How about that timing of worker pay report?

The same day public workers were rescuing hurricane victims out East, and Iowa police officers were being shot in a bank robbery, the Branstad administration chose to release a study on state workers’ pay.

Mike Owen
Mike Owen

Timing is everything.

Consider the announcement Tuesday by the Branstad administration of a new report produced by an outside company to examine whether Iowa state workers are paid too much.

Paid too much?

As the Department of Administrative Services was releasing the report, emergency rescue workers across the Eastern seaboard were putting themselves in harm’s way to help their neighbors in the path of the deadly Hurricane Sandy. And right here in Iowa, within a couple hours of the DAS news conference, bank robbers shot two law enforcement officers — critically wounding the Sumner police chief and injuring a state trooper.

We count on public servants every day, sometimes when lives are at stake, sometimes in enriching life with education, sometimes in just keeping life orderly enough that we can enjoy it without worrying whether the water or food will poison us, or that our job will not put us in danger we did not sign up for.

Oh, and the report? It found that pay scales for Iowa state workers are generally competitive. Where the report cited potential problems, the information provided was too sketchy to delve in and really go through it. And, being produced by a private company that copyrighted the report, we might just never know what our tax dollars produced. This is what happens with privatization, folks. But if you want a quick look at the holes in the report, see the review Tuesday by IPP’s Peter Fisher.

So, for those less inclined toward knee-jerk appeals against public workers, the timing of this report, you might say, wasn’t too bad.

Posted by Mike Owen, Assistant Director

 

Did Iowa just get taken to the cleaners?

Iowa could provide an incentive that Illinois could not — and doubled down on it anyway, at a cost of $1.5 million per job.

Peter Fisher
Peter Fisher

The enormous package of state and local incentives provided to the Egyptian company Orascom to locate a fertilizer plant in Lee County has drawn considerable attention. The package includes $110 million in state tax credits and other incentives and $133 million in local tax abatements — a total of $243 million when all is said and done. All this to attract a plant that will employ just 165 workers.

At a cost per worker of nearly $1.5 million, the incentive is an astounding amount, well beyond the normal range of awards, in Iowa or anywhere else. (While the company claims a large number of ancillary jobs will follow, these claims are unverifiable, and it is not clear how many would even fall to Iowa residents; furthermore, there are always some spin-off jobs with any project, so the valid comparison with other awards is in terms of cost per direct job.)

Yet little attention has been paid to what is possibly the largest incentive provided: tax-exempt bonds, not even included in the above calculations.

Early on in the negotiations, in fact last April, the Iowa Finance Authority awarded Orascom up to $1.19 billion in Midwest Disaster Area (MDA) bonds. These bonds are exempt from federal income tax; Midwestern states affected by the 2008 flood were each given an allocation of these bonds to be awarded to projects in eligible counties — those declared disaster areas after the flood. The $1.19 billion loan would constitute 46 percent of the Iowa allocation.

Because the interest is exempt from federal income tax, the wealthy individuals and financial institutions that would purchase such bonds will accept a lower interest rate than they would require on taxable corporate bonds. The after-tax rate is what they focus on. This means that the company saves money. How much? That depends on the spread between corporate bond interest rates and tax-exempt rates.

Information from officials at the Iowa Finance Authority indicates that the spread would likely range from 1 percent to 2 percent. For a $1.19 billion bond issue to be repaid in equal annual installments over a 20-year period, the savings in interest would amount to between $153 million and $297 million, depending on what the interest rate differential turned out to be.

These tax-exempt bonds could have been used in Lee County or in Scott County; both were flood disaster areas and both, at one point, were under consideration as a location for the fertilizer plant. When the Scott County site was rejected, attention turned to Illinois, specifically the area near Peoria. But neither Peoria County nor any counties surrounding it were eligible for the Illinois allocation of MDA bonds.

This means that Lee County was starting with a huge advantage over the Illinois site: the availability of an incentive probably worth in the neighborhood of $200 million.

While the MDA bonds cost federal taxpayers, there is no loss of Iowa income-tax revenue. (The federal cost comes because the federal government forgoes income-tax revenue on the interest, which must then be made up by the rest of federal taxpayers.) But the point is that, whoever bears the cost, this was a very large incentive that Iowa could provide and Illinois could not.

Thus it raises the question: Given this advantage from the start, why was it necessary for the state of Iowa and Lee County to double down and provide another $200 plus million, especially when the Illinois tax incentives were not even a reality — they had passed the Illinois Senate, but not the House, and the Legislature had adjourned months ago?

Did Iowa just get taken to the cleaners?

Posted by Peter Fisher, Research Director

Does Iowa know when to walk away?

You can almost hear Kenny Rogers singing in the background: “Know when to walk away, and know when to run.”

Peter Fisher
Peter Fisher

There’s Texas Hold ’Em,” and then there’s “Iowa Fold ’Em.”

Wouldn’t you just love to play poker against the folks who run this state?

They never call a bluff. Companies come calling with demands for tax breaks and big checks, or they’ll build somewhere else. And Iowa just happily falls in line with the demands. You can almost hear Kenny Rogers singing in the background: “Know when to walk away, and know when to run.”

The latest: Today the board of the Iowa Economic Development Authority (IEDA) is scheduled to consider sweetening its already generous offer to Orascom — $35 million to build a $1.3 billion fertilizer plant in Lee County — to about $110 million with a slew of new tax credits. As The Des Moines Register points out today, that’s $110 million for 165 “permanent” jobs paying on average $48,000 a year, plus construction jobs that will be gone when the project is finished.

The state tax credits are in addition to the enormous benefit the state is providing by allocating federal tax-exempt flood recovery bonds to this project. If the interest rate difference — between taxable and tax-exempt bonds — were 1 percentage point, the company would save $320 million in interest payments over the life of the $1.2 billion bond. That would bring the firm’s total benefits to $2.7 million per permanent job, a truly astounding number. Even without considering the federal interest subsidy, the state tax credits would total $687,500 per job, many times the typical level of subsidy in deals such as this.

There are no estimates available about the potential environmental costs that will be caused by this plant. Since Iowa does a poor job of monitoring for pollution damage, those ongoing costs might be low, but if there is an accident, it could be costly.

The Register also quotes Debi Durham, head of IEDA, that incentives wouldn’t be needed if Iowa were to reduce corporate income tax rates. Nonsense. Research has shown repeatedly that this is a myth, and that in fact, Iowa’s income taxes paid by corporations are competitive with other states. In many cases, giant corporations are paying not a dime in income tax yet getting huge subsidy checks from the state to do things they would do without incentives.

This hand is the one we are dealt from years of unaccountable economic development strategies by Iowa state government.

Time for a fresh deck.

Posted by Peter Fisher, Research Director

Iowa Development Waters Still Safe for Pirates

Anti-piracy provisions newly incorporated into Iowa’s TIF law need to be implemented for all economic development subsidies.

Peter Fisher
Peter Fisher

The Iowa Economic Development Authority (IEDA) just announced that it has awarded $304,000 in state tax incentives to Putco Inc. to move from Story City to a location about 35 miles away in Polk County. The Polk County Board of Supervisors will hear a proposal on Wednesday that the board add $363,000 in tax abatements to the incentive package.

Why is the state helping to finance the piracy of jobs from one place to another in Iowa? This is not economic development for the state, and in fact appears to be counter to any reasonable interpretation of state law.

The Iowa Code, Chapter 15A.1 (2), dealing with economic development, states that “funds should not be used to attract a business presently located within the state to relocate to another portion of the state unless the business is considering in good faith to relocate outside the state or unless the relocation is related to an expansion which will generate significant new job creation.”

According to  The Des Moines Register, the alternative under consideration by Putco, a manufacturer of car and truck accessories, was a new site in the Story City area, not out of state. Furthermore, the IEDA project report shows no “jobs retained,” as there would be if an out-of-state move had been threatened.

And the new jobs to be created? Five. Over the past 10 years, almost 84,000 new jobs were created every year by establishments expanding in Iowa. Against that number, how in the world can five jobs be judged a “significant” addition?

As the Iowa Fiscal Partnership has argued previously, the “new jobs” exception in Iowa’s anti-piracy statute is so vague as to constitute a loophole large enough to drive a moving van through. In fact, the Iowa Legislature apparently agreed with this assessment. The Tax Increment Financing reform bill passed by the General Assembly and signed by the Governor includes an anti-piracy provision devoid of any job expansion loophole; a move is a move.

Firms will still move facilities from time to time, but they need not be subsidized by taxpayers to do so, as was the case with the $18 million or more provided by Coralville to entice Von Maur away from another location in Johnson County. Such moves won’t be subsidized by TIF subsidies anymore.

Unfortunately, the basic anti-piracy statute that applies to all economic development subsidies, quoted above, was not amended, leaving state agencies and local governments free to interpret “significant job creation” as loosely as they please, for any subsidies other than TIF. One wonders what the folks at IEDA feel is the limit. Three jobs? One job? Given the rather wobbly record of firms receiving state incentives in the past — job creation targets are often not met — it is quite possible that in the end this move will result in no net increase in jobs at all, above the 40 currently employed in Story City, or even a loss in jobs if the new facility is more automated and firm sales fail to meet expectations.

So it appears that taxpayer-subsidized piracy is alive and well in Iowa. The restrictions newly incorporated into TIF law need to be made part of the general law on economic development subsidies. If property tax payers should be protected from such abuse of public funds, why not state taxpayers generally?

Posted by Peter S. Fisher, Research Director

Cities have development tools beyond TIF

The indefensible thing in the 2012 legislative session would be to make significant commercial property tax changes without fixing abuses of TIF.

Mike Owen
Mike Owen

The Business Record’s Kent Darr has an interesting story about Des Moines City Manager Rick Clark’s reaction to the commercial property tax issue, debated Tuesday in the Iowa House.

Clark expressed caution about unintended consequences that can result from tinkering with the property tax laws, which is a legitimate concern. But one of his own remarks demands caution as well. That is his concern about potential changes to tax-increment financing, or TIF, which are being considered separately this year. From Darr’s story:

“For cities in Iowa, it’s the only game in town,” Clark said. “It’s the only thing we have to encourage and promote economic activity; the other tools really don’t work. If we take away TIF or make it less effective than it is today, we’re really in a world of hurt.”

This argument is often raised and it’s just not necessarily so. First, cities do have other tools available, such as abatements. TIF is a tool that simply provides an extra revenue stream to fund those tools; in some cases, it may make sense to pool funds of various local government entities for a given project, but in others, possibly not.

Peter Fisher
Peter Fisher

IPP Research Director Peter Fisher addressed this in his recent report for the Iowa Fiscal Partnership examining TIF use in Johnson County:

It is important to understand that TIF is not synonymous with economic development incentives. TIF is merely a financing mechanism. Cities can and do promote economic redevelopment and job creation in a variety of ways; cities can build facilities to accommodate private projects, they can provide tax abatements for both residential and non‐residential property, and they can issue bonds to finance infrastructure, all without TIF. But TIF has become the mechanism of choice to finance economic development incentives in part because TIF creates the illusion that such incentives are costless, and in part because TIF in actuality shifts costs to other taxpayers.

Second, it should not be assumed that subsidies are effective. Does the subsidy cause the economic activity, or does the activity cause the subsidy? Sometimes it’s hard to say.

Again, Fisher:

Furthermore, much (perhaps the majority) of TIF revenue is not used to incentivize development at all, but rather to finance routine city infrastructure spending that otherwise could be financed with city bonds, retired entirely by city taxpayers, or charged to developers.

Sensible reforms would not render TIF “less effective” for its intended purposes to the extent subsidies are effective now. Fisher’s recent op-ed in The Des Moines Register outlined five common-sense reforms that would improve TIF. They would stop what would have to be acknowledged as abuses — for example, stopping cities from using TIF to fund a project in one school district from the tax base of another.

The indefensible thing in the 2012 legislative session would be to make significant commercial property tax changes — big cuts for businesses at the expense of homeowners or critical public services — without fixing abuses of TIF. Politicians frequently ignore TIF and other preferences when they start ranting about property taxes on business.

Posted by Mike Owen, Assistant Director

Case is compelling to reform TIF

Another public TIF reform meeting is scheduled Saturday, Jan. 21, from 10 a.m. to 11:30 a.m. at the Johnson County Health and Human Services Building, 855 S. Dubuque St. Iowa City.

Peter Fisher
Peter Fisher

A consensus seems to be developing to reform tax-increment financing, or TIF. This represents an understanding that responsible use of taxpayer funds is not a partisan issue. The iron is hot for reform, now.

And it is reform that we’re talking about, not elimination of TIF, as some fear. Reform is the case I have made in a recent report for the Iowa Fiscal Partnership about TIF use in Johnson County, and in a public presentation on that issue recently in Coralville.

Another public TIF reform meeting is scheduled Saturday, Jan. 21, from 10 a.m. to 11:30 a.m. at the Johnson County Health and Human Services Building, 855 S. Dubuque St. Iowa City, conference rooms 202B and 202C, second floor. There is public parking on the north side of the building; enter through NW door near the flagpole.

For reform to be meaningful, we need to do more than tinker around the edges with TIF. Fundamental issues need to be understood and addressed.

Let’s start by recognizing that providing subsidies (some say “incentives”) for retail development is simply bad public policy. They are either unnecessary or counterproductive. Retail development occurs when the market for retail justifies it; potential sales are all the incentive that is needed, and that is driven by location. A subsidy, provided through TIF or another means, is really a giveaway of taxpayers’ dollars.

Next, providing infrastructure to accommodate growth is what cities do. They should not need schools and counties to help in most cases. Many city projects are appropriately financed by issuing bonds, repaid by the city’s taxpayers.

Third, once a TIF project is paid off, cities still may have the district in place and often can find a way to keep diverting property taxes from the school district and county. This can be millions of dollars. A sensible law would require the TIF to end with the completion of a project, so that schools and counties are not denied their share of the increased value created in the TIF district.

Beyond those fundamental problems, TIF law in Iowa permits:

• Piracy of businesses from one community to another, even next-door neighbors, as Coralville is doing with over $18 million in breaks to encourage Von Maur to move from Iowa City.

• A shift of responsibility from residents to nonresidents to pay the taxes needed to provide city services.

• A city to cause residents of one school district subsidize tax-base improvements in another.

TIF reform may take many forms in this legislative session, but no TIF reform package will be sufficient unless it firmly deals with the issues noted above.

Posted by Peter S. Fisher, Research Director

Note: A related guest opinion from Fisher is in the January 19, 2012, Iowa City Press-Citizen.

The need for TIF reform

Economic development types have become addicted to the idea that they can use TIF to do many things without regard to the impacts on neighbors or even the real purpose of TIF.

Peter Fisher speaks at TIF forum
IPP Research Director Peter Fisher speaks at a forum on tax-increment financing as Sen. Joe Bolkcom, D-Iowa City, and Rep. Tom Sands, R-Wapello, look on.

Peter Fisher’s report for the Iowa Fiscal Partnership about the use of tax-increment financing (TIF) painted a picture of a program that has become a monster. I encourage all to find the report on our website, or to view the forum in Coralville hosted by the bipartisan team of Sen. Joe Bolkcom, D-Iowa City, and Rep. Tom Sands, R-Wapello.

It takes some folks out of their comfort zone — apparently former Iowa City Council Member Bob Elliott among them in today’s Iowa City Press-Citizen — to see what an otherwise well-intentioned and potentially valuable tool has become due to lax state law. Cities across Iowa have shown an inability to handle the responsibility that goes with the permission to divert other jurisdictions’ tax revenues with TIF. Such projects that are supposed to benefit all whose revenues are being used. Unfortunately, it frequently does not work that way.

The report offers several ideas for reform to rein in abuses; it does not call for elimination of TIF, but for regulation. Perhaps Mr. Elliott missed that, as he states, “For me, an appropriate analogy to the TIF situation would be medical drugs, which can provide great benefit or be dangerously abused. In situations like that, you don’t eliminate it, you regulate against misuse and retain the capacity for beneficial use.” Agreed.

Indeed, the drug analogy is appropriate. Economic development types have become addicted to the idea that they can use TIF to do many things without regard to the impacts on neighbors or even the real purpose of TIF. Fisher’s report offers examples from Johnson County — notably Coralville’s use of property-tax dollars from one school district to create new property-tax base in another, in a project that effectively lured a major department store from Iowa City next door.

If state lawmakers ignore such examples, they will be repeated — in fact, it would give cities tacit approval to consider these practices appropriate. Take that, Clear Creek-Amana school district. Take that, Iowa City.

Fisher’s report is a wonderful example of how a nonpartisan organization that is focused wholly on issues, and not partisan politics, can help people of any political stripe to understand those issues. Iowans use our work and contribute to it because they know they can count on IPP to provide fact-based analysis and relevant research that holds the political spinners accountable. And yes, contributions to our work are welcome. Click here.

Posted by Mike Owen, Assistant Director