The Shady Role of Urban Development Corporations

In the age of "the deal" in which a real estate tycoon is President, renewed interest in the role of quasi-public development corporations that are supposed to act more like private business is in order. 

Were they created to close the deal where government couldn't? Were they created to be a substitute for boss or machine system in a time when municipal corruption was rampant? Were they created to empower people or to provide loopholes for corporations to get a better deal?

Power in the city: Former Baltimore Development Corporation CEO
Jay Brodie (Photo: Fern Shen)

All of the above could be true, depending on what period of time is investigated, what type of quasi-governmental organization and which city one looks at. Generally, these days suspicion about those type agencies seems to prevail. Many who suspect that especially urban development corporations (UDCs, the subset of the quasi public agencies on which this article will focus) which defy classification as a city department but are usually also not entirely private, are in cahoots with private developers and are only there to circumnavigate open meeting laws and other regulations supposed to ensure transparency.  Development corporation are obtuse.  Are these suspicions correct?


The history of development corporations

Critics of current development corporations may be surprised to learn that their origin lies in the progressive movement and goes back to a motive that is the opposite of obfuscation and shady dealing. The desire in the time before and after the New Deal was to create a body that would act more like a business and less than corrupt local government. Born from the believe that city planning should be rational and not "machine" driven, the result of business thinking and not politics, this type quasi-governmental organisation is an expression of the progressive movement's believe that cities should be governed by business decisions and not politics. Parks commissions eventually became "corporations". The granddaddy of them all, is the 1921 Port Authority of New York City. On the national scale the most known corporation was  FDR's Tennessee Valley Authority, an agency to implement large scale infrastructure as an antidote to the Great Depression. Already Dan Burnham of "make no small plans" bemoaned the ineffectiveness of regular city agencies.

"The public authorities do not do their duty and they must be made to" (Daniel Burnham in "The Plan of Chicago"

Enabled by State laws in the 1930s, local development corporations proliferated quickly mostly with the focus of "slum clearance and blight removal," and an obsession of creating a city of the future fueled by exhibits such as the 1939 World Fair. Initially focused around housing, condemnation powers of redevelopment corporations were soon extended to commercial districts in the name of highest and best use. Slowly the influence of municipal planning departments eroded and the power of privately controlled development corporations grew. This expansion of corprate governance was promoted among others by the Urban Land Institute (ULI). Much later the UDC redevelopment model got yet another boost under Lyndon Johnson's Great Society projects with the new purpose of ending poverty. Originally heavily top-down (Robert Moses style) the development corporations were then seen by Jimmy Carter as model structures for public private partnerships, another term that has seen a renaissance lately. In response to the bad name urban renewal had obtained, Carter created the federal Urban Development Action Grants which fueled much of the activities of redevelopment corporations but now required the inclusion of private developers as partners. Under carter development corporations would act less like czars as Robert Moses had done but instead would wheel and deal with private developers but as before mostly outside of public scrutiny. In fact, the need to negotiate with private business "on eye level" became another reason to create even more urban development corporations.

In whatever period they were created, the duality of purpose seems inherent in UDCs as well as other forms of quasi public forms of agencies such as parking authorities, airport authorities and stadium authorities. On the one hand they were to be outside of government and on the other beholden to it. They were to act like private business but with the power of government in the name of public interest. They could be efficient and nimble but had access to public money. Most of all, they lacked public oversight and accountabiulity. Sometimes agencies erred more on the one side (to be more like government), sometimes on the other (to be more like a private corporation).

Robert Moses, New York

Only rarely did government forego control via appointing board members or CEO's of the UDCs. An exception is the case of Cincinnati's 3CDC corporation which collaborates with the city but is fully controlled and funded by the corporate sector.

The Cincinnati Center City Development Corp. (3CDC) is a 501(c) 3, tax-exempt, private, non-profit corporation. Its mission and strategic focus is to strengthen the core assets of downtown by revitalizing and connecting the Fountain Square District, the Central Business District and Over-the-Rhine (OTR).

3CDC was formed in July 2003, recommended by a City of Cincinnati Economic Development Task Force as part of an overall system to increase the effectiveness and efficiency of development activities in the City of Cincinnati. Its operations are funded privately, through a combination of corporate contributions, management fees, and below-market developer fees. In November 2004 the staff of 3CDC accepted the daily, operating responsibilities for two private investment funds, the Cincinnati New Markets Fund (CNMF) and the Cincinnati Equity Fund (CEF).

While the distance between City Hall and a quasi governmental CDC was deliberate and seen as a necessity for successful redevelopment. But the bi-polar nature of development corporations invites also the opposite view such as a 2008 study titled Who Rules Cincinnati  who sees the Cincinnati development corporation run by corporations as a private power grab:

To achieve their goals, Cincinnati corporations have created a series of private organizations—CBC, DCI, 3CDC—which have usurped democratic control from the city council, from city agencies and from the public. Creation of the “strong mayor,” abolition of the planning department, and handing over public planning functions to private organizations have all worked to the detriment of public discussion, debate and democratic control. 

Corporate control of Cincinnati’s economic and political life has preserved and sometimes deepened patterns of racial segregation, discrimination and outright racism. (Dan La Botz)

Maryland Stadium Authority: A quasi governmental development agency

Concerns are not limited to control and oversight, they also extend to financial accountability. A recent study by the Legislative Research Commission of Kentucky dealt particularly with that aspect. It determined a whole host of reasons why quasi governmental entities were created. Among them financial ones:

Some entities are created because it is believed that debt backed by the revenue-generating capacity of a specific facility, such as an airport or sports arena, may be more accepted in the capital markets or because of the perceived greater efficiency of a separate corporate-style structure. In a separate entity, efforts of the governing board and management can be focused on a specific function instead of the myriad services often overseen by the management of a state, county, or city. 

Many public authorities and special districts have a legal, financial, or administrative autonomy that departments and agencies may not have within a government’s organizational framework. Legal autonomy derives from the organization’s corporate powers, including the ability to buy, sell, lease, and mortgage property in its own name, and the power to sue and be sued without recourse to the government itself

The contrary views regarding quasi-governmental agencies and general and development corporations in particular come also from the many different purposes they serve and the various amounts of power they exert. Quasi-governmental agencies can be parking authorities, agencies that manage public markets, or agencies that were created to build a new stadium, seaport or airport.  At times those agencies have awesome power. They can issue bonds, licences, collect fees or frequently, as in the case of Baltimore's quasi governmental Development Corporation (BDC), even have eminent domain. In a country with strong emphasis on private property rights trhey are among the select few who have the power to condemn private property for public interest. This is even more astounding if one considers the lack of oversight and control.

The broad way in which public interest was stretched to include slum and blight removal  and economic development has been the subject of many high profile court cases. The situation where a quasi-governmental development agency condemns private property to immediately give it back to another private entity with the sole purpose of (private) redevelopment (which creates the public private partnership) resulted in the landmark Supreme Court ruling of Kelo vs New London in which those condemnation practices were confirmed as legal. In spite of the 4-5 ruling, the eagerness of cities to use eminent domain for private re-development received a massive damper. The matter became poilitically unpopular and was lacking positive results. In 2015 the Washington Post reported about the property that was the subject of the Kelo case:

Today, the condemned land still lies empty, though city officials now plan to build a memorial park honoring the victims of eminent domain, on the former site of Susette Kelo’s house.

But some learn slowly. Even today after urban renewal, involuntary displacement, large scale site clearing, demolition and redevelopment have fallen out of favor, cities and small towns continue to create non-profit development corporations to push through just that kind of redevelopment. A recent case is western Maryland's city of Cumberland, still reeling from the decline of coal and still trying to get a foothold in tourism and active experiences such as bike-riding along the C&O canal. As recent as  2015

Cumberland mayor Brian Grim and City Council voted to create an independent organization comprised largely of private sector individuals to oversee economic development for the Cumberland area. A nonprofit organization, the new Cumberland Economic Development Corporation will have a seven-seat board of directors. Five of the seats will be occupied by members of the private sector.“This organization will take bold and decisive action to advance our city. In so doing, it will live up to the great responsibility the mayor and City Council have placed upon us,” said Jonathan Hutcherson, a board seat holder, via news release from the city"

“The CEDC will be the lead economic development entity within the city of Cumberland. We give up a little control but in the process we have significant buy-in from the business community,” said Grim. 

One of the benefits of creating a nonprofit economic development organization is that city contributions to the entity will be tax deductible. (Cumberland Times News 2015).

Demolition and displacement in Cumberland, MD

A specialty of Cumberland's CEDC is that Board members have to pay $5k to be on the board, essentially buying their own seat. The CEDC's first order of business: Good old urban renewal through demolition and displacement. A redevelopment project that calls for the removal of 67 homes and a church to create a commercial zone with a national chain restaurant and businesses. The Cumberland Economic Development Corp. is the entity administering the project. Being hampered by a few holdouts who wont sell and lacking condemnation rights the CECDC has now placed the redevelopment area into the hands of a private real estate company.

Conclusion

The idea that cities should be run like businesses may have been an improvement over the corrupt boss system in place in the early 20th century. Yet, it has since long been recognized that governance of a city is far different from managing a business. Additionally, it is a fallacy to equate the interest of business with the interest of community along the motto what is good for General Motors is good for America. This has proven wrong by the still growing divide between communities by income, race, health and education. It is therefore time to re-think the purpose, structure and operations of quasi- governmental agencies that remain prolific all across America.

That is also what Baltimore's new mayor thinks. She wants to restructure the Baltimore Development Corporation (BDC). It, its predecessors, and the quasi public State agencies (The Maryland Stadium and Port Authority) have gone through all the same successes and failures as quasi-governmental corporations did around the country, from urban renewal that brought investment along racial lines and destroyed urban fabric and entire communities in the name of slum and blight elimination, to redevelopments such as the Baltimore Inner Harbor or Camden Yards which have been recognized as international models. The BDC has gone from "superblock" (a failure) to current "small, small" deals here and there (for which "the jury is still out"). In one of the largest urban redevelopment cases in North America, Under Armour's new Port Covington no UDC was necessary. BDC was a mere bystander processing a gigantic $660 million Tax Increment Financing (TIF) deal for the developer without the resources to properly scrutinize "the numbers". It was ultimately outmaneuvered by a group of urban ministers and even the city council who brought some semblance of public control to the matter. Maybe it isn't surprising, then, that the Mayor toys with the idea of turning the BDC into a small-business  support agency promoting economic development, a sort of chamber of commerce, certainly a far cry from the enormous powers it once wielded.

The pertinent question is how to combine the advantages of quasi-governmental agencies such as their nimbleness and purpose with the democratic oversight, transparency and accountability expected of regular government agencies? Is this a contradiction in terms, i.e. impossible? Not all municipal agencies must be inefficient. And where they are, the inefficiency is usually not caused by open meeting laws, reporting requirements, political oversight and accountability but by a lack of purpose, bad management practices and the absence of measurable metrics of progress. All these ailments can also afflict quasi-governmental agencies, especially after they have been in place for decades and begin acting just like a government agency.  An ineffective quasi governmental corporation which also lacks oversight combines two disadvantages and should be abolished.

On the other hand, cities must have nimble bodies that can tackle large problems and implement solutions. One way to maintain effectiveness could be to require that quasi-governmental bodies be established for a specific purpose (build a stadium, a convention center, a specific development) and then be disbanded. Equip the enabling laws with a sunset date. Even then, they should be subjected to public accountability and oversight.

Longterm quasi-governmental agencies should have a leadership accountable to the public either by by a public vote on their position (as on school boards, judges, sheriffs and the like) or by being under the full oversight of an elected official and the full system of checks and balances including the city council.

Klaus Philipsen, FAIA

This article is part of a series of articles on this blog investigating how public projects for infrastructure and urban planning are delivered. See also: 

• P3: build now- pay more later
• Do public works projects have to be so slow

Resources:

Tondro: A Case Study of Urban Development Corporations
Kimberley Johnson: Community Development Corporations, Participation, and Accountability