The reinvigorated CIT fund

John Ramos

CIT History
CIT History

For the first time since being elected two years ago, Duluth Mayor Emily Larson has proposed tapping the Community Investment Trust fund (CIT) to pay for something. As she explained to the City Council on Sept. 10, 2018, the mayor wants to take $2 million from the CIT and use it to acquire and rehabilitate tax-forfeited housing stock in Lincoln Park and the Central Hillside “in order to create redevelopment momentum in these neighborhoods and preserve naturally-occurring affordable housing.” The mayor hopes the city’s investment in real estate will leverage additional funding from other sources and create a self-sustaining revolving loan fund for housing rehab.

The CIT is an important fund that has seen the city through some tough times. Established by voters in 1993, the CIT was created to hold the city’s proceeds from a profit-sharing agreement with the Fond-du-Luth Casino. At the time, the city was collecting 19 percent of slot machine revenues from the casino, a very lucrative arrangement for the city. As initially envisioned, the money was to be held in the CIT untouched, with the interest to be spent paying back street-improvement bonds. If the City Council did wish to spend CIT money on other things, it would take a 7/9 vote instead of a simple majority. 

Remarkably, the city managed to leave the CIT fund alone for a full eight years. The slot machine business boomed, the casino added more slot machines, and the city’s windfall grew. By 2000, the casino was paying nearly $5 million a year into the CIT, and the fund balance had ballooned to nearly $29 million. 

In 2001, Mayor Gary Doty and the City Council approved their first non-street-related expenditure of casino money, diverting approximately $5 million over 5 years into a redevelopment fund for Old Downtown. Despite this hit, the CIT fund reached $49 million by 2004. 

In 2004, gazing at the beautiful pile of money, Mayor Herb Bergson asked the City Council to approve a measly $200,000 a year for 5 years to help pay for a squad of downtown “ambassadors,” who would patrol the streets picking up litter, being helpful to tourists, and generally making everything cleaner and safer. The City Council approved the expenditure. (The Clean and Safe Team still roams the streets today, highly visible in their fluorescent yellow shirts; when the CIT allocation expired in 2010, funding for Clean and Safe shifted to the tourism tax.)

As his term went on, Mayor Bergson discovered that having a giant pot of discretionary money on hand really made things easier in a lot of ways.

In 2005, when community advocacy groups asked the mayor for $3 million from the CIT to establish a fund for affordable housing, the mayor (and the required 7/9 of the City Council) said sure.

In 2006, when developers of the proposed Heritage Hockey Arena asked the city for $1.2 million to help with construction, the mayor (and the Council) said heck yes.

In 2007, when it became clear that the city was facing a massive, looming unfunded healthcare liability, Mayor Bergson and the Council approved $11.2 million in withdrawals from the CIT to jumpstart a retiree healthcare fund.

(The city went to the CIT a fifth time during Bergson’s term, approving $7.2 million for a new recreational complex that was to be built in partnership with the Salvation Army and the national Kroc Foundation. However, that project fell through, so the money remained in the CIT.)

Even with these expenditures, the money from the casino was flowing in at such a rate that the balance of the CIT fund continued to hover near $60 million.

The good times ended in 2009, when the Band of Lake Superior Chippewa halted their casino payments, saying the profit-sharing arrangement with the city was illegal. Thus ensued a long, litigious, sometimes acrimonious sequence of events which I will not rehash here. Suffice it to say that, in 2013, after endless filings and appeals, the courts ruled that the Band did not have to share profits with the city. And that settled that. The CIT fund received no further payments from the casino.

The year 2009 was Mayor Don Ness’s first year on the job, and he wasn’t just dealing with the casino. The national Great Recession and other factors had hit the city hard, and Ness was scrambling on all fronts. In 2009, he made the decision not to bond for street repairs, but to adopt a pay-as-you-go approach instead. He paid for a full year of street repairs upfront, by taking the entire amount from the CIT—$11.2 million. He took another $7.4 million to retire existing street debt. (Of course, 7/9 of the City Council was still required to approve each of these transfers.)

The following year, 2010, Ness followed a similar strategy, withdrawing $6 million from the CIT for current street projects and $5.7 million for debt. 

In 2011, the city withdrew $2.9 million for debt and $750,000 for a pothole reduction program.

In 2012, the city withdrew $2.9 million for debt.

On Dec. 9, 2013, the city withdrew a final $2.2 million for street debt. That was the last time the CIT fund was used. Not wishing to deplete it further, the city turned to other strategies to pay for streets.

Bold moves

Mayor Ness’s heavy withdrawals from the CIT in 2009 and 2010 made my stomach drop at the time, I recall. With eight years of hindsight, however, I now believe that Ness made a bold decision that put the city on a more sustainable financial path. The city has steadily paid down its street debt ever since Ness made those large initial payments. When I spoke with City Finance Director Wayne Parson recently, he said he expects municipal street debt to be fully retired by 2021. That’s a huge accomplishment. The city hasn’t seen that in decades. It’s a result of Mayor Ness’s decision to move to a pay-as-you-go approach.

Yes, the streets have suffered. But it’s not pointless suffering. Part of the reason we don’t have enough money is because we’re using it to pay off debt. By enduring that hardship, and not for so much longer now, the city is setting itself on a more stable path. As the debt disappears, more money will become available for current projects. When we come out the other side, we’ll be fundamentally better off. 

So, the next time somebody complains to you about getting a flat tire in a pothole or losing their bike in a crack, just explain to them that those are actually good examples of a hard decision paying off in the long run and thank them for participating. It’s all in how you look at it.

A change of investment strategies

One reason Mayor Larson feels comfortable asking for money from the CIT for the first time in five years is because there’s money there to ask for now. The account is rebounding from earlier lows.

By 2013, when the city stopped using it, the combination of heavy withdrawals and no deposits had reduced the balance of the CIT to $17.5 million. By law, the city can only invest money in conservative government vehicles such as Treasury bonds, so the fund languished, earning very little income.

In 2015, the city took advantage of an opportunity to place the CIT money with the State Board of Investment, which offered a much broader range of investment opportunities. Placed in the long-term equity market, the fund has grown $5 million in three years, reaching a total of nearly $24 million today. Mr. Parson characterized the fund’s performance as “fantastic.”

The State Board of Investment is also where the city’s retiree healthcare money is located. It’s been there since 2007, when the Bergson Administration (as we recall) shoveled in $11.2 million from the CIT to jumpstart retiree healthcare. Today, according to Mr. Parson, that fund is worth $60 million. So it seems Herb made a good decision.

About that Kroc Center deal

As I noted above, in 2006, Mayor Bergson and the City Council approved $7.2 million for a new community sports center that was to be built in conjunction with the Salvation Army and the Kroc Foundation. A lot of people got very excited about this project, but in the end, for reasons that are still under discussion in some quarters, the Kroc Foundation pulled out of the deal and the project fell apart.

It’s interesting to think about the $7.2 million that stayed in the CIT fund instead of being spent. Since being placed with the State Board of Investment, the CIT fund has grown by about 26 percent. Thus, that $7.2 million has become $9.1 million. 

If the Kroc Center had been built, the CIT fund today would be $9 million smaller—$15 million rather than $24 million. Right now, for a lot of reasons, I’m happier that we have the cash.

Land of many names

For those keeping track, the property on the other side of Grand Avenue from Spirit Mountain has undergone a bewildering array of informal name changes in recent years. It now appears that some final decisions have been made.

The area in question is actually two separate parcels of property: a large tract of private land that is currently in the planning stages for development, and a new city park on the St. Louis River, also in the planning stages. 

Ten years ago, when developers began creating a vision for the private property, they referred to it as River Walk West. When planning for a new road into the site began in earnest a few years later, they began to refer to the area as Kayak Bay. This was in reference to a small cove on the St. Louis River adjacent to the site, which had no formal name. Apparently, somebody, at some point, thought Kayak Bay would be a good name for it. 

But no longer. On Oct. 22, 2018, the Duluth City Council approved Resolution 722, an agreement with MSA Professional Services to provide design work for the new road, which was now to be called Riverwest Drive. The resolution’s Statement of Purpose explains: “Since the project was initiated, the development has been established as Riverwest and the name of the city’s park along the river has been established as Spirit Landing.  As the project no longer includes anything named ‘Kayak Bay,’ it was deemed beneficial to the project and to the users to choose a name such as Riverwest Drive associated with other elements of the project.”

The park along the river, now called Spirit Landing, has also been called by many names. In 2015, it was called Tallas Island, in reference to the river island a short distance offshore. (This name was confusing in itself, as various documents referred to it as Talus, Tallus, and Talles Island.) As planning proceeded in conjunction with the private development, the park came to be informally called Kayak Bay. In early 2018, when the city brought a proposal forward to the Parks Commission, they referred to it as the Lower Spirit Waterfront Access and Park. And now, as noted, it’s changed again, to Spirit Landing.

So, final answer: Riverwest is the private development and Spirit Landing is the new park. Got it? Unless it changes again.