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  • 16 Sep 2014

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PDC wrangles city's 'zombies'

Urban renewal changes weigh on development agency as it trims budget, wrestles with future obligations


by: TRIBUNE PHOTO: CHRISTOPHER ONSTOTT - Faced with declining revenues, the Portland Development Commission also was hurt by questionable business decisions, such as the 2010 purchase of the abandoned Grove Hotel in Old Town for $3.7 million. PDC now hopes to sell the building for $550,000.Portland Development Commission, the city redevelopment agency credited with revitalizing downtown, is having to redevelop itself in the face of dwindling urban renewal funds.

The PDC board voted Tuesday to slash personnel costs 30 percent, eliminating about 40 positions. Nine vacant jobs were eliminated immediately and five staff will soon retire, induced by new early retirement incentives. About 26 more positions will be axed during the next 15 months, some via layoffs.

PDC faces a dramatic drop-off in its bread-and-butter urban renewal funding, known as tax-increment financing, which will largely vanish in eight years, says Patrick Quinton, PDC executive director.

In response, Quinton is shrinking the agency to nurse remaining urban renewal funds while it reinvents itself and devises new ways to generate cash. Contending ideas include: collecting more rent from real estate, such as parking garages; reaping more profits from business loans; and offering video production and other services to outside entities.

PDC’s bleak funding picture means the agency that spearheaded revitalization of Portland’s central city for more than four decades — projects such as Pioneer Courthouse Square, Tom McCall Waterfront Park, the Eastbank Esplanade, light rail and the trolley — won’t have the same capacity it once did.

“There was an era of big projects, and we got lots of national attention for them,” Quinton says. “I believe we’re in a different era.”

Past city councils relied on PDC to tackle big downtown projects since the 1970s, says Ken Rust, the city’s former chief administrative officer.

“The city has never experienced how to do big projects without urban renewal,” Rust says. “Now it’s going to find out what it’s going to take.”

Maxing out the credit card

PDC, which serves as the city’s urban renewal, economic development and neighborhood revitalization agency, grew to 223 employees in 2008-09 with a budget of $236 million. Now it’s hoping to stabilize at about $65 million a year, after sending the required housing set-aside funds to the city Housing Bureau, with a staff of fewer than 100 people.

“Layoffs are going to be necessary; unfortunately, that’s the case,” says Rob Wheaton, a council representative for the American Federation of State, County and Municipal Employees Council 75, the union that represents PDC employees.

Wheaton is worried that the union will have to fend off benefits cuts, and that remaining staff will face a huge workload, making it hard for PDC to attract and keep its talent.

PDC makes most of its revenue by creating urban renewal districts, which siphon off increases in property taxes to pay for improvement projects. The city sells bonds, using the diverted property taxes to pay bondholders.

The city now has a whopping $5.12 billion in property value in urban renewal districts kept off the regular tax rolls — more than twice the amount of eight years ago. Taxes on that property don’t go to the county, public schools and other local government.

So why is PDC in such a funding pickle?

Zombie districts

The city sold hundreds of millions in urban renewal bonds in past years, but PDC already spent the bulk of the proceeds. Mayor Charlie Hales, borrowing a term he got from Rust, says the city’s longstanding urban renewal areas, such as the Downtown Waterfront and South Park Blocks districts, are now “zombie districts.”

They still spin off significant property taxes that are diverted from local governments, but the money goes solely to pay off bonds, with no new cash coming in to pay for projects or PDC staffing.

“I think they built up a fairly big-sized bureaucracy within PDC; they just kind of got bloated, if you will,” says Tom Linhares, director of the Tax Supervising & Conservation Commission, a watchdog group over local government finances in Multnomah County.

The Great Recession, which resulted in an unprecedented four years in a row of declining property values in Oregon, also caused a dip in PDC revenues that no one predicted, Linhares says.

The agency, and city councilors, also failed to stage urban renewal so that it could create new districts as old ones paid off their debts and put property back on the tax rolls.

PDC lives off the money raised via bonds, not by property taxes, Linhares says. When the city can’t sell new bonds, PDC’s revenue starts to dry up.

PDC also has pretty much maxed out how much property it can put into urban renewal areas, butting up against the state cap of 15 percent of the city’s land base and assessed property value.

New emphasis

When the Great Recession paralyzed the real estate development and financing markets, PDC shifted its focus to economic development efforts that might net new jobs. It’s also been targeting more neighborhood revitalization, responding to residents’ complaints that it’s too downtown-focused.

Neither of those strategies will produce tax-increment funds as reliably as a subsidy that enables a private developer to build a project.

PDC also has decided not to renew urban renewal districts when they reach their targeted expiration dates, due to pressure from Multnomah County and local schools, which want property put back on the tax rolls.

“We don’t believe that the political climate exists to pursue that,” Quinton says. “There’s a greater awareness and sensitivity to the impact on the county and the schools.”

PDC also devoted significant urban renewal funds to pay for new county buildings in the River District and the new Education District near Portland State University, which aren’t likely to produce tax-increment funding.

Though PDC did recently create the new education urban renewal district, much of that will benefit PSU, which doesn’t pay property taxes.

Quinton projects that tax-increment financing will largely dry up by 2021-22, a little more than eight years from now.

The city isn’t expected to pay off bonds for the Downtown Waterfront and South Park Blocks districts until 2024, says Rust, who now works for Public Financial Management Inc. That bars the creation of replacement districts until then.

And new urban renewal districts can take several years to spur private investments that generate tax-increment financing, says Scott Andrews, PDC board chairman. It will take five years for the Education District to generate $5 million in urban renewal funding, he says.

The good news, Andrews says, is PDC has four or five years, under its slimmed-down funding model, to find new ways to raise money.

Quinton says it’s not unusual for a public agency to make money via fees and services. Metro makes much of its money from solid waste fees, he notes, and the Port of Portland makes money from airport fees.

Boston’s urban renewal agency kept an ownership share in a parking garage that it helped finance, and earns money that way, Andrews says.

Some might be more skeptical of PDC’s ability to make money via lending, given projections that it will only collect on half its current loans. Some call those “groans,” for loans that become outright grants.

But PDC has tightened its lending policies in the past couple years, Andrews says, and started charging interest on the loans. The $8 million loan used to lure Vestas to locate its North American headquarters in the Pearl District, for example, gave PDC a lien on the property should the company fail to repay the loan.

The new PDC will still have significant funds. The agency has set aside more than $50 million, for example, for a Post Office distribution center redevelopment on Northwest Hoyt Street. Some see that site as having the potential for a Nike-style campus that could be a magnet for hundreds of jobs. However, that’s just enough money to buy and market the property, not to develop it, Andrews says.

“I think we’re less likely to do a ‘build it and they will come’ approach,” at the Post Office property, Quinton says. “We’re going to have to see someone else come in and take a lead role in redeveloping that site.”