Sharing the benefit, sharing the cost

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For nearly two decades, first as a city council member, then a state legislator and finally state transportation commissioner, Lt. Gov. Carol Molnau pushed for a new, four-lane Hwy. 212 that would pass less than a mile from her 40-acre farm in Chaska.

The project was completed in 2007 at a cost to taxpayers of $238 million. The payoff for Molnau came years earlier. In 2000, she and her husband sold the farm to a townhouse developer for $3.3 million – six times its official estimated market value – eight days after a bill she sponsored to advance the 212 project was signed into law.

Molnau’s good fortune and questions about her possible conflict of interest were detailed recently by Star Tribune reporters Tony Kennedy and Paul McEnroe. Molnau denied any wrongdoing, and it’s likely that the law will be on her side.

But the episode could become Exhibit A in a new state initiative aimed at making lucky owners of land near major transportation improvements share some of their windfall profits with the taxpayers who finance the projects.

A little-noticed provision of the transportation finance bill enacted last month over Gov. Tim Pawlenty’s veto authorizes a University of Minnesota study of “capturing the value of the benefits created” by road and transit projects for nearby property owners.

“The Legislature finds that large public investments in state transportation infrastructure, such as constructing freeway interchanges, new highways and rail transit stations, can result in surrounding private land and other property increasing in value, sometimes by substantial amounts,” the legislation notes.

It appropriates $325,000 for the study by the university’s Center for Transportation Studies. Its final report is due July 1, 2009, with a series of workshops for elected officials to follow.

Minnesota law allows local governments to levy special assessments for streets on property owners who benefit from the improvements, but no such authority exists for state infrastructure investments. “The nature of a large state transportation project may suggest that alternative financing mechanisms are more appropriate,” the legislation says.

In Rochester, Minn., site of recent massive state highway improvements, it was estimated that a new Hwy. 63 interchange boosted land values within a quarter-mile by $7 million compared with the effect of a simple stoplight intersection costing taxpayers millions less. The same analysis, provided by a land developer, said that property within a quarter-mile of the off-ramp was worth $100,000 more an acre than land a half-mile away.

Interestingly, another politician, former state Rep. Dave Bishop, faced criticism for voting for the highway work in Rochester without timely disclosure of his major stake in development land nearby. Not only did Bishop and his partners profit richly on property whose value was enhanced by public investment, they also fought in condemnation court to increase the $1 million the state awarded them for land needed for the highway improvements.

“Anytime you improve infrastructure, you increase the value of some properties much more than others,” said Adeel Lari, research fellow in state and local policy at the university’s Humphrey Institute of Public Affairs. “Some of that benefit should be captured for the infrastructure development.”

Under the current system, however, state government picks winners and losers among property owners wherever it locates a highway, an interchange or a transit station – and shares in none of the swag. And because the rewards can be so lucrative for the winners, there’s great temptation to exert any means necessary – legal or illegal – to influence the outcome.

This is not a new phenomenon. Nearly two centuries ago, building of the Erie Canal greatly benefited landowners near this great advancement for getting goods to market. Not long afterward, railroads were quick to leverage the increased value of property near their tracks. In the Twin Cities, streetcar promoters bought up land near their planned routes and profited from the resulting housing booms in places like southwest Minneapolis.

According to Lari, some of the value of transportation improvements to property owners has been captured in a few places, notably with freeway projects in Orange County, Calif. A 2005 study by the Citizens League of Minnesota proposed doing that via a form of state tax-increment financing of road and transit improvements or, alternately, a move that would have directly impacted Molnau – a state capital-gains tax on the sale of undeveloped land benefited by public infrastructure investment.

Of course, propertied interests can be counted on to oppose such initiatives, and Molnau again provides a fine example. When Chaska officials planned a new Hwy. 212 access road adjoining her property, Molnau fought a $166,000 special assessment for the work, Kennedy and McEnroe reported.

The access road now leads to the housing development that replaced the Molnau farm.

But other possibilities for capturing the benefits of public investments for private property might be less controversial. According to Lari, a former right-of-way acquisitions manager for the Minnesota Department of Transportation, government could buy land surrounding prospective corridors early in the planning process – much as Twin Cities streetcar barons did a century and more ago — then sell it as projects advance, applying the profits to the cost.

Another idea, which has been suggested by former state Transportation Commissioner El Tinklenberg, is to invite developers to help finance construction of transit stations near their projects. That strategy could help to settle the current dispute over University Avenue stops on the planned Central Corridor light rail line between the Minneapolis and St. Paul downtowns.

St. Paul neighborhood activists, concerned about loss of transit service for the poor, want more stations than Metropolitan Council planners say the project’s budget can accommodate. Meanwhile, Finance and Commerce reports that several properties prime for redevelopment – two defunct car dealerships and an old dairy plant – are for sale along University near where the extra rail stations are being sought.

Is there an opportunity to work something out here?

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