STARs dim

The members of the Reno City Council on March 24 were reading through a planned agreement with SK Nevada Land, an adjunct of the company that developed the Reno Aces baseball project. Nevada Land is planning to develop retail properties on the former site of the Mizpah Hotel and other tracts. Councilmember Jessica Sferrazza spotted a reference to Sales Tax Anticipated Revenue (STAR) bonds in the agreement.

She immediately sought assurance from deputy city attorney Jonathan Shipman that the language did not commit the city to granting STAR bonds to the corporation.

Sferrazza: “So by having that in this language we’re not implying in any way that the STAR bonds would be issued?”

Shipman: “Correct. Yes. Yes.”

Sferrazza: “I just want to keep that on the record.”

When her turn came, Councilmember Sharon Zadra insisted that Nevada Land executive Derek Gordon nail the point down.

Zadra: “Derek, could I also have you confirm what we just put on the record from Jonathan, that it’s with clear understanding that there’s no commitment or decision on the issuance of STAR bonds today with this action?”

Gordon: “Nevada Land requested that this language be taken out. So it was the city that asked that it be put in. So we have to live with it and we agree with the—we are agree [sic] with the terms of the agreement with that provision in there and acknowledge that at this point we still have to come before this council for a reimbursement agreement to move forward with the STAR bonds.”

Zadra: “At a future time.”

Gordon: “At a future time. Correct.”

It was the second time this year that there was a tense discussion by Reno councilmembers of STAR bonds, suggesting the appeal of the STAR bonds device is dimming. The caution exhibited toward STAR bonds is an indication of growing skepticism toward the bonds and an acknowledgement that officialdom embraced them too quickly and knew too little about how they would work, producing unforeseen consequences.

STAR bonds were written into state law by the 2005 Nevada Legislature. The new law provided for the creation of special STAR tax districts in which companies that lure tourists can be subsidized for most of their building costs with the sales taxes they generate. At the time the Nevada Legislature enacted the law, the bonds were relatively untried—only one other state, Kansas, was issuing them, and the bugs had not been worked out of them.

Once they were in existence in Nevada, local officials embraced them exuberantly, inviting large corporations like Scheels and Cabela’s to come in and compete with local businesses that did not enjoy the same subsidies. But the Nevada statute, being a new type of law, was uncooked. It provided no way to substantiate whether tourists were in fact being drawn to Nevada and no way to withdraw the subsidy if they failed. Once qualified for STAR bonds, a business could not then be denied. And license plate counts in parking lots provide little evidence that STAR bonds projects are working.

And Nevada governments started handing out STAR bonds like cookies at a moment when they could ill afford to do so—a recession was getting underway, and essential services were drained of revenue. Sales tax revenue normally is divided among cities, counties, schools, and state government.

In addition, all the retailers within a STAR bonds district can qualify on the strength of the anchor business’s eligibility, though only the anchor supposedly draws tourists.

Sferrazza said, “I supported baseball, I supported the original agreement of baseball, I think it’s been good for our community, but at what point is it too much of a subsidy? … They’ve gotten land, they’ve gotten a car rental sales tax, they’ve gotten property taxes, they’ve just gotten a ton of money from the taxpayers, and I think to add STAR bonds on top of that is just—I have issues with that.”

The original idea behind STAR bonds was that businesses would generate the subsidies they received by attracting tourists. It’s not likely that they’re doing that, making STAR bonds simply a subsidy.

Nor are STAR bonds the only problem in a recession. There is tax increment financing, or TIF, a means of spurring redevelopment by rebating about half of the property taxes back to a project over a period of years, based on the increased value of the parcel. These things can be used on the same projects. As subsidies mount up, so do the costs of new businesses. According to a study by state economic development planners, large projects initially generate higher revenues that then fall off as the novelty of the projects decline, throwing people out of work and increasing pressure on public social services.

In the case of the tax district where the Reno Aces operate, the baseball developers were promised $1 million in TIF money. Sferrazza said, “By the time we had to make our first payment, a million dollars would be generated in the district. Well, that’s really not happening.”

Sferrazza said that has meant tapping redevelopment money to pay the city’s obligation to baseball. “The problem is the majority of Redevelopment II money has gone into baseball and only 10 percent of baseball is in the Redevelopment II district. So what you have is you have, in addition to the land, the car rental sales tax, the TIF district, you have Redevelopment District paying almost a million dollars a year.”

Moreover, there has been little scrutiny of STAR bonds outside government, either. There is some very good information at www.downtownmakeover.com, but most news coverage is typified by a boosterish March 31 Reno television report that excitedly described the “highly anticipated Freight House District in downtown Reno,” its nightclubs and patio seating, and never examined the financing. (No STAR bonds have yet been issued on the Freight House district.)

One critic said, “We’re getting investigations of the governor’s divorce but not of STAR bonds.”

At the 2009 Nevada Legislature, Assemblymember Debbie Smith of Washoe County sponsored legislation to tighten requirements for STAR bonds, but it was opposed by business lobbyists and failed to pass.

Another critic, Tracy Figler of Reno, points out that the 75 percent of sales tax does not have to go back to the project developer. “The City Council has the authority to divert any amount up to 75 percent of the sales tax,” she said. Reno city staffers have recommended a formula to the City Council of 11.5 percent (of the 75 percent) for school projects in a STAR bonds district and 88.46 percent for “other projects” in the district, whatever that means. But Figler is skeptical that the city will follow through. Moveover, that kind of arrangement puts local governments in the legislature’s role of deciding how much funding programs like education get.

Sferrazza says problems grew like topsy in the wake of STAR bonds. She points to Reno’s initial baseball agreements that led to the city becoming ensnarled in the fate of the current site of the downtown municipal bus depot at Center and Fourth. The company that developed the baseball project was promised the right of first refusal on purchase of that land (held by the Regional Transportation Commission) when the depot is moved two blocks to the east. Sferrazza said the outcome was that in the recession, the baseball developers could not buy the site, so “the Redevelopment Agency was on the hook for it.”

Sferrazza, like other skeptics such as Zadra, supports STAR bonds, but believes they should be used with restraint and built-in protections for the public.

In Sferrazza’s case, her view carries greater import because she is running for Nevada lieutenant governor. If elected, she would chair the Nevada Tourism Commission, which determines eligibility of projects for STAR bonds.

Meanwhile, the experience of states like Nevada is proving a lesson to other jurisdictions. In Illinois a few days ago, state legislator Tom Holbrook withdrew his support from his own bill to create STAR bonds after an array of local officials opposed it on grounds it would drain their governments of revenue.