Thursday, November 29, 2007

If all goes as planned . . .

Holladay is proposing to subsidize retail activity and residential construction that will occur on its own in Salt Lake County even without a subsidy. Using tax dollars to stimulate this type of activity makes absolutely no sense: retail and residential construction respond to local demand, which is a function of population and disposable income. Taxpayers are the losers when cities use tax incentives to steal retail from each other. If this RDA is approved, the Legislature will have to once again consider reforming RDA statutes.

Holladay Mayor Dennis Webb is the foremost cheerleader for the proposed Cottonwood Mall redevelopment. Under the proposal, over the next 20 years Holladay City, Salt Lake County and the Granite School District would give nearly $100 million—$70 million from the Granite School District alone—to General Growth Properties (GGP), the company who currently owns the Cottonwood Mall. In exchange, GGP will upgrade the current site with more than 1 million square feet of high-end retail and residential space.

If all goes as planned, Holladay and GGP claim the city, Salt Lake County and the Granite School District will receive significantly more in property tax revenues when the project is finished, and a smaller increase in property tax revenues while the project is being completed. They’ll be taking those revenues from another city or another school district, but at least Holladay will be getting more property tax dollars. If all goes as planned.

If, if, if. That darn “if” is a real pain. Every developer, every businessman has a different pain threshold. Some are willing to assume a greater risk for the potential of a bigger pay off; others are content to let lucrative deals pass by, because the potential loss would be too painful.

When it comes to assessing those risks, elected officials aren’t quite as careful, at least when they aren’t using their own money. It’s not because they don’t care, or because they want to be cavalier with taxpayer dollars. But just as most people go bankrupt when playing Monopoly, elected officials’ pain thresholds are much higher when they’re using taxpayer dollars.

The Cottonwood Mall redevelopment project is a perfect illustration. Located on major freeways, the Fashion Place and South Towne malls have replaced the Cottonwood Mall as preferred locations for national department stores like Dillards and Nordstrom. Unsurprisingly, this mall has lost all but one tenant; its parking lot is a shamble; and some of the most prized land in the Salt Lake valley has been almost vacant for some time.

Before any upgrades can be done, GGP estimates $100 million of infrastructure work will be necessary to meet various flood plain, fill and other regulations created since the Cottonwood Mall was first built in 1962. GGP is willing to invest some $550 million into this project over the next 20 years; $650 million takes them past their pain threshold. That’s why they want Holladay, Salt Lake County and the Granite School District to put the last $100 million into the project. And if all goes as planned, what is now the Cottonwood Mall probably will be a residential community people aspire to live in. If all goes as planned.

The question is, why should these taxpayer dollars be placed at risk? Why should education taxes from the Cottonwood redevelopment, which would have been used to pay teachers’ salaries on the west side of the Granite School District, be risked to build condos on the east side?

And we can’t ignore the further risks inherent in the political world. Holladay was among several cities who considered splitting the Granite School District in half. They opted not to move forward this year, but it would be foolish to believe that the impetus for separation has disappeared. More likely, those who wanted to split Granite School District are just biding their time, waiting to see how the Jordan split goes. Can the Granite School District in good conscience let education taxes be placed at risk, with such a serious threat to their very existence looming?

Public education advocates readily proclaim that Utah schools are woefully underfunded. If that’s so, how can they afford to risk these education tax dollars? Mayor Webb and GGP say the dollars aren’t at risk, that the increases in tax revenues are guaranteed. If there really isn’t a risk, why is GGP asking taxpayers to cough up $100 million in the first place? Why don’t they just put the last $100 million in themselves?

Even if all does go as planned, this RDA would be a bad idea. That GGP sees a distinct possibility that it won’t go as planned makes this bad idea even worse. But that’s a topic for our next post.

Monday, November 26, 2007


Rep. Urquhart and Jesse Harris have recently been discussing questions regarding the financial position of UTOPIA on their respective blogs, and Jesse Harris has focused on what he perceives as the dearth of public information on UTOPIA’s financial position. Fortunately, UTOPIA has published much of the data Rep. Urquhart is asking for. Given the dismal story the data tells, however, it’s not surprising UTOPIA doesn’t like to talk about it.

UTOPIA’s original feasibility study projected that they would receive an average revenue per user (ARPU) of $58 (page 16). Page 29 of the same feasibility study anticipates that a take rate of less than 20% would jeopardize the $10.1 million annual sales tax pledges from member cities. Over the 20 years of the UTOPIA bonds, that means UTOPIA pledging members would have to pay $202 million.

During their June 2007 board meeting, UTOPIA’s representatives shared the current state of their finances. Page 2 of their 2007 financials show them with 6,493 customers, and $2.25 million in revenue. (Curiously, UTOPIA still hasn’t published that data online, though they did email these financials when Utah Taxpayers Association asked for it.) That means for 2007 their ARPU was just $29, or half of what they were projecting.

In a recent presentation to the Cottonwood Heights City Council, UTOPIA described their current take rate, both on a system-wide basis, and city by city. On slide 16, UTOPIA indicates that their current system-wide take rate is 16.4%. With their take rate below the break even threshold, and their ARPU just half of what their feasibility study projected, UTOPIA’s financial position seems precarious at best.

Their 2007 financial summary raises other serious questions. While they anticipated receiving $5.25 million in fees from subscribing members, their amended budget shows them only receiving 1/3 that amount, or $1.75 million. Similarly, they projected that they would spend $9.0 million in network operations, but their amended budget shows them spending just half that amount, $4.3 million.

The combination of much lower-than-projected subscriber revenue and much lower-than-projected expenses for network operations suggests that UTOPIA didn’t attract anywhere near the number of retail customers as they anticipated. In all of these cases, UTOPIA made much rosier projections than actual experience justifies. In testimony before the Legislature’s Government Competition and Privatization Subcommittee, UTOPIA general counsel David Shaw explained the dissonance between their projections and reality as the product of “externalities.” Perhaps a better word would be “competition.” Given this dissonance, the Legislature can and should ask whether UTOPIA is a going concern. If they aren’t, it’s hard to see why they should be allowed to expand.