Discussion with Lieutenant Governor Peter Kinder on Historic Tax Credits

My recent post on the status of the historic tax credit ("HTC") program received some interesting responses, with Jeff Rainford (Chief of Staff to City of St. Louis Mayor Francis Slay) saying that the Department of Economic Development is "trying to curtail the program" but that a governor-appointed commission "hopefully will produce a compromise that everyone can live with."  On Twitter, Lieutenant Governor Peter Kinder described the uncertainty created in the hugely successful program as a "devastating body blow."

Shortly thereafter, Governor Nixon announced the formation of a commission to review state tax credits, including HTCs.  While the Missouri Coalition for Historic Preservation and Economic Develoment quickly denounced the governor's move, Mayor Slay expressed his belief that "the governor's new tax credit panel will consider our issues."

Yesterday, I discussed the status of the HTC program with Lieutenant Governor Kinder, a Republican who has often clashed with Governor Nixon on tax credits (and, of course, many other issues) and has positioned himself as an ally of Mayor Slay on the tax credit issue.  I first noted that use of the HTC program has recently dropped drastically, and asked him the extent to which he attributes that to general economic conditions as opposed to the uncertainty that appears to have been created in the tax credit market.

Lieutenant Governor Kinder: "I’ve not done any detailed studies so I can merely say that the uncertainty and noise coming out of Jefferson City certainly has not helped. And a great deal of that noise has been generated by the executive branch of the office of the governor and his own personal pronouncements on the issue which I think are half-baked and ill-informed. I’m sure that it also involves economic factors and the larger economy, and the real estate market."

The lieutenant governor stated that the "uncertainty and noise" relates not only to HTCs. 

Lieutenant Governor Kinder:  “And it takes many forms.  That commission (the Missouri Housing Development Commission) I serve on with State Treasurer, Attorney General and Governor, has existed since 1968. We’ve had governors pretty equally of both parties since that time, and no governor has ever attempted to shut down the work of the commission until now. Literally come out and say, as they have, that their intention is to slow down the work of the commission by not holding meetings, by delaying meetings, and canceling meetings. And I’ve been pressing since May, when they canceled the May meeting, to get another meeting and I’m running into a stone wall of opposition and indifference. That’s a big part of this, what Nixon’s shut down.”

I asked the lieutenant governor about the new "expanded review process" that tax credit applicants have recently been subjected to by DED.  In particular, I wanted to know whether he thinks there is a legal basis for this process (and/or the general delay in application approvals), and if the Governor's actions are within the proper scope of his executive/administrative authority.

Lieutenant Governor Kinder:  “God only knows what the expanded review process is.  There needs to be a legal basis for it. Or else we’re down into the realm of political, discretionary issuance of tax credits, which I have called a step toward a Blagojevich-style of politics in Missouri, which we have never had and don’t want.”

Regarding the new commission appointed by Governor Nixon:

Lieutenant Governor Kinder:  “I do not think that the commission is a good idea. I think it is a usurpation of the elected representatives of the people—the members of the House and the Senate, sitting in the General Assembly.

And I do not accept that it’s a binary choice between this money for tax credits and education.  By the way, let’s assume arguendo that that is a valid point. If you accept that premise, why are the mental health people excluded from the table? Why are the social workers excluded from the table? Why are people that are advocates for correctional reform excluded from the table? If you accept their premise, that this is denying resources to other parts of state government, then everyone should be at the table. But we’ve picked out six representatives of education and said, you have a seat on this commission.

The commission is fundamentally flawed in its concept in my opinion, that these people will deliberate the issue and give us the report we need, when we have elected members of the House and Senate to do that job. And there has been a lively debate about it, and the governor has not been able to get what he wants. So now we’re going to have this commission, which I guess gives him a better chance of getting what he wants.

There is another problem that is pointed out in the [Coalition] press release you referenced that I totally agree with. I’m from small-town Missouri—Cape Girardeau—and I’ve seen the credits do good work in the Fayettes, the Neoshos, the Joplins, the Cape Girardeaus, the Hannibals, and towns all over this state. And no one is representing those Main Street groups that have worked for more than a decade to revitalize their small and medium-sized towns--they don’t have any representation on here.

So I think this commission should be on the defensive. I think their first task is to justify themselves. It is transparent what the governor is up to, and I’d like him to come to the Housing Development Commission sometime—to take one example—and tell us why he’s canceling meetings and delaying meetings. His strategy is to bring developers to his knees by slowing the issuance of tax credits. There are huge, major regional banks that are up in arms about this, who are very alarmed [the lieutenant governor named one such bank, but I have elected not to publish its name here]. The Governor cites the fact that Missouri is #1 in tax credits in the nation, as if that’s a reason to hang our head in shame, when maybe it’s a good thing. And we ought to have that debate. I’m not sure that debate will go on at this commission."

The lieutenant governor shared his thoughts on the effect changes to the HTC program may have on the City of St. Louis, particularly the north side.

Lieutenant Governor Kinder:  "Here’s another aspect of it. Downtown has benefited greatly [from the HTC program]. Soulard has seen some benefit. The Central West End has seen benefit. You go up on the north side, you talk to some of those aldermen—they’re not in my party but I talk to them on a regular basis, and attend some of their functions, like Alderman Antonio French or Alderman Jeffrey Boyd—and you know what they say? All those areas I just mentioned to you, Downtown, Soulard, Central West End , other parts of town, they benefited—but now, just when the groups on the north side get ready to line up for their credits, the governor wants to yank the rug out from under them. It makes it that much more difficult, if not impossible, for them to access these credits that work so well.” He also said that the north side can take off “if it’s not strangled in the cradle.”

The lieutenant governor concluded by saying that, for now, the HTC program should be kept in its current form.

Lieutenant Governor Kinder:  “There was already a $140 million cap imposed last year. They no sooner got that than they started making all these other demands. And by the way, the market is right below the cap, so it’s sort of a fictional issue. We’re not bumping up against that cap this year, nor are we likely to anytime soon.  For now, yes [leave the program as-is]. Now, can we have a debate? Sure we can have a debate. Nobody should fear this ongoing discussion." Tweet

Update from Missouri Coalition for Historic Preservation and Economic Development

The Missouri Coalition for Historic Preservation and Economic Development, which runs the "Save the Historic Tax Credit" site, issued the following press release Thursday afternoon.  Bottom line: They are not impressed with the commission put together by Governor Nixon for the purpose of studying Missouri's tax credit program.
________________________________________________________________________________

July 22, 2010

For Immediate Release

Contact:

Deb Sheals

573-874-3779
[NOTE: The phone number in the e-mailed press release is incorrect; the number above is correct.]

Coalition for Historic Preservation and Economic Development

Governor Nixon's tax credit commission criticized as lacking enough representation of people who know economic benefits of Historic Tax Credits

Columbia, MO - July 22, 2010 - Governor Jay Nixon released his plans for creating a commission to perform a review of the state tax credit programs yesterday. The Missouri Coalition for Historic Preservation and Economic Development (MCHPED) spokesperson Deb Sheals, stated, "We are concerned that the Governor's commission does not appear to have enough representation from people and organizations that are familiar with the dramatic impact the Historic Tax Credit has had in the production of jobs and economic development across Missouri. There are, for example, no representatives from small main street organizations, community development organizations, or historic preservation organizations, all of whom have firsthand experience in how well the program works for the average citizen. Missouri leads the nation in economic development from the historic tax credit, and any commission that is looking at this issue should include more members that are familiar with how it works."

It also appears that the members chosen for the commission mirror a previous effort taken midway through the 2010 legislative session to pit education vs. development and redevelopment in communities throughout the state. This is not an either-or situation; economic development through historic preservation creates a stronger tax base and is therefore a benefit to education.

The State Historic Tax Program is a proven economic engine. Historic Tax Credits create jobs, encourage environmentally sensitive redevelopment, and long term revenue sustainability for the state of Missouri. Since 2000, historic tax credits have generated more than $669 million dollars in revenue for the state and local governments while creating 43,150 new and retained jobs with an average salary of $42,732. (See the attached executive summary of a recent study of the impact of this program.) The Governor's attacks are creating industry-wide uncertainty and have crippled the effectiveness of the program as an economic stimulus.

MCHPED looks forward to once again demonstrating the tremendous state and community benefits generated by the Historic Tax Credit Program. Tweet

Responses on Historic Tax Credit Changes

I have received several interesting responses to my post yesterday regarding recent changes to Missouri's historic tax credit program.

First, shortly after my post I asked Jeff Rainford (twitter.com/JeffRainford), Chief of Staff to Mayor Slay, for the Mayor's thoughts on recent developments with the program. I noted my concern about the uncertainty that has been introduced into the tax credit program, and the extent to which that has the potential to derail the ongoing revitalization of the City in general, and downtown in particular (the Post-Dispatch's article yesterday reveals that use of the historic tax credit program is WAY down in the first half of this year). Mr. Rainford responded as follows:

"Here is where he is. The program is good. It works well. It has been and will continue to be one of the vital components of the City's renaissance. It is an investment for the state. That means it brings back more in tax revenues than it costs.

DED says they are just being more careful, but it is our opinion that they are trying to curtail the program.

Eventually, the governor is going to appoint a commission that hopefully will produce a compromise that everyone can live with, and we can get on with rebuilding the City.  In the meantime, there is an incredible amount of rebuilding going on Dowtown right now, much of it dependent on the historics." (I guess I should have published that info about the commission right away--I would have had the scoop!)

Second, someone from Space Architects (twitter.com/SPACEarchitects) tweeted: "As an architect who often speaks to prospects about HTC's, uncertainty = deal over."  That's consistent with everything else I have heard on the subject.

Finally, Lieutenant Governor Peter Kinder (twitter.com/PeterKinder), who is an ally of Mayor Slay's on the historic tax credit fight, tweeted that the uncertainty that has been created in the program is "devastating" and a "body blow" (or maybe the two tweets were meant to be read together as "devastating body blow"). I will be talking to Lieutenant Governor Kinder in more detail later this week, and will publish his thoughts here.

Stay tuned . . . Tweet

What's Next for the Missouri Historic Tax Credit?

When the Missouri General Assembly's 2010 regular session adjourned in May, the state's highly lauded historic rehabilitation tax credit program narrowly dodged a bullet.  Despite the efforts of Governor Nixon and his allies to reform historic tax credits ("HTCs") and other state tax credit programs "from scratch," new legislation to curtail the use of HTCs was not passed.  Supporters of the HTC program celebrated the near miss, while simultaneously warning of "a greater fight next year."

It appears that those demanding changes to the state's tax credit programs do not intend to wait that long.  An e-mail recently circulated by the Coalition for Historic Preservation and Economic Development has shed light on an "expanded review process" recently implemented by the Missouri Department of Economic Development, that apparently affects both preliminary and final HTC applications.  A sample letter from the DED to a potential HTC recipient states that the purpose of the expanded review process is "to ensure the eligibility of all projects, costs and expenses."

According to the Coalition, the details of the new process are unclear, "without clarification on the length of time being allocated for the added review[,] who within DED is responsible for conducting the expanded HTC review," or "when final approvals will be obtained."  As far as I can tell, the state isn't even bringing the new process to the public's attention, with the website for the Missouri Department of Natural Resources continuing to refer to a 30-day process for "initial processing at the Department of Economic Development, review of proposed work by the State Historic Preservation Office and final processing by the Department of Economic Development."  The Coalition's view of the result of the new "undocumented" process is clear, however:  a slowing down of the entire HTC process, a resulting increase in project costs, a reduction in the number of HTCs issued, and an inability to obtain financing for new projects.

In the same e-mail, the Coalition notes that "$350 million in line item vetos and expenditure restrictions for the FY2011 budget that went into effect July 1 included $47 million to come out of existing tax credit programs."  The e-mail highlights a spreadsheet from the Office of Administration, that includes the following comments next to the noted $47 million tax credit item:  "Tax credit redemptions anticipated to be lower than orginally forecast based on economic sitaution.  Also, more carefully review all tax credits before they are authorized."  [Emphasis added.]

This below-the-radar tinkering with the HTC rules, coupled with new program caps and other changes implemented in 2010 and the governor's presumed intent to pursue further limits on the program next session, appear to have already created the uncertainty and confusion in the tax credit marketplace feared by supporters of the HTC program.  In today's front page Post-Dispatch article, Tim Logan reports that only $13.4 million in HTCs were authorized in the first half of 2010, down from $87.7 million in the first half of 2009 and $86.1 million in the second half of 2009.  The number of applications filed during the first half of 2010 fell by over 60% compared to the same period in 2009, with half of those "still awaiting approval." 

Tim notes that a rough economy, particularly in the commercial real estate sector, is surely partly to blame.  But the real estate market has suffered and credit markets have been tight for several years now.  The actual and threatened changes to the HTC program in recent years, and related uncertainty in obtaining the credits, has almost certainly caused some, if not most, of the drastic drop-off in use of the HTC program.  Elements of fear have even been injected into the process, with Tim's article referencing "a dozen local bankers, developers and others who work with historic tax credits" who would not speak publicly "for fear of alienating the powerful state Department of Economic Development." 

How can a market for tax credits--one that, in prior years, was held up as a national model and a key driver of the Missouri economy--function efficiently in that environment?    Not surprisingly, it can't.  In Tim's words, "[q]uestions about when, or even if, they will get repaid can make banks and investors skittish."  Up-front financing for historic rehabilitation projects becomes much more difficult in the absence of clear, objective, apolitical criteria for the HTCs that are sold to the financier (at a discount) prior to their issuance.

In a post earlier this year, I detailed the costs and benefits of Missouri's HTC program, as well as the political points that I believe should be made by those seeking to protect the program.  Those include the economic benefits that bely Governor Nixon's characterization of the HTC program (in context of the overall Missouri economy) as  a "zero sum game"; the jobs that are created by the HTC program; and the probability that changes to the HTC program would result in "dollars that could have been invested in Missouri [] being invested elsewhere"--in other words, states with more favorable tax credit programs.  Tim's article addresses this last point directly, quoting Representative John Diehl (R-Town and Country) as stating: "Investors just aren't going to invest in places where the rules and the process aren't clear."

In that post, I referred to Governor Nixon's broad attack on the HTC program--akin to taking a hatchet to a problem requiring a scalpel--as "political malpractice."  Although some changes to Missouri's tax credit programs are surely needed in light of budgetary hardships, changes to a hugely successful program--the success of which relies on clarity and objectivity--must be made in a careful, targeted, and transparent manner.  By using administrative antics to achieve what the governor could not achieve legislatively, the state appears to have muddied the waters enough to cause a drastic slowdown in the use of the HTC program and, presumably, future redevelopment.

It is troubling to consider the extent to which the market uncertainty created by these changes, and even more problematic changes potentially enacted in the future, may negatively impact the City of St. Louis.  The HTC program has been a critically important component of the ongoing rejuvenation of the City, and downtown in particular.  In downtown alone, more than 100 historic buildings were redeveloped in the last decade, with 4,400 new residential units coming online and 5,000 new downtown residents, making downtown "the fastest growing community in the St. Louis region."  By the end of this year, over $5 billion dollars will have been invested in the redevelopment of downtown in the last decade, much of which could not have occurred without the HTCs used to help finance the high-cost rehabilitation of the City's historic buildings. 

Mayor Slay has rightly opposed changes to the HTC program that are likely to hinder continued urban development and achievement of the City's goals for upcoming years (which include a 60% increase in downtown's population by 2020, to 20,000 residents).  In Tim Logan's words, builders know that "ad hoc, unspecified changes threaten to bring redevelopment in St. Louis to a grinding halt."  Which recent projects might have been delayed or not occurred at all, but for the certainty of obtaining HTC financing?  Would the complex and fragile financing of the Peabody Opera House, which included $12.5 million in Missouri HTCs coupled with $12 million in federal HTCs, have come together?  Which future projects might be significantly delayed or never happen at all--perhaps a future rebirth of the gorgeous Arcade Building?  Or, more likely, will it be the many smaller rehabs undertaken by the politically unconnected that will suffer as a result of new, undefined rules and probable future attacks on the program? 

It appears that the question now being asked by the tax credit market is, "Who knows??" Tweet