Hard Times at City Hall

The State of the City? We're Broke.

"If we replace that in 20 years, and we extend the bond, then we're paying for something we don't have anymore," Born continued. "We'd be paying for a new asset and paying off the old one at the same time, and we don't want that double payment out there--where the asset is gone, but the payment is still there."

The five-year plan was finely tuned, Born concluded, and failure to act decisively on it could deliver more hits to the city's credit rating. "It's hard to tell you if going three months past our seven years is going to send us over the top in debt service," he admitted. "But I can tell you that it's likely. If we are borrowing for periods longer that the asset's life, that's a big no-no in the credit-rating world. It could cause some change downward in the rating."

Born, who speaks with a quiet authority, hardly comes across as someone caught in the midst of a catastrophic storm, but that's probably because he's right in the eye of the hurricane. He has been with the city for two years, and before that he was a financial consultant in the private sector. In the early 1980s, he worked in the state's finance department, and he remembers a time when Minnesota may have been in worse financial shape than now and managed to pull through.

Born is ever eager to sing the praises of Rybak for working closely with the council and staff on a long-term property-tax policy and the five-year plan, two things Born considers historic achievements for the city. If the proposed cuts to LGA happen, he says, simply, "We'd have to go back to the drawing board on that." When pressed, he concedes the city would have no choice but to start laying off 900 of the city's 4,500 employees. But by and large, Born maintains that the city has charted a course that will remedy the problem by 2008.

"Previously, decisions were made to do things and pay later," Born says. "There was an appetite to do things that was more important than good financial management would permit. This is not happening anymore."

 

All this bean-counting notwithstanding, the public perception is that the city's fiscal mismanagement can be seen on most any street corner in downtown Minneapolis. A quarter-century ago, City Center was funded with a $50 million subsidy; in 1998 the city pitched in $62 million for the Target facility on Nicollet Mall; little more than a year later it ponied up $39 million for Block E.

But despite what the public may think, Ken Kriz maintains that bankrolling big development is not the main source of the city's woes. "It has a little bit of an effect, but not much," Kriz claims. "I've done studies that show for every million dollars invested in these projects, they only cost the city $40,000 in the long run. You can't just look at the dollars siphoned away from the tax base, but look to jobs created. I've looked at cities that spend on these projects and then face financial trouble, and there's almost no correlation."

Instead, Kriz argues, much of the problem can be found in tax-increment financing (TIF) and the city department that oversees it, the Minneapolis Community Development Agency. The purpose of TIF, an idea hatched in California in the 1940s, is to develop abandoned or underperforming parcels of land and to invest in upgrading city property. TIF schemes allow government bodies, in this case the MCDA, to designate specific geographic areas in need of development. The city lends money to developers for projects deemed to be in the public interest; the amount of tax dollars to be paid from that development into the city's general fund get locked in from year one. But meanwhile the real taxes paid on TIF properties increase. The additional revenues bypass the general fund and get pumped back into additional development.

For instance, if a new entertainment complex built in a TIF district originally taxed at $1 million a year pulls in $10 million in real revenue, $9 million goes to the MCDA to put money back into infrastructure in the area and to service the debt incurred. In other words, some critics argue, with TIF bonds the city is giving money right back to the developers at the expense of its own fiscal health. (Both Block E and Target deals used TIF money.)

"In some cases it's a wonderful tool," Kriz notes, citing TIF as a boon for environmental cleanup projects in particular. "But it's become more of a general development tool. Cities are too quick to designate TIF districts, give developers a break, when the land might have been developed anyway. But they don't want to hear that a lot might sit empty for four years before somebody does something with it; they want to get something on it right away. It only works best when there's no chance that the land would develop without the city's help."

Then there is the case of the MCDA. The agency ostensibly exists as a one-stop shop for development projects, providing sites for housing, preserving affordable housing stock, and financing land for new businesses. But at times the MCDA has appeared more interested in brokering sweetheart deals for contractors and developers who don't necessarily need them. And critics charge that the agency is immune from public scrutiny, often shifting various loans and grants around to account for its finances. (It should be noted that the MCDA is quietly being phased into a new city department, Community Planning and Economic Development.)

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