Testimony of Ed Lazere, Executive Director, DC Fiscal Policy Institute At the Community Participation Hearing on “The District’s Draft HUD Section 108 Loan Guarantee Application for the DC USA Project and Proposed Modification to the FY 2004 Consolidated Plan Action Plan”

Thank you for the opportunity to speak today. My name is Ed Lazere, and I am the executive director of the DC Fiscal Policy Institute. DCFPI engages in research and public education on the fiscal and economic health of the District of Columbia, with a particular emphasis on policies that affect low and moderate income residents.

The prospect of a major retail development with several popular stores in this neighborhood is very exciting. At the same time, this hearing is not just about whether residents would like to have Target, Starbucks, and other stores in their neighborhood. Instead, we are here to discuss whether the specifics of the District’s plan for bringing retail to Columbia Heights make sense. My review of the proposal finds that it is not a good deal for District taxpayers and it is not as good a deal as it could be for Columbia Heights residents.

First, the city’s proposed subsidy consumes too much in terms of DC tax dollars. The city initially proposed supporting this project under its Tax Increment Financing Program. For several reasons, however, the TIF proposal was rejected by the DC Chief Financial Officer. In particular, the CFO noted that the DC USA proposal violated the guidelines that TIF subsidies should not exceed 20 percent of the project and that the developer’s equity investment in the project should be larger than the TIF subsidy. These guidelines help ensure that TIF is a responsible use of tax dollars and that it be used only as gap financing. Following the CFO’s rejection, the Washington Business Journal published an editorial supporting that decision and arguing that developers had asked the city to support an unreasonably high share of their project’s costs.

The new proposal requires a somewhat smaller subsidy than the TIF proposal, largely due to lower financing costs. While that is an improvement, the new proposal still violates the TIF guidelines. Using the mayor’s figures, the District’s land and Section 108 loan subsidies would total $55 million, or more than one third of the development costs; this is well above the 20 percent maximum. Moreover, the District’s subsidy would be greater than the equity provided by the developer.

It also is worth noting that this proposal could put the city’s future CDBG funds at risk. If the Grid USA project does not generate enough revenue to repay the Section 108 loan, CDBG funds would have to be used. Even if the risk is low, this should be an issue of concern.

I question why this project needs a subsidy of this size to succeed. The business climate and the opportunities for new businesses to succeed in the area seem especially strong. The Columbia Heights area is benefiting from a number of recent public investments, including the opening of the Metro Station, the upcoming Tivoli Development, and the disposition of other properties controlled by the NCRC. Columbia Heights also has a very strong real estate market. Finally, the population density of the area is attractive to potential retailers.

In fact, every sign suggests the DC USA Project will be tremendously successful. In addition to Target, a number of big-name retailers have expressed interest in locating there ‘ including Whole Foods, Starbucks, and Office Depot. Target expects this store to be its top-grossing location in the nation. This is consistent with success other retailers have had in tapping DC’s markets, such as Home Depot.

One common argument is that investments of this type pay for themselves because they generate new tax revenues. Indeed, the subsidy for the project’s parking lot would be paid for using incremental sales and property tax revenues from Target and the other retailers. Yet the notion that this project is cost-free requires an assumption that no other development will occur at the site over the next 20 years ‘ the life of the loan ‘ without this subsidy. That assumption seems ludicrous. If the Section 108 loan guarantee is not approved, it is likely that the DC USA project will go ahead ‘ perhaps with some modifications ‘ or that some other development will occur at the site. In those situations, all tax revenues generated at the site would go into DC coffers and be available to support services, rather than being diverted to pay of the developer’s subsidy.

I also find that the plan presented today does not provide sufficient benefits to Columbia Heights residents. If the District chooses to make a substantial investment of public dollars in DC USA, it also should expect and require substantial benefits for DC residents. The development of a new retail center is not sufficient benefit alone, especially since the District’s subsidy will support a parking lot and most area residents do not have cars.

Documents provided by the developer show that 94 percent of jobs created at this development will be retail service clerks, security guards, and other similar positions. These jobs will pay $9 or $10 according to the developer. These wage levels appear overstated to me, but even at these levels, a full-time employee would make less than $21,000 per year. That is less than 150 percent of the poverty line for a family of three. It is less than 25 percent of the area median income for a family of four. And it is well below “self-sufficiency” income levels identified by groups such as Wider Opportunities for Women. The documents make no claims regarding guaranteed comprehensive health insurance coverage for employees. In short, the jobs at DC USA primarily will be low-wage, low-benefit jobs. If the District wishes to support this project, it should work with the developer and prospective employees to improve the available job opportunities as much as possible. This could involve guaranteed wage levels that meet some living-wage standard. It also could mean requiring the developer to train local residents for both entry — level and higher-level jobs. It could mean accepting a labor peace agreement.

In addition, the revitalization that DC USA will bring to Columbia Heights will make this neighborhood more attractive to middle- and upper-income residents. It will promote gentrification and thus will have a negative effect on affordable housing opportunities in the area. In addition, many people who work at DC USA will face affordable housing problems. Someone earning $21,000 per year can afford to spend only $500 per month on housing without exceeding the HUD affordability standard of 30 percent of income. For these reasons, the District’s investment in this project should include some component to preserve affordable housing in Columbia Heights. The District could choose to reduce the subsidy for the DC USA project to fit within TIF guidelines, and the freed-up funds could be devoted to affordable housing development.

Thank you for the opportunity to testify.