published Tuesday, August 12th, 2014

New battle erupts in two-year war over taxpayer financing for Chattanooga area road

Black Creek Mountain
Black Creek Mountain

A trio of Miller & Martin attorneys fended off two hours of blistering attacks from a packed crowd Monday as litigators, City Council members and former city officials blasted a taxpayer financing agreement that would subsidize a road from a Chattanooga golf course community to access 3,000 undeveloped acres on top of Aetna Mountain.

Smelling blood after a judge struck down a deal that would have allowed more than $9 million in taxes to flow toward a group of developers led by New York-based York Capital, opponents of the plan attacked what former City Councilwoman Deborah Scott called "special favors for special groups."

Developers, for their part, contended that the board should fight to reaffirm the two-year-old decision to allow taxpayer financing when it meets Friday at 11 a.m. to decide whether to appeal the judge's order.

The $500 million project, including $60 million in direct investment from developers, would open a new mountain to development for years to come, creating jobs in construction, architecture and service fields, argued attorney Mike Mallen, who has represented the developers.

"This will become an economic anchor," Mallen said.

But that opinion was in the minority at a bruising meeting that saw the city council chambers filled nearly to capacity with vocal opponents of the project.

Quoting from Miller & Martin's own website, Scott heaped scorn on the developer's attorneys for its "outside the box thinking, which is critical when a project fails to meet the criteria of statutory incentives or when a company's first proposal fails to close the gap on financing."

"The developer's investors want you to think outside of the box," Scott told the Industrial Development Board. "As you ponder what you do, I would urge you to be cautious about stepping outside of the box commonly known as state law."

Under tax increment financing, developers spend the money for a project up front, then are paid back with interest over a 20-year period out of additional tax revenues generated by the development. Developers have argued that the road serves a public purpose, since it would could potentially lead to Aetna Mountain becoming filled with homes, shops and amenities like Lookout Mountain or Signal Mountain.

The Industrial Development Board was forced to reopen debate on the tax increment financing deal after Chancellor Frank Brown voided the agreement in July because of apparent violations of Tennessee's open records laws by former city attorney Mike McMahan, and a conflict of interest by Nashville-based bond attorney George Masterson.

In a rare behind-the-scenes look at how deals to finance private projects with taxpayer money are forged, attorneys revealed that McMahan acted alone to approve $9 million in taxpayer financing for a road and sewer line that would open access to a proposed $500 million commercial and residential development on top of Aetna Mountain.

It was that type of secrecy surrounding the project that prodded retired city planner Helen Burns Sharp, who has been sharply critical of what she sees as taxpayer-supported corporate welfare, to file a lawsuit to open the board's records that stop the project from moving forward without more public scrutiny.

McMahan acted without the approval of the board itself, alleged former chairman of the IDB, Ric Ebersole.

"I understand why the judge is confused, I'm confused. I don't know how [the deal] closed," Ebersole said. "If any of you were involved in any way, correct my misunderstanding, but I don't believe any of you had any communication with anyone else on the board about the closing of this transaction until you read about it in the paper. If I'm wrong, speak up."

No one did, including McMahan, who did not respond publicly to the allegations and could not be reached for comment after the hearing. McMahan previously said the board was meeting in executive session under the cover of attorney-client privilege.

Despite the fact that apparent violations of Tennessee's Open Meetings Act law have been the primary impetus behind the two-year drive to dismantle the deal, it was the public policy debate that drove much of Monday's discussion over how a high-end golf course community qualified for $9 million in taxpayer money.

Developers claim that proposed commercial development as well as a sewer pipe that will serve the top of the mountain are what qualify the project for public money. But Deborah Scott, the former city council member who represented the area around Aetna Mountain, argued that those assets are in fact the project's biggest weaknesses.

The proposed convention center would compete with the already debt-ridden Chattanoogan hotel, which is owned by the city, and the proposed sewer line would bring more sewage into a city that is already under a federal consent decree for dumping excess waste in the Tennessee River.

But objections to the project on public policy grounds had no place in the IDB debate, said Alfred Smith, a bond and finance attorney for Miller & Martin. That authority belongs to the Chattanooga City Council and the Hamilton County Commission, which both voted two years ago to approve the project.

"They make some very good public policy points. However, there are only two bodies that make the decision on this, that's the City Council and County Commission," Smith said.

In fact, Tennessee's TIF statute is fairly permissive, in that it does not require developers to cure blight or prove that the project would not go forward without public financing. Projects eligible for financing must simply have some element of public good integrated into a plan like, for instance, the proposed sewer line that will run along the contested road.

And unlike cities such as Knoxville which have developed an advanced framework for dealing with requests for taxpayer financing, Chattanooga has few such rules or mechanisms in place, officials said.

"I don't think that I ever, on any issue, either before the city and county bond board have seen as much misunderstanding and misrepresentations of what the law and the fact are as on this project," Smith said. "I suppose the closest thing was when the Aquarium was being planned. It was stated that the Aquarium was really just a scheme to benefit private citizens, and that the investment by the city and county governments in the plaza around the aquarium was a boondoggle, wasted public money."

But developers could have a hard time convincing ever-more-skeptical public servants of the wisdom of funding the road up Aetna Mountain, as officials like city councilmen Ken Smith, Chip Henderson and Larry Grohn made clear on Monday.

In fact, "the council that approved this TIF is no longer in existence," said Grohn.

"Every incumbent that had a contested race that sat on the council who approved this TIF was thrown out of office," Grohn said. "It is a telling, telling point, that immediately after approving this TIF, that council placed a moratorium that still exists today on all TIFs, because they felt they did not have enough information to properly make a decision. That point alone should encourage you to follow some of the advice you've received today."

Contact staff writer Ellis Smith at 423-757-6315 or esmith@timesfreepress.com with tips and documents.

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about Ellis Smith...

Ellis Smith joined the Chattanooga Times Free Press in January 2010 as a business reporter. His beat includes the flooring industry, Chattem, Unum, Krystal, the automobile market, real estate and technology. Ellis is from Marietta, Ga., and has a bachelor’s degree in mass communication at the University of West Georgia. He previously worked at UTV-13 News, Carrollton, Ga., as a producer; at the The West Georgian, Carrollton, Ga., as editor; and at the Times-Georgian, Carrollton, ...

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