The landmark Blackstone Hotel in downtown Chicago, which has hosted 12 presidents, reopened in 2008 after a two-year, $116 million renovation. Inside the Beaux Arts structure, built in 1910, buffed marble staircases greet guests spending up to $699 a night for rooms with views of Lake Michigan.
What’s surprising isn’t the opulent makeover. It’s how the project was financed. The work was subsidized by a federal development program intended to help poor communities.
The biggest beneficiary of taxpayer help for the Blackstone revamp was Prudential Financial Inc., the nation’s second-largest life insurer. The company got $15.6 million in tax credits from the Department of the Treasury for helping to fund the project, according to Chicago city records.
JPMorgan Chase, the second-largest U.S. bank, also took in money by serving as a lender and the monitor of Blackstone construction financing, city records show.
Since 2003, some of the world’s biggest financial companies, including Goldman Sachs, U.S. Bancorp, JPMorgan Chase and Prudential, have taken advantage of a federal subsidy that will cost taxpayers $10.1 billion — and most of the public has never heard of it.
Investors have used the program, called New Markets Tax Credits, to help build more than 300 upscale projects, including hotels, condominiums, office buildings and a car museum, on streets far from poverty, according to Treasury Department records released through a federal Freedom of Information Act request.
Money spent on high-end development could have been used to build more than 1,000 job-training centers, medical clinics and schools. The program, endorsed by then-Sen. Rick Santorum, R-Pa., and House Speaker Dennis Hastert, R-Ill., and adopted by Congress, was signed into law by President Bill Clinton in 2000.
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Not program’s intent » Building high-end commercial projects goes against the intent of the New Markets program, said Cliff Kellogg, a former senior policy adviser at the Treasury Department who helped design New Markets.
"Things like luxury hotels are entirely contrary to what we set out to do," said Kellogg, a bank consultant. "Some hotels may create jobs and spur other nearby investment, but you have to ask if these projects prevent worthwhile ones from getting done."
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Some of the subsidized luxury projects may not have required federal aid at all, the Government Accountability Office found in a 2010 study.
"This underscores the need to ensure the program is operating as efficiently as possible at a time when the government is under severe pressure to address the growing federal budget deficit," said Michael Brostek, GAO’s tax issues director.
The Blackstone adjoins Chicago’s cultural hub, one of the most vibrant in the nation, and is miles from the city’s neediest neighborhoods. Prudential invested $9.3 million and made $30.4 million in loans, according to Chicago records.
Under New Markets rules, firms get a credit of 39 cents on the dollar, paid over seven years, for cash or loans they put in. For its contribution, Prudential collected $15.6 million in credits, according to a July 2008 JPMorgan project oversight report filed with Chicago.
Prudential spokesman Simon Locke declines to answer specific questions about the Blackstone project, saying "we do not comment on individual transactions or discuss our clients." JPMorgan spokesman Tom Kelly also declines to discuss specifics, adding, "we think these projects help the community." The Blackstone says it hired more than 200 workers when it opened in 2008.
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Taking opportunity » Clinton regarded New Markets as a way to spur development and create jobs in communities held back by high unemployment and lagging business growth. He touted the program on a six-state tour in 1999.
"This is a good business opportunity," he said at a cabinet factory in Clarksdale, a Mississippi Delta town with a per capita income of $12,611. "If we can’t fully develop the Delta now, with the strongest economy, when will we get around to it?"
Clarksdale has received no benefit from the tax credit program, Treasury Department records show.
President Barack Obama has endorsed New Markets to help ease the effects of the longest recession since the Great Depression and proposes increasing the tax credits. In December, Congress extended the program for two more years.
The Treasury controls who gets tax credits money and how the subsidies can be used.
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