The public needs to participate in TIF

In theory, a TIF project requires no new taxes. It pays for itself by increasing the tax base. Municipal government provides needed capital to redevelop a decaying neighborhood. While the properties in the TIF district improves TIF captures any incremental increases in property tax collected. That provides a revenue stream for the redevelopment that allows the new spending without increasing taxes.

In theory or so says TIF supporters.

George Lefcoe, author of a Legal Studies Research Paper for the University of Southern California Law School, Competing for the Next Hundred Million Americans: The Uses and Abuses of Tax Increment Financing finds support for certain TIF economic development projects more so in large cities and especially wealthy suburbs. But for midsize cities and blighted neighborhoods he warns of pitfalls and risks for other taxing bodies and taxpayers.

Lefcoe noted that truly blighted neighborhoods offer the fewest possibilities for easy increases in property value.

Citing an Iowa study that found TIFs to be most successful in “booming suburbs and metropolitan areas,” because that is where costly new developments have the best chance of being financed, built, and when completed add greatly to the property tax rolls. But TIF funded redevelopment in distressed areas seldom boost property values enough for the project to pay its own way.

According to Lefcoe’s report TIF projects drawing on future value increases is unlikely to support even a successful intervention in truly blighted areas if that project achieved only reduced rates of decline in EAV, or even stabilized values — however heroic that accomplishment might be in fact.

Some consider the Downtown DeKalb renovation project as a heroic accomplishment even though property values have declined since more than $14 million was borrowed and invested via TIF. That was after the 23 year term of the Central TIF District was set to expire and the state legislature approved an extension to 35 years.

Thanks to the work of local government watchdog Lynn Fazekas, here is a summary from the Section 5 of the FY2012 annual TIF report, which tracks the amount of public investment and private investment for individual projects:

• Number of Downtown projects, 11/1/1999 through 6/30/2012: 14
• Public investment undertaken: $12,536,212
• Private investment undertaken: $7,163

An absence of private investment, which is the justification for public investment via TIF, may also be a signal that the market has not identified development opportunities in the target area, according to Lefcoe. In that situation, a number of unsuccessful investments might be the price for undertaking any ambitious redevelopment initiative.

City Council members are now exploring spending up to $7.5 million on renovations to City Hall, with $5.5 million of that coming from tax increment financing dollars and $2 million coming from increases to gasoline taxes, water bills or property taxes.

The latest downtown consultant hired recommends investing additional TIF funds in the two largest traffic generators downtown. The two largest traffic generators identified are the Egyptian Theatre and the DeKalb Public Library. Both could always use more revenue and have received annual TIF funds for some time.

The library and the City of DeKalb are committed to financing a major expansion. The library received $2 million from the Central District TIF for the expansion.

The Egyptian Theatre received $890,000 from the Central District TIF to replace seats, purchase a new sound system and install air conditioning in the historic theater. The air conditioning system cost much more than the $500,000 anticipated so the Egyptian Theatre spent that half million on other maintenance projects without oversight and looks to receive more TIF funds in the near future to finally install the air conditioning. See page 12 of 26.

Lefcoe’s study of the TIF experience found dramatic evidence that the ability to spend against future revenue for unspecified purposes with little oversight presents opportunities for excessive borrowing.

In theory “the incremental revenues pay for the public expenditures, which induce the private investment, which generates the incremental revenues, which pay for the public debt obligations.” Accordingly taxpayers are, in theory, not required to pay higher taxes for those projects or its debt service.

But the inability to predict what would happen in the absence of TIF undermines this theoretical basis. An assumption that any tax base growth is caused by TIF justifies earmarking the tax base increment to pay for that development, and lies behind the claim that TIF allows new spending with no tax increase.

Increases in EAV resulting only from general growth or inflation should not be attributed to the TIF. If tax base growth that reflects inflation is properly allocated to the TIF district, the jurisdictions that depend on the property tax for basic funding may have to raise their tax rates or face budget shortfalls. Many local government budget items, such as compensation packages including health insurance and retirement benefits for public employees can rise at rates well above that of inflation.

A frozen or declining tax base is likely to require even higher tax rates, new fees, or other mechanisms to fund ongoing government operations.

School districts and other taxing bodies must contend with TIF officials who focus narrowly on whether a project is financially viable, not whether it is also economically efficient for all the taxing entities contributing to it. A project is financially viable if it produces enough increment to reimburse the public for its investment in the project. A project is economically efficient if it produces greater net public revenues than any alternate use of the site and would not have been built elsewhere within the taxing entity’s boundaries.

According to a letter from Andrea Gorla to Rudy Espiritu, District 428 has experienced about a 17% loss in property values (EAV) since voters approved a $110 million school construction referendum in 2008. The school district’s operating tax rate increased by $1.633 since 2008 and that does not include the increase due to the referendum bonds which are escalating as well, according to Gorla.

Redevelopment agencies have been known to spring into action and modify a redevelopment project boundary to include a newly announced major private development project that the agency had no part at all in bringing to the area. (Lefcoe)

DeKalb’s Central TIF District was modifed several times in its original 23-year life span. A portion of Park 88 was included in the TIF district in an amendment to extend Industrial Drive. A boundary line was drawn from the Central TIF District to the former County Farm property that captured tax revenues from Lowes, the Best Buy shopping complex and the Summit Enclaves residential subdivision.

Former Mayor Greg Sparrow used to tell anyone who would listen that the school district would receive a windfall of new tax revenue when the Central TIF District expired. Instead it was extended for 12 more years. After the extension the boundaries were readjusted to include the Pappas development (formerly Small Furniture) now under construction on Sycamore Road.

Redevelopment and economic development agencies often keep the public in the dark about their transactions. Scant public reporting of TIF expenditures and revenues does nothing to allay suspicions of favoritism and corruption. Lefcoe found that in some places, it is difficult even for local public officials to know whether agency cost-and-revenue estimates are accurate, and whether the project’s performance matched its original projections.

Lefcoe’s report attributes the lack of transparency partly to “lack of oversight and of monitoring by the public. He offers tools for monitoring TIF and increasing public participation.

The SEC prohibits brokers, dealers, or underwriters from purchasing or selling municipal securities unless the issuer has contracted in writing to provide certain financial information for the benefit of bond holders: an annual report and certain “event” notices. The information is all about the TIF cash flow—tax rates, assessed valuations, identification of the ten largest taxpayers in the project area responsible for more than 5% of the taxes levied, property tax appeals, exemptions, tax increments collected in the prior year, tax delinquencies, and estimated debt service coverage ratios.

As Lefcoe notes times are not optimal for TIF. Bond investors now anticipate local government tax revenues remaining flat and demand high debt-service-coverage ratios. For every dollar of debt service, investors are insisting upon $1.25 to $1.50 of estimated property or sales tax revenue.

At the same time, many redevelopment agencies are struggling to make ends meet because of property tax revenues declining in tandem with falling property values. Under severe fiscal stress, some cash-strapped cities and states could dissolve redevelopment agencies instead of trying to cover the administrative costs of keeping them alive with appropriations from the general fund.

But as the economy improves, we can expect to see developers eager to reduce their equity needs by adding a TIF component to their financing capital stack. It remains to be seen how state and local government officials will respond to calls for greater TIF accountability. Ignoring those calls could erode public confidence in the role of governments as redevelopers, and lead local and state government officials to push for an end to all TIF-financed redevelopment.