HELEN BURNS SHARP
Black Creek/Aetna Mountain TIF
A CASE STUDY OF CHATTANOOGA'S FREE LUNCH PROGRAM TO WEALTHY CORPORATIONS
I filed a lawsuit in early 2013 after becoming convinced that I had to do anything I could to call attention to this gross misappropriation of local taxpayer funds. This $9 million needs to go into city and county tax coffers for needed services rather than to the Wall Street firm that now owns the controlling interest in the Black Creek Mountain residential subdivision.
Pulitzer Prize-Winning reporter David Cay Johnston wrote a book called "Free Lunch"--How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill). He suggests that Americans memorize the following lines: "If it is a sound investment the market will make it. If the investment is unsound, why should taxpayers subsidize it"?
We need to send a message to our elected officials that they need appropriate written criteria and thoughtful deliberation when they are considering requests for ALL tax incentives. Had either been in place in the spring of 2012, this project would not have been approved.
While this case has a David and Goliath dimension, I believe there is a very good chance I will prevail. Chancery is an equity court. This case is about fundamental fairness. I have excellent attorneys in John Konvalinka and Tom Gautreaux. Please consider helping financially with my legal bills.
An acknowledgement at the outset: This is not exactly a fun, quick read. TIFs are complicated and mind-numbingly boring. Few people other than those directly affected understand them. The corporations getting the tax subsidy benefit from the fact that few members of the public have even heard of TIFs. That lack of awareness allowed this particular TIF to get (and get away with) a public subsidy for a project where there is no public benefit.
1. What is the lawsuit about?
This lawsuit seeks to invalidate our city and county governments’ decisions to provide a $9,000,000 property taxpayer subsidy to well-financed developers for a residential subdivision. TIF funds are currently slated to be used to build a road and sewer improvements to the top of Aetna Mountain in the Black Creek (Cummings Cove) development in Lookout Valley.
Typically, local governments approve tax increment financing (TIF) for projects that either revitalize a blighted area or result in a significant number of permanent family wage jobs. This project does neither. In this particular TIF, the property taxes we pay for things we want--like police, fire, parks, and good jobs--get diverted into a slush fund to pay developers for a remote road we have no interest in.
The lawsuit is also about transparency in government. It is a reminder to elected officials and their staff that what is required by state law and city code should be followed. It requests the Courts to address issues about access to public records and possible violations of the sunshine law. It challenges whether or not this project is even eligible for TIF funding under Tennessee Code Annotated § 7-53-101 (13).
2. How does this TIF project affect us as taxpayers and citizens?
In creating this tax increment district, the city and county agreed to give all new property tax revenue generated in the Black Creek plan area to the developers to recoup their costs for the road in their subdivision. (In every other subdivision in town, this is a cost borne by the developer.) Tax revenue will also be used to pay them interest (prime + 2--currently 5.25 percent) and to reimburse them for legal and engineering fees associated with bond issuance and construction of the road. Included in the subsidy were $232,252 in legal fees related to the issuance of the TIF bond.
When you and I pay our property taxes, the money goes into the general fund to help pay the cost of providing services like police, fire, street maintenance, trash pick up, parks, libraries, etc. In this scenario, taxes going to city and county government from new Black Creek residents are frozen at low, pre-development levels. For up to 20 years, our city and county general governments loose out on the tax revenues generated by new development. Tax revenue from the Black Creek area that would otherwise go to the general fund will go to the developers to pay for the road and sewer line. This diversion means less property tax revenue for other pressing and deferred needs all over town. This list includes priority items such as enhanced police protection and numerous needed street improvements.
New development translates into increased costs for emergency and other services. When a suburban residential TIF like Black Creek is created, it reduces costs to wealthy private developers and means that middle class taxpayers throughout the city will ultimately pay more to cover those costs or accept a lower level of service as government services are spread to developments that are not paying for them.
Can you find the PUBLIC interest that justifies our $9 million gift to a New York hedge to build a road in a $500 million residential golf course community? "If it is a sound investment the market will make it. If the investment is unsound, why should taxpayers subsidize it"?
3. What is the status of the lawsuit?
The lawsuit was filed in Hamilton County Chancery Court on February 28, 2013. The defendants are the three policy bodies that approved this TIF. Since that time, their attorneys have filed responses and motions and my attorneys have responded.
In April of 2013 the Industrial Development Board and the City filed a Motion to Dismiss the portion of my lawsuit that asserts that the TIF is unlawful. They argued that I lack standing to bring claims challenging the authority of TIF approval. In an Memorandum Opinion dated June 5, 2013, the Chancellor DENIED defendants' Motion to Dismiss my claims relating to the IDB's approval of the TIF. Chancellor Brown wrote that I met the required three tests for standing: (1) I have taxpayer status; (2) I allege a specific illegality in the expenditure of public funds; and (3) I made a prior demand on the government entities, asking them to correct the alleged illegality.
During the "discovery" process, we served the defendants with Requests for Admission, Interrogatories, and Requests for Production. In December of 2013 we took depositions from representatives of the City (Ron Littlefield), the County (Larry Henry), and the Industrial Development Board (Ric Ebersole). Five attorneys representing the defendants took my deposition on March 27, 2014. On June 25, my attorney took the deposition of attorney George Masterson, who served as bond counsel to the developers.
July 2014 Update
In June the defendants (City, County, Industrial Development Board) filed a Motion for Summary Judgement to try to get the Court to dismiss my case without a trial. This is a tool frequently used by a party in a lawsuit to try to convince the judge that all the evidence is on their side. In their motion, the defendants relied heavily on an Affidavit prepared by George Masterson, a Nashville attorney whom the developers hired as bond counsel. My attorney then prepared a Motion to Strike the Masterson affidavit, questioning Mr. Masterson's purported expertise.
In the hearing on July 7, Chancellor Brown granted our Motion to Strike. He added that he believes that the TIF process was flawed because of a patent conflict of interest: the IDB relied on the opinion of bond counsel to give an unqualified opinion that this project was eligible under state law and bond counsel was also representing the developers. Judge Brown said this was like asking prisoners if they thought there should be locks on their doors.
In the hearing on July 10, the Chancellor denied defendants' Motion for Summary Judgement. He said that he thought the IDB's approval was a violation of the Open Meetings law because the Board did not vote at a public meeting on whether or not they had received an unqualified opinion from counsel that the project was eligible under the state TIF statute. If it is deemed a violation, the IDB approval action of this TIF project could be invalidated.
My attorney, Mr. Konvalinka, questioned whether or not the TIF funds were necessary since the purchasers of the bonds are the same group developing the project. Continuing with Monday's conflict of interest theme, he pointed out that the road is to be built by the family construction firm of one of the developers. He said that the way the deal is structured the road builder can "charge what he wants." He showed an overhead of the illegible map given city and county officials. It is so hard to decipher that Mr. Masterson, who attached the map to the Economic Impact Plan, admitted in his deposition that he could not locate the proposed TIF plan area, the proposed road or the proposed commercial facilities. Amazingly, he testified that a member of the public ought to be able to tell where the TIF district is, even though he could not.
On July 15, the Black Creek saga moved from the courtroom to city hall. Under the "business from the public" portion of the City Council meeting, spokesperson Eleanor Cooper asked the Council to respect the judge's decision and to instruct the city attorneys not to be involved in an appeal. She asked that the city establish criteria for future TIFs and PILOTs. Applicants should be asked to demonstrate that their project is eligible; that it benefits the public at large, and that the tax incentive is necessary to their location or expansion decision. Garnet Chapin noted that TIFs can be an invaluable tool but that they need to be used properly and the process needs to be transparent. Jefferson Hodge of Chattanoogans Organized for Action said that TIFs should support the people of the city over outside corporations and that TIF agreements should not be drawn up in back rooms.
On July 16 at 11:20 AM, Chancellor Frank Brown filed a final Order. He said : "In the present case, Ms. Sharp won." The court held that the Open Meetings Law was violated and the IDB's action was null and void. The defendants have the right to appeal. I hope that our local governments will not appeal. I hope they will not try to orchestrate some sort of bandaid procedural fix by going back to the Industrial Development Board. Please check back here for updates. We have won the battle; we need to make sure we win the war.
4. What is the goal of the lawsuit?
The goal is that the TIF approvals for this project be declared null and void so that no taxpayer dollars are spent on this road and sewer line. Any public funds that have been spent would be reimbursed to the taxing districts.
The other goal is that our local governments agree to establish written criteria for reviewing ALL future requests for public-private partnerships and that they hold deliberations in the “sunshine.” This would include future TIFs as well as PILOTS (payment in lieu of taxes), which also involve property tax breaks. Chattanooga currently has many more PILOT agreements than TIF agreements. Whether or not to grant a tax incentive through a PILOT and, if so, what the terms should be, should be discussed at public meetings. Two threshold criteria should be how the project benefits the public and why the public subsidy is necessary.
5. How can you help?
I very much need financial contributions from other citizens to help pay the attorneys working on this public interest lawsuit. I have spent $49,956.01 of my retirement money in legal fees and court costs, as of May 31, 2014. ( I probably can't recover attorney's fees. Google the "American Rule." ) My unpaid bill for professional legal services in June is $7,039.50. The bill I will receive for July, which has been such a productive month, will likely exceed $10,000.
I have set up a separate bank account with the name of Community Development Consulting.This web site provides a link to PayPal. For those who would prefer to send a check, my mailing address is 129 Walnut Street, Unit 444, Chattanooga, TN 37403.
When I started following this case in the summer of 2012, filing a lawsuit was the last thing on my mind. I was involved in four tax increment districts in my professional career as a community development director. I believe TIFs can be an appropriate economic development tool. But the more I learned about this particular TIF project, the more concerns I had about the legality of the project and the integrity of the process. For several months, I requested the policy bodies to press the "pause button" in the approval process and hold a public hearing. Those requests fell on deaf ears. It was pretty clear that the train was on the track. Chattanooga has changed so much for the better since the time I grew up here. I didn't want to believe that this project is representative of the "Chattanooga Way."
We all have a stake in tax equity and good government. The lawsuit sends a message to our elected and appointed officials that we want them to be good stewards of our tax dollars. It also tells them that we expect decisions affecting our tax dollars to be discussed at public meetings.
If we prevail in this lawsuit, it will affect how the city and county approach all the other requests for financial assistance that come their way in the future.
6. Who approved this taxpayer subsidy?
In 2012, the Industrial Development Board of the City of Chattanooga, the Chattanooga City Council, and the Hamilton County Commission approved tax increment financing for the Black Creek project.
7. What approval criteria were followed?
None. This is the first local TIF request. Each of the policy bodies made their decision without having established criteria or developing criteria to guide them.
8. What criteria are appropriate for tax incentives?
This project doesn’t meet any of these criteria. If you do research on how other other cities throughout the country deal with TIF requests, you will find that it is highly unusual for a local government to make a funding decision in a vacuum, without an application form or any criteria to guide them.
In their brief deliberation on this TIF, the Chattanooga City Council referred to Knoxville's program. When you google Knox County TIF, you learn that they have an application, policies, and procedures. They have a $10,000 application fee. They have an administrative fee. They say that TIFs are "primarily for projects that provide improvements to infrastructure in blighted and underutilized areas." Their maximum term is 15 years. They send out notice to all owners in the Plan Area. They state that projects that are substantially residential will not qualify for TIF funding. They require that the applicant submit a signed affidavit certifying that the project cannot proceed without the availability of the TIF funds. The Hamilton County/Chattanooga process and the Black Creek TIF do not meet ANY of these requirements.
9. What is the significance of project eligibility?
To be eligible for TIF funding, the applicants Economic Impact Plan (EIP) must demonstrate that what the Developer proposes as economic impact meets the definition of “project” in the TIF statute in state law. Unless this threshold test is met, the TIF bonds would not be lawfully issued. Developers’ bond counsel acknowledged that a straight residential project would not meet this test.
Listed below are the details on the Black Creek project and the definition of project in state law. You don’t need to be a lawyer or a rocket scientist to wonder if the Black Creek project is what the Tennessee Legislature had in mind as “economic development” when they passed the TIF statute. Is this the kind of project that the City's Industrial Development Board should issue bonds for?
In the EIP, Developers list the following retail and commercial projects they plan to construct to demonstrate economic impact:
*The Planning Commission approved a Planned Unit Development at the base of the mountain in February of 2013. The PUD Plan included an assisted living facility (ALF), which is one of the components of developers' Economic Impact Plan. The Plan expired expired after one year since construction had not started. In April of 2014, the Planning Commission approved a new PUD Plan submitted for this area. It calls for single-family housing. No ALF. Has the Assisted Living Facility been eliminated or are they proposing to move it to the remote mountaintop with only one access? ** denotes project component to be located at the base of mountain that does not need the $9 million road and sewer. If the remaining project components were to be located on top of the mountain, it would require a change in zoning. How likely are the proposed retreat center and resort lodge? How likely are they to build a restaurant and banquet facility in addition to the one on the Golf Course? How many (or few) jobs are we talking about for the $9 million taxpayer subsidy? Note that they don’t mention an office or an office park, but rather “an area” for an office park.
Contrast the Developers’ list above with these portions of the definition in Tennessee Code Annotated § 7-53-101 that their bond counsel points to for justifying eligibility: (13) "Project" means all or any part of, or any interest in: (A) Any land and building, including office building, any facility or other improvement on the land, and all real and personal properties deemed necessary in connection therewith, whether or not now in existence, that shall be suitable for the following or by any combination of two (2) or more thereof (ii) Any commercial enterprise in selling, providing, or handling any financial service or in storing, warehousing, distributing or selling any products of agriculture, mining or industry;(C) Pollution control facilities, coal gasification facilities, and energy production facilities….Pollution control facilities include waste water collecting systems and waste water treatment works.
Is there anything in their list of proposed “commercial” enterprises that seems to fit? Where are the commercial enterprises that are financial in nature or have anything to do with “agriculture, mining, or industry?” Do you think a residential sewer line should be considered a “pollution control facility”? A wastewater treatment plant is a facility. A sewer line isn’t a waste water collecting system. A system is a set of things forming a complex whole.
10. What did the policy makers NOT discuss in their deliberations before approving the TIF?
11. Why then did the City and County approve the tax subsidy?
It can be hard to come up with the right answers if you don’t know the right questions. Perhaps the members of the County Commission, City Council and IDB Board assumed that someone else had asked the appropriate questions and had received good answers. Since this was not the case, they all became a rubber stamp for the developers.
The policy-makers may have also been seduced by being told that this was economic development, which no elected official wants to be perceived as being against. [But this wasn't economic development in the conventional sense. It's a road in a residential subdivision. The permanent "jobs" associated with it are few and low-paying.]Before the vote on the TIF, a City Councilor asked about the impact on the project if Council were to delay to study the issue more. The developer said that a delay would have an impact, that they were late already. [After passage of the resolution , it took developer four months to go back to the Industrial Development Board. It took eight months for them to close on the bond note. Could it have been that they sensed that the public was starting to ask questions? ] He added that if the TIF were not approved by the Council, it would have a "chilling" effect--it could send the message that Chattanooga "is not open for business." [Really? Business? What business?]
This TIF is essentially a political slush fund hiding under the guise of economic development.
City and county legal staff and planning staff failed to raise any of these issues at any of the public meetings. Apparently, they did not prepare written staff reports prior to the meetings or advocate for developing criteria prior to decision-making. One might have expected the City Attorney, who was also the IDB attorney, to act as gatekeeper. At a minimum he could have made a determination at the beginning of the process on whether or not the project was clearly eligible for TIF funding under the state statute and explained why he thought so. One could also have hoped that he would have been a proponent for the establishment of criteria to guide the policy-makers in their decision-making. The position of City Attorney in Chattanooga is a city government position. In the case of this TIF, the City Attorney may have received a separate check other than his regular check for being the "issuer's counsel." He, along with the private attorneys (according to State Form CT-0253), was on the list for payment from TIF funds after the bond closing in February of 2013. One wonders if there is a conflict-of-interest question because the City Attorney had a contingent financial stake in the outcome. Or, was he going to receive the same amount if the TIF was not approved and/or closed?
Members of the developer’s team lobbied policy makers prior to the public meetings in the spring of 2012 and made their case again at the public meetings. Officials were apparently persuaded by the developers’ argument that the area on top of the mountain would produce a substantial tax base in 20 years if development goes as planned. City officials probably did not realize that the city would be spending more money every year from then on to provide services than it would receive in property taxes. Studies from throughout the country show that it costs more to provide services (police, fire, road maintenance, etc.) to a new suburban residential development than the local government generally receives in property taxes. A study for Blount County in East Tennessee found that for each $1.00 in revenue the county collected, it cost $1.23 for them to provide services. Maintenance of the road up Aetna Mountain would make serving this development especially expensive.
Once the public found out about this project from the newspaper, there were no public hearings before the County Commission or City Council where citizens could raise questions or express opinions.
12. What about public records and public meetings?
“Transparency” has never been this project’s middle name. It has been difficult to get access to public records and it has been difficult to find out what is on the agenda for public meetings. By their own admission, elected officials were approached by developers well before the public meetings in May/ June of 2012.
In his order on July 14, 2014, Chancellor Frank Brown found an Open Meetings Act violation. The Industrial Development Board voted in October of 2012 to approve the project subject to an unqualified opinion by counsel or the Attorney General that the project was eligible under the TIF statute. In February of 2013, the IDB closed on the project, but no vote or discussion about accepting the opinion took place in a public meeting. I had requested all email between the IDB/City Attorney and IDB board members on this topic. I suspected that deliberations took place outside a public meeting after board members received the opinion. We were told that the emails were privileged, although they were clearly deliberating towards a decision in secret.
13. What do local citizens who oppose this TIF project have against the Black Creek subdivision and its developers?
Nothing. Black Creek is an attractive, prestigious development and an asset to Chattanooga/Hamilton County. The local developers are successful businessmen. Since York Capital in New York apparently now has the controlling interest in Black Creek, its role further reinforces the question as to why our local property tax dollars should be used to repay that out-of-state group for the road and sewer improvements up Aetna Mountain. "If it is a sound investment the market will make it. If the investment is unsound, why should taxpayers subsidize it"? Funding private enterprise is not a legitimate government expense.
14. Are opponents of this TIF against all so-called public-private partnerships?
No. However, many believe that requests for all TIFs and PILOTS should be evaluated on a case-by-case basis using appropriate criteria. These tax incentives can be valuable economic development tools when judiciously applied. This project, however, is a classic example of a square peg in a round hole. It sets a terrible precedent for Chattanooga and gives ammunition to opponents of all tax incentives.
Community concerns prepared by:
Helen Burns Sharp
June 6, 2013 (original posting date--site updated periodically)