The following letter was sent by John P. Mallamo of Bel Air:
A brief Post Mortem on Bill 10-10 if you will.
Bill 10-10 passed on a 6-1 vote as reported elsewhere. It does have some unattractive features.
The TIF and the Enterprise Zone designations that the County administration is pursuing for economic development establishes a special class of business. The Enterprise zones give businesses moving into the County a big break on their property taxes. Both the TIF and the Enterprise Zone processes may provide low cost capital to business. Existing businesses do not get the same treatment as those in the enterprise zone, neither do those not using the TIF. Existing business, when paying the full property tax assessments are placed at a competitive disadvantage, and their profit margins are jeopardized. The theory behind these Harford Handouts is that the jobs will be created, and more tax revenues will be collected. The situation is ironic because the tax dollars from existing business are used to directly subsidize their competitors.
The end results and unintended consequences of the County’s actions may not be consistent with the goals. In the case of the TIF, the County provides the bond to capitalize the project at the market rate for municipal bonds, not to exceed 9 percent. The proceeds are disbursed to the developer. This results in the following:
1. Private equity funds (capital) are withdrawn from the equity markets. Funds for other projects cost more or are not available.
2. The relative priority of projects is artificially adjusted, without benefit of economic analysis, based on criteria that are not related to market rules. Normal Market rules evaluate each project and determine, based on return and risk among other factors, which project should proceed. In this case the sponsoring agency is using its ability to sell a bond, the proceeds of which will be used to fund Beechtree Estates, and some infrastructure. The capital that will be withdrawn from the private equity market will not be available for other projects which may have a higher return on investment, therefore altering prioritization of all other projects.
3. Other businesses are placed at an economic disadvantage and become noncompetitive and unprofitable both today and in the future. Every home builder and developer, not just in Harford county, but in Delaware, Pennsylvania, Cecil County Baltimore County, and to some extent beyond are affected.
This Bill also establishes a Special class of residents within the County. Residents in the to-be-built Beechtree Estates homes will benefit from the low interest capital available to the developer. The Tax Increment Financing deal that the County struck with the developer shifts current costs to the future in the form of future property taxes. For 30 years, the homeowner will be paying back the cost of development. The cost of their houses are reduced by the low cost capital and by putting the cost of the supporting infrastructure within the development into a 30 year bond, payable with property taxes. The assessed value of the house is reduced, which means tax revenue available to the County is reduced. When the property owner in the development pays property taxes, the Tax Increment portion, used to pay the bond, is deducted from the total amount. The remainder is distributed to the County’s General Fund. The property owner does not receive less in the way of services from the County, he/she just pays less. All other County residents are left to pay the difference. In essence the property owner is using his property taxes to pay for his/her house.
In other developments the Developer pays for the infrastructure, and fees, and recoups the cost of the development at the time of sale of each property in development. Since the costs are borne at the time of sale rather than over the following 30 year period, the property is assessed at a higher value, and the County gets more revenue going forward. All of the property tax revenue is deposited into the general fund and is not earmarked for a capital bond payback.
It is interesting to read about the additional revenue that will be generated by this project. Intimations that somehow there will be extra revenues that will result from extra houses are overly simplistic, unrealistic and simply not credible. The reality is that the tax revenues that come from these houses and all other properties in Harford County are used to provide services like schools, roads, snow removal, pay teachers, fund Parks and Recreation, establish Solid Waste disposal sites, pay salaries of County workers, Sheriff’s department, law department and County Council as well as their buildings and to provide for all of the other requirements of the County’s residents. There was never any discussion of cutting services to Beechtree residents, and unless that happens there is no extra tax revenue.
Applying the rules from corporate finance to municipal finance without some further translation is a mistake. Unlike corporate America, additional Property tax and Income tax revenues are not extra profits. They represent requirements. They are used to support requirements. Residents get services, not dividends. If there are more revenues than expenses, then taxes should be cut. There was no public discussion of a tax cut resulting from this project.
Discussions on Infrastructure also require a careful review. Harford County used a Pay as You Go financing structure for decades. If the money wasn’t there, it was not spent. During this time significant surpluses were built up. The surplus was not a result of good governance, it resulted directly from underfunding infrastructure. Harford County is now borrowing and spending to build infrastructure to more than compensate for previous underfunding. Unfortunately, the current economic environment which has reduced revenues, and the County’s operating budget are working against the effort.
The infrastructure that is being added are the brick and mortar variety. Schools and administrative buildings. Roads and highways have not been adequately addressed at the Federal, State or County level, nor does Bill 10-10 address them. Only the intersections that the development will affect and two others will be improved.
Building roads inside the development is the developer’s responsibility. Improving intersections within a 2 mile radius of the development, when previously established criteria are met is the developer’s responsibility. South Stepney Road and Route 22 and South Stepney road and Route 22 meet this criteria. The intersection at Route 7 and South Stepney Road meet this criteria, and the intersection at Route 22 and South Stepney Road may meet this criteria. The concept here is that the roads and intersection improvements would not be required if the development were not built, and therefore the developer, not the county, should pay the cost of those infrastructure improvements. The other 2 intersections that will be improved by the Beechtree development are Route 7 at Route 40, and Route 7 at Route 543. The Harford County Transportation Element Plan – 2010 identifies the US 40, MD 159, MD 7 intersection as a high priority project , with a construction cost estimate, which does not include acquiring any of the easements or other costs, of $30 million dollars. The intersection of Route 7 at 543 is not specifically addressed in the Transportation Element plan, however the I-95 and 543 interchange is. It also has a high priority, and the construction cost is $15 million dollars. There may not be sufficient money in this project to fix the interchanges. Additionally, there was no discussion of how these improvements will be approved. All of these intersections involve either Federal or State roads. The County does not have unilateral authority to make improvements.
The other infrastructure project identified was the larger water line to support Frito Lay. If the developer is required to run the water line and he can put the larger pipe in hole, the cost of the larger line should be Frito Lays, not the developer nor the County. Unfortunately, the homeowners in Beechtree Estates will be subsidizing Frito Lay.
The millions of dollars in road improvements mentioned seem to exist only in the development. These roads could be identified as assets on a corporate balance sheet, and certainly they do have a value. There is also a future liability in them, as they will require periodic maintenance and repair. A significant portion of the Property Tax revenue generated from each property will be used to pay the bond used to fund the streets for thirty years. The remainder will go to Harford County’s General Fund. Maintenance for the streets will come from the General Fund which is underfunded by the Tax Increment portion of the property taxes.
None of the roads outside the development will be improved. Additionally, adding any new traffic control devices at Stepney Road and Route 22 and Stepney Road and Route 7 to allow Beechtree residents to enter and exit the development will create constrictions on Routes 22 and 7, which will exacerbate an already bad situation.
This project has a dark side that will impact all future business and development seeking to move into Harford County. There is no question about what the developer is required to do in a development. Streets, sidewalks, sewer hook up, water hookup, fee payment and major intersection improvement in both directions from the development. The Beechtree Estates project is doing more, presumably in order to get County financing. Whether that was voluntary, or coerced is not clear. In some areas the additional work for favorable financing could be called pay to play, or a shakedown or extortion. It seems appropriate here to call it the Harford Hustle. All future developers and businesses will have to ask themselves how much will it cost to do business with Harford County.
I am not accusing the County Executive or the County Council of favoritism or of committing nefarious deeds. The TIF process is available to anyone who qualifies. The Developer in this case should not be disqualified because of a friendship with the County Executive. The qualification criteria themselves seem to be open to very wide and liberal interpretation. Redeveloping a golf course for a housing development might be on the very fringes of those criteria.
It does appear, however, that there is little to be gained from this deal.
John P. Mallamo