Beware the Trojan Horse of “Urban Renewal”

Let’s pretend that you have an old house that is in need of fixing up. You are cash poor, and cannot afford to pay for the remodel out of your own pocket.

But you have some equity in the house, so you are able to borrow money to make the necessary improvements to your home. You receive a return on investment on the remodel based on the improvement to the overall value of the house, which should increase as a result of the work. Therefore, the borrowing of money was a necessary and wise move that built value.

This was how urban renewal was explained to me by a city official once. He was selling the vision of “urban renewal” to a larger group. Heads were nodding along with each point he was making, and it seemed he was able to garner some support using this “home improvement” analogy. (I’ll address the this fallacious metaphor later.)

Of course, I want to see my city make improvements, and to become an attractive place for commerce. I live in a quaint, small town that is experiencing the same economic hardships as the rest of middle America: big industry packing up and leaving, small business owners struggling to keep the lights on, and local government that is powerless to reverse the course of economic trends.

But as this official continued his pitch, my skepticism waxed and waned. Valued-loaded terms like “blight,” “tax increment financing”, and “urban renewal authority” entered the dialogue — words that would give most libertarian-minded individuals pause. When prompted for clarification on these terms — What is “blight”? How is it determined? Can you please explain how a TIF works? — the city official did what he usually did best: dodge the questions.

“These are all good questions, but when you get into the details it gets really complicated,” the city official responded. “I would be happy to provide those details to you in email or a separate meeting, if you’d like.”

An attractive presentation that obscures the devilish details is a great method to selling a bill of goods.

So I took it upon myself to address the Trojan Horse that is urban renewal, and how it can become a vehicle for wasteful spending, public handouts to private interests, and abuse of power.

Blight is in the Eyes of the Beholder

Urban renewal starts with the premise that blight — an area of urban decay where abandoned, crumbling buildings are bringing down the overall property values of a municipality — creates a downward economic spiral if left unaddressed. Essentially, blight begets more blight.

In response to reversing the negative impacts of blight, cities and towns band together by creating special districts — similar to those used for fire departments and schools — called urban renewal authorities (URAs). This governing body, which usually double dips into the city council board, then becomes an entity with the authority to identify blighted areas within its predetermined boundaries, levy taxes on businesses to finance operations, and leverage eminent domain as a tool to absorb property that will then be developed in a manner approved by the governing body.

So how is blight determined? For an area to be labeled as blighted, the property must meet the following conditions. The property must:

· Substantially impair or arrests the sound growth of the municipality

· Retard the provision of housing accommodations

· Constitute an economic or social liability

· Act as a menace to the public health, safety, morals, or welfare of the municipality

If these determining factors seem vague and subjective to you, you are correct — and this uncertainty is intentional. Leaving terms in such a gray area provides more legal leeway for the governing body in their urban renewal planning. In addition, empowered with the ability to leverage eminent domain, the URA is granted the ability to intimidate property owners.

An abandoned building that is physically marked by mold, infestation, and crumbling walls is an easily identified example of blight, right?

However, what if governing authority has been approached by developers who are interested in constructing an upscale hotel that will likely bring more commerce and traffic into town? The end result will likely bring in more tax revenue and a number of other attractive amenities from the multiplier effects of the project. What happens when your private property is targeted for redevelopment? Any slight appearance of physical disarray might be abused to label your property as blighted, and — often times — you are not granted any legal means to appeal such a decision.

There is a reason that city officials shy away from the words “eminent domain” when trying to institute URAs: it’s a concrete term that sends shivers down the spines of all private property owners. Though a URA can “promise” to never use eminent domain, they are still granted that authority, providing an “ace in their pocket” to be potentially be abused for a future date.

Governing boards can shift and change in their composition and values, so one group of city council members are not beholden to the promises made in previous administrations. However, that legal authority to leverage eminent domain can exist in perpetuity.

Like the concept of beauty, blight is in the eyes of the beholder.

Forcing Your Neighbors to Pay for Your Improvements

New construction is pricey, and cash-strapped municipalities typically don’t have the liquidity to pay for it out of pocket. Tax increment financing (TIF) presents a shifty tool to bypass this financial reality.

City governments and URAs write up proposals for urban renewal projects, where they carefully detail the costs and purported benefits of redevelopment. These proposals are then submitted to lending institutions to underwrite and issue the funds necessary to finance. If approved, the URA goes to bid, requesting proposals from private developers.

Public accessors determine the value of blighted properties identified in the proposal, then “freeze” that value to be used as a baseline metric. URAs then impose a tax increment upon all properties within its district. All increases in the property values — which always correlates with increased gains from property taxes — go back into paying off the original loan.

Let’s return to the original (and fallacious) “home improvement analogy.” Urban renewal isn’t really comparable to an individual homeowner making improvements to his own property, and paying for it via the equity he earned from ownership. Instead, a more apt analogy would involve that same individual borrowing money for improvements, but forcing his neighbors to subsidize the improvements.

Furthermore, any gains from increasing property values of neighboring homes would be neutralized by the tax, which actually burdens other taxing districts — such as, again, fire departments and school districts — that voters might prefer their funds going to in the first place. (Of course, “preference” and “taxation” are mutually exclusive, but you get the point.)

TIF is no more than a handout to private developers through the use of public funds, where losses can be easily socialized and billed to taxpayers. And, as the Cato Institute finds, most studies indicate that redevelopment subsidized by TIF plans “would have happened anyway in the same urban area” regardless of central planning. Urban renewal simply provided a platform for developers to skirt most of their upfront costs.

Urban Renewal — Picking Winners and Losers

Beware the allure of urban renewal.

Often disguised as a plan to improve the overall quality of life within city limits, urban renewal plans amount very little other than a form of cronyism that awards winners — developers and local governments — by making the losers — private property owners — pay for it all.

Urban renewal planners and developers are asking that taxpayers flip a coin on their financial future: heads they win, tails the taxpayers lose.