Rolling The Dice: The City of Elk Grove Casino Spots $16.4 Million Hoping Jobs Materialize

August 31, 2017 | Within hours of the conclusion of the Wednesday, August 23 Elk Grove City Council meeting, the city's public...

August 31, 2017 |

Within hours of the conclusion of the Wednesday, August 23 Elk Grove City Council meeting, the city's public information office sparked-up their PR machine and issued a press release regarding a major infrastructure project.

The project, a $16.4 million roadway, water, and sewer project, will build what the city calls "backbone infrastructure" for the city Southeast Policy area. That project for the SEPA will build sewer systems. 

According to the city's press release, "funding sources include Roadway Impact Fees and Laguna Ridge CFD 2005-1 funds." Put another way, the city will pre-pay the cost of the development in anticipation of repayment of fees as the 500-acres, which the city characterizes an "employment city," is built out.

On the surface, this appears prudent - who can argue the logic of paying the cost up front(?). But there are costs that will be incurred and the Elk Grove taxpayers will be the one coughing up the cash. 

In a more typical scenario for a project of this type, municipalities will issue assessment bonds and the properties benefiting from the improvements will be assessed to repay the bond (with interest). Assessing vacant properties for the cost to prepare them for development is not preferred by the land developers, because the market may not support rapid development and their land carrying cost could go on for years. 

If developers can get the city (i.e. taxpayers) to advance the interest-free funds, then the developers have eliminated the upfront capital needed to make their property marketable and essentially make the taxpayers wait for their money to be reimbursed. Plus, the development fees paid by the developer when the building permit is issued is directly passed on to the buyer in the selling price anyway, so the check they wrote is out there for a very short time. 

By drastically reducing the cost of money by not fronting their capital costs, not paying interest, and not having to wait a long time for fee reimbursement of the money they did pay, well, the developers must be laughing all the way to the bank! Once again, the developers in Elk Grove reign supreme and all the taxpayers got in return is a fancy press release. 

In this instance, the City of Elk Grove does not appear to be levying assessments in the form of a community facilities district; rather it is fronting the money from other pots of taxpayers money. Readers may recall the City used the same tactic when it borrowed more than $6 million from the drainage fund to buy the 99-acres for the long dormant proposed Major League Soccer stadium and fields on Grant Line Road.

While the City Council may argue this front-loading will help spur development of the crucial jobs center, it is not without flaws. The first of which is the benefit it bestows on the landowners.

By not levying the assessments on the property owners, who would have to pay for the improvements beneficial to their property immediately regardless of whether the land is developed now or 20 years from now, taxpayers are picking up the tab. By most definitions, this amounts to a big-fat, juicy subsidy for the land owners on the backs of taxpayers.

Or as was often said of Wall Street investments bankers bailed-out during the credit collapse, profits are private, but the risk is socialized. In Elk Grove's scenario, taxpayers are on the hook for the costs of the project while the land owners avoid assessments for a community facilities district which essentially becomes a public subsidy and taxpayers are paid back only when that property is developed.

Short of inquiry at the county recorders office, it is an inexact science to say who the property owners are that will be the recipients of the taxpayers' largess. Nevertheless, if the Wilton Rancheria Casino were open it would be a pretty safe wager to place a bet the names of those property owners are the same ones that show up on the contributors' lists of our City Council members, but that is something to be explored at another time. 

Undoubtedly the City will say these up-front payments will make it is easier for developers to bring the employment center and some of the 25,000 jobs promised by former Mayor Gary Davis and his protege, current Mayor Steve Ly. Like most things, this too is a matter of perspective.

A contrary view holds that these wealthy landowners, who are riding free because of their assessment free status, have no urgency to develop the commercial centers needed to attract those employers. Since they do not have to pay the assessments, they are in no rush to build according to current zoning.

Furthermore, since they are receiving a free ride and have no onerous assessment obligations, what happens if at some point they claim the demand does not exist for employment centers? Since they never were under no financial pressure to build the structures that would house those 25,000 jobs, they can claim no interest exist, and Voilà, the City Council will be more than accommodating to a rezone to say residential housing.

Notwithstanding the City Council's history of never meeting a rezone benefiting developers they did not fall head-over-heels in love with, we hesitate to say this is an intentional escape hatch built for the landowners. Rather we will give them the benefit of the doubt and say if this area never develops as a jobs centers as have been promised it will be a textbook example of unintended consequences.

Beyond the subsidy being extended to the landowners, there are opportunity costs for taxpayers. Given the rapidly deteriorating roads in Elk Grove and the city's unwillingness to address them head on, it is not without irony the City will use $5.7 million from the roadway fund..

We would also be remiss if we did not address the City's ability to attract those 25,000 high-paying jobs, much less a fraction of that promise. We all remember the words spoken in March 2016 by Davis and Elk Grove economic development director Darrell Doan.

Davis and Doan told the world that Fremont, Calif.-based NRC Manufacturing, which they characterized as a major Silicon Valley concern, was relocating to Elk Grove. NRC, who we were told would be the keystone tenant in the SEPA, would initially bring 600 jobs within one year of the announcement and eventually expand to 2,500 employees.  

To date NRC has not relocated to Elk Grove, nor are there any indications they will follow through and bring even one of those promised jobs. Maybe Doan did not offer a large enough incentive. 

Going back to the sewer system the City is financing to spur the development of the 500-acre employment center, given the City's prolonged failure in delivering any of these 25,000 jobs, why should anyone believe Ly when he says "job creation in the City has been a major Council goal for many years, but it is not just an aspiration."  

So are you ready to gamble? Given the City's dismal track record and quickly diminishing credibility, this roll of the dice might just bust.    


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D.J. Blutarsky said...

The funny thing about this is that the savvy land speculators would have known about this deal in advance and already purchased their land beforehand at dirt-cheap ag-land prices. And, the old-time land owners who have held onto their land since the days of the thundering elk herds, will finally get their lottery checks and fly the Elk Grove coop. Bon Voyage.

The press release serves as advertising to let potential developers know that Elk Grove "is open for business". And as is already general knowledge in the business community, Elk Grove will eventually dole out even more incentives to land the big fish-all you need to do is just ask!

This whole process of relieving the developers of having to pay their upfront costs and instead have the city act as a casino is a pretty good deal. If the real estate market slows down, it's not the developer's cash out there blowing in the breeze--it's ours.

Unknown said...

Yes this does mean Elk Grove is open for business. The truth is: without these developments, businesses who want to develop in this region would not take that step because the time to develop the infrastructure is too long for most businesses. This is a wise step on the part of the city...unless you're a NIMBY who never wanted any improvement to our city.

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