JEFFERSON CITY • Missouri spends more to renovate historic homes and commercial buildings than any other state, and a large chunk of the state’s money is siphoned off by middlemen, investors and taxes.
That’s the bottom line from Missouri Auditor Tom Schweich, who on Tuesday released a critical report on the state’s historic preservation tax credit.
“While the goals of the program are laudable in some respects, the state’s HPTC program is an inefficient use of state resources,” Schweich concluded.
Established in 1998, the historic preservation credit reimburses one-fourth of the eligible costs of renovating old buildings. It has been popular in St. Louis, where it helped revive areas such as the Washington Avenue loft district and landmarks such as the Old Post Office and the Chase Hotel in the Central West End.
Jeff Rainford, chief of staff to St. Louis Mayor Francis Slay, said the audit misses the program’s “immense benefits,” such as revitalizing neighborhoods and bringing life to empty, abandoned buildings.
“This is like the greenest of green programs,” Rainford said. “It is way better to rehabilitate an existing building than to walk away and build new on a cornfield.”
But the audit says that the roughly $123 million-a-year cost of the historic rehab credit has far outstripped state projections. A cap that the Legislature placed on the program’s expenses in 2010 is ineffective, the audit said.
Also, the Missouri Department of Economic Development’s oversight of the program needs improvement, Schweich said. For example, bureaucrats don’t make site visits to check on projects, leaving the state open to fraud, he said.
In a written response, the department said it ensures that only qualified expenses are reimbursed by checking “photographic evidence” and making “periodic” visits. The agency said it will consider making additional site visits.
Overall, more than $1.1 billion in historic preservation credits have been redeemed in the state in the past decade, making Missouri’s program the largest in the country, the audit found.
To be eligible for historic credits, properties must be listed on the National Register of Historic Places or certified by the state as contributing to the significance of a historic district.
Building owners generally sell their credits, at a discount, to brokers to raise money for renovations. But Schweich said only 49 cents to 85 cents of each tax historic preservation credit dollar actually goes toward rehab costs. The rest goes to middlemen, investors and state and federal taxes.
Earlier this month, the auditor cited similar problems with the state’s low-income housing tax credit. Legislation reining in both tax credits has stalled in the Legislature for the last five years.
During that time frame, the historic preservation credit has cost Missouri an average of $123 million a year, Schweich said. When the program was established, analysts estimated its annual tab would run about $14 million.
Legislators voted in 2010 to cap the historic credits at $140 million a year, plus an exemption for projects receiving less than $275,000 in credits. That cap is among the highest of the 18 states that have annual limits and is “so high that it does not contain actual spending,” Schweich said in the audit.
The remaining 12 states that grant historic credits have no annual limits on their programs, but “those states have a significantly lower level of activity than Missouri,” the audit said.
One problem with the current program, Schweich said, is that the credit is an entitlement. Thus, the state is unable to “limit tax credits to projects that represent a good investment for taxpayers” or that wouldn’t be financially feasible without the credits.
An average of $316 million a year in rehab work in Missouri qualified to be partially reimbursed by historic credits from 2001 to 2012, according to the National Park Service. That was more than any other state.
“If you look at the chart, it’s much bigger than anywhere else, and that’s something the policymakers in Missouri need to consider,” Schweich said in an interview.
The next-highest state was Massachusetts, which averaged $194 million in qualified expenses.
A commission appointed by Gov. Jay Nixon recommended in November 2010 that Missouri legislators lower the historic credit lid to $75 million, but that attempt has died repeatedly in the face of opposition from St. Louis leaders and others involved in the program.
Even at $75 million, Missouri would have the largest state historic program in the country, Schweich said.
Rainford, Slay’s assistant, said proponents are willing to compromise and possibly scale back the historic program to make room for other job-producing incentives.
“But it seems like the people on the other side don’t want to compromise,” he said. “They want to gut the program.”
Schweich said legislators could improve the credit’s efficiency by making it “refundable.” When a credit is refundable, the state gives recipients cash if they don’t owe enough taxes to use the credits. That way, recipients don’t have to sell their credits at a discount.
Alternatively, the state could simply appropriate grants for historic preservation projects, Schweich said.
Repeating a point made by former state auditor and now U.S. Sen. Claire McCaskill, D-Mo., in an earlier audit, Schweich, a Republican, criticized use of the historic credit for affluent homeowners who could afford renovations without the state’s help.
In one case, a homeowner renovated the top portion of a 35-story building to create a “luxury residence.” The state paid $250,000 of the $1.2 million in rehab expenses.
A prior owner had already received credits to renovate the exterior of the 6,100-square-foot residence, which includes a rooftop garden, a private elevator and a movie theater.
Some states use competitive processes to award the credits. For example, Ohio ranks proposals based on economic benefit and regional balance.
Schweich suggested several reforms that have been pushed unsuccessfully by GOP fiscal hawks in the state Senate. Those changes include putting a “sunset” or expiration clause on the program to trigger regular reviews and preventing developers from “stacking” credits by using credits from several programs on the same project.
“This stacking of tax credits allows additional tax credits to be issued while no additional economic activity or state benefit is generated,” the audit said.
Without site checks, Missouri could end up like Virginia, where officials found at least three developers were bilking the program of millions of dollars by submitting false invoices, Schweich said.
He also said that despite state guidelines that call for awarding credits within 60 business days of a project’s completion, the department does not meet that schedule.
Auditors took a close look at 10 projects that were issued a total of $8.7 million in historic credits. On average, the state took six months to approve those credits, causing developers to incur more interest costs, Schweich said.
Overall, he gave the program a rating of fair, the second-lowest score on his rating scale.