Solar panel-maker Solyndra has been in the headlines because it received $528 million worth of taxpayer-backed federal loans and then went bankrupt. But Denver residents don't need to look at failed Solyndra to see the trouble that government loans can bring. Sadly, there are some prime examples closer to home.
Last month, The Denver Post reported ["Tattered sales twist finances," Dec. 9 news story] that roughly 15 percent, or around $20 million, of the loans in the Denver Office of Economic Development's $127 million portfolio are currently in arrears or in default.
One of these loans, known as the Lowenstein Project, illustrates how local officials have been gambling with taxpayer money on dubious urban renewal initiatives. The Lowenstein Theatre, located across from Denver's East High School on East Colfax, had been essentially vacant for 20 years. In 2006, former Office of Economic Development (OED) Director John Huggins proposed the Lowenstein Project, which would target the area for a $14 million redevelopment effort to build a movie theater, bookstore, music store and restaurants.
Denver officials loved the idea and helped private companies buy the Lowenstein property by handing out tax increment financing (TIF) loans of $475,000 each to Charles Wooley; Denver-based real estate firm St. Charles Town Co.; Twist & Shout; and Neighborhood Flix Cinema and Café.
By 2008, Neighborhood Flix Cinema and Café was bankrupt, taking taxpayer money that had been loaned to the company down with it. Then, in February 2011, the Lowenstein Project developers defaulted on their $2.4 million TIF loan.
Fast forward to now: On Dec. 19, the Denver City Council amended the $2.4 million TIF loan sitting in default so that a separate, more senior $1.5 million TIF loan can be paid off first.
As The Post reported, Huggins, who advocated for the Lowenstein Project in 2006, happens to be buying the loan in question for cents on the dollar from U.S. Bank. In other words, the rules are such that former politicians and bureaucrats can go through the revolving door and profit at the expense of the taxpayers once they're out of office.
The OED claims that these TIF loans are innovative ways to jump-start projects. In truth, they are corporate welfare, which leads to socialized risks and privatized profits.
Politicians love the loans because they don't have to pay for projects as they go, don't have to issue municipal bonds, and don't need voter approval.
Proponents of government-issued loans argue that government needs to provide assistance that would not otherwise be available in private capital markets. In other words, politicians and bureaucrats are taking risks with taxpayers' money that banks, private companies and taxpayers aren't willing to take themselves.
This is an unavoidable flaw when politicians and bureaucrats are in the business of issuing loans. However, some see it as a feature. As District 10 Councilwoman Jeanne Robb explained prior to the council vote, "All these loans are risky. That's why OED makes these loans and private banks do not."
In contrast, Councilmember Jeanne Faatz of District 2 cast the lone vote against amending the contract. Faatz said that the City Council's "job is to do the best job we can with taxpayer money."
Government-issued loans are often based on insider favoritism and politics. They rarely fulfill their supposed purpose of the public good. The companies that receive government welfare are given an unfair advantage over those that don't. Corporate welfare encourages companies to be good at politics, instead of good at business.
Government-issued loans amount to taking money from productive taxpayers and wasting it on politically connected insiders. Politicians interested in urban renewal might instead look in the mirror and see if their own policies are stifling economic growth.
Harris Kenny is a Denver-based policy analyst at Reason Foundation (reason.org). He wrote this for the Independence Institute (i2i.org), a free-market think tank in Golden, Colorado. This piece originally appeared here in The Denver Post on January 6, 2012.