By Karen Gutierrez
Enquirer staff writer

Newport on the Levee has been named the best family mall in America. by Zagat Survey and Parenting magazine. But under a special deal with the city, it gets an 82 percent discount on taxes owed to local schools.

The school board isn't happy. It recently voted to search for a tax lawyer to scrutinize the deal, arguing that one government shouldn't be allowed to waive the revenue of another.

"It's our feeling there's a boatload of money out there, and it's due the kids of Newport," School Board Chairman Tete Turner said.

The dispute illustrates two points about development in Northern Kentucky.

As the region becomes more prosperous, citizens and officials are increasingly questioning the need for huge tax breaks to lure business. But some say it's the suburban areas - not struggling downtowns like Newport - that can best afford to say no.

In upscale Crestview Hills, for instance, Jeffrey R. Anderson Real Estate sought property-tax breaks to build an outdoor shopping mall next to the Dillards at Dixie Highway and Interstate 275.

The city agreed, but county officials fought the proposal, saying it would cost the Kenton County School District about $8 million in potential revenue over 20 years.

Anderson subsequently withdrew its request. But far from abandoning the project, the company arranged private financing and began construction of the mall this spring.

Boone County also has a policy of protecting school revenue, County Manager Jim Parsons said.

For a new hub under construction in Union, FedEx will get a 40 percent discount on state and county property taxes. But it must pay 100 percent of taxes owed to Boone County schools.

"We don't think the school system should be having to participate in economic development projects," Parsons said.

In Newport, by contrast, school revenue hasn't been considered so sacrosanct.

The bulk of the Levee complex is assessed at $84 million, which ordinarily would generate about $844,000 a year in taxes for Newport schools. But the district gets none of that, collecting instead about $165,000 in other Levee-related charges.

Parsons defended the deal, which he helped craft as Newport's city manager at the time.

As a retail and entertainment complex, the Levee was ineligible for a popular tax incentive involving money withheld from employee paychecks. When allowed, that's a good option, because it gives businesses a break without affecting school revenue, Parsons said.

Another challenge in Newport: Its riverfront was virtually derelict in the late '90s, and a public housing complex still sits a few blocks away. Developing there was riskier than it would have been in a suburban area like Boone County, Parsons said. Hence, Newport had to offer more.

"I think people don't understand how difficult it is to get development in downtown areas," Parsons said.

The Levee's tax breaks were made possible through a common financing tool known as industrial revenue bonds. Cities or counties sell such bonds to raise money for developments. The property is then owned by the governments, which makes it tax-exempt.

Developers agree to make interest payments on the bonds, usually for 20 years. Once they are paid off, ownership passes to the developer.

Such projects are scattered around Northern Kentucky, all with different effects on government revenue. In many cases, cities negotiate a "payment in lieu of taxes" that developers must make to local schools, libraries and others.

Newport's agreement with the Levee calls for such a payment. It's supposed to be $875,000 a year, which the city is to decide how to divide among taxing districts.

So far, though, nobody has seen any of that money. That's because Newport has used all of it to help the Levee make interest payments on its bonds.

For all of its weekend crowds, splashy restaurant openings and national acclaim, the Levee's profits have suffered from bad timing, city Finance Director Greg Engelman said.

The complex didn't open all at once, as originally planned. Then came Sept. 11. A planned hotel was never built. And interest rates on the bonds have been high. The Levee couldn't make the payments on its own, so by prior agreement, the city kicked in the $875,000, Engelman said.

Some day, Newport schools will get some of that money, he said. Meanwhile, the district does get about $128,900 a year in taxes on business equipment owned by Levee tenants, and anther $36,000 from Levee property that is not tax-exempt, records show.

Thanks to the Levee's buzz, Newport property values are climbing, which further helps the schools, City Manager Phil Ciafardini said. From 2001 to this year, total district tax collections increased by $1.1 million, or 29 percent, city records show.

"They're not missing out on anything," Ciafardini said.

Newport school officials aren't so sure.

Residents of the district pay the highest property tax rate in Kentucky. If the Levee and other developments contributed more, the school board might be able to cut that rate, said Dan Sullivan, Newport's long-time superintendent who retired this month.

His successor, Michael Brandt, said he hopes to meet with city officials soon to discuss the district's concerns.

E-mail kgutierrez@enquirer.com