STAR bonds are under fire in Nevada

Last year while she was running for reelection, Assemblymember Debbie Smith was talking to a Sparks Tribune reporter about the planned Sparks shopping mall Legends.

“I hope that the whole project is just really, really successful. We’ve had a few issues, and I’ve worked with [Sparks city councilmembers] in the process,” she said. “I can’t wait to take my granddaughter to that dinosaur restaurant.”

It may be a while before she can do that, because—also last year—the smaller tenants in the project announced that, because of the faltering economy, they were postponing their participation in the project until May 2009. The economy has not gotten any better since then. No one now knows if Legends will ever evolve into the kind of project first envisioned.

A Scheels store in the Legends project was launched with a relatively untried corporate tax break that was in existence in only two other states. It’s called Sales Tax Anticipated Revenue (STAR) bonds. Under the terms of the bill sponsored in 2005 by Washoe Sen. Maurice Washington, public funds are used to build a commercial project if developers can make a case that half the customers will be tourists. Seventy-five percent of sales taxes generated by the project go to paying off the bonds. Both Legends and the Verdi Cabela’s were built on STAR bonds.

Misgivings about the bonds grew when the economic meltdown showed they crumbled in hard times.

Washington sponsored the bill creating the bonds, but Democrats supported it, too. Some critics call it a typical example of the corporate-oriented party the Democrats have become—a Republican-sponsored regressive tax used to pay developers’ construction costs, enabled by Democrats.

“Business boosterism and jobs!” wrote columnist Andrew Barbano of the Democrats.

Barbano, who considers STAR bonds economic development run amuck, has been a scorching critic of them. When Cabela’s claimed to Reno officials that its Verdi store would boost tourist traffic by 3 million people a year, Barbano promptly pointed out that Washoe County’s entire tourism infrastructure attracted 5.1 million tourists in both 2006 and 2007. Cabela’s was promising a 60 percent tourist increase for its one store.

“Cabela’s proposal was preposterous, the equivalent of adding a new Hot August Nights every month and then some,” Barbano said last week.

Yet the Nevada Tourism Commission—the body empowered to certify developers’ claims for their tourist allure—approved the bonds.

In fact, new Reno Sparks Convention and Visitors Authority figures show that the tourist traffic is in sharp decline and RSCVA predicts a 19.2 percent decline in room tax collections in 2009. Cabela’s opened on Nov. 16, 2007, Scheels on Sept. 27, 2008.

Barbano says Cabela’s “can always blame Dubya or Obama or their horoscopes.”

In fact, some Sparks officials blame labor unions because of the cost of prevailing wages on the project. Barbano has little patience with that claim, pointing to studies that show when union wages go up, it has a positive effect on all wages, union or otherwise.

Scheels made a less ambitious—but still dubious—claim for its tourist traffic to qualify for the bonds. Its owners said they would attract 800,000 new out-of-state visitors each year.

Neither store is producing the sales tax revenue expected from it. So, do they lose the STAR bonds privileges? No.

“There is no tracking of results and no penalty for underperformance,” says Barbano. “It’s a suede-shoe used-car salesman freebie.” There is, in fact, no requirement that projects like Legends even show that half their customers are tourists, the threshold that got them the tax break in the first place.

Assemblymember Smith, a Democrat, has introduced legislation to change the STAR bonds law. She says when lawmakers last year asked for figures showing that the new stores were actually attracting tourists, the stores refused on grounds that the statistics (if they exist) are proprietary trade information. “And I get that, you know, they don’t want their competitors to know where their customers come from,” she said. “But I still say if you’re going to have taxpayer dollars you have to be accountable. So we’re working out a reporting system that would be confidential so the whole world wouldn’t know.”

Some local governments love the STAR bonds, since they essentially allow local officials to pay developers to build in their communities. That kind of a system is naturally subject to abuse. Smith was angered by one of the ways the bonds were used: A Sparks Target store was permitted to shut down its store at Prater and I streets where it paid its full freight in sales tax to move to another site where, in effect, it got to keep three-fourths of the sales tax.

The Verdi and Sparks projects were the first Nevada uses of STAR bonds. They are now moving south, pitting local governments against each other because they drain away sales taxes that would otherwise go to schools and other community-based projects.

Smith’s colleague in the next Assembly district, Assemblymember Bernie Anderson, says there is no way to redeem the STAR bonds fiasco and has issued a public apology for ever voting for it.

In a recent message on the year in the rail city, Sparks Mayor Geno Martini gave an extended defense of STAR bonds:

“Without this important economic development tool established by the Nevada Legislature … the Legends would not have been built in Sparks. STAR Bonds provide a mechanism to finance developments that attract visitors, the majority of whom come from out-of-state as determined by the Nevada Commission on Tourism.

“Legends at Sparks Marina will help solidify Sparks on the map. It is the largest project in Sparks, and certainly the largest project taking place in northern Nevada at the moment.

“Legends is a $1.2 billion project that will attract nearly 1 million visitors annually. Additionally, the project will create in excess of 5,000 jobs. A recent economic impact study showed an $8.3 billion economic impact over a 20-year period and $600 million in taxable sales annually.

“While 75 percent of sales taxes generated by the development go toward paying off the STAR bonds that allowed the project to be built, the remaining 25 percent continue to the benefit of public services such as local education, city, county, and state programs. A quarter of new sales tax revenue is clearly better than none. …

“The fact of the matter is, STAR bonds are a vital tool that have allowed communities such as Sparks to embark on economic development, ultimately attracting visitors, creating jobs, and enhancing spending. Only now that financial conditions are poor are some suggesting STAR Bonds should be reexamined or terminated. In my view, this is shortsighted.

“During a tough economic climate, it is more critical than ever that tools such as STAR Bonds continue to provide enticements for development of projects that supply long-term benefits to our local, state and regional economies.”

Martini and other defenders of STAR bonds say that it is unfair to judge them based on their performance in difficult economic times. Barbano says just the opposite—that the test of STAR bonds is in hard times. “These new tourist magnet stores should have insulated us from a slump, but apparently it can’t happen here,” he said.

Nor has anyone done the math to show that the 25 percent of sales taxes generated by STAR bonds businesses pays for the growth engendered by those businesses.

Another objection to the STAR bonds law is that it provides for the creation of “Tax Improvement districts” that, like redevelopment Districts and governing boards of entities like the Regional Transportation Commission and Washoe County Airport Authority, insulate governing boards from accountability in elections. Plus, businesses within those districts that have no tourist orientation, such as Target, get the same tax break as the business—in this case Scheels—that do qualify.

Instead of trying to repeal the law, its critics are mostly trying to amend it so the system will work better, with more transparency and accountability.

To Barbano and other critics, though, it means that ordinary taxpayers will still be getting screwed, their taxes being used to pay for developers’ construction costs.