East Baltimore Development Inc. has spent $6.4 million per acre since 2002 to revitalize a largely vacant chunk of inner city bounded on three sides by slum and blight. The money has gone to buy homes, demolish buildings, relocate residents and build underground infrastructure for water, sewer, state-of-the-art fiber-optic and electrical systems. Of the $564.7 million tab so far, $212.6 million has come from the cash-strapped city, state and federal governments, $214.2 million from private developers, $92.5 million from the Johns Hopkins University, the Annie E. Casey Foundation and other nonprofits, and $45.4 million from investors of federal tax credits. And nowhere is there a comprehensive, independent public accounting of the funds and how they have been spent.

A five-month investigation by The Daily Record found that large sums have been spent to pay consultants for plans that may never be used, and generous salaries have been paid to the EBDI staff. The newspaper found an intricate trail of 15 sources of public money for the project. In one case, there was a $3.5 million disagreement between EBDI and the city Department of Housing and Community Development about how much money EBDI had spent on infrastructure. The city said $1.8 million; EBDI said $5.3 million. The amount of private investment in the project was overstated - sometimes significantly - in EBDI public reports. An undated EBDI document written to lure investors inflated the amount of private investment by more than half a billion dollars. The same incorrect figure was included in EBDI's 2005-2006 annual report. The reports incorrectly stated that private developer outlay for the first 31 acres of the project, known as Phase I, was $848 million, or 86 percent of the project's investment. The magnitude of private investment "is unique for enterprises of this nature," said the undated document written for investors. John T. "Jack" Shannon Jr., EBDI's CEO until 2009, said the $848 million figure was actually an estimate by the project's master developer, Forest City-New East Baltimore Partnership, of how much private investment would go into the project's first 31 acres when fully built. The $848 million should have been labeled "projected private development," Shannon said. In recent years, figures stating the amount of private investment in the project have disappeared from public EBDI reports. The annual reports for 2008 and 2009 contain no monetary figures but rather colorful pie charts showing only percentages of investment by governments and foundations. There is no mention of private investment. Cynthia Swisher, EBDI's chief financial officer, said private investment figures were omitted because EBDI's former communications director decided to mention only investment generated directly by the nonprofit and not "investments made in privately-owned real estate. " 'I would urge transparency' Since its creation in late 2002, EBDI has operated largely independently by virtue of its status as a nonprofit in spearheading the city's biggest urban redevelopment project since the construction of Charles Center-Inner Harbor in the 1960s and '70s. In interviews that began last fall, The Daily Record found that key elected officials have paid scant attention to the project's finances, despite its magnitude. Although two members of the Baltimore City Council sit on EBDI's board as nonvoting members, the nonprofit is not audited or overseen by City Hall in any formal way. City Comptroller Joan Pratt has no fiscal oversight over EBDI because of its nonprofit status. City Councilman Carl Stokes recently told The Daily Record that he would call for a public audit of the project. But Mayor Stephanie Rawlings-Blake said on Monday she sees no need for such an audit. "I don't think a public audit is anything to run from, but I am sure in accordance with regulations for them as a 501c3 that their financial books have been audited as regularly as they should be," the mayor said. "I am also confident in the community leaders that have been a part of the EBDI process there. The former head [of the board, Joseph Haskins Jr.], as well as the chair now [Douglas W. Nelson], have very good reputations for their financial acumen as well as integrity. " The mayor approves the hiring of EBDI's CEO as a matter of protocol, according to former Mayor Sheila A. Dixon, who approved the hiring of Christopher Shea, the current CEO. Dixon said then-Mayor Martin O'Malley approved the hiring of Shannon, the first CEO. Paul T. Graziano, the city's housing commissioner and a nonvoting member of the EBDI board, receives monthly reports from EBDI on the project's progress but discards them after reading them, said Cheron Porter, his spokeswoman. But she said Graziano and other city officials are in "regular communication" with EBDI. City Council President Bernard C. "Jack" Young held hearings in April 2009 about EBDI's minority hiring and relocation practices. But he and the two council members who now represent the area said they knew next to nothing about the project's public funding when interviewed last fall. There is also little fiscal oversight at the state level. Although Lt. Gov. Anthony Brown is a member of the EBDI board of directors, state Comptroller Peter W. Franchot and legislative auditors have no fiscal oversight responsibility over EBDI. EBDI declined to give The Daily Record copies of its internal audits. It is not legally required to make them public because of its nonprofit status. When asked about the inconsistent and inaccurate public reporting of the project's finances, urban development consultant Paul Brophy said, "I think accurate reporting is to the program's advantage - reporting where the money's coming from and where it's going. I would urge transparency. " Brophy, former president and co-CEO of the Enterprise Foundation, was an early consultant to the project before EBDI was formed. "Nobody ever believed that figure of $848 million anyway," said Raymond A. Winbush, director of the Institute for Urban Research at Morgan State University. He was an early critic of the project because of the decision to eliminate the community that occupied the redevelopment area. "Once we asked to see a [breakdown] of that money and they didn't want to show us," he said. "They never gave it to us because they said it was private money and they didn't have to. "

'A legal and moral obligation' Public money paid $169 million, or 77 percent, of the $219 million it cost to purchase and demolish properties, relocate residents and build new infrastructure for The New East Baltimore, according to figures provided by EBDI and the city and compiled by The Daily Record. Relocating 732 households and buying 1,838 properties cost taxpayers $101 million. The high cost of relocation was due to unprecedented amounts paid to each household. The city and EBDI originally sought to pay less than $50,000 per household, according to former residents and city officials. But bitter protests by the residents secured payouts of between $150,000 and $265,000 per household, according to federal documents examined by The Daily Record. Officials at the Annie E. Casey Foundation and EBDI say they paid the higher sums because federal law required it and because it was the socially responsible thing to do. Shea, EBDI's CEO, said EBDI staff counseled several families after they moved so they would not lose their new homes to foreclosure as the subprime mortgage crisis hit. Explaining the high relocation payments, former EBDI CEO Shannon said, "We needed to look not where people were today, but on fair-housing laws, where they needed to be. We had families in substandard housing and houses not big enough for their families. So we needed to adjust. "Keep in mind these individuals did not ask to move. We had a legal and a moral obligation to get this exactly right. If it required more funding and time to do it, then so be it. "

High expenses EBDI has also spent heavily on consultants, sometimes for plans that were abandoned or shelved, according to The Daily Record's examination of public documents and inquiries to EBDI. * In 2007 EBDI paid the local architecture firm of Ziger/Snead $614,000 for plans to renovate and expand the vacant Elmer A. Henderson Elementary School at 1101 N. Wolfe St. The plans were scrapped after vandals stripped and burned the building, making it unusable, said Shea and Shannon. * Two master plans have been written since the project began, costing a total of $1.8 million. The first, a 2001 plan depicting the project's first phase, was commissioned before EBDI was formed. Prepared by Urban Design Associates of Pittsburgh at a cost of $930,000, the plan promotes 1.5 million to 2 million square feet of biotech space and contains designs and floor plans for several types of homes that have not been built. The plan was financed by the Goldseker Foundation, which paid $790,000, the Abell Foundation, which paid $65,000, and the city, which paid $75,000. A second master plan, from 2006, cost EBDI $825,000 and was created by Sasaki Associates, an architectural and planning firm with offices in Boston and San Francisco. That plan, outlining development for Phase II, is still in a draft form but has been shelved because the market for building new housing dried up, said Shea. Last summer, EBDI and Forest City-New East Baltimore Partnership hired the local advertising firm of Carton Donofrio at an undisclosed sum to "rebrand" the community and relaunch the project.

'A Third World country' The complex level of public investment is no surprise to outside experts on public financing or those who have been in charge at The New East Baltimore. The magnitude of the project, they said, has dictated the many layers of financial wizardry needed to acquire, demolish and begin to rebuild during the recent recession as lenders remain frozen and wary. "This by no means was seen as an inexpensive project," said Haskins, the former EBDI board chairman. "But we saw it as a project with a lot of future implications for the city and state and potential to become a national model of how to revitalize an area that looked like a Third World country. " Haskins, who is chairman, president and CEO of Harbor Bank, was one of the first Baltimore leaders selected by then-Mayor Martin O'Malley to plan the transformation of the Middle East neighborhood. He worked with Shannon, EBDI's first CEO. "The level of public investment that's required at the outset of these projects will always be substantial at the beginning, compared to the level of private investment," explained Shannon. "What EBDI has put together is infrastructure and provided the platform to attract private investment in the neighborhood. The level of public investment will not increase and private investment will," he said. Shannon's comments shed light on why the investments to date are so top- heavy with public funds - tax dollars were largely spent to eliminate the old Middle East community and rebuild infrastructure. And Brophy notes that the project has heavy upfront support from foundations because of the "social purposes that are in play here" with unprecedented support services for relocated residents. Private money, Shannon says, largely pays for new development. For example, the project's lone biotech building cost was paid for with $100 million in private funds.

It's 'ridiculous' Meanwhile, city taxpayers and their elected officials are staring at a multimillion-dollar commitment in public funds that will last for the next 29 years. Two of the largest public investments in the project are loans that must be repaid with interest from tax dollars, saddling the city with $227 million in payments. That's in addition to the $212.6 million already committed. The largest public investment comes from the sale of $78 million in Tax Increment Financing (TIF) bonds to investors that must be repaid with future property taxes diverted from the project's first 31 acres. By the year 2039, Baltimore will have paid $199 million in principal and interest to bond investors. A $21.2 million loan, called a Section 108 Loan, from the U.S. Department of Housing and Urban Development, is being repaid from Community Development Block Grants. Those grants, used to renovate houses and upgrade parks, are a dwindling federal resource that is the lifeline to communities throughout the city. By 2024 the city will have repaid $28 million in principal and interest. Other government funds come from a myriad of sources, including city general funds, motor vehicle revenue funds, city waste water bonds, city general obligation bonds, city public works revenue, state capital funds, state sunny day funds, federal empowerment zone funds, federal rent vouchers, and federal tax credits. Councilman Stokes, who has created a task force to study TIFs and other development incentives, said it's "ridiculous" for the city to divert property taxes to repay loans. "It's a lot of money [even] if it returns investments to the citizens," he said last week. "But it won't return investment to citizens. The citizens will foot the bill. "

[SIDEBAR]

TIFs increasingly fuel city projects By Melody Simmons and Joan Jacobson

What is a TIF? The acronym stands for Tax Increment Financing, a little-understood form of public investment in urban redevelopment now favored by the city of Baltimore. When City Hall approves a TIF to help finance a new development, bonds are sold to investors. The bonds are to be repaid not with city general funds but with future property taxes from the new development. This financing mechanism decreases the upfront development costs, but it also decreases the amount of property taxes that flows into city coffers from the new development until the bonds are paid off. Historically, Baltimore has enticed developers with a variety of tax breaks such as PILOTs (Payments In Lieu Of Taxes) or multimillion-dollar loans as second mortgages that often did not need to be repaid. But in the current economy, city economic development officials like TIFs because they function like a blank check and can keep development moving even in the depths of recession. A TIF is often seen as "a kind of free money," says Joan Youngman, a senior fellow and TIF expert at the Lincoln Institute of Land Policy in Cambridge, Mass. "This is why they're often seen as the only game in town and the only feasible and palatable [option] when a tax increase is not popular," she explained.

A serious commitment From the standpoint of the private investor, a TIF is viewed as a signal that the city has made a serious commitment to a project, said Steve Kraus, chief of the city's Bureau of Treasury Management. Since May 2003, Baltimore has sold bonds for seven TIFs, Kraus said, totaling $116.1 million. Those TIFs were used for HarborView, Clipper Mill, Mondawmin Mall and Locust Point, among others. "These projects would not have moved forward without the TIF and they needed more money than a PILOT," Kraus said. No bonds have been issued yet for three additional TIF districts created by the City Council. One of those districts is in Harbor Point, on the slice of land between Harbor East and Fells Point where developer and bakery magnate John S. Paterakis hopes to get $150 million in TIF bonds for new construction, according to members of the TIF task force. Another is at Westport, where developer Patrick Turner envisions a 4.8 million-square-foot mixed-use development on 50 acres along the Patapsco River. It would include office, retail, housing and hotel space and cost $1.5 billion. Turner is expected to seek $160 million in TIF bonds, according to members of the TIF task force. After the City Council voted to establish the Harbor East TIF district in November, Councilman Carl Stokes formed a task force to review TIF and PILOT financing in light of the city's budget woes. At a task force meeting last Tuesday, Kraus said bond rating agencies consider TIF bonds the same as general obligation bonds in calculating a city's debt load. Joseph T. "Jody" Landers III, a member of the task force who is executive vice president of the Greater Baltimore Board of Realtors and a former city councilman, cautioned that TIFs divert tax revenues from the city's general fund because the TIF bonds are repaid, often for decades, before full tax revenues are realized from a development. "Clearly you're committing tax revenue to a specific project - it is money that doesn't go into the general fund," Landers said, agreeing that the impact on the city's borrowing capacity is also affected by TIF because rating agencies look at combined debt.

Largely vacant land The largest TIF issued by the city so far is for The New East Baltimore. The bonds sold in 2008 and 2009 total $78 million, or more than one-third of the project's public funding to date. A debt service schedule obtained by The Daily Record from the city's Bureau of Treasury Management shows that $199 million in property taxes will be diverted to repay holders of the TIF bonds over the next 29 years. That schedule assumes there will be enough development on the property to generate the taxes to repay the investors. But today The New East Baltimore TIF tax district is largely vacant land. According to city documents outlining the TIF, the property owner - East Baltimore Development Inc. - would be liable for the debt if there is not sufficient property tax revenue to repay it. If the property owner defaulted, the land would revert to the city like any tax delinquent property. But in that case, the bond holders would not get paid. Youngman, the TIF expert at the Lincoln Institute of Land Policy, said she is unaware of a municipality anywhere in the country that hasn't collected enough property taxes to repay TIF investors. The institute is currently sponsoring research to see if declining property values in Wisconsin are adversely affecting repayment of TIF bonds. One of the investors of the Baltimore TIF bonds was the locally-based national philanthropy, the Annie E. Casey Foundation, which pumped in $27 million in 2009 when the economy slumped and it became difficult to find traditional investors. Douglas W. Nelson, Casey's recently retired CEO who is now chairman of EBDI's board, said he realized the risks inherent in getting loan repayments in difficult economic times. "Of course, if there is no tax increment, the city can't pay us back, and so if we don't have homes ... and other enterprises, we'll be in trouble," said Nelson. "I don't expect the city to default on these bonds," he added, "but I recognize that this is a debt that requires a patient lender because of the time it will take to create the resources to repay the city. " In the meantime, city officials say they are confident there will be enough of a cushion in a reserve fund set aside to aid such repayments to cover expenses in the early years of the bond repayments. Repayments of the New East Baltimore TIF began in 2008 with interest-only amounts of about $2 million a year. This year payments will be $3.8 million. By the year 2038 annual payments will be $9 million. "We're going to get what's owed us and the bond holders will get paid," said Kraus, who praised the Casey Foundation for purchasing the bonds when conventional investors would not. The city is not liable to repay the bond holders, said Kraus, and if the bonds don't get repaid, it will not affect the city's bond rating. He also noted that no TIF debt in Baltimore has ever gone unpaid.

Extra precautions With that in mind, EBDI and the city are taking extra precautions they hope will keep Baltimore's TIF debt repayment record intact. At the behest of city financial advisors, two recent additions to The New East Baltimore development plan - a $60 million graduate student housing tower owned by the Johns Hopkins University and a $175 million state Department of Health and Mental Hygiene lab - will be required to make unusual payments in lieu of taxes to make sure each tax-exempt building contributes to the TIF repayments. "We need to hold fast" to the responsibility to bond investors, said Christopher Shea, EBDI's CEO. "In order to welcome a tax-exempt building to the project," he said, TIF repayments still must be made. Hopkins will be responsible for a $400,000 annual payment in lieu of taxes, said Cynthia Swisher, EBDI's chief financial officer. The annual amount of the state lab's payment in lieu of taxes has yet to be determined.

An essential tool? TIF financing dates to 1952 in California. It became a popular way to finance development projects in the 1980s and 1990s as federal and state funding grew scarce, according to research conducted for the Lincoln Institute of Land Policy, an independent nonprofit organization that studies urban development and land taxation. Today, Wisconsin has more than 1,300 TIF districts, according to the Lincoln Institute Recent articles in the Chicago Reader showed that Chicago has 159 areas where property taxes are redirected to repay TIF investors and finance new development. The Reader skeptically called Chicago's TIF program the "shadow budget" because the city attempted to keep confidential the financial plans for half a billion dollars gleaned from TIF districts. The newspaper also reported last year that Chicago's TIF districts will run deficits in the next few years from declining property taxes. Local governments tend to like TIFs because they typically don't need voter approval like other bond issues, says Youngman, the Lincoln Institute TIF expert. When asked if he thinks the average citizen understands the TIF financing mechanism and its implications for the government issuing the bonds, Baltimore City Councilman Carl Stokes said no. "We don't even understand this," Stokes said, referring to his council colleagues. Youngman said cited a lawsuit filed in Florida by a man trying to stop a road project. In 2007 the Florida Supreme Court ruled that voters must approve TIFs, then reversed itself a year later after complaints from local governments, Youngman said. In its reversal, according to the publication State Tax Today, the court wrote that demanding voter approval would "cause serious disruption to the governmental authorities. " Baltimore City Councilman William H. Cole IV says TIFs are an essential development tool for the city. Cole says he monitors Baltimore's TIF projects as chair of the council's Community Development Subcommittee and as a member of the Taxation, Finance and Economic Development Committee. Without TIF bonds, says Cole, a project like The New East Baltimore might never get off the ground. "We can't settle for the status quo," he said.

[SIDEBAR]

EBDI's top earners surpass those at BDC By Joan Jacobson and Melody Simmons

As the nation headed into its worst recession since the Great Depression, staffing and salaries at East Baltimore Development Inc. skyrocketed between 2005 and 2009, Internal Revenue Service documents show. The pay and benefits at the nonprofit increased by 46 percent, from $2.6 million in 2005-2006 to $5.6 million in 2008-2009, when eight employees made more than $100,000 a year. During that time the staff expanded from 43 to 72, according to Cynthia Swisher, EBDI's chief financial officer. One of EBDI's highest-paid employees is Arlene Conn, head of relocation services and girlfriend of Baltimore's housing commissioner, Paul T. Graziano. His agency pumps millions of dollars into EBDI and he is a nonvoting member of the organization's board of directors. Graziano and EBDI officials say there is no conflict of interest. EBDI officials say they have trimmed staff as acquisition, relocation and demolition work at the 88-acre site of The New East Baltimore winds down. Swisher said wages and benefits for 2010 fell to $5.1 million, about 10 percent of the nonprofit's $50 million annual budget. EBDI eliminated five vacant positions and terminated another five employees last year. The EBDI board has not approved a salary increase in two years, she added. EBDI was formed by the city, the Johns Hopkins University and community leaders in 2002 to serve as the developer charged with rejuvenating East Baltimore. The group was formed as a 501(c)(3), a nonprofit organization, so it does not have to adhere to city hiring, procurement or salary rules. Staff members at the nonprofit, for example, are not affected by recent pay cuts and furloughs that have rankled city workers, including firefighters and police. EBDI's top salaries are considerably higher than those at the Baltimore Development Corp., the city's development arm, which is also a nonprofit. In 2008-2009, the most recent year for which tax statements are available, BDC's top eight earners made only 72 percent of the salaries of EBDI's top eight earners. Total salaries for EBDI's 79 employees who worked at least part of that year came to $5.6 million, while BDC's salary total for its 70 employees was $4.7 million. That year, EBDI's CEO, John T. "Jack" Shannon Jr., earned $263,065, while BDC's president, M.J. "Jay" Brodie, earned $205,740. Asked about his organization's salary structure, current EBDI CEO Christopher Shea said, "I think it's high. " But "the board approved it," he added. Shea's salary is $219,399. "It was a salary structure that I inherited when I came here," said Shea, who became CEO in 2009. "Some people here are better at what they do than anybody else in the country. " Shannon said staff members were hired when the real estate and financial industries "were at a high employment level" and EBDI needed to compete for talent. Salaries increased, he said, to retain employees in such a "high-stress environment. " Graziano also defended EBDI's salaries. "They have very complicated technical issues they're dealing with and they're paying for competency," he said. "It's a nonprofit but also engaged in a major redevelopment project but far above a scale of typical nonprofit. " Conn owns a house with Graziano, according to property tax records, and lives with him there in Bolton Hill. She heads a relocation staff of 11 employees and received a salary of $109,000 in 2008-2009, tax records show. More recent figures are not available. Graziano and Shea said there is no conflict of interest between Graziano's position as the city official who oversees millions of dollars that go into The New East Baltimore project and Conn's job administering some of those funds. "As CEO of this organization I am absolutely comfortable that there is no inappropriate interaction," said Shea. Referring to Conn, he said, "I have the single most qualified person in this position. I don't see a conflict. " Before Conn was hired, EBDI consulted a lawyer about her personal relationship with the housing commissioner. The attorney, Michael A. Brown, said he wrote an opinion in which he found no conflict of interest. "I am not a voting member of the [EBDI] board," said Graziano. "I have kept out of any matters [that could involve Conn]. "

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CITY LIFE (90%); INVESTIGATIONS (90%); REAL ESTATE DEVELOPMENT (89%); NONPROFIT ORGANIZATIONS (89%); ANNUAL REPORTS (89%); REAL ESTATE (78%); PRIVATELY HELD COMPANIES (78%); REGIONAL & LOCAL GOVERNMENTS (78%); CONSTRUCTION SPENDING (78%); URBAN DEVELOPMENT (78%); ECONOMIC NEWS (78%); HOUSING AUTHORITIES (77%); PUBLIC FINANCE (75%); CITY GOVERNMENT (73%); WAGES & SALARIES (73%); FIBER OPTICS (71%); ACCOUNTING (69%)

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BALTIMORE, MD, USA (92%) MARYLAND, USA (92%) UNITED STATES (92%)