Key Reforms: Accountability in the Approval Process

Reform #5: Increase Accountability in the Subsidy Approval Process

The approval process for most subsidy deals is highly secretive. Development decisions are typically handled within the domain of "experts" such as company representatives and development officials, with little opportunity for community input. The message sent to residents is that the process is too complicated for them to understand, or that secrecy is imperative for the success of the deal. Too often, residents hear nothing about a deal until public officials and the company hold a press conference to announce the signing of a subsidy agreement.

Residents must be included in the decision-making process when their communities and tax dollars are involved, and they must be able to hold elected officials accountable for their votes on development deals. Residents have a right to know what projects are being considered, and are often better judges than public or company officials as to what constitutes "good" economic development in their area. The subsidy approval process can be made more accountable to communities by requiring that all proposals for subsidies be debated in a public hearing and be voted up or down by a body of elected officials.

Hearings enable public participation

Public hearings serve a dual purpose of both informing the public about developments under consideration and allowing citizen input on those plans. Hearings are a pre-deal version of disclosure, making information regarding the details of planned development subsidies available to the public. Hearings provide an opportunity for residents make their opinions known to their representatives and to contribute to the decision-making process by voicing objections, suggesting changes, or expressing support.

Every subsidized project should be debated in at least one public hearing, and the hearing should conform to guidelines that create circumstances in which the public can make a real contribution to the debate. The mere existence of hearings is not enough to ensure their effectiveness. Hearings must be held at a time and place that is convenient and accessible, taking into account factors such as work schedules and public transit accessibility.

Hearings must be well-publicized in advance of the hearing date, in places where the public will take notice, such as the daily paper or city website. Copies of key documents and other information about the development proposal must be made available to the public in advance, so that individuals and organizations can look them over, do their own research, and come prepared with questions and comments.

Elected officials must be held accountable

Public hearings give residents a voice but not a vote. Citizens vote only at the ballot box, and for this reason it is important that the final decision on subsidy deals is made by elected representatives who can be held accountable at the polls on Election Day.

Many subsidy deals are already voted on by elected bodies such as city councils or state legislatures. But some jurisdictions allow subsidy decisions to be made by appointed boards that are not accountable to taxpayers. The solution is to restrict subsidy decision-making power to only those governmental bodies that are elected by the public and whose members' votes are transparent to the public.

It is important to note the difference between discretionary and entitlement subsidies. The requirement that a deal be voted on by elected representatives and that it involve a public approval process typically applies only to discretionary subsidies -- those granted to a specific company for a specific project. But even entitlement subsidies -- tax breaks or other types of aid a company can automatically collect by meeting certain criteria -- are not immune to public pressure on lawmaking bodies, since elected officials must vote on the bills that create the programs and are responsible for funding and renewing them.

Best practice

The best practice for increasing accountability in the subsidy approval process is to require public hearings on all subsidy deals -- with adequate protections to ensure meaningful participation -- and to require subsidy proposals to face an up-or-down vote by elected officials.

Minnesota's accountability law is a good model on both fronts. The law requires that the public be notified and have the opportunity to voice opinions at a subsidy hearing before large subsidies can be voted upon. Large subsidies are defined as those over $100,000 given by cities or over $500,000 from the state. The law also stipulates that elected governing bodies, such as city councils, must make the final decision on whether to grant a subsidy.

The federal government requires public input into the granting of tax-exempt private-activity bonds. In order to qualify for tax-exempt status, private-activity bond issues are subject to a "public approval" requirement. This requirement can be met by a voter referendum or a public hearing following "reasonable notice." This is commonly known as the TEFRA requirement because it was instituted by the Tax Equity and Fiscal Responsibility Act of 1982.

Some states have laws that assist residents interested in tracking subsidy proposals by disclosing information on all current subsidy applications. Connecticut requires subsidy-granting jurisdictions to maintain a log of all pending requests for economic development subsidies. The log is organized by municipality, and includes the name of the business requesting the subsidy, a brief summary of the purpose of the application, and instructions on how members of the public can obtain additional information about the subsidy request. While such a provision does not by itself ensure citizen participation or political accountability, access to timely and readily available information is an important component of an accountable subsidy approval process.

Caveats

Passing laws that require public hearings and votes on deals by elected bodies does not automatically increase accountability in the process of subsidy approval. Residents must be organized and actively engaged in the development process. They must track subsidy proposals, gather information, attend hearings, ask questions, demand answers, and stay involved throughout the life of the deal. Otherwise, public hearings can easily turn into a rubber stamp for developers, and votes can become just another formality.