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PG Benchmarks Roundtable: When to spend public money on private projects?
Sunday, October 22, 2000 By Dan Fitzpatrick, Post-Gazette Staff Writer
Discussing the question in today's Roundtable Discussion are: Mulugetta Birru, executive director of the Urban Redevelopment Authority; Sara Davis Buss, public finance lawyer who is on the board of the Sports & Exhibition Authority as well as director and shareholder at law firm Houston Harbaugh; Tom Croft, executive director of the nonprofit Steel Valley Authority; Jim DeAngelis, associate professor at the University of Pittsburgh's Graduate School of Public and International Affairs; and Harold Miller, vice president of the Allegheny Conference on Community Development.
Q: Starting with an effort to clean and redevelop the city after World War II, Pittsburgh has a history of government involvement in development projects. But some people think government is now too involved, giving away too many subsidies to corporations, developers and department stores. Some think government should stick to parks, roads and schools. What is your opinion as to when a project is in the public interest and, therefore, deserving of public subsidies?
Birru: You don't do it for the sake of doing it, but you do it to create value. Eventually, by investing public subsidies, you will make an area competitive and at a certain point, you don't have subsidized projects. I see that as exactly what we are doing.
When we did the Lazarus project [at Fifth Avenue and Wood Street], we were at a point with a new mayor in office. Horne's department store had been taken over by Federated. But that was a blow because Pittsburgh was left, literally, with Kaufmann's. We felt very strongly in terms of making sure we [would] keep [both of] them, but I was not looking at Lazarus becoming the savior of Pittsburgh. I was looking in terms of what would Lazarus do to Downtown Pittsburgh.
We acquired a number of buildings; we relocated over 40 tenants, we demolished a lot of buildings and we have a brand new store, which, before we finished, got the attention of [other] major department stores, wanting to be here. When we raised the idea [of redeveloping Fifth and Forbes avenues with new shops and restaurants] to Urban Retail Properties, they knew for sure we could deliver. We did Lazarus; we did Lord & Taylor. Our investment has been tremendous with Lazarus. The subsidies became lower and lower [moving from] Lazarus and Lord & Taylor [to] Urban Retail Properties. Urban Properties gets no subsidies from us; they get no loans from us; they pay us market rate for the land. So that is an excellent deal compared to [that reached in] any other city that has done inner-city development.
Q: So you are making it easier for the private market to take over?
Birru: We created the value. The market rate is going up; rents will be going up. The value of the properties will be going up. The city will get its money back probably in four or five years, if [Fifth and Forbes] happens. All of the taxing bodies will get their money back in a much shorter period of time.
Miller: One of the simplest ways to think about this is that there are many situations in which there are benefits or costs associated with a private development that are not easily captured by the private development itself.
Let me take an example of a manufacturing firm. It is a highly desirable thing for the region to attract manufacturing firms here because they have good jobs, they pay well and they also have spin-off benefits. So when they hire folks and those folks make good wages, they go out and they buy things, which, in turn, stimulates the rest of the economy. Now manufacturing firms, by and large, can locate anywhere they want to. Particularly today, manufacturing firms are looking to locate very rapidly. They need to make quick decisions. They are going to look for places where there is infrastructure in place, where there is land that is ready to go.
Now, if you asked, should private developers develop the land for manufacturers or should public developers do it, what you would find in most cases is that private developers would not do that. Private developers want to get their money back out of it quickly. So, they are going to look for the quickest way to get a return. And, in fact, if you look around the region, you will see lots of locations where you have Wal-Marts, Kmarts, other kinds of retail facilities, because those [offer] quick returns.
If you leave it to the private marketplace, you will not end up with enough sites for manufacturing firms to locate, which is the reason why we have had a lot of public investments.
The Regional Industrial Development Corp. was originally created because Pittsburgh had a particular problem in that regard. We are very "topographically challenged." We have lots of hills, lots of valleys, lots of rivers. Because we are a very old industrial region, a lot of the best sites have already been taken up by other firms.
The manufacturing firm takes no account of that. It is simply looking for the quickest, most cost-effective place to locate. And if the public sector does not say, 'We need to have that firm here, because it is good for the region,' and make sure the site is there, we may lose [many of] them.
The convention center is a perfect model. You would not want to leave that to private hands, because if it was run privately, it would merely attract the kind of conventions that could pay their own way. And you would get lots of public shows and consumer shows, which are not bad things to have. But they do not bring the value to a region that trade shows and conventions do, because they bring other people to Pittsburgh.
There is a mechanism that exists called the hotel tax that actually captures some of that benefit. A person who comes to the convention centers stays in a hotel; they pay a room rate. There is a tax on that; that tax then generates the money to support the convention center. So the convention center can't support itself on its own, but there is a mechanism we have established whereby the convention center can capture some of what it is bringing the community back.
We don't have any mechanisms like that with manufacturing firms; we don't have any mechanisms like that for retail firms. So what the public sector does is, it needs to look at those kinds of developments and say, 'Is there a significant benefit to the community in terms of having the firm here or having the firm in this particular location?'
Do you simply take any site around the region or do you look for a brownfield site [that has been used previously for industrial use]? It clearly costs more to develop a brownfield site. There is no reason why the manufacturing firm would want to pay that extra cost. But it is to the advantage of the public sector to do that, because all of the infrastructure may be in place. If the firm locates in another location, you may end up having to build new roads; you may have to build new transit lines.
You may end up having to provide a greater subsidy at the beginning, because what you are, in fact, covering is the risk that the first firm coming in takes by not knowing whether the other firms are going to come in for sure. The second and subsequent ones come in with less risk, because there is already a base there; there are already other stores there; there are already other attractions there. So you don't need to subsidize [as] much.
DeAngelis: Simply put, I think the justification for public investment in projects like this is to persuade or to work with other investors to do something they might not otherwise do.
It would be nice if we had the kind of world where people really came together and found a shared vision that they could then articulate as a priority and use that as a basis for making an investment. Kind of like a portfolio manager might in a mutual fund. It's an interesting metaphor to think about our leadership, our elected and our corporate leadership, as being managers or custodians of our investment portfolio. You have some assets that you can use to leverage other assets that might not be under your control. At some point we are able to achieve some kind objective for our community at large.
What's transpired over the last few months [during the discussion of Fifth and Forbes] is that we are in that bickering stage. We don't seem to have a shared vision about what we ought to be investing in. I am amazed how little grass-roots support there is for these extraordinary investments that are being made Downtown.
I think this is a problem for managers of a community portfolio, because they look over their shoulders. They are out there alone.
I am just amazed at how reasonable people really are suspicious and distrustful of government, distrustful of assessments, uncertain about all kinds of things. You name it, people have got concerns. I'm not a big listener of the talk shows on the radio, but friends of mine are, and they come back with horrendous attitudes.
My concern is that the people who have the authority and the responsibility to make these investments perhaps are a little bit farther ahead than the rest of the community to have that kind of grass-roots support you really need. It is still a public enterprise, and we are still in a republic or a democracy, and we have to abide by the will of the people.
Croft: In terms of the purpose of public financing, I think a lot of it historically has come down to where there are market failures, there is sometimes a need for the public sector to invest and to try to re-create growth. In many cases, public financing targets distressed areas. In many cases, it is innovative and has evolved beyond brick-and-mortar projects into incubating businesses. In some cases, it provides capital to existing companies to develop new products, expand, modernize or create new jobs.
It seems that what has happened in the Pittsburgh region in terms of the last 15 years, since the decline of the industrialization period in the 1980s, when we lost so many major industrial jobs, is that there have been a number of huge projects that were funded through various universities and institutions to try to decide what [our local] vision is. One of the mistakes the region made was declaring some of the hard industries dead.
One year we were going to be the medical city, the next year the high-tech city, the next year the biotech city, the next year the robotics city, the next year the hotel-and-convention-center city, the next year the tourism destination, the next year the fun city. I guess this is the fun city year, right? We are becoming an amenities city.
It seems as though many of those initial goals were reduced to, basically, investing in real estate projects Downtown or toward the urban core. I want to see some thought given to stretching back to where there are more true market failures. So that we begin to look at the broader region in terms of areas which have been harder hit, for instance Braddock, a Mon valley town.
We need to target industries which are going to pay better than the kinds of jobs we have been creating in this region.
Why put public financing at risk? Besides investing in distressed areas and trying to deal with market failures, we need to invest in projects where there are quality standards attached. Projects that invest in quality jobs. We need to look at ways to make investments where there are indirect spin-offs and where companies are going to make a long-term commitment to the region.
Buss: The question you posed was, when does a private project qualify for a public subsidy. Some of the words that have been used here are real important -- the investment phrase.
The public asset is our land and our people. If you want to improve your asset, you need to make an investment in it. And so the investments that are frequently made with public finance, in my view, are the public sector saying, 'We think it's an important enough project; we agree on a policy level that the public finance is worth putting at risk to see that this private project happens.'
Everybody is yelling about TIF [tax increment] financing. [In tax increment financing, a portion of the property tax increases generated from a development help pay for that development.] Well, TIF financing is a way for the public sector to make an investment in a project using funds that they do not have today, and they may not ever have unless they do make that investment. The return, when the project works, is many fold.
Right along the Monongahela River, here in Allegheny County, is the Pittsburgh Technology Center, which was the site of the former J&L mill site. No banks would lend on it; people would not invest there. It was a brownfield site; it was polluted. A company, Union Switch & Signal, said 'We will come down there, but why should we?' The city made a decision: It's important enough that we get this private entity here. TIF financing was put in place. As a result, that technology center now has many buildings.
Farther down the Mon, you look at Homestead, and you look at the Waterfront, which is nationally held out as one of the best examples of a public/private partnership that has been done. Now, granted, some of those jobs are lower-paying jobs. They are going to be retail and restaurant-type jobs. But there are also the higher-paying jobs. You have Eat N' Park moving its corporate headquarters there.
You have to be willing to make investments and take risks. I think one of the things that has held this region back is this reluctance to take risks.
The fact is, the investment philosophy is going to be driven by the market. What does the market nationally now say? The market says, if you want to have a sports team, if you want to have a department store or retail area, you've got to compete. And hopefully, in competing, you will come out winning.
This region, physically, is one of the most beautiful places in America. We have just got so much over places like Cleveland, places in Ohio. I go to these places and think, why can't you get a hotel room? Why is it so crowded here? It's ugly. There is nothing even that nice. We've got these rivers; we've got these hills. We could just be doing so much more without that culture of 'Let's not take risks.' We are worried that maybe if we invest it is not going to work out. Maybe it won't work out, but you'll never know.
Miller: Sara mentioned tax increment financing. One might like to believe that somehow all of those taxes come along, and we should take them and stick them in a bank. If a project didn't happen, you would get none of that. So it's a very reasonable thing to say, 'Let's figure out a way to share that,' and the public sector actually does benefit by giving away some dollars to that firm that it would not have been able to get otherwise.
So the actual amount of grant money in many cases is very small. In cases where there is grant money, you have to think about it as an investment. We made on a regional basis a major effort with the state to get dollars for industrial projects, and one of the arguments to the state was, it's an investment for you. The state is going to collect income taxes on the people who work at the site. The state is going to collect the corporate income taxes on the companies that locate there. The state is going to collect the sales tax on the spending of the people who work there.
Buss: This issue of what is a public subsidy: It is not a new phenomenon. The federal government for years has provided tax-exempt financing as a tool to encourage people to invest in nonprofits and certain kinds of manufacturing facilities in redevelopment areas. So that's public subsidy, too.
People have never been concerned about that.
Birru: There tends to be impatience in this country where people think very, very short term. Investment development is measured in the very long term.
As to the lack of grass- roots support, I think, Jim, you are absolutely wrong. I have spent my last 8 1/2 years at the URA. Hundreds of development projects. In fact, I am happy when I see opposition, because I know can make the project better and make the project happen.
Q: How do you respond to the feeling among some people that these investments constitute corporate welfare?
Birru: I can clearly demonstrate how the level of subsidy has declined from Lazarus to Fifth and Forbes -- significantly declined. Maybe we have failed to convey the message. But our investment, there has been no real city money in Fifth and Forbes.
Q: What about money in the deal coming from the city-sponsored Pittsburgh Development Fund?
Birru: That's a loan.
Q: You wouldn't consider that a public subsidy?
Birru: Even if you [include] that, our investment is lower than for Lazarus and Lord & Taylor. If a new store were to come, we would be in a position to say we have created a market.
Q: What about the subsidies the city is willing to provide to Seattle-based Nordstrom, which may decide to build another department store Downtown?
Birru: If Nordstrom comes, that becomes a different picture. That improves the quality of the Downtown project significantly. Therefore we would look at that in terms of what are the cost and the benefits, and I think the benefits would exceed the costs. Nordstrom would make Downtown a better retail center, a center for the region. Is an investment worth it? We have to analyze that. If Nordstrom comes, the value of the land we acquire becomes higher. We will be able to bring in the highest-quality shops.
Miller: I think that what many people don't realize or don't remember anymore is that there is an overall investment strategy that the city, county and the Allegheny Conference have been pursuing. With respect to Downtown, it was a recognition that you needed to have entertainment, offices, housing and retail.
There has been a strategy to try to get a range of industrial sites around the region. But frankly, it has been very difficult to get any kind of regular news coverage of those developments so that people understand. The developments aren't very interesting, but they are very important. If we want to get manufacturing jobs here, [we have to think] about where we are going to locate sites and ask, 'Do we have the right transportation, water and sewer infrastructure in place?' Most people don't understand that is even a gap we have to try to fill.
Mulu is exactly right. These are not things that happen overnight or over the course of a couple of years. It really takes a substantial amount of time to put all the pieces in place.
It is not well-known that we actually lose firms that want to come locate here, because we do not have the sites and buildings available for them in the right kinds of locations.
Q: If we agree that roads, water and sewer lines are the responsibility of government, why are we so lacking in those areas?
Miller: The large sites we do have are by and large brownfield sites, which doesn't mean just that they are environmentally contaminated. There are old buildings with dirt floors, things that are not attractive to modern businesses. No firm is going to say, 'Gee I'd like to locate here so much that I am willing to spend this huge amount of money to tear down all the old buildings and clean up the site, when I can go right across the state border in Ohio and find lots of these sites ready-made, ready to go.'
Birru: It costs us on average about $550,000 an acre in a brownfield site to make way for development. We may sell that for $80,000 an acre for manufacturing. Compare that to Ohio selling the land for $60,000, $70,000 or even $80,000 an acre. So there is a big gap with the brownfield development sites.
Miller: That firm is not going to be willing to pay that premium to locate here when it can go somewhere else. We need to be able to make the investments to capture those kind of benefits for the region. We have some of the biggest challenges in the country in terms of being able to locate businesses here because of that.
Birru: So do we give up?
Buss: You have to do a careful risk analysis when you are looking at that kind of investment. I think part of the region's responsibility is not only to assess the likelihood of success. but also hold the private sector more accountable to produce what they represent they will produce.
Q: Can you have any kind of development that happens without effective government activity?
Birru: The federal government is probably the major subsidy provider. All of these manufacturing jobs would not leave town if all these highways were not built.
Croft: We have to examine the role of government in our trade relations and whether or not over the last 10 years we are establishing polices which have created a net loss of manufacturing jobs.
I think regions can be smarter. The Cleveland region has come up with this idea that you don't just target these very small niche industries and pour all of your money into that, forgetting the base of your economy.
The problem with the New Economy may be if you solely focus on the New Economy, it may be that the New Economy is actually creating jobs where there is a bad job mix. You do have a number of well-paid jobs at the top. People with high IQs will get those jobs; people with good educations will get those jobs; but you may have a situation where you are creating more jobs which are potentially low-income jobs.
Miller: Manufacturing is growing here. There are many manufacturing firms that are locating and expanding with no government help whatsoever. In fact, what government has helped do is get out of the way in a lot of cases.
Birru: I don't think there is any region in this country where there has been development without government intervention.
Buss: Can you move forward without government, that is, if you got government out of the development business altogether?
I'd say no. We have zoning laws and we have environmental-use laws. We have all kinds of regulations that are out there.
Some would say, get rid of those regulations, too, and see what happens in the free market out there. As a society, we have made the decision that we want to have this laid out; and here are the rules; and here is how we are all going to operate; because we have decided that these rules have produced a greater common good.
Q: What about Downtown housing? Should government take a broader role in assisting that type of project?
Birru: The rule of thumb is that you have to acquire a building for $10 a square foot to make it work without subsidies. But for tenants, rents have to be in the $2- per-square-foot range to make it happen without any subsidies. My hope is we will push that price closer to the $2 range, at which point there will be no public subsidies.
Q: Where are rents these days?
Miller: In the order of $1, $1.10 per square foot.
DeAngelis: Wasn't it in San Diego that they made a commitment to bring housing along with a large downtown mall that they have created and a large supermarket that could not possibly survive until there was a density of development?
Miller: I am the only expert here, because I am the only one here who lives Downtown. I would have to say that I think the issue of grocery stores Downtown is much overblown. There is a Giant Eagle on the North Side; there is the Strip District a bus ride away. If you have a car, you can drive from Downtown to more different grocery stores than, probably, anyone else in the region.
The issue with living Downtown is that there have to be enough things to do to make it worthwhile. There need to be places to shop and places to eat. There needs to be a cultural district. Until we have a cultural district and all these other things in place, it is not the most attractive place to be at night.
You have to start by providing something to attract people. Cleveland has seen more and more housing developments downtown after the first ones that they did. The initial ones required very significant subsidies, and as people saw people living downtown, they saw that they enjoyed it; they saw that it worked out well; people became more interested in coming downtown; they were willing to pay more for it. When you pay more, you close that gap and so at some point housing can be developed with little or no subsidy at all.
Birru: On properties on the South Side, we invested extensively over 10 years. Now we are developing housing without any subsidy at all. Prices have increased from $90,000 to $200,000 without any subsidy.
There is no need for government subsidy for housing on the South Side. The private finance market has reached the point where a bank can provide the financing.
Miller: The biggest challenge in development is, who goes first? Somebody has to go first, and that is a big risk for the person who goes first, whether it is the first person who looks at housing, the first retail store, or the first restaurant.
Q: Is there a risk-averse culture here? Mayor Tom Murphy, for example, has said he doesn't know why more private developers don't take the risk required to redevelop Oakland.
Miller: I think there is risk aversion, but I think it goes back to the issue of viewing this as investment rather than payouts or payoffs or grants or whatever. People need to realize how some of these returns will come back and some will fail. But if you are doing enough, many will succeed and then you will get a return on that overall portfolio.
Birru: I think we are at the point now where we are starting to attract development from other areas. I think sometimes there are some risk-averse developers locally, but I think the advent of all these other developers can create a sense of competition.
Q: Do any of you think there are projects that have received public subsidies that don't deserve them?
Birru: There are a few companies that I thought we should have not helped at all. I don't want to name names. But when the company is threatening it has alternative sites, I am in a position of saying this company does not deserve it. In my gut I feel they may not leave and this is a threat. But it is a difficult position.
Croft: There is always political pressure, and I think that calls back [this] question: Are we always doing special deals because of that pressure? Or, are we setting the standards that we really have to have?
Q: This area has been under much more pressure than others to get those jobs.
Buss: It relates to the question, 'Do you have to be broke and on the way out of the region to be a candidate for public investment?' There are some instances where the public subsidy [seemed undeserved] -- I don't understand it. It was a company that was financially healthy.
Birru: (A few years ago) Federated Investors was looking at the city and the suburbs. There were some public officials who accused them of wanting public subsidies, and the end result was they moved to Cranberry. So sometimes there is a real threat.
Should we have the guts to say 'No, they won't leave, and therefore we shouldn't subsidize.' What if the outcome is they say, 'Mulu and the mayor were not helpful and, therefore, we moved out?'
Croft: You have got to have some kind of protections; otherwise, you are a candy store, right? I think the cases where you just give money sight unseen and blindly are not going to turn out that well anyway, because a lot of those situations don't have any commitment to stay there in the first place.
DeAngelis: You don't always have to wait for somebody to come to the door, because they have a need or a problem. You maintain a reasonable liaison between the public interest investor and the business community so that as they have opportunities to expand and do things they might not otherwise do, you involve yourself in it. It doesn't always have to be a situation where this is an act of concern to leave.
Birru: But we do consult them on that.
DeAngelis: Yeah, you do. It is very important, and I think that is one of the things that needs to be built into the way you are talking about this issue. That it isn't always an investment that comes in a moment of crisis, right?
Q: If you could pick one area that you think is undernourished with public money, what would it be? Where you would really like to see money go?
Birru: I would say the area between Oakland and Downtown.
Miller: I would say Oakland, because it is a source right now of both economic energy and addresses one of the major issues we have in the region, which is attracting and retaining young people. It does not give the kind of impression at all that it wants to stimulate people to come and stay here. With the right kind of development in Oakland, I think what happens between Downtown and Oakland will be much more likely to occur on its own.
DeAngelis: I really thought with all the changes that were occurring in institutions and in government there would be a different attitude toward investment in Oakland. Now, there have been some movements that are very positive, but I think not quite of the magnitude that I would have hoped and perhaps that you are suggesting.
Buss: I would not put the public money first. I think that the nonprofit institutions that dominate Oakland have not been doing their share of investing there.
Q: No one mentioned the airport area?
Birru: I don't work there anymore (laughs).
Miller: It can be Oakland and the airport and Downtown. We can do all of those things.
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