Friday, December 21, 2012

Hollywood Joins the Subsidy Scam

Up there on the "silver screen" Hollywood productions usually portray themselves as ardent foes of Big Business graft and corruption. In the real world, not so much. There the emphasis in Motion Picture Industry is more often on the "Industry" part. In the second installment of  her "The United States Of Subsidies" series, New York Times reporter Louise Story details the saga of how the once mighty capital of the automotive industry--Pontiac, Michigan--"woos Hollywood, but ends up with a bit part." The studio--a state-of-the-art facility supposedly fit for the making of Hollywood blockbusters--was the brain child of a small group of local investors with grandiose plans. The studio, they reasoned, would attract prestigious film makers, and the movie productions would "create" jobs to pump money into the local economy. It would also transform the much-derided symbol of the Rust Belt into a glamorous, world-class, entertainment capital. Perhaps appropriately, the first movie to be produced in this Midwestern film capital was to be a big-budget Disney production entitled "Oz: the Great and Magnificent."

This transformation had its genesis in August, 2007, just as the automobile industry was on the verge of collapse. Seeking to avoid the apparently inevitable disaster, Governor Jennifer Granholm got together with Michigan-born actor and director Mike Binder,who persuaded her that extending incentives to the movie industry--euphemistically referred to as "film credits--would be Pontiac's salvation. Herself a one-time aspiring movie actress, the governor embraced the project wholeheartedly. Within eight months, according to Story, "the capital of the flailing auto industry became the capital of film tax credits". The legislature, equally desperate to combat the impending doom, agreed to a program that offered film makers a deal in which the state would return nearly one-half of every dollar that Hollywood spent locally. The news was greeted with enthusiasm by several movie moguls. Within a week after the announcement, the director of the state's film office attended a a movie conference in Santa Monica, at witch she was besieged by everyone from "the baby studios to the big guys." As Story wryly observes, Hollywood makes lots of movies about the evils of capitalism, "but it rarely works without incentives, which are paid for by taxpayers." Within two months, 24 movie productions had signed up to film in Michigan, up from two the year before. All told, these productions planned to spend $150 million filming in the state, of which $70 million would be refunded. According to a state-by-state survey by the NYT, $1.5 billion in tax breaks are lavished upon the film industry each year.    

It wasn't long. as Story notes, before Pontiacers were rushing out on their lunch breaks to catch sight of such celebrities as Drew Barrymore, Clint Eastwood (sans chair), and Michael Moore. Movie making was a great escape from the economic disaster that blighted their lives. G.M. and most of its workforce left town, half of downtown Pontiac was boarded up, and landlords accepted rent checks through slots in doors locked for protection. State government was suffering budget shortfalls,while some of the lawmakers who had voted for tax credits were already questioning whether the state could afford such largess. But, just like in the movies, a savior appeared in 2008, in the person of Linden Nelson, a well-connected local entrepreneur with a charismatic personality (God save us from people with charismatic personalities) who had made a considerable fortune out of making removable key chains for valet-parkers and trinkets for AT&T and Harley Davidson. He had recently received a hefty insurance settlement for an "accidental" office fire that destroyed much of his factory. Much like "Professor Howard Hill" of "Music Man" fame, he proposed to save the town by turning an abandoned G. M. plant into a "world class" movie studio "right here in River City,"Ooops, Pontiac.

Nelson conveyed his enthusiasm for the project to Ari Emmanuel, promoter extraordinaire and brother of Rahm, soon to be President Obama's chief of staff and then to be mayor of Chicago. In his best Hollywood patois, Ari
expressed his confidence in the project to the Detroit Regional Chamber of Commerce: "I'm like, blown away by it....I think this is a no-brainer for the state of Michigan."  He and Nelson, along with John Rikolta, the head of a commercial construction company, and A. Alfred Taubman, a prominent investor who made billions building shopping malls nationwide, teamed up. (Tannenbaum spent 10 months in prison in 2002 over price fixing accusations related to Sotheby's auction house, one of his vast holdings. He still maintains his innocence.)  The four of them founded Mot5own Motion Pictures, LLC in May 2008. They bought the former auto plant from G.M., for virtually nothing," according to Rikolta. How much? Rikolta later boasted that G.M., which had just received a massive federal bailout, "spent more on the carpet than we spent on this building." The four invested between $10 and 12 billion of their own money and proposed to raise another $70 million using borrowed money and incentives from state and federal government. Of these sources, "Michigan appeared to be the largest competitive advantage to the company." In public, the investors touted the plan as an altruistic gesture on behalf of Pontiac. Taubman told the Detroit Free Press that, while he usually went into deals primarily to make money, this was different. "I just want to help create jobs," he announced, "and this can create 36,000 jobs." In February, 2009, Pontiac declared itself to be in financial crisis and appointed an emergency manager, Fred Lieb. He found that the city had overspent its budget by an estimated $7 to 12 million, and was still liable for old incentives it had given to G.M. and other corporations. Even sizable redevelopment tax credits from state and federal governments failed to make up the deficit.  In particular, the city was asked to waive virtually all of the revenue from property taxes. During their deliberations, Lieb asked for job numbers to be written into the contract, but the investors refused. "We started seeing some backpedaling," he told Louise Story, and acknowledged that the meetings featured some "knock-down, drag-out fights." Nelson, et. al. insisted that they did not recall Lieb making that stipulation, and that whatever jobs were created were the responsibility of the film makers renting out the studio. Under pressure from the governor's office, Lieb later claimed that the city had little choice but to accept the deal. In her 2009 state of the state address, she praised the contract as "very exciting," and as "a classic transformation, The phoenix rising from the ashes." (That summer, Nelson suffered another loss from a fire of "undermined origins:, this time to his 23,000 square foot lake shore mansion in Bloomfield Hills.)

Sinking further into the abyss, the legislature agreed to use the state workers' pension funds as collateral for borrowing $18 million in municipal bonds. Needless to say, if the investors failed to repay the loan, the pension fund would be liable. Moreover, neither the state or federal government was aware of the deals each other had made with the investors.  At the studio's groundbreaking ceremony on July 7, 2010, Nelson attempted to justify the incentive package because it would create a large {still unspecified} number of jobs. "It is a very competitive landscape out there," he insisted, "and that some "40 states have some some rebate or another in this industry. It kis an industry that's fought after." Although the Motion Picture Association of America claimed to employ some two million people and support 115,000 businesses, the non-partisan Tax Foundation, which opposes film industry incentives, reported that such claims were based upon, "fanciful estimates of economic activity." As the Pontiac studio opened, it announced that it was receiving $40 million from the state for the filming of "OZ."   Although some Pontiac residents were employed upon making the film, the majority were "from L.A.", according to one local actress. In fact the studio admitted to hiring only 200 people, most of those employed on constructing the studio itself. According to its own records, the studio had created only two local jobs in 2010 and 12 in 2011. While that paltry number made it impossible for the studio to collect the $110 million contingent upon job creation, it did collect on other credits, including $14 million for a "Film and Digital Media Infrastructure Investment Tax Credit." Meanwhile, the city's third emergency manager, who was an avid foe of incentives, announced his opposition to such deals because it was "detrimental" to the city's revenue because "the money is needed for police, fire, and trash pickup." Frustrated in his attempts to collect taxes from a convoluted Disney corporate maze, he acknowledged that while the movie business was glamorous on the outside, "it's not very glamorous for the municipality that wants to collect something." He freely admitted that Pontiac had been "outgunned." 

In November, 2010, however, Michigan elected a right-wing Republican governor named Rick Snyder. He is pretty reprehensible on most issues, but he quickly moved to rein in incentive programs. His budget director announced that "states harm themselves by competing on tax credits." Almost immediately, film makers deserted the state in droves. The Michigan Motion Picture Studio (which Nelson referred to as "Hollywood-land in Pontiac") began to lose out on contracts to states, like North Carolina, which continued to offer incentives. When the date for the studio's bond interest came due in February, 2012, the studio paid only a fraction of the bill due--"$210,000--
leaving the remaining $420,000 to be paid for by the state pension fund. Nelson and cohorts insisted that they would have been willing and able to pay the full freight, if only the state had not changed its tax credit law. Ruefully, the  new head of the state's development agency declared that the pension fund might "end up owning these studios." (can anyone say "white elephant"? The "investors" themselves admitted that they had never considered making the entire interest payment, but that the state had agreed to cover the entire bond. The studio CFO insisted that the investors already stood to lose twice as much as they had originally intended to invest. In August, the studio defaulted on the entire $630,000 interest payment, despite the governor's offer to reinstate some of the tax credits. The investors began to lobby the state legislature to put more money in the tax credit fund, and even formed a political action committee to win public support. They initiated public tours of the studio. "Please don't hesitate to contact your state representative,' Nelson lobbies tourists, "tell them you've been here, you believe in it, so please appropriate enough money so it will work." If the state failed to up the ante, Nelson warned, they would probably have to shut down the studio. The last film  made at the Pontiac studio was "Black Sky," a movie about a town ravaged by a tornado. Whether that was a case of life imitating art, or art imitating life, is a matter of perspective. In either case, Pontiac's love affair with using movie making as a redevelopment strategy is as dead as the studio's deserted sound stages.

Whatever else Pontiac's debacle might prove, it clearly demonstrates two absolutes. The first is that the once powerful cities of the "steel belt" turned "rust belt" are so desperate that they are willing, even eager, to buy into any redevelopment scheme, no matter how fanciful. The other is that corporations, film or otherwise, hold all the cards. They can make any preposterous claims about creating jobs and revitalizing local economies, but they cannot be pinned down to a legally-binding "quid pro quos" that would obligate them to deliver on their promises  They can walk away at any time, with no financial or legal repercussions. They can cynically pit states and municipalities against one another, reward those who give them the best deal, and abandon the rest. It is not quite as good as a "license to steal," but it comes close enough.


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