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The Abatement Game

Tax abatements are supposed to spur job growth and economic development. But who really benefits?

By Jim Sack

Fort Wayne Reader

2011-11-03


Who really benefits from tax abatement programs?

Is it the entrepreneur with a winning idea but a bit short on cash who benefits? Is it the area of town where unemployment rates are high and buildings lie vacant where revitalization is most needed? Is it the average citizen whose tax “contribution” is used to spur job growth, new taxpaying enterprises and a richer community?

Or have the abatement system and the myriad economic development programs become little more than vehicles to rewards insiders, supplements to already healthy bottom lines, safe employment for economic development staff programs and talking points for politicians who rubber-stamp the programs?

The city has long struggled with economic development.

1. In the 70-80s there were a couple staffers in city government who managed a database that listed vacant buildings should an out-of-town company call. The computer and the phone were about their only tools. They took calls, mailed brochures and waited by the phone.

2. Over the years competition has gotten keener between cities and states to attract, or poach, businesses to the point where economic development staff numbers have multiplied and companies have learned to play one community off against another.

3. Fort Wayne and Allen County governments each have their departments, as well as supporting the Alliance and the Partnership which also focus on attracting new business. And, there is the Chamber of Commerce with its programs. And, there is the state, and there are the regionals…

4. Economic development is the banner all cities wave while pumping hundreds of thousands into “outreach” budgets by combining tax dollars, assessments and contributions.

5. Acronyms such as CREE, TIFF, CEDIT abound. The state offers a glossary of terms.

6. Abatements and other tools divert tax dollars from the general fund purposes, such as infrastructure, parks and amenities into funding-pools that staff “invests” and politicians tout as ways to spur economic development.

7. However, since the 1980s the average wage in Fort Wayne-Allen County, once well above the national average, has tumbled well below it, and unemployment remains unusually high.

8. This has led local economic development people to demand more tax money to buy more “tools” and preparing yet another new comprehensive plan that will better “target” economic development dollars (your money) to spur growth.

Abatements are one of the most visible incentives in the quiver of the economic development teams. A company can avoid paying taxes on new improvements and purchases. Usually, they are given 10 years of abatement, sometimes less. Applications are scored by local staff to determine the length of the abatement.

In exchange, the company is expected to create new and higher paying jobs, as well as bringing investment to sagging areas of town. Those are the three keys: new jobs, higher wages, and revitalization.

Application and reporting guidelines are set by the State. Local city and county councils can further create rules to protect your investment.

Over the past year, two local labor leaders and a team of helpers have been looking into whether past abatements actually have created jobs, whether the jobs are better paying than the local average, and whether any blight has been being mitigated through “revitalization” of run down areas.

The questions asked by the labor leaders are simple and fundamental, but they seem alone in scrutinizing the performance of the abatement program and of economic development results as measured against the goals. Members of City and County Council, the legal watch dogs, admit as much. The councils simply have no idea whether the abatements achieve those goals.

Those two labor leaders, Tom Lewandowski and Cheryl Hitzemann from the North East Indiana Central Labor Council, are running into fundamental problems identifying whether jobs have been created, as promised, and whether the salaries that may be paid are directly related to the abatement program.

In a written summary the two labor leaders charge the reporting format and guidelines are so superficial that annual reports submitted by abatement recipients: 1) lack defined terms resulting in “inconsistent reports which had made it impossible…to measure the effectiveness …of the tax abatements”; 2) that self-reporting “ has made it impossible “to determine who or what…is being reported”; 3) that a lack of accounting standards meaning that jobs and payroll are very loosely defined; and 4) that there is a no formal method of reporting fraud.

In short, Lewandowski, Hitzemann and team say, “Without legitimate markers (we) have been unable to measure the effectiveness or ineffectiveness of tax abatements.”

Performance reports, they add, are provided by the recipients of abatements — oversight lacks independent verification to insure our tax dollars are used as promised.

Once a month or so City of Fort Wayne staff presents a new candidate or two to City Council for a new tax abatement. A “revitalization” zone is created for the applicant and, based on “scoring” of the application, they often receive a 10-year abatement. Usually, that 10-year abatement means savings of thousands of dollars to a company’s owners; sometimes tens of thousands in taxes, sometimes hundreds of thousands in taxes are waived from a company’s bottom line. The County reports that the 46 companies they abated saved $3.3 million in 2010 taxes. The City does not produce a report.

After creating a revitalization area, council then votes whether to grant the abatement. Seldom does a citizen speak at the public hearings. Seldom do council members question any part of an abatement recommendation from staff. Abatements of millions are passed quickly, often the same night they are introduced. Only Lewandowski and Hitzemann have posed serious questions in three visits to City Council and other meetings with County Council. Very seldom in those meetings do council members raise the first question.

The County estimates their abatement process, not including departmental expenses, costs you $35 a year or so if you pay property taxes on a $100,000 house. The City, as mentioned, does not report costs to city rate payers.

Some government leaders would say that that amount is a pittance for the jobs and growth that has occurred. After all, it is only $3.3 million per year. The problem is, they can not really tell you whether your tax dollars at work have created the first job. They don’t know, hardly anyone asks.

Here are a few examples of abatements:

• A revitalization zone was created on one side of the Lutheran Hospital campus to allow a company to build a new facility. Is the Lutheran campus blighted or undesirable in some way? Is a well manicured lawn blighted? Would the company have folded its many operating theaters and moved anyway, or would they have been unable to expand had they not been granted an abatement?

• A revitalization zone was created off Lake Avenue so a company could build a $7 million apartment complex. They promised to create one full-time job, perhaps two part-time jobs. Perhaps. Given the flexibility of the rules they hardly need to create the first job, but will still may receive the hefty deduction.

• A company in New Haven was approved for a Fort Wayne abatement to move a few miles down I-469. Is the abatement program designed to poach business from our closest neighbors?

• Lutheran Hospital was given a break, some $34.5 million, to add on to their hospital complex. Do they really need an abatement to make it in business?

• Ash Brokerage’s project “retained” 293 jobs, but did not promise to create the first new job. Would they have fired everyone on staff had they not received the tax break?

More than one local politician has called the program is a mess, that it hardly creates any jobs, that it is more a break for those who are in the know. Government abatements, one added, favors one company over another in what should be the competitive marketplace, essentially placing a thumb on the scales of competition. In other words, he snorted, you add a bit more to the bottom line of prosperous companies hardly in need of the help and hardly likely to help put any of your unemployed neighbors back to work.

Vera Bradley is a famous example of that. The company received an abatement after promising to create hundreds of jobs. The problem was they tossed hundreds out of work in a handful of small sub-contracting companies and brought the work in house. It was reported there was a net loss of jobs. For that legerdemain they got a sizeable atta-boy tax break from our government.

Has the abatement program raised wages? Doubtful. Ask Lewandowski and Hitzemann and the team that conducts the research. They reiterate it is impossible to identify whether any job was created as a result of an abatement. Reports are a jumble of numbers, employee totals are not broken down or attributed, salaries are not broken out. Numbers are lumped together, they say, without identifying whether they relate to the tax break or not. They do add that full-time jobs are too often replaced by temps without benefits.

To Lewandowski, Hitzemann and the team it is an additional shortcoming that a company need only achieve 75% of the employment goals they promise to get the abatement. Circumstances beyond company control, such as the national economy, are seen as valid excuses why only seven of 10 promises need to be kept.

So, the apartment company that promises one full-time job in exchange for a $7 million tax break may only need to show a part-time job or none at all to receive their substantial break. And, since they self-report, since there is no audit, who would know anyway?

There is a provision for “claw-back,” the act of recovering abated taxes as a consequence of failed performance, but never, in the life of the program, has a city applicant had to return tax savings.

Frequently, staff comes to City Council to beg a waiver for companies that just “forgot” to submit an annual report, the one real expectation of the program. City Council asks few questions about the waiver, nods understanding of the plight of the recipients, and grants the dispensation. Staff notes that the process is not that hard, but they lament they find themselves hand-holding with companies from start to finish.

According to Lewandowski and Hitzemann, these observations call into question whether the abatement program does what it is intended to do: create jobs, create higher paying jobs and restore deteriorating neighbors. Once again, Lewandowski and Hitzemann have studied the program, and can’t answer those fundamental questions.

They do know, however, that economic development “teams” get paid, that politicians take credit for abatements as their way of leading the “fight” to bring jobs to the area, but that neither City nor County council thoroughly question the efficacy of the program. The question remains: does the community benefit? The answer: who knows? It is doubtful that either City Council or County Council can empirically prove that a single job has been create due to tax abatements.

What we do know is that the local economic development leadership is preparing a new comprehensive plan. It was touted at the last meeting of the Legacy Task Force by one member who went so far as to ask fellow members to endorse it for Legacy funding without 1) it being completed; and 2) before anyone had read it.

There are those who are sure that economic development programs are essential and are successful, but there are still those nagging doubts: for whom?

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