By William C. Shelton

(The opinions and views expressed in the commentaries of The Somerville News belong solely to the authors of those commentaries and do not reflect the views or opinions of The Somerville News, its staff or publishers.)

Any investment involves some level of risk. Aldermen should carefully consider whether the Assembly Square District Improvement Financing proposal before them this evening is a gamble.

Before Adolf Hitler ordered Erwin Rommel’s assassination, the great general had made a distinction between a risk and a gamble. With a risk, if you lose you can still recover, and return to your original position with acceptable losses.

With a gamble, there are so many variables that when any one of them goes wrong, problems can cascade. Withdrawal becomes more difficult because the stakes are so high. Your efforts to rescue the situation can as easily make it worse.

District Improvement Financing (DIF) is a financing method for supporting tax- and job-generating development. The city and state draw the boundaries of a DIF district and add up all the assessed property values within it.

Tax revenues produced by subsequent increases in property values do not go into the general fund. That is, they don’t contribute to government functions citywide. Instead they are used to make payments on debt that the city incurs by issuing bonds to build infrastructure within the district.

Federal Realty Investment Trust (FRIT), a corporation with $4 billion in assets and $240 million profit last year, says that it will build 400 residential units, 287,000 sq. ft. of retail space, and a 160-200 room hotel on three blocks in Assembly Square. Mayor Curtatone wants to create a DIF and borrow $25.8 million to build a road, storm water conduit, and streets that would support these projects. The city would buy the land for the streets from FRIT, although the streets would serve only FRIT’s development.

If the district produces more money from the resulting property tax revenues than what is required to make bond payments, the surplus would go to the city’s general fund. If it doesn’t produce enough taxes to make the debt payments, the city must take money away from providing services throughout the city.

For those interested, the background and details of this deal appear in the sidebar.

There are two major risks. The first is that unfavorable market conditions could delay the development and its new tax revenues, but the city would still be obligated to pay bondholders. FRIT has agreed to share part of this risk by giving the city $15 million if it does not perform within a fairly generous deadline.

The second has to do with whether new costs to the city created by the development will eat away at the new property taxes that it generates, undermining the city’s ability to fully cover debt payments. This was a central focus of testimony at a March 31^st Board of Aldermen hearing.

The city had retained an outside financial analyst to forecast the project’s net tax revenues. Richard Paik of the W-ZHA consulting firm concluded that it would generate new costs to the city of only $37,500 dollars during its first full year of operation.

To say that this conclusion strained believability is an understatement. Even Mr. Paik acknowledged surprise at the projection.

Finance Committee Chairman Maryann Heuston stated most succinctly the concerns of many. First, the analysis says that providing city services to the development would require hiring no new city staff. But the city already needs more staff than it has to meet residents’ needs, and it doesn’t have the funds to hire them.

Second, municipal costs are rising faster than inflation. She cited employee health insurance as an example. Mr. Paik’s analysis does not allow for such nonlinear increases. Abrupt drops in state aid, such as the one in the new budget, are also a big risk.

Third, she questioned whether the city department heads who provided information to Mr. Paik would risk disapproval from the mayor. I cannot improve on Ms. Heuston’s insights.

Most of us have short memories. I’m at a point where I can hide my own Easter eggs. But to some of us, this conversation sounds familiar.

In a 2003 election campaign debate, candidate Joe Curtatone stated that, “There will be a big-box strip mall [at Assembly Square] over my dead body.” He also suggested that if the developers who elected him (http://www.thesomervillenews.com/archives/3513) were allowed to do what they wanted, taxes on the average two-family Somerville home would ultimately go down by $1,000.

Three months later, the newly elected mayor was persuading aldermen to weaken Assembly Square zoning so that those developers could build a big-box strip mall. He retained outside financial analyst Richard Bonz to project the increase in net property tax revenues that would be produced by IKEA’s and FRIT’s proposed projects. (http://www.thesomervillenews.com/archives/3499)

In March 2004 Mr. Bonz reported to the Legislative Matters Committee that the strip mall would generate no net tax revenue increases, and all the other projects, taken together, would produce only $890,000 more tax revenues than costs. Aldermen were stunned.

Mr. Curtatone hustled Mr. Bonz out of the committee room. A week later Mr. Bonz issued a revised report.  It projected net revenues for all projects at $4 million.

The following month the Board of Alderman passed the zoning changes. A year later the Massachusetts Land Court found them to be illegal. But by then, FRIT had transformed the abandoned Assembly Square Mall into Assembly Square Marketplace.

That project has increased the property’s value by about $31 million in today’s dollars, thereby increasing property tax revenues by about $650,000. Associated increases in costs to the city are unknown. Meanwhile, other buildings in the area have been razed or shuttered, lowering property tax revenues by about $200,000.

Unless he was lying, Joe Curtatone sincerely believed Richard Bonz’s revised report. Today he sincerely believes that issuing the DIF bonds will ultimately result in revenue sufficient to pay them off as well as annually contribute $3 million to the city by 2043.

I cannot offer an opinion as to whether this scheme will work. But as General Rommel observed, those who are drawn into gambles focus on the brilliant glow of potential success. They give less attention to the disastrous consequences of failure.

(Sidebar)



DIF background and details

Assembly Square cannot be developed to its full potential without an Orange Line station. In 2000, Mystic View Task Force members began advocating with the Boston Metropolitan Planning Organization (MPO) to fund the station’s construction. The MPO is the regional body that allocates federal transportation funds. City officials and hundreds of Somerville residents subsequently added great force to these efforts.

In 2006, Mystic View, Federal Realty Investment Trust (FRIT), and IKEA negotiated a settlement to a lawsuit in which FRIT and IKEA agreed to contribute $15 million to the $50 million project. Congressman Capuano obtained an earmark for $25 million. And the MPO/Commonwealth committed to pay the balance.

Congress subsequently appropriated only $1 million of the $25 million earmark. The MPO and the Massachusetts Department of Transportation were the most likely sources to make up the shortfall.

The MPO had allocated money for the Somerville Community Path and for road improvements at Crosby Corner in Concord, but the respective jurisdictions did not perform on the projects in time to draw down the funds. The MPO agreed to reallocate the $16 million in commitments to the Orange Line station.

The Commonwealth of Massachusetts is interested in the Orange Line station as a means of supporting tax- and job-generating economic development; specifically, the IKEA and FRIT projects. It will commit $19 million to make these happen, and none if they don’t

So what does this have to do with FRIT’s projects’ street and storm drain infrastructure? The Commonwealth will not make its Orange Line contribution unless someone pays for the rest of that infrastructure. FRIT and IKEA won’t pay for it, and the original financing plan has been undermined by IKEA’s refusal to say when or if it will build in Assembly Square.

That original plan involved the issuance of $50 million in Infrastructure Investment Incentive (I-cubed) bonds. Developers pay the interest on such bonds during development projects’ construction. Once the projects are occupied, the Commonwealth contributes the resulting businesses’ sales taxes and employees’ income taxes to make the bond payments. If these tax revenues are insufficient, the city is on the hook to make up the difference.

IKEA’s balking scuttled this plan. Meanwhile, the Orange Line station’s construction plans are ready to go out to bid. But the Commonwealth will not make its contribution to the station’s construction if someone does not put up $25 million for infrastructure. Hence, the DIF proposal.

There aren’t a lot of alternative sources for the funds. One is that IKEA will decide to go forward, resurrecting the I-Cubed financing. The permits that the Commonwealth has issued to IKEA will expire within the next year. In view of the recession, the Commonwealth decreed a statewide two-year extension of such permits.

But last month the Commonwealth rescinded that extension for I-Cubed projects. So IKEA must decide if it will go forward with development now, or undertake the enormous expense of obtaining new permits in the future. If it went forward now, there would be no need for the DIF.

Failing this, other potential funding sources are equally uncertain. With the delay in Green Line construction, the Commonwealth will need to meet its legal obligations to the Environmental Projection Agency and U.S. Department of Transportation by funding other mass transit projects like the Orange Line station. Or, the federal government may in the coming year offer new sustainability or transportation grants.

None of these alternatives inspires confidence. So city decision makers face a dilemma.