the high end, $1.9 million a year on the low end. Over 30 years, the most value we'd derive from the team is $66 million, says the study.

Think big picture
Yet there are many public expenses that aren't worth the investment, strictly from an income-expenditure standpoint.

Examples abound. Public transit is almost always a losing venture, yet there is an incalculable societal value to providing subsidized transportation for the people who need it. The needed upgrades to our water and sewage systems can't be paid for solely via user fees, but few would argue that a city would somehow be better off without its sewers.

But forget about infrastructure. Let's talk about "vibrancy." The open market won't always support a free library, a nonprofit symphony or an opera, yet we put tax money toward these things in hopes of promoting the city's cultural state of being. A sports team, though it may be a drain, can be included in this category of cultural amenities.

So are economists, not to mention the free-market philosophers and "corporate welfare" opponents, missing the big picture?

"Focusing in on your Downtown is critical for any region, especially the Pittsburgh region," said Patty Burk, vice president of housing and development for the Pittsburgh Downtown Partnership. "I think our core has been neglected for many years ... It's the best it's been in 20 years, but that doesn't mean it's up to market rate."

And when a core has been neglected, often the only way to encourage development is to take the risk out of big projects. That's especially true in older cities, where office leases and apartment rental prices are low, but construction costs are still high. Subsidies and credits for Millcraft, for example, means there's a better chance that the company will turn a profit on its Fifth and Forbes improvement project.

"Nobody's going to do anything if they can't make a profit," Ms. Burk said. "You're competing with suburban markets and sprawl. It's more expensive to operate construction-wise in the urban core. You don't have places to park your construction vehicles. All of those things add to the cost of being Downtown."

If anything, she said, more incentives -- including a much-debated but never-approved downtown historic-zone tax credit -- are needed to persuade developers to take a chance on building in an urban core.

For years, the state Legislature has proposed bills that would encourage restoration of historic buildings, similar to a program already in use in Missouri. The state forfeited $41 million in uncollected taxes, but that forfeiture resulted in $240 million in new private investment, according to a St. Louis accounting firm's review of the program's first few years.

That's what makes this incentive business so tricky. Some subsidies end up being good deals. A great many end up being bad deals. And sometimes, no matter how much forecasting you do, there's no way to know the end benefit unless you take the leap.

Take the SouthSide Works. The old LTV site, which had been dormant since the mid-1980s, was prepared using public money, and the parking garages were subsidized, too. Opponents said the subsidies would artificially keep the massive SouthSide Works afloat, damaging other bars, restaurants and retail in the South Side neighborhood.

But as anyone who has visited the South Side recently could tell you, that doesn't appear to be the case. Bars and restaurants are opening all the time, so many that neighborhood activists are trying to prevent any more bars from locating on East Carson.

And directly across from the SouthSide Works, bars are opening too, capturing spillover from people who don't want to wait in line to eat at the Cheesecake Factory, said Rick Belloli, the executive director of the South Side Local Development Company.

Spin-off benefits
The project may not have created a net job gain for the state or even the region, but when a city is competing for its own survival, that's often not the point.

"It isn't a subsidy," Mr. Belloli argued. "It's balancing the cost [of development] so that it's competitive" with cheaper-to-develop land in, say, Butler County.

Same goes for the state.

Every year, Pennsylvania doles out $500 million in grants, loans and tax credits to business each year, hoping to bring them, or keep them, here. Critics who oppose such perks should know that these subsidies aren't distributed in an economic vacuum, said Kevin Ortiz, spokesman for the Department of Community and Economic Development.

"It's not only competing with other states, but competition on a global scale," sometimes against low labor prices that America can't match, Mr. Ortiz said.

"Obviously, we need to provide the resources that spur investment and create jobs."

There is value in, say, keeping Westinghouse Electric's nuclear expansion in-state, instead of letting up to 2,000 new jobs escape to one of six other states that were initially being considered. North Carolina's loss -- it was runner-up -- is our win.

And winning big projects, via subsidies, can sometimes unexpectedly create big free-market spinoffs -- Toyota's Georgetown, Ky., plant now employs 7,500, after initially starting as an $800 million factory employing 3,000. Kentucky spent $325 million luring Toyota, but now the company pays more than $100 million in state taxes every year, and supports hundreds of new, nearby auto-parts suppliers. Few in Kentucky would now say that the huge subsidies weren't worth it.

But few were so sure in 1988. That's part of the game.

"It's what in game theory is called 'the prisoner's dilemma'," said Mr. Lotterman, the economist. "If you think the other guy is going to do it, and if you're a Pittsburgh and you are desperate for some jobs and some development, you have to do it, too."