Posted: February 14, 2014 City leaders explain tax increment financing
This week, stemming from a City Council meeting and comments and materials from the Citizens for Referedums Committee, there has been a lot of discussion on tax increment financing.
The City Manager Russ Van Gompel, Finance Director Becky Noland, and Economic Development Director Mike Schatz, together, would like to dispel misleading and wrong information. That includes that TIFs have not been successful, that businesses would have located somewhere else in Eau Claire, and the public-private partnerships are crony capitalism.
They would like to help community members understand TIFs and illustrate the successes the City of Eau Claire has had with TIF Districts.
The following is written by City Finance Director Becky Noland.
Response to “Myths of TIFs”
Thank you for asking about “The Myths of TIFs”. The Myth document describes some basic TIF facts correctly, but does not convey the total picture of TIFs. Here is further information about the “myths” or assertions that you may find helpful.
Assertion #1: TIF is anything but free.
“TIF” does stand for Tax Increment Financing. It is an effective tool for promoting economic development throughout the state. There are several types of TIFs. TIFs may be established to promote industrial development, mixed use development, blight removal, and environmental remediation. In Wisconsin, 414 cities and villages (out of 593) have used TIF Districts for one or more of these purposes. Since 1976, 1,823 districts have been created. Of these, 1,126 TIFs are still active. Eau Claire has had 8 districts, 4 of which are still open. The Myth document does not recognize that the City’s track record on TIFs has been very successful. TIFs #2, 3, 4, and 6 have all recovered their project costs and did so in periods ranging from 11 to 14 years, well under the 27- year maximum life. Development in TIF #2 included a 40,000 square-foot office building, a 44-unit apartment building and a parking deck downtown. Oakwood Mall was the primary development in TIF #3. On the west side, TIF #4 included HTI, Silver Springs, the current Erv Smith building and many other commercial/industrial buildings. TIF #6 included the Leader Telegram facility, a dry wall company, and the U. S. Postal Service building. The property valuations in these closed TIFs increased by $143 million and the properties now provide city-wide tax revenue of $3.1 million. As a matter of fact, in 2012 Oakwood Mall was the City’s largest taxpayer, and HTI was the fourth. (Nestlé’s, which is in TIF #5, was ranked the fifth largest taxpayer.) The purpose of these TIFs was to provide the infrastructure necessary to make the land affordable and competitive for the companies considering location to Eau Claire. The City provided the site development, drainage, water, sewer and streets. As a result of the TIFs, we have companies that provide jobs and pay property taxes for the benefit of all Eau Claire residents.
Assertion #2: TIF borrowing is risk free only to bondholders.
This assertion addresses two issues. The first is the nature of general obligation bonds. The City does borrow funds to pay for streets and utilities in TIFs. The borrowing is guaranteed by the tax levy. When a TIF Project Plan is created, certain assumptions are made about the likelihood of development in the TIF. The first and most basic assumption is that development will not occur without the infrastructure or other project costs. The City establishes TIFs so that the City is well situated to compete for industries that may be interested in Eau Claire. Unless it is for very basic site preparation, like bringing utilities to the area, no project costs are incurred until the City or Gateway has secured an interested company. TIF #9 is an example of this. It was established in 2008, but no debt has been incurred to-date. The taxpayers are at very little risk, because the debt is incurred in conjunction with commensurate development. Even then, the City routinely requires other guarantees to assure that revenue will be available to pay the debt. For example, developers are often required to sign PILOT (payment in lieu of taxes) agreements which become a lien on the property.
The second issue is a discussion on whether the dormitory owners are likely to be able to pay the taxes on the guaranteed valuation of $21.5 million. This City is notably a “university town”. The City is fortunate to have UWEC here, an institution that has just been ranked by The Princeton Review as one of the best universities in the nation for value and education. There is a large demand for student housing, especially in the downtown area. It seems reasonable to expect that the dormitory will be well-received. While a development agreement has not been reached, there seems to be consensus that a PILOT will be required and, as indicated above, it will be a lien on the property.
Assertion #3: TIF projects all but assure property tax increases to city residents.
It is true that new taxable construction in the TIF is considered in the levy limits calculation. This is true of any new construction in the City. It is not reasonable to take the position that new construction is bad because it enables the Council to raise taxes for public services like snow plowing, public safety and recreation. There is a very basic premise that cities need to grow. New construction should help pay for services.
The fact that the property tax base remains with the TIF, while the levy limits are applied City-wide is the result of legislation at the State level. Prior to the legislation, all the taxing entities (city, school, county, CVTC) had to wait until the TIF closed to take the increased valuation into the levy calculation. A closed TIF permitted the taxing entities to either reduce their tax rates, or to raise their levies while maintaining the same tax rate. Because very strict levy limits are now in place, the State permits taxing entities to recognize the new construction in the levy calculation as it occurs.
From current discussions with the developers, it appears that the possible increase in taxes resulting from the new dormitory construction would not be fully realized until the 2020 budget. At that time it will be up to the Council and the other taxing entities to determine whether levy increases are needed to pay for expenditures as compared to possibly reducing services. Under current tax rates, for purposes of illustration, the $21.5 million proposed new construction would generate about a .5% rate increase, or about $.038 per thousand. On a $150,000 home, this increase would amount to $6.
Myth #3 also mentioned that the 4.6% increase in the 2013 taxes collectible in 2014 was enabled partially by new construction that occurred in the TIFs. The reality is that all new construction enabled the City to increase taxes about $350,000. That was the only levy increase that was permitted to cover the costs of wages and benefits, utility increases, subsidies for Transit, the Pool, Hobbs and Parking, equipment, street maintenance materials, insurance, etc., in a budget of $58 million. The bulk of the levy increase, $1.274 million, or 74%, was due to the levy increase needed to cover the debt issued in 2013 for city capital projects not in a TIF. These projects included street improvements, the new public safety space at the Courthouse, and narrow banding projects. It is much better to provide public improvements through a TIF, where all of the taxes of the taxing entities are applied to the cost of infrastructure.
Assertion #4: Additional taxes will be needed to make the annual TIF debt payment.
This assertion assumes that the final TIF Project Plan would not match infrastructure improvements to projected tax increments. The City is still in the initial stages of negotiations with the developers. It is premature to declare that a debt service subsidy will be required until the scope of the Project Plan is determined.
Assertion #5: TIF debt often remains in place for decades and can be extended indefinitely.
General Obligation bonds are generally issued for 20 years and include call features which permit the debt to be repaid early. As pointed out in the discussion of Assertion #1, the City has already repaid debt early in 4 TIFs. TIFs have statutory limits. TIFs for blighted areas have longer time limits reflecting the difficulties of attracting development to areas stressed by dilapidated housing, empty storefronts, and deteriorating buildings. In addition, there may be flood plain and environmental issues, crime, and infrastructure in need of significant upgrades. New TIFs can be “overlaid” existing TIFs to extend or expand the development. Tax increments are needed to pay the debt service on the projects, but the citizens benefit from the projects from year one. In TIF #8, Phoenix Park, the trailhead, the trails, and the ambiance of a vibrant downtown including restaurants, concerts, and farmers markets are all being enjoyed now.
Assertion #6: TIF #8 returns are essentially non-existent.
The Redevelopment Authority (RDA) has been “investing” in the TIF #8 area for several years. Acquisition of blighted properties was undertaken long before the TIF was established. The RDA asked for a report showing what progress had been made to-date in reaching its goals of blight elimination, redevelopment, increased property tax valuations and other improvements. The chart referenced in the Assertion was meant, in a colloquial manner, to summarize the RDA’s success in reaching its redevelopment goals. The chart shows that there has been a significant increase in property valuation in TIF #8. As a matter of fact, the TIF valuation as of January 1, 2013 is now $46 million. Does the RDA now have $46 million in cash or property? No, but the RDA has made significant progress towards its goals for redevelopment
A companion analysis to the Myths Document compares the City/RDA investment to a monetary investment in a Treasury bond. The fallacy in this analysis is the assumption that the City had the funds and the legal ability to make such an investment. The City borrowed the funds or leveraged grants and other revenue sources to pay for the infrastructure improvements. Since the late 1980’s, cities have not been able to invest borrowed funds to earn interest greater than the rate on the debt. Any such interest earnings are considered arbitrage and must be paid to the federal government. More to the point, the City’s function is to use the borrowed funds to pay for infrastructure which benefits the entire City.
Although the chart indicated that the RDA/TIF had invested $17.2 million in TIF #8, that included some costs that occurred before the TIF was established because the point was to show all of the RDA’s investment in the area. According to the 2012 TIF Report, actual TIF #8 expenditures for construction, developer enhancements, administrative charges, and property acquisition have totaled $10.6 million. Taxes for the 2013 TIF #8 levy were $863,000 which is a return of 8% on the costs to date.
The Assertion states that the citizens receive no benefit because all of the tax increments go to bondholders. What is not understood is that the debt in the TIF is the City’s debt, and the citizens benefit by having the increments pay that debt. In the meantime, the citizens are able to enjoy right now all of the infrastructure including the streets, utilities, parking lots and the park areas that were paid for by the bonds issues.
Assertion #7: Studies indicate that most projects would be built, although perhaps not in the TIF.
For the City of Eau Claire, the projects would not have been built but for the TIFs. HTI required a 40 acre site that was served by streets and utilities. We would not have been competitive with the other cities vying for HTI’s plant had we not been able to provide the infrastructure. The TIF enabled the City to construct the public improvements and recover the costs through the increments. The developers of the Royal Credit Union (RCU) corporate headquarters were actually looking at greenfield sites in other areas of the city. Would they have built a headquarters in Eau Claire? Yes, but definitely not in downtown, not in the North Barstow area. TIF #8 was established in response to the Hyatt-Palma Downtown Action Plan in 2001. The Action Plan indicated that the City should make a significant investment in the downtown as soon as possible. TIF #8 was created as a way to make that investment, and RCU was the development that made the infrastructure financing possible. Perhaps RCU would have located elsewhere in the City, but we would not have all of the other amenities that we enjoy on North Barstow today.
Assertion #8: Public/private partnership is another name for crony capitalism and foster corruption.
This assertion is just plain offensive. It does a great disservice to all of the staff, the developers, the RDA, and the City Council-all who have spent time considering, negotiating and financing the projects in the TIFs. It implies that there is something fishy or illegal about the transactions that have resulted in incremental property valuation increases of $232 million, new jobs, and public infrastructure throughout the City.
To-date all of the TIF expenditures have been for infrastructure, with the exception of one development agreement with an early participant in TIF #8. Through a developer agreement, which is permitted under the TIF statutes, that developer is receiving an annual payment from the increments generated by his development. The payment is based on a requirement that the development meets or exceeds a certain valuation and is capped at 10% of the valuation.
Taxpayers are not unwitting risk takers when TIFs are created. All TIF Project Plans are approved by informed elected officials who represent the citizens and are able to gauge the likelihood of the TIFs success.
The Myths of TIFs document does not recognize the role that TIFs have played in economic development in the City. While it is reasonable to be concerned about the various aspects of the Confluence proposal, it is not appropriate to undermine the use of TIFs as a development tool in Eau Claire. Eau Claire’s TIFs have been very successful, and should remain available as an effective financing mechanism for the City. It likely to be beneficial to the City to allow City staff and other interested members of the community the opportunity to negotiate agreements, raise funds, and prepare TIF Project Plans that may accomplish a major portion of the Confluence proposal at a risk level acceptable to the City Council. These types of projects take time to develop, but the Confluence is a unique opportunity that should be given full consideration.