Johns Creek Development Authority - Crony Capitalism Institutionalized

The Johns Creek City Council discussed the activation of a Development Authority during their April 23, 2018 Work Session.  The stated goals of a Development Authority would be to increase jobs, increase per capita income, increase taxable investments in the city, and to enhance the quality of life in Johns Creek.  It would seek to achieve those goals by attracting quality businesses to the city, and serving existing businesses to expand their footprint and grow their workforce.

That all seems like a very noble set of objectives, but let's dig a little deeper and look at what this would really mean.

What Support do Local Businesses Receive Already?

We already have two organizations dedicated to attracting and retaining business in Johns Creek: the Johns Creek Chamber of Commerce, and Johns Creek Advantage.  Both organizations are dedicated to advocating and lobbying on behalf of business constituencies in Johns Creek.  Our City Manager sits on the Board for both organizations.  The City of Johns Creek is listed as a top tier financial Platinum Club sponsor for the Johns Creek Chamber of Commerce, and the top tier Lead Investments Division (>$100,000) for Johns Creek Advantage.  There is no lack of support for business development by the City of Johns Creek on behalf of these organizations.

What Would a Development Authority Provide?

So what does a Development Authority provide that Johns Creek Advantage or the Johns Creek Chamber of Commerce don't already cover?  Two things:

  1. Access to revenue bonds that the Development Authority may be able to facilitate at a lower rate than a business might be able to get on the open market, and
  2. The ability to grant tax abatements that reduce the overall business tax burden 

A City Staff memo to the Johns Creek City Council states, "The tax abatement and revenue bond financing provides an attractive incentive for firms to relocate or expand their business in Fulton County."  Further in the memo, it is noted, "Financial Impact: If the Council activates Johns Creek Development Authority, the financial impact to the City would include reduced property tax revenue due to any tax abatements offered by the Authority. Operational costs would likely be supported through administrative fees collected through the bond issuance."

From a purist's perspective, "incentives" provided to one party but not others distorts the market.  One party is granted benefits not available to others.  To place that in perspective, consider a situation where you and your neighbor have identical homes on the same street.  Your neighbor wants a larger home and plans to move, but is offered an "incentive" to remain in the home and expand it in exchange for waiving some portion of the incremental property tax value of the improved property for the next 10 years.  In addition, your neighbor is given access to financing at a lower rate than you can receive at any bank.  Your neighbor adds a beautiful new addition to the home for which property taxes are now effectively at a lower rate relative to its value than the effective tax rate you will pay.  The services provided by your City may have to increase now that your neighbor has a larger house (his extended family will add two additional cars to our roads, three new children to our school system, and increasing population means we'll need additional police and fire coverage), so your taxes may increase to make up for the lower property tax revenue yield granted to your neighbor.  The rules by which you must abide are no longer equal, and you are placed at a disadvantage. 

How Would a Development Authority be Funded?

According to the memo, operational costs would likely be supported through administrative fees.  Take note of the qualifying word, "likely".  In the Georgia Development Authority Handbook, we find that

"Georgia law provides that property taxes may be levied and collected to provide financial assistance to county or joint county and municipal development authorities. Municipal taxes of up to 3 mills may be levied for the expressed purpose of developing trade, commerce, and industry. County taxes may be levied up to 1 mill. Many constitutional development authorities specify other tax levy arrangements. Some authorities are supported solely through line-item city and/or county budgets, and some also receive funding through an administrative fee that is included in its bond issues."  

So while it is "likely" that a Johns Creek Development Authority would be funded by administrative fees, it's also possible that Johns Creek property owners may end up paying the bills for an Authority that is granting tax abatements to chosen businesses.

How is the Development Authority Structured?

Under Georgia law, a Development Authority can be created in one of two ways:

  1. Activation by resolution of the City Council under a general statute
  2. Activation by local law or local act

The difference between the two options is that activation by local law or local act can specify exactly what powers are granted to the Authority, and may place a limit on certain powers available in the general statute.  In both cases, a board is established with between 7 and 9 members, appointed by City Council on staggered 4 year terms. Once established, the board has a wide breadth of authority.

Georgia Development Authority Handbook

The principal activities of the Development Authority include:

  • Reducing the cost of project financing through the use of federal, state, and local government financing programs
  • Reduce the cost of project operations by providing some form of ad valorem property tax relief
  • Assemble tracts of land for development as industrial parks
  • Promote the community as a choice location for business location and expansion

To Whom is a Development Authority Accountable?

Georgia's Development Authorities Law states that Development Authorities shall have perpetual existence. An amendment passed in 2000 provides a means for the city to dissolve the Development Authority if there are no bonds outstanding. In effect, once established, a Development Authority can ensure its continued existence.

The board membership is appointed by City Council, and the 7 to 9 members serve staggered 4 year terms.  This provides for some limited accountability, but the risk is that appointments could be politically motivated and/or influenced.  Key decisions and commitments are made by an Authority that is, at best, far removed from voter accountability.

How Prevalent are Development Authorities?

Development Authorities are relatively widely deployed. Johns Creek is already covered under the Fulton County Development Authority.  All of our surrounding counties have a Development Authority. At the level below the county, most of our closest municipalities do not have a Development Authority - the notable exception being Alpharetta.  Cumming, Duluth, Milton, Norcross, Peachtree Corners, and Suwanee do not have a Development Authority, and Roswell's Development Authority is marked as "inactive".

Comparative Analysis.jpg

How Does All of This Relate to Crony Capitalism?

Crony Capitalism - an economy in which businesses benefit not as a result of risks they take, but rather as a return on money amassed through a nexus between a business class and the political class.

Johns Creek is already well represented by several organizations dedicated to advocating, lobbying, and working on behalf of businesses.  City Council Staff sit on their Boards, and significant amounts of funding are provided to further their cause.  

The case will likely be made that by establishing a Development Authority, we are sending a message to the market that Johns Creek is "business friendly", and that by having our own Development Authority instead of relying on the Fulton County Development Authority (FCDA) will bring control closer to home. It will also likely be suggested that the FCDA typically will not get involved in deals below $10 million, a Johns Creek Development Authority will be better positioned to help smaller businesses. The carrot on offer is that the costs of facilitating business location or investments will be offset by economic growth for the community.

On the other hand, the benefits realized through a Johns Creek Development Authority would likely accrue mostly to new businesses, leaving existing businesses and residents to absorb the costs borne by the loss to tax revenue due to tax abatement grants.  While tax abatements are set to reduce or expire over time, many of the assets acquired through a development program would have also depreciated to the point where they're no longer taxable.  All of that amounts to picking winners and losers, and not allowing for a level playing field for all business participants.  

Why is Crony Capitalism Bad?

The topic of Activation of a Development Authority is set to continue as an agenda item on the next City Council Work Session Meeting. Those in support of a Development Authority will make statements about the potential for positive impacts and the need to increase the percentage of our tax base contributed by business. It is our position that Johns Creek already has adequate representation from organizations like the Johns Creek Chamber of Commerce and Johns Creek Advantage, and that the Fulton County Development Authority has, and will continue to support the development function for Johns Creek. There is no significant additional benefit to establishing a Johns Creek Development Authority.  Doing so would risk establishing an unaccountable bureaucracy that is protected by a nearly unassailable perpetual existence, and further increases the influence of lobbyists and special interests over the interests of residents. 

The City of Johns Creek was founded largely on the desire to have greater resident control over decisions affecting our community.  In light of an almost two year long Comprehensive Land Use Plan process and the hard-fought effort of the community to shape that process away from over-development, establishing a Development Authority that is not directly accountable to our residents is a step in the wrong direction.