LAST SPRING, investor Jonathan Holtzman had his sights set on a $40 million development project downtown on a block that included the site of the old Statler-Hilton hotel. But one thing stood in his way: the vacant building at 139 Bagley, owned by real estate developer Anthony Pieroni.
When Holtzman emailed Pieroni inquiring about the property, Pieroni was in no mood for games.
"Don't play stupid with me re: land value," Pieroni wrote. "I WILL NOT BE EXTORTED and certainly not by assholes such as you and Holdwick.
"If you ever approach me again about this matter," Pieroni added, "you had better be on your fucking knees and groveling."
These emails were recently made public as part of a nuisance lawsuit involving the city of Detroit and Pieroni's Triple-A Venture, which later filed a counter-complaint against the Detroit Economic Growth Corporation (DEGC) and the Detroit Downtown Development Authority (DDA).
And although Detroit, according to a Wayne County Circuit Court judge, was correct to argue Pieroni's building was a public nuisance that needed to be demolished, the DEGC's involvement with the city seemingly goaded Pieroni into negotiations with Holtzman.
The DEGC staffs and operates the DDA, whose board of directors in March preliminarily signed off on Holtzman's deal to construct an estimated 250-unit apartment complex on the block where Pieroni's property is located — including Pieroni's property.
But according to court records, Pieroni was never notified of Holtzman's plan before the project was publicly approved.
The "Holdwick" Pieroni references in the email is Brian Holdwick, executive vice president of business development at the DEGC. A month after the DDA approved Holtzman's project, Pieroni alleged in court filings that he met with Holdwick — only after negotiations with Holtzman for a selling price on his property fell through — to discuss potential development of his site. Pieroni accused Holdwick of saying the DEGC would deny any tax breaks to the buyer of another building Pieroni owned nearby, unless he sold the property at 139 Bagley for a lower price, according to court records.
In plain English, Pieroni accused Holdwick of threatening him.
Whether the meeting took place exactly in that fashion, however, is unclear. The records of the DEGC, a 501(c)(4) nonprofit that has negotiated economic development deals on behalf of Detroit since 1978, aren't directly subject to Michigan's Freedom of Information Act. And the DEGC, through its spokesman, refused to discuss the allegations.
The DEGC has a rather curious arrangement with Detroit. Its main purpose is to broker economic development deals on behalf of the city. The agency has been criticized by some as an opaque machine, one with the cheery goal of bringing investment to the city. The DEGC's fundamental structure permits it to handle millions of public tax dollars for that purpose — with little scrutiny.
The DEGC itself holds meetings, with a 53-member board of directors, that aren't open to the public. And it's not subject to public records requests. Yet roughly 70 percent of the DEGC's operating revenue comes from public tax dollars.
The DEGC provides staff and conducts business that forms the basis for action of seven public entities. The DDA alone projects it will spend more than $1 billion over the next 30 years, but it's unclear how much the other six boards the agency oversees will spend.
It's just one example of the unusual and convoluted relationship between the city the DEGC.
The DEGC acknowledges it's not a part of Detroit's government, but says "we are a [longtime] partner of it." Its articles of incorporation state its purpose is to:
— Operate and act "exclusively for
charitable or educational purposes" by creating opportunities for Detroit residents;
— Help generate new and additional tax revenues for Detroit;
— And to "promote, encourage, and assist the expansion of existing commercial and industrial business in Detroit."
But how good of a job has the DEGC done in accomplishing that task over its 36-year existence? Detroit, now neck deep in bankruptcy, has an unemployment rate of 14 percent and a continually eroding tax base.***
For some, why the DEGC exists as the agency that oversees a number of Detroit's development authorities is a mystery — a point actually once considered by a former Downtown Development Authority board member during a public meeting, who said she "often wondered" why the DDA uses the agency for staff.
The DEGC has received a load of criticism over the years from those who feel it operates under a veil of secrecy. In part, that's because the agency maintains that its records can't be requested under Michigan's Freedom of Information Act.
But the agency certainly has produced and assisted in a number of wins for Detroit: the refurbished Book Cadillac Hotel, Ford Field, Comerica Park, the riverwalk, the city's three casinos, and scores of residential buildings and businesses. It has launched programs and initiatives to the benefit of areas outside of downtown, such as its involvement with the REVOLVE program and by providing small-business loans.
The exemption to public records disclosure, however, makes it difficult to independently verify if the agency's wins translate into long-term results.
Critics also contend the nonprofit devotes the majority of its attention to downtown projects, and not to Detroit's neighborhoods.
"You have a tale of two worlds going on," says Michael Sarafa, president of the Bank of Michigan and co-publisher of The Chaldean News. "The neighborhoods are still largely, from an economic standpoint, ignored." Sarafa says he believes Mayor Mike Duggan's administration is making an effort to change that.
Even so, the DEGC has developed a reputation from some activists and preservationists as an entity committed to demolishing buildings rather than saving them. Some would claim, in honor of former DEGC chief George Jackson, the nonprofit stood for "'Demolish Everything,' George Cries."
The DEGC rejects those assessments, saying its strategy "aligns well with the strategies of other cities that have been challenged by the loss of manufacturing jobs, suburban sprawl and other factors." The agency provided written responses to a series of questions from Metro Times.
"Downtown successes have received significant publicity largely because of their size and impact," the agency says. But, it added, "DEGC has always had active projects in other parts of the city, from industrial parks along I-94 and in Southwest Detroit, to infrastructure improvements and incentive programs along East Jefferson, facilitation of manufacturing investment in major industrial employment districts, retail and streetscape improvement along Livernois Ave., retail support in West Village and Grandmont Rosedale, and independent grocery store projects in many neighborhoods."
When asked to highlight some of its biggest accomplishments over the last 10 years, the DEGC said to review its annual reports, as the "highlights of DEGC's activities are described in them."
But why, for instance, the DEGC holds the title to mostly vacant property on Detroit's east side according to city records, was not explained. The DEGC says it "does not own the parcels in question."
What's more, in recent weeks, the DDA announced that it might engage in a financial gamble known as an interest rate swap. The authority says it's considering borrowing $200 million to finance the costs of a new Detroit Red Wings arena, a surprising development that came to light just weeks before a likely groundbreaking ceremony. But the DDA, through its spokesman (who is also the DEGC spokesman), declined to directly comment on the possible ramifications of such a move, saying any further discussion would be "premature" until a vote was finalized.
The DEGC's involvement with some Detroit public authorities runs deep. The agency says it "conducts activities and makes recommendations to the boards of those authorities at the direction of the boards themselves." As administrators, the DEGC prepares agendas and board packets for each meeting. Basically, the agency does everything up to voting on matters before the authorities' boards of directors.
Tracking down those with intimate details of the DEGC's inner workings also proved to be a Herculean task: A number of former board trustees, former employees, and business owners who've worked with the DEGC in the past declined requests for comment on the agency.
Created in 1978 by then-Detroit Mayor Coleman A. Young, the DEGC grew out of a citizens' task force assigned by the mayor, who said the agency was tasked to answer a question as pressing then as it is today: How can Detroit grow its tax base and create new jobs for residents?
Young described the benefits he saw in the public-private partnership in an annual report, located at the Detroit Public Library, saying the city's progress toward "economic revitalization is due in part to the substantive efforts of [the DEGC's] dedicated, results-oriented officers, board members, and staff." At the time, the nonprofit employed roughly 30 people and, according to its financial statement, generated $1.51 million in revenue, with about $1.35 million in expenses. It received the bulk of its financing through pledges from the city and state, as well as various foundations.
From the outset, the DEGC made its presence known. In 1979, it reportedly contributed a $300,000 loan to keep the Book-Cadillac Hotel afloat for the imminent 1980 GOP national convention in Detroit. Within a year, negotiations for the controversial GM Poletown plant began, another project the DEGC had a hand in.
Regarding its position as the support beam for several public entities, Robin Boyle, professor and chairman of Wayne State University's department of Urban Studies and Planning, describes the DEGC as a "holding company." A city official called the boards the DEGC oversees the "alphabet soup," due to the slew of development agency acronyms associated with the DEGC. Its relationship with Detroit delivers the nonprofit a roughly $4.5 million annual cushion in contracts to operate, in exchange for operating expenses.
Fast-forward two decades. Despite efforts to revive it, the Book Cadillac failed anyway and had to be resuscitated by the DEGC during the 2000s through an extraordinarily complex deal that has proved troublesome for Detroit pension funds who provided financial support.
Those efforts were "handled through the auspices of the Detroit Economic Growth Corporation," Boyle says. "To give it a title, it was dealmaking."
The DEGC says it has an important role in the city's efforts to attract new business and residents. The use of an independent nonprofit to administer a number of different public authorities "was considered an innovative and progressive step forward" when the agency was launched, the DEGC says.
Since then, the DEGC says, it's become a common practice. The arrangement provides business and developers a "one-stop" agency to "facilitate and coordinate the needs of a business before a number of different public authorities," the DEGC says.
The agency cites its Green Grocer Project, an initiative to provide grocery options in the city, and REVOLVE Detroit, a program that seeks to utilize vacant storefronts in Detroit business districts, as "good examples of programs that coordinate assistance to growing businesses across a number of fronts."
That can include a number of things: city processes, site selection, marketing, and financing "through a number of traditional and nontraditional resources."
"[T]he structure is very conducive to collaborations and public-private partnerships," the DEGC says.
But, as the DEGC assumed a larger role, its presence produced a downside, Boyle contends. "Detroit became a very complicated place to do business," he says. The question among potential developers became: Who was the planning authority in charge?
"Was it Detroit's Planning and Development [department]? Was it the city planning commission? Was it the Detroit Economic Growth Corporation?" Boyle asks. "It was difficult to know who was calling the shots in terms of land use, planning, and development, because we had several different planning agencies. It was complicated — and it still is, to some extent."
As the DEGC continued to grow, Boyle says the DEGC got into a habit of securing deals before there was "the appropriate public oversight."
"And to be honest," he says, "the [new Detroit Red Wings arena] is a really good example."
Detroit Red Wings owner Mike Ilitch and his company, Ilitch Holdings Inc., announced their intentions to build a new arena in downtown Detroit in late 2012. Negotiations for the City of Detroit were handled by the DEGC, whose involvement was evident as early as mid-2012, months before the project was ever disclosed to the public.
In July 2012, Mark Morante, senior vice president at the Michigan Economic Development Corporation, sent an email to the DEGC's Jackson and Brian Holdwick that said, "I need to confirm your offer of $2 million is 'on the chart.'"
The "offer" was related to a complex deal to support construction costs for a new arena. The $2 million would be a portion of the project costs potentially being committed by the Detroit DDA and Wayne County. As it was later envisioned, the state would borrow $450 million for the project, which would be repaid through three revenue streams: roughly $13 million to $15 million in state school taxes already being captured by the Detroit DDA, about $2 million annually in local taxes captured by the DDA, as well as $11.5 million generated annually at the new arena.
To move the massive proposed project forward, however, a bill lingering in the state House would first have to be resurrected, amended, and passed in order for the DDA to continue capturing those state school taxes.
This was interesting for two reasons: Negotiations between Detroit, the state, and Red Wings owner Mike Ilitch lasted throughout 2012, and Ilitch representatives were actively making rounds at the Capitol in the weeks leading up to the bill's eventual passage, hoping to persuade pols to approve the project. It was already common knowledge that Ilitch wanted a new arena for the Red Wings. It just wasn't clear when.
Yet, when negotiations began, not a word leaked about the new arena to the public. That is, until nearly five months after Morante sent that email, on Dec. 4, 2012, when the amendment to Michigan's DDA Act to allow state school taxes to be diverted for the proposed $450 million arena was introduced.
"This plan makes good business sense for two reasons," DEGC's Jackson said in a statement that day. "First, it's not a plan for an isolated, single-use structure. Instead, it builds on the clear successes we've already had downtown integrating districts that feature entertainment, and support commercial, retail and residential development around them. Second, it doesn't impose any new tax burdens; it simply continues a program for retiring debt related to economic development. It's hard to argue with that."
But as state Rep. Rashida Tlaib (D-Detroit) previously said to Metro Times of the arena negotiations: "All of that was backroom dealings. Every single thing that happened here in the Legislature, as well as on the city level — all of that was agreed upon without consulting the community."
Even if someone did want to scrutinize the project, there was never an opportunity in the run-up to December 2012 because no one outside of the negotiations knew about it — or at least made it known. And if someone from the public had been informed of the project prior to then, they would've likely been greeted by a stone wall — remember, the DEGC isn't required to disclose records inquired about through a FOIA request.
That unusual relationship between the DEGC, the DDA, and Detroit was amplified by the Red Wings arena deal: The Detroit DDA, already a separate legal entity of the city, will own the arena — yet the DEGC provides staffing and handles day-to-day operations of the DDA.
The fact the DDA will own the arena is also odd when you consider it technically has no employees. The DDA is less a public body of government than it is simply a board of directors tasked with approving projects and resolutions organized by the DEGC worth millions of dollars, usually including public money.
It's a board that meets bimonthly inside a small boardroom of the nonprofit's office on the 23rd floor of the Guardian Building. (The DDA, along with the public boards the DEGC provides services to, shares the same mailing address as the nonprofit DEGC.) Handling the downtown authority comes with a large checkbook, too: The DDA projects it will spend more than $1 billion in public tax dollars over the next 30 years, according to records obtained by Metro Times.
The DEGC's intertwined relationship with the DDA can perhaps best be understood through the way contract negotiations between the nonprofit and the authority are conducted. Every year, the DDA is asked to renew a contract, now worth $1.5 million, with the DEGC, which allows it to continue handling the DDA's operations.
How that is arranged, as indicated by documents reviewed by Metro Times, is as follows: The DDA first approves a resolution that allows some top DEGC employees to sign checks on behalf of the authority, called "authorized agents." Then, a DDA agent sets about ensuring the DDA board of directors will consider a resolution to contract for services with the DEGC. The downtown authority's oversight of such funding matters, it appears, is thin.
In one 2002 letter to the DEGC's Jackson, DEGC Vice President of Board Administration Art Papapanos said, "[T]he DDA hereby gives formal notice of its intent to extend the Agreement for an additional 12 month renewal term. If the above-described extension offer is accepted by the DEGC, the additional 12 month renewal term period will commence July 1, 2002, subject to DDA board approval."
Two months later, Jackson sent a letter down the hall of the DEGC's office to Papapanos, saying, "[T]he DEGC hereby accepts the extension offer for an additional 12 month renewal period commencing July 1, 2002."
One way to look at this is that the DEGC's Papapanos, on behalf of the DDA, asked Jackson if the DEGC would continue the contract to receive the necessary funding to support the nonprofit's operations, and, by extension, the DDA.
In other words, the DEGC asked itself if it wanted to pay itself.
Asked if that arrangement has ever posed an issue in the past, the DEGC said "no."
Of the dozens of resolutions the DDA board considered between 2002 and 2007, all were unanimously approved, unless a board member recused or abstained from a vote, with the exception of only two resolutions that received a single dissenting vote.
Still, while the DEGC touts its successes in managing the DDA and its six other public authorities, the truth is that many likely have no idea why it even exists.
That was the point of view taken by a former DDA board member in 2002 who, according to meeting minutes, stated she "often wondered why DDA utilized DEGC staff, but felt it would be prudent to provide in writing the reasons and rationale because even now people still want to know who staffs the DDA."
To WSU's Boyle, the $180 million deal cobbled together in 2006 to save the Book Cadillac Hotel likely wouldn't have happened, were it not for the DEGC and then-president Jackson's team.
Jackson, who was approved as DEGC chief in 2002, has led the agency through a period of sizable growth. During former Mayor Kwame Kilpatrick's reign, Jackson apparently was bestowed with a serious amount of trust: As he put it to Crain's Detroit Business in 2008, Kilpatrick gave his agency a "free hand to manage what has amounted to a $6 billion economic development program."
The DEGC has nearly doubled the amount of revenue it generates during Jackson's tenure: In 2004, the DEGC collected $3.86 million in revenue, according to IRS documents; by 2012, the most recent year available, it collected close to $6 million.
That growth also brought a pay increase for Jackson. In 2004, according to IRS documents, Jackson earned a total compensation of $211,000; by 2012, that number jumped to $365,000, which included a $1,000 monthly car allowance and retirement benefits.
The DEGC says the documents are a bit misleading, as they "don't take into account contributions to Mr. Jackson's total compensation made by DTE Energy during his first few years at DEGC." Jackson was an "executive on loan," which the agency says is not uncommon. Jackson had only one "material increase" in compensation during his tenure, the DEGC says.
Jackson's compensation is not unusual for someone in his position, says Jeff Finkle, president of the Washington D.C.-based International Economic Development Council. In cities as large as Detroit, he says, CEOs of economic development corporations typically earn between $250,000 and $350,000.
"They will go higher," Finkle says. "It wouldn't surprise me to see a base of $260,000-$300,000, with the ability to get a 25 to 30 percent bonus if they met certain metrics."
He adds: "This is a pretty competitive business, and people who do well in it get compensated. People that aren't at the top of their games don't get compensated as much."
A slew of metrics exist to judge a CEO's worth, Finkle says: how many jobs the individual can take credit for, if the budget grew under their watch, what the economic value of the agency's projects are worth, how many deals were closed, and more.
In the DEGC's case, it projects it "managed or assisted" in crafting in 2013 were expected to generate $1 billion in investment and generate or retain 6,000 jobs, according to the nonprofit's so-called 2013 Progress Report. That was likely boosted because of the Ilitches' proposed $450 million arena and adjacent entertainment district.
Jackson also boasted of the agency's efforts to potential donors in a 2011 letter provided to Metro Times by the Michigan Attorney General's office, writing that the DEGC that year attracted a combined investment of $82 million to the city, assisted in the creation or retention of nearly 3,500 jobs, and worked with nearly 380 companies "interested in investing in Detroit."
However, in its 2011 progress report, the agency maintains that the projects it managed or assisted in that year were "expected to lead to $645 million in public and private investment in the City of Detroit when they are completed, generating new or saving 8,000 jobs for the city."
The conflicting 2011 numbers in the letter at the AG's office, according to DEGC spokesman Bob Rossbach, are "irrelevant." It was an internal draft, he says, one that was never sent to potential donors. Asked why the letter was submitted to the AG office, Rossbach didn't respond. A voicemail and email were left with the AG's office for comment, but went unreturned at press time.
How to independently verify the DEGC's numbers published in their annual reports can seem like a fool's errand.
The agency says its job figures are "based on the best estimates we have from public records and representations made by businesses." The estimates stem from investment and job commitments made during the year.
"They represent commitments made in the time period, which may vary in practice from construction costs paid or people hired," the agency says. "DEGC makes a concerted effort to review the numbers available to avoid duplication in the total number, however, you will notice that in some instances a projected investment will be counted in two categories. The overlap is adjusted in the overall total."
The DEGC reported on its IRS filings that financial statements are made available to the public upon request. When Metro Times asked last month to review the statements, the DEGC's spokesperson said he was unaware of the agency's protocol to review the documents. He said to make a direct request by phone or through the DEGC website. Voicemails left at the DEGC office, as well as a message left via the contact submission on degc.org regarding the protocol, went unreturned.
Jackson, who stepped down earlier this year, announced his retirement in light of restructuring by Mayor Duggan. To some, his decision to retire was seen as an indication that Duggan might bring the DEGC under the auspices of Detroit's central government. But a spokesman for Duggan told Metro Times the mayor is fine with DEGC's role as it relates to economic development within the city.
Last month, Jackson's replacement, 36-year-old Rodrick Miller, was approved by the DEGC board as its next CEO. A recruit from New Orleans, it's unclear if Miller will earn as much as Jackson.
According to The Detroit News, Duggan said of Miller: "When I sat down with Rod, I felt like it was somebody from our administration already. He talked step by step how he engaged the city of New Orleans, drew them in every step of the way. I said this is exactly what we need at this time and this city."
Miller launched the New Orleans Business Alliance, an agency similar to the DEGC, according to Crain's Detroit Business. The organization focused on bringing national names to the city, Crain's reported, which included New Orleans' first Costco and two Wal-Marts.
Surprisingly little information exists on the public's response to Miller's big-box "achievements."
Back in late 2012, even after the state bill to support construction of the new Red Wings arena was introduced, media reports were scant on details, because details were scant.
Yet it's clear, from emails obtained by Metro Times, that in private, those involved in discussions — the state, the Ilitches, and Detroit's negotiator, the DEGC — understood a basic structure of the deal months before lobbying the state Legislature for support: The state would borrow money to finance construction costs of the arena, and that would be repaid by DDA-captured tax dollars and arena revenue.
That fact was not confirmed until mid-2013, nearly a year after Morante sent the email to Jackson and Holdwick requesting confirmation on his $2 million order.
In part, it appears the arena deal was mostly negotiated in Lansing with state lawmakers and officials; state school taxes are supporting the majority of the public costs tied to the project. But when the time came to present Detroit City Council with the components needed for city approval to keep the project rolling on schedule, criticism was levied against the DEGC by some who said too much was given by the city to the Ilitches for little in return.
The DEGC's Holdwick, who has denied Metro Times requests for comment in the past, told the Detroit Free Press earlier this year, "We obviously wanted more ... Given the amount of money that the city's put into this — which is zero — it's a great deal for the city and its residents."
But that point has also been argued by critics of the way the Detroit DDA finances its operations, and some projects: with a dense financing tool called tax-increment financing, or TIF. Examples of TIF projects downtown include the M-1 Rail streetcar along Woodward, Quicken Loans headquarters, housing developments, and more.
TIF provides a sort of subsidy for businesses attracted to the DDA's district. It allows the DDA to create an area in which it captures the increased property taxes generated as a result of new development. That money can be spent on a multitude of projects. However, it's money that would otherwise flow to, among other entities, Detroit and its general fund, which finances the city's police and fire services. The city captures the taxes generated in the district and then is legally required to transfer the funds to the DDA, which also levies a tax on all property owners within its district.
According to David Bieri, associate professor of urban planning at the University of Michigan-Ann Arbor, that creates a continuing problem, because "not a single real estate deal that has taken place in [downtown] Detroit has come without the form of a subsidy."
That was a point echoed recently by John Gallagher, of the Detroit Free Press, who wrote that incentives and subsidies "are so built into Detroit's development culture that they're not going away anytime soon." But, he wrote, they should: "Incentives and subsidies take tax dollars away from other projects and services that need them. ... Meanwhile, getting rid of incentives and subsidies ought to quiet the perennial rancor over what deserves priority — downtown or the neighborhoods."
The DEGC countered, saying Detroit exists in a competitive environment where it has to match other cities and states with their business acumen to generate interest from developers.
"As long as other places are willing to offer businesses financial incentives as trade-offs for investments and the creation of jobs, Detroit has to have access to similar tools in order to compete," the DEGC says. "Detroit has tremendous advantageous [assets] to offer, including ... transportation infrastructure, a skilled workforce, a concentration of research activities ... and access to globally recognized centers for healthcare and medical research.
"Even with those assets, however, it must have additional tools to ensure it can compete for new businesses or expansions of existing companies."
But, says Bieri, in the case of development agencies, that sort of incentive culture is fueled by a structure that provides little accountability.
With TIF districts, he says, it's "potentially problematic because the district earmarks funds out of the general fund ... for special purposes, for special development, but they're not subject to the same accountability mechanisms as the general fund is."
To facilitate the new Red Wings arena, the DDA's TIF district was expanded and extended for an additional 30 years. Detroit City Council would have to sign off on the TIF expansion, but by the time it came up for consideration in late 2013, its approval was almost a technicality: Detroit Emergency Manager Kevyn Orr, a supporter of the project, under state statute could've unilaterally approved the needed resolutions. By the time it expires in 2045, it will have existed for nearly seven decades. Studies and experts have said a productive use of the tool would be to keep a TIF district limited in scope.
Bieri says "the only logical conclusion" he can find why DDAs and other separate authorities exist and can continue using TIF "is that it's in some people's interest in how much money [they collect.]"
He adds, "Nobody's asking what could we be using that money for if it got fed back into the general fund."
Breaking down how much the DDA captures requires a review of numerous budgets and records kept with the city and state. The $11 million captured by the DDA last year included $8.55 million in property taxes paid by downtown property owners that otherwise would've flown to the city. About $6 million of the city's cut came from its general fund, the remainder from the Detroit Public Library.
To put that into context, over the course of the next 10 years, the DDA will capture anywhere from $60 million to $70 million of money that otherwise would've flown into the city's general fund. By comparison, in Orr's proposal to reinvest in Detroit's public services, the emergency manager seeks to spend $75.2 million to hire 250 additional civilian personnel for the Detroit Police Department, "which will allow the City to redeploy uniformed personnel to more appropriate functions," according to bankruptcy court documents.
Orr can't use any of that $60 million to $70 million the DDA captured.
Additionally, according to state records, the DDA's capture included $1.75 million that would've gone to Wayne County, $610,000 that would've gone to Wayne County Community College, and about $1 million that would've gone to the Wayne County Regional Educational Service Agency.
One of the reasons that's a problem, Bieri says, is a TIF district essentially allows an authority like a DDA to "circumnavigate the ballot box without making up for the accountability." Another issue, he says, is that the state treasury, which is supposed to collect data on how much TIF money is captured by authorities, doesn't have a clue how much has really been diverted by these districts statewide.
Moreover, it's unclear how many jobs the incentive has created, as that's a number typically not reported by authorities to the state, as well. In the Detroit DDA's most recent annual report filed with the state, the line for number of jobs created is left blank.
There's also a concern about providing equitable services between the DDA and other parts of the city. Think of the days in downtown Detroit when there's a baseball game, a Lions game at Ford Field, a show at the Fox Theatre or the Fillmore. Or when the annual Fourth of July fireworks take place. Tens, if not hundreds, of thousands of people flock downtown for an event that requires a serious police presence. (And, in the process, wears down our "tremendous" transportation infrastructure to the point billions of dollars are needed to repair it.)
According to the Detroit Police Department's public information office, the number of local law enforcement officials patrolling the downtown area on the night of festivities "varies from six officers all the way to approximately 1,000 officers, depending on the type of event and the amount of people expected." But, the PIO added, "We also work with outside agencies that bring officers in, so that can vary greatly."
That's a thousand officers paid by the city patrolling an area whose property taxes generally flow back into the DDA, not to the City of Detroit.
In June, during the recent fireworks festivities, while local, state, and federal law enforcement officials were overseeing festivities near Detroit's riverfront, DPD witnessed a number of emergency calls that "rolled in at a pace much faster than officers could respond," according to a report by Detroit-based Motor City Muckraker.
"Between 8 p.m. and midnight, when a bulk of police resources were downtown, officers were called to at least three shootings, seven home invasions, three armed robberies, four arsons, a rape, and numerous domestic assaults," Muckraker reported.
Detroit, by recent accounts, employs roughly 2,300 officers, down about 30 percent since 2000.
As Bieri puts it, with this kind of arrangement, the downtown authority's city services — police, fire, EMT — have been outsourced "to the rest of the community."
Louis Schimmel, the former emergency manager of Pontiac, says the bureaucracy of Detroit's development agencies, and similar ones across the state, "have their own agenda, which very often could be very different from that of the mayor and the council.
"They justify their existence because they want to be something different from the mayor and council," he says. But the bigger problem, he adds, "is you're diverting funds that otherwise would've gone to the city's general fund." Typically, that's tens of thousands of dollars being captured for economic development, rather than being used for city services. In Detroit's case, it's millions.
By February, when City Council was asked to transfer land valued by the city at $2.9 million to the DDA for $1 in return to move the Red Wings arena project along, key negotiators in the deal were offered some criticism by Nancy Kaffer, columnist at the Freep. She wrote that the DEGC had "dropped the ball" in negotiations.
"It is the lead negotiator for nearly every downtown development, including this one, and if it pushed for community benefits," a firm agreement activists wanted the Ilitches to consent to, "it wasn't successful," she wrote, later adding: "As a nonprofit, albeit one that's largely funded by taxpayers, the DEGC operates with a notable opacity. It is not subject to requests for documents made under the Freedom of Information Act, for example, and the agency does not typically make information about negotiations it is conducting public."
DEGC chief Jackson didn't take kindly to Kaffer's words. In a response published by the Freep, he wrote the Red Wings arena is "likely the most-scrutinized development deal in decades."
The reasons, Jackson said, were simple.
"The enabling state legislation passed more than a year ago," he wrote. "The rough draft of the development deal was presented more than seven months ago. Decisions about it since then were made by four public bodies that held at least nine public meetings.
Resolutions, actions, minutes, agreements, and more for the public entities, including the DDA and Detroit City Council, "are all available to the public," Jackson continued.
"Nothing the public needs to know has been withheld," he contended.
It bears mentioning that the Michigan Strategic Fund, which is expected to issue bonds for the project, does post meeting minutes and agendas online. Detroit City Council meeting agendas can, if requested, be sent by email or can be found online, though the city's website is difficult to navigate, a point acknowledged by Mayor Mike Duggan's administration.
However, the DDA, and the Economic Development Corporation (EDC), another board the DEGC operates, don't post meeting agendas or minutes online. Asked why, the DEGC said, "It's not required by law." The Detroit Public Library stores DDA minutes and agendas, but only through 2007. More recent years, apparently, require a request to the public authorities, likely through a FOIA request.
And while it's true those particular documents can be made available, that requires another unusual time-consuming affair: Separate requests for records of public authorities the DEGC oversees must be made to the DEGC's Papapanos, who serves as the FOIA coordinator of all seven boards.
When Metro Times requested information earlier this year related to the total amount of TIF money captured by DDA districts and several authorities the DEGC operates, the initial request was inadvertently made solely to Papapanos, the DDA FOIA coordinator.
In response, Papapanos provided documents for the DDA only, adding, "The DDA is not able to respond on behalf of any other public body." When four separate additional requests were filed, all made out to Papapanos, serving in the capacity as FOIA coordinator of the respective boards whose information was sought, the documents were then sent.
And the public would have to attend a meeting to know who sits on the DDA's board, a group appointed by the mayor and approved by Detroit City Council, as the listing of the DDA's board members on the DEGC's website doesn't represent the current makeup of the board. Mayor Duggan issued his appointments in March, and board members were sworn in soon after, according to meeting minutes.
"Municipal authorities are regulated by state law and the DDA and other authorities administered by DEGC take the necessary steps to comply with state laws and regulations," the agency says in response to a question on what steps it takes to ensure there's transparency with the DEGC, as well as the public authorities it staffs.
The DEGC's relationship with the city also raises another concern: the potential for conflicts of interest related to the arena deal, considering the scope of overlapping connections related to the arena deal between the DEGC, the DDA, the Ilitches, and the Downtown Detroit Partnership (DDP), a nonprofit that consists of major business CEOs, civic leaders, and Detroit officials focused on implementing programs and initiatives downtown.
According to its website, the DDP's 12-member executive committee includes George Jackson, and Christopher Ilitch, of Ilitch Holdings. In the past, numerous members of the DEGC and DDP have held positions on each board and, occasionally, the public DDA.
The DEGC says it maintains a conflict of interest policy, but it generally pertains to "individual, financial conflicts of interest. That is, votes in which a board member has a direct financial stake."
Regarding the occasional overlap, the DEGC says, "It is not unusual for non-profit organizations with some common interests to have common board members."
In recent weeks, the DEGC, and by extension, the DDA, have continued to finalize the financing of the new Red Wings arena through negotiations with the state and the Ilitches. The discussions have brought about the possibility of an entirely new financing structure — all of which have yet to be reported by local media.
As it was revealed last week in a request for proposals (RFP) issued by the DDA for a "swaps consultant," the authority may now issue $200 million in bonds (read: borrow money) to finance a portion of the project, which would be paid off with the Ilitches' $11.5 million annual contribution, according to Papapanos, in a brief interview after a recent DDA meeting.
The DDA was searching for a consultant because it's now considering the option of entering into what's known as an interest-rate swap agreement. That would allow it to secure, and pay, a fixed interest rate on the bond payments, rather than a floating rate.
A swap is essentially a bet. It's aimed to secure a fixed interest rate, assuming a benchmark interest rate used by financial institutions across the world will rise, rather than fall. Such agreements have been scrutinized to no end in Detroit's ongoing municipal bankruptcy case, as the city entered into complex interest rate swaps to secure financing for its pension funds, only to have the gamble turn sour: The city was saddled with a $50 million annual payment for its fixed interest rate to the banks that organized the swap, according to published reports — with nothing in return, because the floating interest rate the banks were paying had plummeted.
In the RFP, the DDA wrote of the proposed deal that "The purpose of the swap is to mitigate interest rate risk and synthetically fix the rate of interest of approximately $200 million of floating rate bonds."
The swap would last roughly 30 years, and would allow the DDA to pay a fixed rate of interest to a counterparty that would later be identified by the Ilitches, according to the RFP, and, in return, receive a variable rate based on LIBOR, the London Interbank Offered Rate, an interest-rate benchmark.
According to Heber Farnsworth, associate professor of finance at the Penn State University Smeal College of Business, it's possible the Ilitches would get to choose the counterparty involved in the swap because the creditworthiness of the bonds may be more appealing with arena revenue securing payments.
If the DDA actually pursues the swap, Farnsworth says the authority would then come to an agreement with the counterparty as to what both sides believe the LIBOR rate will be when the swap kicks in — likely in 2018, according to the RFP.
Farnsworth offered a possible worst-case scenario if the DDA's bet headed south: For instance, if the LIBOR rate drops, the DDA could be stuck with paying a fixed rate, while receiving a smaller amount in return from the counterparty. If that happens, and the DDA is on the "losing" side of the bet, it might have to post collateral — similar to how Detroit posted its casino revenue when the city's infamous interest rate swaps went sour.
If the DDA were to then miss a swap payment, the counterparty could simply "seize all the collateral," Farnsworth says. But whatever the DDA could possibly post as collateral is entirely unknown.
The potential ramifications of the proposed swap are unknown, but Farnsworth says one thing's for certain: Over the next 30 years, the LIBOR rate will rise and fall — again and again. The DDA's proposed swap would terminate in 2045, according to the RFP.
However, if the LIBOR rate rises, Farnsworth says, the DDA would be in a position where it's receiving more from the counterparty than it's paying in return. Why exactly the DDA will potentially pursue a swap for bonds secured by the Ilitches' revenue from the arena, and not the public money involved in the project, is unclear.
Asked why the financial structure of the deal could change, Morante, of the Michigan Economic Development Corporation, said in a recent statement that "We are working on a deal and have talked about a number of things but nothing is concrete. We will be happy to address any questions when all of the details are approved by all involved."
And that's happening soon. At the DDA's bimonthly meeting on Aug. 27, the DEGC's Papapanos said the authority's board could take action on the final financing package for the arena as early as its next meeting, Sept. 10.
Pressed for comment to help enlighten the public about what exactly is going on here, the DDA — or, the DEGC on behalf of the DDA — says the RFP for a swaps consultant was required under federal law. The RFP was posted on Aug. 26; the deadline for responses was Sept. 3.
In a statement to Metro Times, the DDA confirmed an interest rate swap was being considered as "part of the overall financing" for the new arena.
But exactly why was this even more convoluted financial scheme being considered this late in the game?
The DDA's response left much to be desired: "Any comment on the details of a possible swap agreement beyond the references in the RFP would be premature."
In other words, we'll know what, if any, risks the deal could pose after it's been made. — mt
Ryan Felton is Metro Times' investigative reporter.
About this report:
Even though the DEGC isn't a public entity, documents the nonprofit must produce for the state and federal government can be obtained through a number of agencies, offering added insight. And so this story was largely developed from what's available for public consumption, including court records, IRS disclosure forms, documents on file with the Michigan Attorney General, city records, documents located at the Detroit Public Library, and other records obtained through the Freedom of Information Act.