April 2002 

Real Estate and Economic Development:
Improving the Public Subsidies Debate

By Dr. Thomas A. Musil

The polemics surrounding the merits of public subsidies for economic and real estate development projects are highly charged. Public interest and media attention on publicly subsidized projects comes and goes, with the ebb and flow marked by surprise reactions to project shortcomings or emergency announcements regarding project solvency. Project cost over-runs, apparent boondoggles, and lingering public financial commitments for projects falling short of projected performance, are becoming all too common as distinguishing features of publicly subsidized projects. Public concern with insolvent or under-performing development endeavors and the resulting obligations that have (or will) cost taxpayers millions of dollars are causing publicly subsidized projects to come under increased public scrutiny.

Public subsidies for real estate and economic development projects come from several sources. Higher profile subsidies for stadiums or large factories are typically funded through state resources; smaller corporate and commercial development projects are typically assisted with tax increment financing, revolving loan funds, and tax abatements created by cities and other units of local government. Federal funding is present in fewer and fewer instances, but continues to play a supportive role on the fringe of some projects. It is important to realize that local and state public subsidies have increased in response to the decline in federal support.

As noted at the outset, public interest and media coverage of the subsidy debate is often driven by events such as surprise disclosure of project financial shortfalls. Demands for subsidy funding for stadiums and retention of professional sports teams is another topic which draws public interest and media coverage to the debate surrounding the value of and need for subsidies.

Outside such contexts, however, more important and far-reaching events like legislation of comprehensive tax reforms, corporate welfare laws and subsidy reporting mandates garner only moderate acknowledgement on the public's (and media's) radar screen. The low interest level about relevant legislation is surprising, because subsidy reform legislation creates major changes in how local units of government fund development and how public sector accountability for project outcomes is determined.

It seems that we are rarely in a comfortable position that enables a meaningful discussion about public subsidies for development. Too often when an opportunity for discussion is created, its urgency and value are diminished because the broad issues outside a specific situation do not meet the panic-level criteria necessary to draw the public's attention. In order to have meaningful and productive debates about public subsidies, it seems that we must be confronted with "breaking news" announcements of financial shortfalls that will result in taxpayer bailouts of troubled projects.

Perhaps the lack of debate outside of concrete crises is due to familiarity and taking the existence of subsidies for granted.  Public sector real estate and economic development subsidies have a long tradition in American life. The first subsidies date back to 1791 when Alexander Hamilton obtained approval from the New Jersey Legislature to establish a company for industrial development. Hamilton, armed with state tax exemption, the power of condemnation and extensive water rights, created the first U.S. industrial park on the Passaic River. During the depression of the 1930s, southern states attracted industrial development with tax abatements, plant, land and financing subsidies.

Public subsidies for development have continued to be embraced by the public with a generally high level of consensus, expectation and acceptance. Support for the private/public partnership created when subsidies are used has largely avoided critical assessment. Indeed, public support for development subsidies appears to be akin to public support for nuclear deterrence, civil rights, protecting the environment and energy conservation. For most Americans, development subsidies make sense.

But if this is the case, where have we gone wrong in evaluating specific subsidies, that the attention-drawing crises occur? Where have we gone wrong in trying to hold public administrators and the business community accountable to provide meaningful information and evaluation?

If we consider how we evaluate development projects (hopefully before a panic situation is created), we see a public sector framework that must apply some form of analysis to measure the costs and benefits associated with a proposed project. But how far does "some form of" analysis go in practice?

To better define this matter, I surveyed 1500 municipal public administrators responsible for development activities in the 2600 U.S. cities with populations between 10,000 and 300,000. The survey enjoyed a response rate of slightly over 27 percent, sufficient to provide a reasonable overview of the public sector's analysis practices.

The survey asked economic development administrators how frequently they (that is, their agency or department) used cost-benefit and impact analysis techniques to evaluate projects. They responded as shown in the following table.

Thomas A. Musil is the Director of the Master of Science Program in Real Estate Appraisal and the Shenehon Center for Real Estate Education, Graduate Programs in Business at the University of St. Thomas.
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Notably, about 30 percent of the development program administrators did not use or rarely used any type of cost-benefit or impact analysis study to measure and evaluate projects.

The next question that presented itself was, what are the tools and methods employed by the 70 percent of development administrators who did at least sometimes use some type of cost-benefit or impact analysis study to evaluate projects? I asked respondents to rank seventeen analytical tools and methods that could be used to evaluate project impacts. The development administratorsí answers showed that their use of evaluation tools and methods declines from the moderate use of a few key measures to the infrequent use of several other methods of evaluating project impacts.  To highlight this, the listing is ordered according to frequency of use.

To inform a meaningful debate about development policies, subsidies and projects, we must collect and analyze information on the costs and benefits of the subsidized projects themselves. The idea that mere completion of the project is a sufficient measure of success has little value. In the long run, for development projects to be judged effective in making real contributions to communities, the projects' outcomes should be clearly measurable.

Thus, public administrators and the development community must be able to provide the subsidy debate with accurate cost-benefit analysis measures, and be able to discuss the benefits that a particular project or development policy has upon a community. In part, this necessary ability includes business skills in determining accurate cost and income projections. But in a larger sense, an analysis template needs to be created so that both public officials and citizens alike can be in a position to better understand development decision-making. To help reach this goal, reporting models like the Cost-Benefit Model for Kansas Local Governments 1 or the Minnesota Corporate Welfare Law 2 need to be instituted as tools to assist both public administrators and citizens. Other suggestions for improving our ability to make more beneficial use of public subsidies include creating uniform project evaluation methods, and tying the subsidy support to project performance measures.

In order to have a meaningful discussion about public subsidies for stadiums, shopping malls or factories, we need to establish minimum impact and information expectations and standards. Public administrators must move away from mere community "boosterism" and provide meaningful data and analysis on potential and past projects. Whatever method is devised to move the public debate on subsidies to a higher level, it is imperative that we remember the admonition of Mark Twain when he appropriately stated for both public administrators and project developers that "it is important to understand the facts before you misrepresent them."

Notes

1  K.S.A. §12-1749d.  Related software exists: Kansas, Inc. (1997) Property Tax Abatement: Cost Benefit Model for Kansas Local Governments. Topeka, KS: League of Kansas Municipalities.

2  Minn.Stat. §116J.991.  Cf. Business Subsidies Act, Minn. Stat. §116J.993, and development district legislation, Minn. Stat. ch. 469.