City doesn't track return on incentives

When the Enquirer asked Cincinnati about $250 million in incentives granted to business and developers since 2008 and how return on that massive investment is tracked, city officials couldn't provide answers.

The newspaper's reporters then created and scoured a database of seven years' worth of deals and determined the city gave tax breaks and other types of incentives more than 200 times since 2008, with beneficiaries ranging from Procter & Gamble to the owners of fraternity houses.

City documents show officials expected $2 billion of investment in return, as well as creation of 14,114 jobs and retention of 15,290. The problem: The city doesn't track those totals.

The deals were granted with no guidelines about what is a good deal — and what isn't. And City Council approved many of them almost sight unseen because they were given details at the last minute.

In addition, the deals shortchange city schools, education leaders say.

Jeff McElravy, who served as the city's interim development director from July 2013 through last November, resigned Tuesday in the midst of Enquirer questions related to the incentive agreements. He and other city officials could not explain discrepancies in some deals or how they calculate return on investment.

"This is a challenge because we have asked our elected officials and their staffs to do what they can do to foster economic development in the community," said Jeff Rexhausen, research associate at the University of Cincinnati Economics Center. "Economic development is inherently ... risky."

He recommended the city get an outside evaluation before reconsidering policy approaches.

"It's the sort of thing that I'd suggest doing that is in the long-term best interest of the city and county," he said. "If you don't do a review, then it's hard to learn from those experiences outside of anecdotes."

Mayor John Cranley said the public is entitled to know how tax dollars are spent.

"We are instituting changes to make sure all these deals are tracked, there are clear metrics with them and that the policies behind them can be fairly debated," he said.

Incentives certainly helped lure General Electric to the riverfront and dunnhumbyUSA to the long-cursed corner at Fifth and Race streets. But roughly 15 smaller deals haven't worked out as planned or raise questions about whether projects gave the city the best return.

A Roselawn salon got a $35,000 loan in 2008, but so far has paid just $5,000.

The developer of the Clifton IGA got a property tax exemption worth $203,724 in 2011 to reopen the beloved neighborhood grocery store, but it sits vacant.

Malton Art Gallery got a property tax exemption that could be worth $17,000 to move from Hyde Park to Oakley, where it built a two-story art gallery. Property values show the location is worth $313,310. The gallery employs two people.

And, of course, there's Mahogany's, a 2012 deal in which the city gave restaurant operator Liz Rogers a $684,000 grant and $300,000 loan to open at The Banks. When the business failed last September, the city could have collected, but instead cut a widely criticized deal to forgive all but $100,000.

City data incomplete; guidelines lack consistency

The Enquirer launched the review after officials could not say how GE ranked among the city's largest incentive deals.

We found:

• City Council – nine people elected to be stewards of taxpayer money – aren't told about deals sometimes until the day before they're asked to vote, giving them little time to scrutinize agreement details.

• City officials didn't keep consistent records on incentive deals and many documents were inaccurate or incomplete. The Enquirer used multiple online city databases, documents posted on the city's website, and newspaper archives to analyze outstanding incentive agreements.

• Since 2008 the city has had five development directors, two of them interim. The lack of continuity among decision makers means there's no ownership of problems.

• The deals – as allowed under Ohio law – shortchanged the public school system by about $1.4 million a year. The city's operating budget and levies that help the mentally ill, abused children and senior citizens also lose money.

• In early 2013 the city spent $119,000 to purchase software to track deals, but data entry and other issues have prevented staff from using it effectively.

Cranley was troubled by the Enquirer's findings, but not surprised. After taking office in December 2013 he recruited Harry Black to run the city. Black is restructuring one-third of the city's departments to make them more efficient and perform better.

Still, Cranley said incentives are necessary to growth and revitalization.

Local governments use incentives to land jobs, tax money and development from companies. If the city won't cut a deal, a company may go somewhere else.

"Some economic development incentives still will be needed in the future due to the competitive nature between cities in attracting projects, and the need to attract capital to secondary markets," Cranley said.

Hamilton County Auditor Dusty Rhodes has long criticized incentive deals and said the city should seize the opportunity to rein them in.

"It's a treadmill to oblivion," Rhodes said. "They can't say no so the deals keep increasing. Eventually it will be one little guy in Price Hill paying all the taxes because everyone will be getting breaks.

"Once it starts, it's almost impossible to stop," he said. "You have to hit the brakes at some point."

Experts who track how states and municipalities award tax incentives say it's important to make sure those deals reflect bigger policy goals.

"What we're trying to do is grow our local economy based on an understanding that if there are more jobs here and better jobs here everyone will benefit," Rexhausen said.

Rexhausen said when officials seek support for an incentive, they should always make a detailed case on why it's a good deal. This information helps people gauge success long after the deals are done.

Robert Zahradnik, a policy director for the Pew Charitable Trusts, said government leaders often struggle to evaluate the success of certain incentives when there isn't a clearly defined purpose for why the incentive was created. Cities must, he said, define what success will look like at the end of the deal.

"To what degree are you lowering a business' costs sufficiently enough to change behavior to do something they wouldn't have already done," said Zahradnik, who works on issues related to the fiscal health of states and economic growth. "At a base level that's how incentives work."

'Delicate balance' in weighing costs to schools, levies

About two-thirds of all incentive deals the city has awarded since 2008 involved property tax abatement.

Real estate and business owners are expected to reinvest those savings into projects. But agreements also reduce the pot of cash available for Cincinnati Public Schools, the Public Library of Cincinnati and Hamilton County, and the county's general fund among other tax revenue beneficiaries.

If Cincinnati has a vibrant economy and gets more economic development, the school district benefits, said Eve Bolton, finance chair for the Cincinnati Public School board. She said increased development and the completion of the district's $1.2 billion facilities master plan have helped the district see enrollment gains in the last few years.

That said, incentive deals now cost Cincinnati Public Schools about $6.4 million in a year, said Jennifer M. Wagner, the school district's treasurer. A $5 million annual city payment to the schools was intended to offset the lost tax revenue, but it's not enough any more.

The city and CPS reached that agreement in 1999 and it's set to expire at the end of 2019. Bolton said the impact of future incentive deals will have to be addressed in the coming months. School districts have to send five-year spending plans to the state for review, and she said forecasts of tax revenue collections are important.

"It never quite makes us whole but that balancing act is important to facilitate economic development and population growth," Bolton said. "It would be helpful if we were more fully engaged – not in usurping the city's power – but at least as a partner in communication."

Cranley insists the schools aren't being cheated because the projects wouldn't have happened without incentives.

"What they're talking about losing is make-believe money," Cranley said. "There would be no tax revenue at all without the incentives."

City Council demands change, but is still waiting

City Council members have been demanding clear incentive guidelines since they approved the GE deal last summer. Council has twice directed the city administration to evaluate the effectiveness and economic impact of property tax abatement, loan or other incentive agreements.

Two weeks ago Vice Mayor David Mann was so upset about a last minute deal brought to Council two days before the anticipated vote he called Community and Economic Development Director Oscar Bedolla to City Council chambers mid-meeting seeking answers.

Bedolla has been on the job four months. Black plucked him from New York City, where as a vice president at a large accounting firm he specialized in project finance and public-private partnerships.

Bedolla's resume boasts his involvement in a number of large-scale, complex development transactions including the Chicago Riverwalk Project and the redevelopment of Denver Union Station in Colorado.

"I have been frustrated about things since I got here in 2011," Councilman Chris Seelbach told Bedolla in the meeting. "The problem never seems to change.

"Council does not want to be a rubber stamp even when they are good deals," Seelbach added. "We are an elected form of government which means taking more than an hour or 24 hours to look at a deal, even if it is a good deal."

Bedolla promised to bring the first of the three plans detailing how incentives will be awarded in the future to Council's Budget and Finance Committee meeting Monday. Instead, a special committee meeting has been called for April 23 because city simply isn't ready.

"My concern is the department is not where it should be in terms of revising these policies," Black said.

He's not even sure the city has the resources to properly address the problem. He's considering bringing in an economist as a consultant to help craft policy revisions.

"Clearly there is a lot of work to be done here," Black said. "It's unacceptable. We need to be on top of our work."

Black said his philosophy is "just enough incentive, just in time." A comprehensive review and assessment of the city's economic development policies are underway.

He plans to create a department just to track deals.

The final regulations will ensure uniform standards are used to evaluate deals and there is a valid reason to give it. The city's long-term goal is to grow and protect the earnings tax. Still, Black said, he'll allow for flexibility when needed.

Incentives helped revitalize Over-the-Rhine, Walnut Hills

One of the biggest arguments for incentives is what has happened in Over-the-Rhine. The private non-profit developer Cincinnati Center City Development Corp. has overseen the renovation of dozens of historic buildings, built new buildings and helped attract scores of new residents and businesses with $529 million – $79 million of it in the form of incentives from the city – since 2003.

Those projects include: the Washington Park transformation; upgrades to the Gateway Quarter, home to some of the city's best restaurants; and Mercer Commons, an apartment, condominium, restaurant and a parking garage development.

The 12-year-old organization's investments in Over-the-Rhine and Downtown have helped create 62 new businesses and more than 2,275 jobs – 60 percent of which have been filled by residents in low-income communities, according to 3CDC.

"3CDC works diligently to minimize or eliminate any incentives required when developing projects that bring economic benefits to the city," said Adam Gelter, executive vice president of development at 3CDC. "We've only asked for city participation on projects that would otherwise not be possible without the gap financing."

Four years ago there was no demand to develop anything new in Walnut Hills. But in the last few years the city invested money to buy and stabilize buildings and worked with a neighborhood and community development groups to support other projects.

Drive down McMillan Street through the neighborhood today and the seeds of change are evident. A new Fireside Pizza restaurant is filled with patrons on nights and weekends, a $9 million historic renovation project underway to add new apartments, and a "pocket park" is planned for a small area that was a big neighborhood security concern. Developers are now circling Walnut Hills seeking projects to invest in.

"The incentive package is invaluable to the Walnut Hills of four years ago and they're necessary to get developers to take a look at the neighborhood," said Kevin Wright, executive director of the Walnut Hills Redevelopment Foundation.

The widely acclaimed 21c Museum Hotel at Sixth and Walnut streets is now a critical piece of the city's Backstage Arts District Downtown despite only being open for three years. The project received more than $6 million in incentives including a city loan to redevelop the former Metropole building. The closing of the low-income housing development was controversial at the time, but changes at that corner have had a big impact in supporting nearby restaurants and entertainment venues.

Rob Smyjunas, who developed Oakley Station and the Center of Cincinnati retail and restaurant complex near Interstate 71 and Ridge Road, said incentives are critical to building economic development projects.

"Right now people think we do have a better economy here," said Smyjunas, chief executive of Vandercar Holdings. "I'm not convinced its robust but it's getting better.

A tax increment financing district and other incentives helped Smyjunas' company transition a former industrial site south of I-71 and the Norwood Lateral to one that features luxury apartments and has become a magnet for shoppers and moviegoers. But even Oakley Station has had disappointments, showing incentives aren't a cure-all for projects.

It missed out on landing General Electric as its signature office tenant after being a site finalist and a deal to attract an Olive Garden fell apart. Smyjunas said incentives may help his company continue to build out the 74-acre property.

"Incentives are not a one-way street," he added. "We are building neighborhoods."

Types of common Cincinnati incentives

LEED-CRA – Leadership in Energy and Environmental Design-Community Reinvestment Act

The city of Cincinnati can offer property tax abatement to a company that wants to build or renovate a building for commercial or residential use. This agreement calls for projects to be certified under the U.S. Green Building Council LEED program.

CRA – Community Reinvestment Act

The city of Cincinnati can offer property tax abatement to a company that wants to build or renovate a commercial building.

JCTC – Job Creation Tax Credit

This is offered in conjunction with the state. This agreement allows the city to give an income tax credit equal to a percentage of the tax revenue generated from new jobs.

PIR – Property Investment Reimbursement

The city agrees to send a cash payment to a company, reimbursing them for a portion of the earnings tax from new jobs or the cost of capital investment.

TIF – Tax Increment Financing district

TIF arrangements allow the diversion of property taxes into a separate account for a defined period of time. The money can then be used by the city to finance the construction of roads, sewers and garages, land acquisition and defray the cost of the city's involvement in projects.

Cincinnati's development priorities

Four reasons the city uses incentives, according to Mayor John Cranley.

Big job growers: These are projects that significantly increase the number of jobs in Cincinnati, which is the city's top priority. The primary component of the city's budget is the General Fund, which pays for services such as trash pick up, police and pothole repair.

EXAMPLES: Great American Tower, Vernon Manor, Medpace

Catalytic or transformational neighborhood projects: These are projects designed to revitalize neighborhoods and attract other development to either dilapidated or under-utilized areas, or to clean up contaminated industrial sites.

EXAMPLES: GE U.S. Global Operations Center, 21c Museum Hotel, U Square @ The Loop, Oakley Station, Mercy Health, Vernon Manor, Medpace, Graeter's

Residential Growth: The City of Cincinnati has placed a priority since 2001 on supporting projects that add residents. Cranley said the investment is paying off and less subsidy may be needed for future deals.

EXAMPLES: Seventh & Broadway Tower, Fourth & Race, The Banks, Oakley Station, American Can

Hotels: These projects generally have not required cash subsidies just TIF revenues, which would not be created without the investment and so should be viewed differently.

EXAMPLES: Old Enquirer building, 21c Museum Hotel, Renaissance, Holiday Inn)

How we created this story

Enquirer Reporter Sharon Coolidge asked Cincinnati officials in June if the incentive package to land General Electric was the biggest in the city's history. When multiple leaders couldn't answer the question, it prompted the public information request seeking a report of previous economic development deals. In addition to interviews, story gathering required analyzing information on deals from public records, Enquirer archives, and city and state websites.

Do you know more about which of these projects has worked well and which has not? Contact reporters Sharon Coolidge or Bowdeya Tweh at 513-768-8387 or 513-768-8515.