Best Laid Plans: Getting the Biggest Bang for Tax Bucks

I have been a member of the L.A. Community Redevelopment Agency board of commissioners for nine years. That means I’m one of seven decision-makers overseeing the work of the city’s multimillion dollar economic development agency. All of my experience from those nine years can be summarized in the answer to one question:   What is a “good deal?”

When is the investment of scarce taxpayer dollars in private development projects a good idea? I know that the answer for some is “never.” That is not – and has never — been my view, (which is why I have been derided by some as a “redevelopment thug.”  Fundamentally, the question of the investment worthiness of private economic development projects is one about good government, and how our government should interact with the private market.

I bring this up now because public subsidies to private industry were in the news again recently.  According to the New York Times on Saturday, November 12, the federal government has given billions of dollars to renewable energy projects over the past few years without asking for a lot in return. While the article made it sound as though the government wasted billions of taxpayer dollars, the article brought to mind the same question that I regularly ask myself: Was this federal program designed to catalyze new investment in renewable energy production “worthy” of precious federal dollars?

In the past nine years, I have come to believe that there are five key rules of thumb for crafting a good deal and making sure that  shrinking public resources are invested wisely. While the first two of these rules are clearly the most important and ones that I weigh most heavily, skipping a single one of these rules can result in bad things happening.

1. Know what you want for the program or the project. Do you want to create affordable housing, parks, sustainable energy? If you don’t know the answer to this question, you’ll probably support something that the public doesn’t want or need. In the case of the renewable energy program, the goals seem to be clearly articulated. High marks on this one.

2. Act like an investor, with taxpayers as your shareholders. This actually means two things, in my experience:

a. have underwriting guidelines like a bank does. This means both the basic financial things like ensuring that the proposed recipient is credit worthy and has a good plan, but also that there is real criteria around “a return on investment.” Concrete things like the creation of good jobs, more sustainable industries, affordable housing, grocery stores in food deserts, etc. In exchange for the public subsidy, government expects private industry to create certain community benefits in return.

b. drive a hard bargain. This means negotiating with the subsidy applicant like he or she is on the other side of the table, not on the same side. Recognize that the applicant may have shared goals, like the creation of renewable energy capacity, but the interest of a private company is to make money and the interest of the public investor is to create public good.

Without examining the documents, it’s hard to know whether the federal officials had good underwriting guidelines and drove a hard bargain. Having clear criteria about results is a big part of the puzzle, however.

3. Imagine the worst and write the agreement from that perspective. Just like in the private sector, deals go bad and thought needs to be put into protecting the public investment as much as possible. Meaning, the agreement needs to be enforceable and clear, with concrete remedies just in case the company does not follow through with its commitments. I am constantly surprised at the number of developers who put forward – with a straight face – proposed agreements that call for “commercially reasonable efforts” to create jobs or comply with core elements of the project proposal. This is what I always say: “commercially reasonable” or “best efforts” or “good faith effort” is the same to me as times zero, meaning worthless.

4. Make sure that everything is signed, sealed and delivered before final public approval. I am also surprised at how many times a developer will emphasize the “urgent” nature of the project and insist that the final public approval be done (meaning a vote by the board or the decision-making body) before all of the “details” have been worked out. If I don’t see a finalized agreement with all blanks filled in and a signature on the document from the private company getting the money, I vote No. I have learned from experience that human memory is short and if the final “agreement” is not signed, sealed and delivered, multiple drafts will miraculously “appear” later on with significantly different terms.

5. Be sure that the systems are in place to monitor compliance with the agreement and to evaluate results of the investment.

While it’s difficult to know whether federal officials cited in the N.Y. Times piece met the criteria in three through five, it’s important to recognize that good government is a difficult balancing act. Well-intentioned people can disagree as to whether it makes sense to invest scarce public resources in general or in a particular project. But having criteria, being committed to an open public process and ongoing evaluation, will guarantee better long-term results that are more reflective of our values as a society than what we would get if we left things up to the invisible hand of the market.