How the Rich Get Richer in Texas
Texans talk a good line on free enterprise, but they're falling all over themselves to subsidize everything from picante sauce to posh hotels.
If you were to take almost everything that is quintessentially Texan—if you were to pull your Lee bluejeans over the tops of your Tony Lama or Justin boots, if you were to dabble a tostado in a certain brand of picante sauce and wash down the fire with a cold Lone Star beer or even a Coca-Cola, if you were to drive your pickup on Michelin tires and spend the night in a motel in Muleshoe or the luxury San Luis Hotel in Galveston—you would be patronizing businesses that benefit from a runaway subsidy for the well-to-do cheerfully endorsed by many Texas political and business leaders who simultaneously talk up the virtues of free enterprise.
The jeans and the boots, the beer and the Cokes, the picante sauce, the tires, the parts for the pickup, and the hotel and motel rooms are brought to Texans by private enterprises that financed their businesses at interest rates two to five points below the market rate with the help of industrial development bonds (IDBs)—bonds that pay interest that is exempt from federal income tax. While most businesses finance new ventures and expansions the old-fashioned way—at the marketplace, where interest rates reflect the fact that lenders must pay federal tax on income their loans earn—Texas billionaires and millionaires, huge corporations like Exxon and Mobil and IBM, beer distributors, doctors, film studios, department stores, warehouses, office developers, banks, small-town newspapers, and hundreds of small manufacturers are using IDBs (also called industrial revenue bonds) to give them an edge over their competitors.
Who can blame them? Texas business people simply have joined a national stampede for IDBs: all categories of private-use, long-term, tax-exempt bonds have grown phenomenally, from $6.2 billion worth issued in 1972 to $44 billion in 1982.
The principle of tax-exempt bonds is simple. The Internal Revenue Code exempts the interest paid on state- and local-government obligations from federal income tax. A school district, for example, needs to borrow money to build schools. It issues bonds yielding interest that is exempt from federal taxes. Because the bond buyer does not pay federal income tax on interest earned on the bond, he will accept a lower rate of return than if he had to pay taxes on the income. The school district borrows money more cheaply than private business would (in recent years, from three to five percentage points off prevailing interest rates). Schools are built, and local taxpayers are spared the burden of having to pay commercial interest rates.
In the name of "economic development," industrial development bonds enable private businesses to get the same cheap credit local governments enjoy. A private borrower asks a government or quasi-governmental authority for permission to borrow from a private lender under the terms of the IDB program. If permission is granted, a bond attorney (for a fee, of course) certifies that the transaction meets state, local, and federal requirements, and the bonds are approved. No tax money is risked: if the borrower defaults, the private lender must absorb the loss.
When Congress revised the laws authorizing states to approve private-use IDBs, in 1968, it created several categories of "small issue" bonds—for private multifamily housing, student loans, sports facilities, convention facilities, airports, harbors, mass transit, sewage and solid-waste disposal, utilities, and pollution control. In addition, Congress let states authorize other small issues to private interests with a limit of $5 million per issue, raised to $10 million in 1978. Believing fully in the rights of local governments, Congress decided to let them decide what the "public purposes" of such bonds should be.
State and local governments quickly responded: Public purpose is anything we want it to be. Industrial development bonds are being used to build shopping centers, restaurants, department stores, and hotels. Many have simply been routine business loans for some major enterprises: According to Rep. Jake Pickle (D–Tex.), the national nursing-home chain Beverly Enterprises has used $165 million worth of IDBs, Wal-Mart discount stores have received over $100 million through IDBs, and $210 million in IDB financing has gone to K-Mart. The Norfolk Port and Industrial Authority of Virginia even approved an IDB application to finance a $2.5-million Mitsubishi jet for a psychiatrist.
Indeed, small-issue IDBs are not so small. As more and more states have passed legislation enabling local governments to authorize IDBs, use of the bonds has mushroomed. According to a 1983 House Ways and Means Committee study, small-issue IDBs amounted to only $1.3 billion in 1975. In 1982, they amounted to $13.7 billion.
The wild growth of IDBs has led Congress to try to pull in the reins. For the most part, the legislators are concerned about the amount of federal revenue that is forgone through IDB tax exemption. But Representative Pickle, a member of the House Ways and Means Committee who has helped lead the effort to limit the amount of IDBs states may issue, points to another concern, as well. Last fall, he warned the National Association of Bond Lawyers that since 1979 the private sector has been borrowing more federally tax-exempt money than all state, local, and county governments combined. With the private and public sectors competing in the same bond market, Pickle noted, the cost of borrowing to build schools, roads, sewers, and water supplies—the traditional "public purposes" of tax-exempt bonds—has escalated.
"Five years ago, the interest rate on tax-exempt bonds was roughly 65 percent of the interest rate on taxable bonds," Pickle told the bond lawyers. "By last year [1982] it had risen to approximately 85 percent of the rate on taxables. With each new private purpose issue, the value of traditional tax-exempt bonds is further eroded."
Who pays for the increased costs of government while some businesses get low-cost loans? The taxpayers, of course, who end up paying for the higher interest rates for traditional public projects. And this includes those business people who, out of ignorance or principle or lack of political influence, don't borrow through government.
Most insidious, however, is that IDBs distort the marketplace in two ways. On the one hand, businesses ordained by the government to receive below-market-rate IDB financing have an advantage over their not-so-lucky competitors. On the other hand, investment may be directed to activities that without IDB financing would not be profitable. But why should government try to usurp market forces? The economic price of either sort of distortion is hard to calculate—but is nonetheless real.
Yet for mayors, city council members, urban planners, and other local politicians and bureaucrats, industrial development bonds are an exquisite mechanism to make them look like effective servants.
"By 'sprinkling holy water' on an IDB project," says Representative Pickle, "the city council or county government can take credit for the construction of a new plant facility, shopping center, or hotel/motel. Economic feasibility studies or cost analysis are rarely required."
So while the system demands that enthusiasm for IDBs be couched in terms of "economic development," the bonds are in reality a perfect trysting place for local authorities and business people.
The IDB bonanza has hit virtually every state, but Texan bond fever has a certain ironic twist: while the Lone Star State's popular image is one of rugged free enterprise, Texas is outdoing nearly every other state in subsidizing businesses through IDB financing. It is second only to California in issuing private-use IDBs, having authorized $4.4 billion worth of the tax-free bonds during the last four and a half years.
Texas got off to a late start—it was the 47th state to approve IDBs for private businesses—because the state constitution forbids cities to lend their credit or make any grant of money or thing of value to individuals or corporations. In 1971, three years after Congress had approved small-issue, private-use IDBs, a Texas attorney-general's opinion said that the state constitution prohibits such IDBs for Texas.
Texas bond attorneys and businesses watched the rest of the nation indulge in a bond spree and tried twice to get the voters to pass a constitutional amendment permitting the bonds. After the voters turned the amendments down in two separate elections, a bond attorney at the gigantic, politically well connected Houston law firm of Vinson and Elkins—whose partners now include Republican presidential hopeful Sen. Howard Baker—saw an opening: Instead of cities sprinkling holy water on private developments, why not create nonprofit "economic development corporations" to do it? Each such corporation would be controlled by a governmental entity—a city council or county commissioners court, for example. Council members, commissioners, and their appointed representatives could sit on the development corporation, and the corporation's activities would be subject to the approval of the parent government. The governmental bodies, in turn, would be insulated from the constitutional question. The result: As official state documents reveal, Texas bond attorneys have raked in $25 million in bond fees since passage of the Development Corporation Act of 1979, roughly half of those fees having gone to a single law firm: Vinson and Elkins.
The act created the Texas Economic Development Commission to preside over the various development corporations. The commission promptly praised the act as the "most significant legislation affecting economic development in Texas passed in the last 20 years." There is nothing new about private-use IDBs, the commission noted—they are being used widely, and in every one of Texas's neighboring states. "The advantages are many," enthused the commission, whose job is to oversee use of IDBs throughout the state. "Rural communities have access to long-term financing for large projects enabling them to compete with larger communities as well as towns in other states. Bonds can also be effectively used in larger cities to provide incentive for locations in certain neighborhoods with high unemployment rates."
In effect, the 1979 act said that private employment is a public purpose. It held that "the present and prospective right to gainful employment and general welfare of the people of this state require as a public purpose the promotion and development of new and expanded industrial and manufacturing enterprises." It also declared that financing such enterprises is in the general interest and that Texas was becoming unable to provide "additional and sufficiently sizable first mortgage loans"—even though in 1978 the state had experienced 10 years of booming prosperity that was the envy of the rest of the country.
Texas quickly made up for its late start in the IDB spree: by 1983, it was surpassed only by Pennsylvania and New Jersey in passing small-issue, private-use bonds that fit the vague category of creating jobs. In May 1983, the Congressional Budget Office reported: "Among the states, the most dramatic growth in the use of small issues occurred in Texas. In 1982, its third full year of operation, the Texas Industrial Authority reported sales of small issue IDBs in excess of $1.2 billion, a 94 percent increase over 1981 (and a 470 percent increase over 1980)."
To survey the Texan IDB scene, one might begin by sending $10 to the Texas Economic Development Commission—which I recently did—for two computer printouts documenting the state's IDB issues: the amount of each issue, its purpose, the borrower, the issuer, the bond attorney (and fee), the authorizing entity, etc. As you inspect these thick, oversize documents, with their long lists of names and dollar amounts, a number of questions might start to arise.
For instance, it would be difficult to determine, from these documents alone, just how effective has been the use of IDBs to create new jobs. In El Paso, for example, jeans and boots manufacturers got bonds ostensibly to create hundreds of jobs—though how many went to the 16,000 Mexicans who daily cross the border from Juarez is hard to tell.
I recently posed that question to Dwight Culver, director of finance for the El Paso Industrial Development Corporation, who said it's probably a small minority of the jobs that go to the Mexicans. El Paso has approved IDBs for 25 projects totaling $170 million, employing 3,600 people, Culver told me. But, he said, informal surveys by the corporation reveal a wide range of discrepancies between the job estimates on the bond applications and the jobs that eventually materialize. One plant might estimate 100 new jobs and actually create 65; others create more than estimated, Culver said, and some have gone broke. A Justin boot plant, for instance, had to shut down when the urban cowboy craze faded away, while a plastic injection molding company has come back for seconds and thirds on IDBs. "Like all business ventures," Culver said, "some don't make it and others go beyond all expectations."
Not only do the "development corporations" appear to have no special ability to pick winners and losers, but they also seem to have curious definitions of the terms they use to justify private-use IDBs. In El Paso, for instance, with its cheap labor and high unemployment, the city's industrial development corporation emphasizes "manufacturing" among IDB uses. Nevertheless, one of the largest bank-holding companies in Texas, Houston-based Texas Commerce Bancshares, got in on El Paso's bond action earlier this year, with $1.7 million in IDB financing for an expanded building and drive-in facilities. The project created four new jobs.
A similar situation turned up in Austin. While one of Austin's two development corporations has helped out "needy" manufacturers like IBM and Coca-Cola—as well as, among others, makers of bovine serum and hamburger buns—the city's other industrial development corporation hasn't been industrial at all. During the last four years it issued $82 million worth of IDBs for 19 projects: four hotels, a furniture showroom, a parking garage, printing equipment, and 12 office and retail buildings. And the industrial cities of Beaumont and Port Arthur issued bonds for such industrial endeavors as shopping centers, hotels, office buildings, and banks.
With so many authorities empowered to approve IDB issues—more than 200 throughout the entire state—developers can shop the various development corporations for a deal. In Houston, for example, the Harris County commissioners court in 1982 turned down a request for $14 million of IDBs to build a Sheraton hotel at Houston's Hobby Airport after two hotel owners at Hobby protested. They pointed out to the county commissioners that their hotels were running half empty because of the downturn of the oil economy. They didn't think it was fair for government to give a potential competitor a low-interest loan while they borrowed in the marketplace.
No problem—a year later the hotel developer, G. Phillip Albright, went to the city's industrial development commission and got $20 million worth of IDBs for the project. (Because the hotel was to serve the airport, it was exempted from Congress's $10-million limit on small-issue IDBs.) Albright told a Houston Post reporter he needed the tax-free bonds because he couldn't get conventional financing—bankers didn't want to invest in another hotel when the city had an oversupply of hotel rooms.
So easily do IDBs flow—at least to the right parties—that on the same day he voted for bonds for Albright's hotel, Houston city council member Ben Reyes won approval for $2 million worth of bonds from the Harris County commissioners court to enable a company he heads to buy a lumberyard. There was little public reaction.
A fundamental purpose of IDBs is to enable businesses to finance projects that otherwise wouldn't be done. Yet some of Texas's richest business people get IDB financing. In the Dallas area, the world's biggest real estate developer, Trammell Crow, quickly saw the value of the tax-exempt bonds. In 1980 he got $3.5 million to build a warehouse and distribution center in suburban Carrollton. A year later, he used $9.4 million worth of IDBs to build a film and television studio in the posh Las Colinas development of Irving. Seventy-year-old Crow, a folksy, self-made multimillionaire who praised the spirit of free enterprise when the Republican national convention came to town this year, does more than a billion dollars' worth of real estate deals a year—but still goes to Texas development commissions, hand extended, for cheap credit.
Crow's company got the bonds authorized not through any elected government but through the Trinity River Authority—which, under the terms of Texas's 1979 Development Corporation Act, qualifies as an "other political subdivision." The TRA, a state agency whose directors are appointed by the governor, was first created in 1955 to fulfill the long-cherished north Texas dream of "Port Worth," a scheme to make the Trinity River navigable. After voters turned down revenue bonds for the project in the '70s, the TRA turned to other projects in its huge jurisdiction, which encompasses Dallas, Forth Worth, and a swath of land around the river down to the Gulf Coast. Since 1980, when the first IDBs were permitted in Texas, the TRA has approved approximately a quarter-billion dollars' worth.
In the city of Dallas, multimillionaire Ray Hunt, son of the late right-wing billionaire oilman H.L. Hunt, persuaded the Dallas city council to declare a high-rent block in downtown Dallas "blighted" so he could use $1.5 million worth of IDBs to build an underground parking garage with a park on top. Dallas has issued only $42 million worth of IDBs, in part because unlike those issued by the TRA, IDBs approved by the South Dallas Industrial Development Corporation are subject to city-council debate. While developer-mayor A. Starke Taylor, Jr., talks to the press about building a "partnership" of government and business, South Dallas councilman Max Goldblatt, a septuagenarian hardware-store owner, calls the bonds "socialism for the rich."
Meanwhile, the city planning staff continues to work on plans to reverse Dallas's tendency towards sprawl by encouraging denser development, especially downtown. The keystone of this plan is a ritzy $110-million downtown project, Town Lake, to be built with outright federal grants (Urban Development Action Grants, via the Department of Housing and Urban Development), "tax-increment financing" (a twist to be described later), and—more IDBs.
All of these plans may fall apart in 1986, when small-issue IDBs are scheduled to expire under the Tax Equity and Fiscal Responsibility Act of 1982. Two years, of course, gives bond attorneys, mayors, governors, and others with vested interests in IDBs plenty of time to rally their forces to preserve the bonds. Meanwhile, governors are going to have to sort out a cap on IDBs, placed by Congress this summer, limiting states' annual IDBs (small-issue and other) to $150 per capita—or, for Texas, about $2.3 billion worth for 1985. And that limit will drop to $100 per person in 1987. (Certain types of projects—including housing and mass transit—are exempt from the limit, as are sparsely populated states, which may issue up to $200 million per year in IDBs.)
Congress's annual limit on total IDB issues merely exacerbates a fundamental problem with the bonds: because politicians and bureaucrats decide who gets cheap credit and why, the process by necessity is a political one—not a business one. And with a limit on the bonds, the politicization of IDB approval is guaranteed to get even messier. In Texas, the competition among businesses will be especially keen, because Gulf Coast industries have been big users of IDBs for pollution-control equipment, a category exempt from Congress's $10-million limit on individual private-use issues. Pollution-control equipment runs in the tens of millions of dollars yet provides few new jobs. And you can bet the oil companies, which exercise formidable political clout in the Lone Star State, will scramble for their share.
There is one further complication. As in 1971, the use of IDBs in Texas may again be ruled unconstitutional. Earlier this year, the Texas Economic Development Commission, the state agency overseeing IDBs, asked state attorney-general Jim Mattox for an opinion on the legality of some rule changes it had made. Mattox responded with a letter questioning the state constitutionality of the whole system. The commission withdrew its request, so no opinion has been made public—but the constitutional issue sits like a land mine waiting to be tripped.
Industrial development bonds are not new, supporters are fond of pointing out. The first were issued in the 1930s in Mississippi to support a textile mill. The rationale: to provide jobs in a state that had raw materials—cotton—but lacked the means to make something of it.
Government and business in America, it's worth remembering, have always been intertwined. General-obligation bonds were used to build the Erie Canal. The federal government gave the railroads millions of dollars' worth of land as a financial incentive to lay track. The railroads made the settlement of the West possible, a definite "public purpose"—unless, of course, you were an Indian.
The "public purpose" of IDBs is jobs. What makes the bonds so attractive to local governments is that they appear to cost nothing. Local governments can, in Representative Pickle's phrase, sprinkle holy water on a transaction between a private borrower and a private lender. No tax money changes hands.
The "new" jobs, however, may be a misnomer. What IDBs have done is simply move jobs around the country. If a plant moves from Ohio to Texas, the jobs lost in Ohio are not counted when the Texas Economic Development Commission figures the benefits for Texas.
Further, most of the companies that qualify for the bonds are reviewed for financial solvency, at least briefly by the governments authorizing the bonds, and in depth by the lending institutions that are risking their money. In many cases, IDBs are used by businesses that were going to expand anyway. Does anybody doubt that Coca-Cola or Sheraton or Trammell Crow can find money to do a deal? Nobody wants to lend to a loser. So why should a winner get low-interest loans?
For a while, Dallas even considered a "but for" clause by which a business would have to prove that but for low-interest IDB financing, the deal could not make a profit. That would only push government further into the peculiar position of judging the soundness of individual businesses—an activity better left to the marketplace, where investors and other economic players make those judgments more reliably.
Most of the private-issue IDBs in Texas have gone to manufacturing concerns, making everything from oilfield equipment to hamburger buns for fast food chains. But some states and cities wondered why manufacturing should be the sole public purpose for these bonds. Florida, for example, is a tourist state, not an industrial state. It wanted hotels. A job as a busboy or room clerk or maid is as important to some states and cities as a job manufacturing widgets.
That's how the island city of Galveston, Texas, came to declare itself "blighted" in 1981. From 1970 to 1980, while most of Texas was booming, Galveston actually lost population. A tenth of the population lived in government-subsidized housing. Unemployment was high. Moreover, a substantial portion of the city's real estate is occupied by state entities, such as the University of Texas medical complex, that pay no property tax. Much of the housing is old. The middle-class people who work on the island live on the mainland, where housing is less expensive. The work force that lives on the island is untrained.
By declaring much of the city blighted, Galveston could authorize IDBs for commercial development, such as hotels and retail outlets. The Development Corporation Act of 1979 said that in order to qualify for commercial-development IDBs, blighted areas should have "a substantial number of substandard, slum, deteriorated, or deteriorating structures" and a "high relative rate of unemployment." And it left it up to the cities to define those standards.
While Galveston may have fit a commonsense definition of blighted, other Texan cities have actually declared expensive sections of downtown real estate blighted so that developers might get IDBs. In February of this year, the Dallas Times Herald reported that "more than any other city, Austin has used the blighted area law for individual projects, calling 13 hearings since February 1982 to designate 20 blighted areas, most of them for single buildings or lots."
Acres of bald prairie on the edges of cities and towns, where neither a dilapidated building nor an unemployed person could be found, have also been designated as blighted. And when the Texas Economic Development Commission began tightening the definition of blight last winter, several Texas cities declared themselves blighted to beat the deadline of the tougher regulations. One small-town merchant complained to the Herald about facing competition from a million-dollar Wal-Mart built with IDB financing: "There are some things that are legal that ain't right."
In Galveston, IDBs are regarded as the savior of the city. Thanks to IDBs—and the growth of nearby Houston—Galveston has a building boom of hotels. A decaying but beautiful nineteenth-century street, the Strand, has been renovated and is becoming a tourist attraction. The Galveston Development Corporation, in close cooperation with the Chamber of Commerce, has approved more than $128 million worth of IDBs for motels, hotels, office buildings, a Wal-Mart, and shipyards. Roughly $29 million worth of those bonds has gone to one of the world's richest men, Houston oilman and developer George Mitchell. Mitchell has bought several nineteenth-century buildings on the Strand and is restoring them with the help of IDBs. His luxury hotel on the seawall, the San Luis, opened last spring—built with the help of $10 million in IDB financing, the maximum allowed for this type of project.
The unskilled jobs created by hotels seem perfectly suited for Galveston's work force, Mayor Jan Coggeshall recently told me. And she worried that if under the new cap IDBs are apportioned by population, Galveston, a city of 60,000, would get very little. If the bonds are genuinely designed to help economically distressed parts of the country, Galveston qualifies, Coggeshall insisted.
But would IDB-financed investments have happened anyway? Mitchell's representatives have repeatedly said that their Galveston investments, especially the restoration of historic buildings on the Strand, couldn't have happened without the low-interest rates provided by the bonds. Yet a building boom of beach houses continues on West Beach—an area adjacent to Galveston—a boom that seems inevitable given the burgeoning growth of nearby Houston. But Galveston's authority to collect taxes is restricted by a Proposition 13-style limitation, and the city is desperate for any improvements to the tax base. So the urge is strong to give developers what they want.
Mayor Coggeshall has not gone along with all of the demands of the developers and has voted against some of their bids for favors. The real problem with IDBs, she told me, is equity: How do you make economic decisions that affect everybody in a fair way? The answer to that question—that governments can't—becomes clearer the deeper one digs into the IDB story.
The much larger city of Dallas has actually approved of far fewer bonds than tiny Galveston, $42 million worth compared to Galveston's $128 million. Only a few developers have been active in Galveston. In Dallas developers are, as they say, thicker than fleas on a hairy dog. While Houston has made its money in energy, Dallas makes its money in banking, insurance, and real estate—prime candidates for a commercial IDB scramble.
Industrial development bonds would seem tailor-made for Dallas, a city that prides itself on consensus politics and flourishing development. Yet Dallas has been slower than others to join the IDB craze.
Indeed, ever since Texas's 1979 legislation permitted private-use IDBs in the state, both Dallas newspapers had seemed to feel there was something wrong with IDB projects and warned city council about overusing them. At the same time, a sense of guilt—and perhaps a sense of opportunity—about the underdevelopment of predominantly black and brown Dallas kept growing among the city's civic leaders.
Unlike Houston, which can annex huge amounts of territory, Dallas is virtually landlocked. If it is to grow economically it must compete with cheaper land in the "mid-cities" area, between Dallas and Fort Worth. South Dallas looked like the last frontier.
So perhaps sensing that all hell could break out if everybody tried to get in on the act, Dallas restricted the use of IDBs to the southern half of the city, a huge area that the city council declared blighted in 1981, freeing it for the commercial use of IDBs. But this hard-line attitude is worth more on paper than in practice.
Not all of South Dallas is really blighted, though the southern half of town is comparatively poorer than the expanding North Dallas, a largely white, middle- and upper-middle-class area. Most of the IDBs gravitated to Southwest Dallas. Technically in the region described as South Dallas, Southwest Dallas is actually a successful, thriving, new suburban area that is gradually spreading west, over wheatfields and cow pastures, towards Fort Worth. It has a small but prospering municipal airport, called Redbird, and it was in that area that developers, following market forces, wanted to invest.
Southwest Dallas was so attractive a place for investment that investment banker Randy Evans proposed building a strip shopping center across from Redbird Mall. In February 1983 Evans told the Dallas Times Herald that he needed $5.5 million in low-interest IDB financing in order to build the center. The reason? Land prices were too high. Cheaper credit would make or break the deal. The tax-exempt bonds had reached a new rationale: instead of being an incentive for investment in blighted areas, IDBs were being viewed as leverage for a deal in an expensive area. After several store owners in the Redbird area complained about the unfairness of giving cheap credit to the center's developers, the city council killed the project despite the city staff's favorable recommendation.
One of Dallas's toughest battles over IDBs—and one that ultimately revealed the city's yes-and-no stance on the bonds—revolved around Wynnewood Bank of Oak Cliff, a modest but relatively prosperous section of South Dallas across from the Trinity River. Wynnewood had planned a new facility for some time, and after it had obtained interim financing for construction—and after construction actually began—its application for $2.89 million of IDBs was approved by the city planning staff and the Dallas Industrial Corporation. The new facility promised four new jobs.
The official opening of the new bank was in April 1984, yet it was May before the IDB application made it to the council for final approval. Under questioning by outspoken maverick city councilman Max Goldblatt, the bankers admitted that they were currently open for business, had hired no new employees, and had not sought permanent financing because they were counting on the bonds at a lower rate of interest.
Somehow the idea of providing low-interest financing to a bank for a building that was already completed did not appeal to a majority of the council. The council postponed the vote and asked the city staff to provide background on those projects already approved by the development corporation and on the standards used for approval.
Meanwhile, in Washington, the House Ways and Means Committee was hammering out the compromise that put a cap on the amount of IDBs each state can issue. In Austin, the state capital, the Texas Economic Development Commission was drawing up new rules that defined blighted areas as those where 25 percent of the buildings are substandard and the unemployment rate is one and a half times the state average. Bond attorneys, of course, were urging the commission to leave things the way they were.
The Dallas city council decided to get firm with IDBs: the bonds would be considered only for areas eligible for federal community development grants—which is all of the commercially zoned real estate in South Dallas except the Redbird area—and the area defined by the federal Department of Housing and Urban Development in 1983 as eligible for Urban Development Action Grants. That adds up to 243 "depressed" acres that include Ray Hunt's multimillion-dollar Reunion Center complex, the new Dallas city hall, the Farmer's Market (which did $100 million worth of business in 1983), as well as the poor communities around Fair Park and the open flood plain of the Trinity River. The council also voted that it would not "grandfather" $32 million worth of IDBs already in the pipeline, but would look at these projects one at a time and vote on their individual merits under the new guidelines.
When Wynnewood Bank again came up for consideration earlier this year, Councilman Goldblatt pointed out that the owner of Wynnewood Bank, Tom Ewers, had already been involved in several IDB deals. In order to build the new bank, Ewers had sold his old building to a group of black investors who used $1.25 million in IDB financing for the purchase. And just to make the deal easier, one of Ewers's other banks, the Bank of Arlington, bought the bonds. Ewers had also been a partner in a deal that built a commercial mail center with $1.2 million of IDBs. Goldblatt also pointed out that Wynnewood was hardly in a blighted area: the area's unemployment rate was 3 percent, the lowest in the city.
Two weeks later, on June 20, the city council approved the Wynnewood bonds by a 6–5 vote and eventually passed all the bond issues in the pipeline, including a $4-million office-warehouse project for the firm of Watson and Taylor—Taylor in this case being Mayor Starke Taylor's son. (The firm has since withdrawn the project.) So much for the city's new firmness on IDBs.
Dallas's downtown parking saga provides a further illustration of how business and government can pervert the use of IDBs. In February 1983, Ray Hunt's Woodbine Development Corporation had been able to get a single block of downtown Dallas—where real estate sells for $100 a square foot—declared blighted so that Hunt could get $1.5 million worth of IDBs to build a parking garage next to a historic building he was refurbishing.
The city staff, too, had grand plans. It was busy developing a report on a parking "crisis" in downtown Dallas and in November 1983 urged the city to ring the central business district with parking garages. Even the editorial writers at the Dallas Morning News, who had earlier warned about overuse of IDBs, endorsed the idea as essential to downtown growth.
Picking up the scent of cheap financing, the owners of the multimillion-dollar Plaza of the Americas said they wanted $14 million worth of IDBs to build a downtown parking garage, promising to try to build apartments on top of the garage. They may well have read in the June 13, 1983, Dallas Times Herald about a 72-page city planning document. The Herald reported that city planners wanted to reshape Dallas from a sprawling, thinly settled, automobile-dependent city into a more densely populated city with downtown housing. This planning was to be achieved by more stringently regulated development and "partnerships" between government and business. City Manager Charles Anderson, citing parking as Dallas's number-one problem, endorsed Plaza of America's request.
City planners were so eager to get into the parking business that in December 1982 they had persuaded city council to commit $16.5 million for a city parking garage in the new downtown Arts District surrounding the Dallas Museum of Art. The garage would be built by a private developer and operated by the city. The costs would be paid from leasing fees, to average $125 a month.
Private parking operators downtown began to see what the Dallas "partnership" of business and government was all about: the city was about to go into the parking business, and if it couldn't get enough customers at $125 a month (a fee that was generally considered too high by market standards), the city could use tax money to make up the deficit. It was also willing to give an advantage to the operators' competitors with IDB financing.
In a December 1983 statement to the city council, George Roberts, an officer of the private firm Classified Parking, pointed out that private industry had delayed building parking garages downtown because of the threat of government competition. He also pointed out that the likely fee in the Arts District would be $25 a month for parking space rather than $125, and that he and the other private operators doubted the city manager's claim of a severe parking shortage. The council is now studying the matter.
The biggest hope of Dallas city planners, developers, and like-minded politicians is Town Lake, a project to dam the Trinity River and create a shallow (8- to 10-feet-deep), three-mile-long lake south of downtown Dallas. Town Lake has always been envisioned by proponents as a developer's paradise, with sailboats, hotels, high-rise apartments and condominiums, and commercial buildings springing up like mushrooms after a rain. It has been envisioned by some environmentalists as a cesspool that would need constant dredging.
In 1978 voters rejected a revenue-bond package to provide financing for the $110-million project. In 1983 a South Dallas economic task force revived the Town Lake project once again. Consultants have called for a "tax increment" financing scheme, in which tax revenues from the increased property value of the project are funneled to a development commission, which may turn around and subsidize the project. The eyes of developers are already glowing.
Developer Don Bodin of Pawnee Corporation—who had already launched a Sheraton hotel in Galveston with $10 million in IDB financing—was approved for $10 million more of IDBs by the Dallas city council to start a $150-million hotel-office complex on property adjacent to the Town Lake site. But since companies are limited in the amount of IDBs they can apply for, Bodin could probably get $30–$40 million worth of bonds only by dividing the project up and bringing in other partners. Bodin has withdrawn his IDB application and has found conventional financing—a clue to the necessity of IDBs in the first place.
Dallas planners have also won an outright federal subsidy for Town Lake. In 1983, the land around the proposed lake was declared a "pocket of poverty," qualifying it for Urban Development Action Grants, although the undeveloped land lacks either the unemployed or the buildings traditionally identified with such aid. And under congressional legislation passed this summer, developers will have to choose between UDAG or IDB financing.
Despite the city's free-enterprise boosterism, it appears that few people in Dallas question the propriety of involving government in so many business projects. The Dallas Times Herald, which over the years wrote several editorials warning about the overuse of IDBs, endorses their use for Town Lake if environmental concerns can be cleared up. And though the Dallas Morning News, formerly one of the most staunchly conservative papers in the nation, has sounded warnings, the editors appear unable to make up their minds about principles.
The old Dallas used to talk about free markets and free enterprise while limiting the role of government. The operative word of the new Dallas is partnership, but the unanswered political question is: If there is only so much of the business-government partnership to go around, who decides how to cut up the pie, and how is that pie going to be distributed?
Bond attorney Ray Hutchison's law firm has done the legal work on about a half-billion dollars' worth of IDBs throughout Texas since the bonds were first issued in 1980—collecting total fees of about $3.2 million—including a good part of the $42 million worth issued by Dallas. Hutchison is former state Republican chairman of the most Republican city in Texas. His wife, Kay Bailey Hutchison, chairs the advisory board of…the Dallas Industrial Development Corporation.
When I talked to him recently, Hutchison was refreshingly candid in admitting that IDBs make him uncomfortable. Though he lobbied hard throughout 1983 to keep Dallas's airports and mass-transit facilities eligible for IDBs (he is the attorney for the Dallas Area Rapid Transit), he is suspicious of using the bonds for pollution control, pointing out that companies are required by federal law to install the devices anyway. If the bonds are to be used, he says, they should be used to develop genuinely blighted areas.
When I asked Dallas city planner Ray Kuchling about the problems of sorting out the proper use of IDBs, he conceded that Dallas has had such problems, but he contends that new city standards are the most stringent in Texas. And he echoes the sentiments of the 1979 legislation that if everybody else uses the bonds, Dallas has to use them, too. "I can't use a squirt gun when everyone else has a .38," Kuchling told me.
By everyone else, Kuchling means not only other states, but suburban towns in the area competing with Dallas for new business. In Dallas, to get IDB approval for a commercial use, an applicant now has to pass through tougher restrictions, including a city-council meeting—and some council members are beginning to doubt whether the bonds are in the spirit of free enterprise.
Compared to the city of Dallas, getting IDBs from the nearby Trinity River Authority is a piece of cake. While Dallas has approved a total of $42 million worth, the TRA has approved $250 million of IDBs, many of them in Dallas and Fort Worth, with scarcely a hint of controversy. Most of the projects are manufacturing concerns that can be scattered anywhere in the authority's huge jurisdiction. When the 1979 Texas legislation to permit IDBs was passed, some legislators tried to restrict bond-approval authority to political subdivisions, excluding quasi-governmental appointed boards such as river authorities. They failed.
As a result, the Trinity River Authority has approved more bonds than any other agency in Texas except Houston's Port Development Corporation (which can approve huge issues for businesses concerned with harbors, one of the explicitly favored public purposes in the federal legislation). The TRA had originally intended to use IDBs for development in rural areas of the Trinity watershed, the TRA's public affairs chief, John Jadrosich, recently told me. But, he said, most of the projects have gone into urban areas of North Dallas and Forth Worth. This is scarcely a surprise, since, generally, only projects that would succeed without IDBs are eligible in the first place—projects that will succeed are going to be developed where the market is strongest, not where it is weakest.
It was the TRA, for instance, that helped Trammell Crow build his Las Colinas film and TV studio—admittedly a risky venture, but where's the free enterprise that Crow and an army of other Texan "free market" boosters pride so much? Thanks to the TRA's generosity with IDB issues, dozens of small manufacturing companies that probably would have located in the Dallas–Fort Worth area anyway have happily taken advantage of IDBs.
While most development corporations will let any qualified bond attorney agreeable to both parties do the legal work to certify its deals, the TRA has just one firm—McCall, Parkhurst & Horton of Dallas. The firm's name is written on the contracts and questionnaires that prospective clients first read. So is the name of the company that issues the bonds, First Southwest Company. On $257 million worth of IDBs, state records show TRA's exclusive bond attorneys were paid fees of $1,888,125. First Southwest made $1,053,864 in issuer's fees. Politicians, planners, and developers aren't the only ones with a large stake in the IDB system.
When I recently inquired about the TRA's exclusive use of a single bond firm, an agent for the TRA told me that it would be too complicated to have to deal with half a dozen firms. And when I spoke to Charles Kobdish, a lawyer for McCall, Parkhurst & Horton, he said that the company is proud of having built the trust of the TRA for so many years that they have the exclusive relationship.
Someone was sure to call a halt to the IDB spree sometime, and House Ways and Means Chairman Daniel Rostenkowski (D–Ill.), in an alliance with President Reagan's Treasury Department, began trying to reform use of the bonds. In 1983 Rostenkowski got aggressive and began talking about a limit on IDBs. Governors and mayors began screaming. Bond lawyers began lobbying. Rep. Pickle went to their national convention and tried to make the lawyers see that they were killing the goose that laid the golden egg: if everybody had IDBs, they were no special advantage anywhere. They were driving up the cost of borrowing for traditional city needs. And since local government seemed to have no sense of self-control, Congress would have to impose it. A limit of $150 per capita was still pretty generous. It gave Texas about $2.3 billion worth of bonds a year to play with.
Congress's Dallas delegation fought the cap proposal tooth and nail. Democrat Martin Frost of South Dallas, a member of the House Ways and Means Committee, brought Rostenkowski to a standstill. Frost was particularly concerned about limitation on IDBs issued by Dallas Area Rapid Transit (DART), Dallas's new transit authority. Frost wanted mass transit, a pet project of Dallas planners and politicians, excluded from the limitation—and he got his way.
Texas politicians and business leaders have probably generated more hot air about free enterprise, individual initiative, and keeping government out of business than any group in the country. The IDB binge has sorely tested their free-market rhetoric.
Common sense has been stretched to the breaking point in defining "urban blight." Banks and warehouses get millions of dollars of IDBs to create a handful of jobs. Some of the state's richest business people and some of the nation's wealthiest corporations have used the bonds again and again, although they have access to conventional financing. The bonds discriminate against businesses that borrow at the marketplace, and widespread use of IDBs has driven up the cost of local government borrowing, with taxpayers making up the difference.
But what is most disturbing is that in their pursuit of cheap credit, Texans are ignoring the noxious premise that underlies IDBs: the "partnership" of business and government. Creating jobs isn't a favor to a municipality. Creating jobs is what business does in order to make a profit. A "partnership" of business and government is an Orwellian way of saying government in the service of the few and the powerful.
Michael Berryhill is a free-lance writer who lives in Houston. His coverage of Houston's mass-transit controversy for Houston City magazine (April 1983) won the Washington Monthly Journalism Award. This article is a project of the Reason Foundation Investigative Journalism Fund.