Section 3: Making It Work
Local Government Financial Risk & Strategies to Reduce That Risk
Redevelopment projects such as the Van Aken District can bring new tax revenue and attract investment. However, they also carry financial risk for local governments. Financial risk is the possibility that an investment will not deliver the expected return or will create ongoing costs that strain the city’s budget.
For Shaker Heights, the Van Aken District required significant public commitments, including city-issued bonds, tax increment financing (TIF), and grant-funded infrastructure work. These investments were made with the expectation that new property values, income taxes from jobs, and sales tax from businesses would offset costs and eventually provide a net gain for the community. If the project had failed to attract tenants or visitors, the city might still have been responsible for debt repayment and ongoing maintenance without the anticipated revenue.
There are many examples of public-private partnerships gone bad. Here are a few.
New London, CT – Fort Trumbull
- What happened: The city and state cleared a waterfront neighborhood for a promised mixed-use plan (housing, hotel, R&D space) linked to the nearby company Pfizer. The plan collapsed; multiple attempts to salvage development failed.
- Fallout: After takings, clearance, and infrastructure spending, $80M+ in public money was sunk and the site remained largely vacant for years. It became a national cautionary tale about speculative, subsidy-driven redevelopment.
Kansas City, MO – Power & Light District
- What happened: The city guaranteed bonds for a new downtown entertainment/mixed-use district on the premise that project revenues would cover debt service. They didn’t.
- Fallout: For more than a decade the general fund has backstopped the shortfall; by early 2023, Kansas City had paid $160M+ to cover the debt, with another $17.5M budgeted that fiscal year alone.
Rochester, NY – Midtown Plaza/PAETEC HQ plan
- What happened: The city/state demolished the aging Midtown Plaza to make way for a new corporate HQ and mixed-use build-out. Their partner company (PAETEC) then was acquired by another company (Windstream), which canceled the tower; the cleared core block (“Parcel 5”) sat empty for years.
- Fallout: Public sources tally ~$100M in combined city–county–state–federal spending tied to demolition/site prep and the redevelopment push, much of it committed before the anchor vanished. The city was left carrying costs.
Moral Hazard in Redevelopment
Moral hazard refers to a situation where one party, often in a financial or contractual agreement, is more likely to engage in risky or undesirable behavior because they know the other party will bear the costs of those risks. In redevelopment, subsidies can shift risk from the developer to taxpayers, which may invite behaviors that wouldn’t happen if the developer bore the full cost.
Guardrails to Reduce Risk in Public Subsidies
Local governments can take steps to limit financial risks when supporting redevelopment projects. Practical guardrails include:
- Gap-financing only, with third-party review – Fund only the minimum verified gap between a project’s total cost and the amount the developer can reasonably secure through private financing. Require an independent review of the developer’s pro forma before committing public dollars. A pro forma is a financial forecast that estimates a project’s future income, expenses, and returns based on “what-if” scenarios.
- Performance-based, milestone-tied disbursements – Use structures like Shaker’s performance-based grant. These means paying only after leases/financing are secured and milestones met.
- Hard caps, clawbacks, and recapture – Tie public support to jobs, tax receipts, and on-time delivery; reclaim funds if targets aren’t met or if the asset is quickly sold/refinanced at a windfall.
- School-district protections in TIFs – When using a tax increment financing (TIF) agreement, make sure the school district still receives part of the new tax revenue. Also, limit how long the diverted funds go toward the project before all tax revenue returns to the schools.
- Cost-to-serve analysis before approval – Quantify long-term public-service costs against conservative revenue scenarios.
Used well, tools such as TIF, targeted grants, and public infrastructure can unlock viable projects; used loosely, they can dull market discipline and load risk onto residents. The point is not “never subsidize,” but “subsidize with teeth.” This approach includes transparent math and enforceable terms.
