Public money for private business: Empowerment Zone bonding for former director’s project

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“There’s something about it that just doesn’t smell right.”

Annie Young doesn’t mince words when speaking about the bio-mass incinerator/generator project proposed for the Phillips neighborhood in South Minneapolis. Young, a commissioner-at-large for the Minneapolis Park and Recreation Board, adds, “A lot of us that were initially supportive of it are now changing our minds.”

For previous articles on the Midtown Eco Energy project, see:

Green fuel or green-washing? by Dan Gordon, TC Daily Planet

Neighbors blast proposed Phillips biomass plant at public hearing by Dan Gordon, TC Daily Planet

March meltdown ahead for Midtown Eco-Energy? by Mary Turck and Dan Gordon, TC Daily Planet

In March, the Minneapolis City Council will face one more decision on the project, this time on a request for a second contract extension that would keep alive $78 million in Empowerment Zone bonding for the Midtown Eco Energy project. The basis for the $78 million in bonding is the project’s promise to employ seven Empowerment Zone residents. Midtown Eco Energy is the only Empowerment Zone bonding proposal ever approved by the City Council.

Midtown Eco Energy needs city hall approval for two components: purchase of city land for its proposed energy plant and financing for the project through the Empowerment Zone program. The project has been criticized for cronyism. City council member Lisa Goodman chairs the city council’s Community Development Committee, a group that oversees the administration of the EZ program. She is also an investor in the Midtown Eco Energy project and owns land in Kandiyohi County with two of the principals in the project, Michael Krause and Kim Havey. Havey and Goodman previously shared a condo, and have been close friends since their college days. Krause formerly served on the Minneapolis Planning Commission. The third principal in the project, Craig Wilson, formerly served as an aide to Goodman.

Both time and money are running out for the Empowerment Zone program. Federal funding will end in 2009. According to the 2007 HUD report, the program has committed $28.9 million to 190 programs and initiatives since 1999. The program now has only $1.96 million left to spend during its remaining year, according to a staff report released January 10. But it also has $130 million in bonding authorized. Up until now, none of the $130 million in EZ bonding authority has been issued to any project. Former director Kim Havey says that some organizations asked about bonding, but that none qualified, so none formally applied for bonding. The only bonding application that has been approved is the Midtown Eco Energy application, made by Kandiyohi Development Partners.

Kandiyohi has created a shell company called Midtown Eco Energy LLC that has its sights set on using $78 million in tax-exempt Empowerment Zone bonds to fund a wood-burning power generator in south Minneapolis.

The fact that Midtown Eco-Energy doesn’t have any employees, hasn’t found a buyer to purchase this potential electricity, and doesn’t yet know who will manage the plant doesn’t seem to have hindered the bonding approval. The bonding deal came before the EZ executive committee in August 2006. At that meeting, EZ staff was directed to convene a working group to consider questions about the application and concerns about the bonding process.

At the September 14, 2006 meeting of the full EZ governance board, staff raised a question about whether a business would actually need to have employees to qualify for EZ bonding. The governance board passed a motion saying that this was a requirement.

EZ director Jonathan Palmer sent Havey a 9/29/06 email saying that Midtown Eco-Energy, as a shell company with no employees, probably wouldn’t be eligible for EZ bonds. He promised, however, to work to find a solution for the former director. Subsequent e-mails said that Great River Energy would also manage the plant.

Palmer evidently found a way around the “problem,” if only by ignoring it. Without any further EZ board vote or discussion reflected in the minutes, the bonding proposal sailed directly to the city council, where it was unanimously approved in November 2006. The next EZ board discussion of the project would not come until September 2007, when Kim Havey appeared before the EZ governance board and received unanimous approval for the bonding project – which had already been approved by the city council.

Timeline for EZ and City Council action on Midtown Eco Energy

June 2006 – City Council grants Kandiyohi Development Partners an option to purchase the city land where the incinerator/generator would be located.
August 2006 – The EZ executive committee receives proposal for bonding and asks for creation of a working committee to investigate it and a staff report.
September 2006 – EZ governance board passes a resolution saying that no bonding can be approved for an entity that has no employees. (Midtown Eco Energy has none.)
November 2006 – City Council unanimously approves EZ bonding for Midtown Eco Energy.
March 2007 – City Council approves one-year extension of option to purchase
July 2007 – City Planning Commission issues conditional use permit for construction, good until 7/30/08.
September 2007 – Kim Havey appears at EZ governance board to ask for approval of bonding authority. EZ governance board approves.
March 2008 – most recent extension of option to purchase will expire.
July 2008 – conditional use permit for construction will expire

The November 2006 bonding approval was based on a proposal that claimed widespread community support, promised clean energy production, and said that Great River Energy would purchase the electricity generated by the plant. In 2008, Great River Energy is out of the picture. Midtown Eco Energy now says Xcel Energy will purchase the electricity, but Midtown and Xcel still have not signed any such agreement.

The city council’s previous grant of an option to purchase city land for the project will expire at the end of March. Until now, all Kandiyohi Development Partners/Midtown Eco Energy requests for bonding, for the option to purchase, and for extensions of agreements have sailed through the city council with unanimous support – not surprising, given the connections of the developers. The mayor co-chairs the Empowerment Zone board and appoints several of its members. Two city council members, Don Samuels and Robert Lilligren, also sit on the EZ board. This time around, however, the project faces closer scrutiny. Neighborhood groups that wrote letters of support for the project last summer, including the East Phillips Improvement Coalition, have either withdrawn support or are reconsidering their positions.

Minneapolis: One of Fifteen Zones

The Empowerment Zone program was intended to be one of the Clinton administration’s legacies—a ten-year blitzkrieg assault on urban poverty. In 1999, packages of grant money, tax incentives, and bonding authority were wrapped up and delivered to Minneapolis, along with 14 other major cities, to disburse as each city saw fit. The federal government’s Department of Housing and Development (HUD) commissioned each city to set up a mechanism to allocate and distribute the funds in a way that would stimulate growth in its most impoverished neighborhoods.

City officials in Minneapolis got together, carved out a 6.7 square mile set of shapes cut from census data, and laid them on the Minneapolis map. There are large zones in north and south Minneapolis, as well as a small one in northeast that has had only one project built. Almost 50,000 residents live in the zones, which include five neighborhoods—Near North, Harrison, Sumner-Glenwood, Phillips, and Whittier—as well as portions of the surrounding neighborhoods.

Nearly 120 cities tried and failed to win Empowerment Zone funding. Minneapolis was chosen on the strength of its application, which highlighted the brutal gap between the city’s rich and poor.

“A third of all children under five live in poverty in Minneapolis,” the 1998 application stated, “…and the violent crime rate is eight times that of the region.” Unique to the Empowerment Zone approach, as opposed to previous war-on-poverty campaigns, was its emphasis on a holistic approach. Rather than focusing on only one area, such as employment, the program targeted housing, economic development, crime and safety, education, and community-based services. Before the program got off the ground, most of these emphases disappeared. Over the years, Minneapolis Empowerment Zone board members have revised the program to concentrate mainly on economic development.

“The program was trying to be too many things to too many people,” says EZ Director David Fey. “We needed to sharpen it and re-state its focus.”

The Empowerment Zone program has been called a sign of hope for struggling inner-city neighborhoods and a cash cow for well-connected developers. Some have dubbed it “a modern day plantation,” claiming an apparent reluctance to distribute grant money to minority-led projects.

A 2003 HUD audit report strongly criticized the Minneapolis program for giving EZ funds to programs that did not benefit Empowerment Zone residents, or that benefited relatively small numbers of EZ residents. In addition, the HUD audit found that the Minneapolis EZ inaccurately reported results of projects and inflated the numbers of people served.

A 2005 Minneapolis Civil Rights Commission investigation was sparked by complaints that the EZ program did not serve minority residents. The Commission struggled to complete an investigation, as EZ staff refused to provide information. In the end, the Commission report criticized aspects of the program, but recommended in favor of reform rather than prosecution.

Bonding for Midtown Eco Energy, based on the promise of creating seven jobs for EZ residents, raises questions about what qualifies as economic development. This is not the first time that such questions have been raised, or the only project to generate criticism. Future articles in this series will look at other aspects of the Empowerment Zones in Minneapolis, including:

Part 1 – Public money for private business: $78 million in bonding for a project that promises to employ seven Empowerment Zone residents.
Part 2 – Falling short—business development, housing, and job creation: Out of the money that has been awarded in the last nine years, the lion’s share has gone to development firms and large, established non-profits.
Part 3 – The color of funding: Since its inception, the program has caused bitterness among some neighborhood activists, who say it hasn’t directly benefited the African-American communities it was intended to serve.
Part 4 – All power to the people? Community charges cronyism: While seven of the EZ governance board members selected by the City Council are required to be residents living inside the empowerment zone, many have questioned whether this truly amounts to community representation.

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