Is TIF District Money Reserved to Subsidize Corporations?

Leave it to my friend, Jule Zavon, to keep asking questions until I can explain these public financing concepts in clear, simple terms. Julie and I went to Walnut Hills High School and should have graduated together in 1973 except that she left at the end of her junior year to start college early. These days, she speaks four or five languages including Russian and isn’t afraid of tackling a bit of public finance on the side.

Yesterday she sent me an email and suggested I write another blog post about the relationship of Tax Increment Financing to the Oakley Station garage and include my answer to her simple question, “How much cheaper for a developer is TIF financing than other forms of financing?”

First, let’s review a simple definition of the TIF concept, courtesy of the villiage of Shaumburg, Illinois (municipalities present these definitions in their most favorable light as they are using them):

TIF stands for Tax Increment Financing.  A tax increment is the difference between the amount of property tax revenue generated before TIF district designation and the amount of property tax revenue generated after TIF designation.  Only property taxes generated by the incremental increase in value of TIF district are available for TIF projects.  Tax rates do not change when a TIF is created.   TIF districts do not increase taxes. 

Now my answer to Julie’s question:

Oakley-Station-Birdseye

Here’s where the documents on the Oakley Station Garage get very confusing, Julie.  TIF financing.  All my reading of these agreements and I have not yet been able to identify the language that differentiates TIF District grants from TIF Project Financing.

After City Council started to publicly discuss the Oakley Station Garage, I finally understood that this was a TIF District grant.  That means the $6.2 million to build the garage is coming from the Oakley TIF District as an outright payment from the city – free money (the best kind and it beats all other financing hands-down).  Residents of the Oakley TIF don’t pay their property taxes on the full value of their homes and commercial properties.  Taxes on any appreciation in value in the District after its formation (I’m pretty sure it was in 2004) don’t go into the general pool to pay for basic services.  They go into a special TIF fund and can only be used for infrastructure improvements in that specific District.  That can mean streets, landscaping – probably park improvements.  But in reality more and more of the money goes to these damn garages which are really the foundations of buildings for major for-profit development projects and a subsidy for the tenants who lease the space at therefore reduced rates.  Doesn’t matter if we really need anymore covered garages.  That’s immaterial. As I understand it, this office building is near lots of surface parking.  (As was the garage that the Port owns at Kenwood Collection.)  This is a way for taxpayers to foot the bill for 20% (Queen City Square) – 50% (dunnhumby) of a building’s cost.

 

So we could be using this TIF District money to actually pay for street improvements in these neighborhoods.  Instead the City Manager just put through an Emergency Ordinance to borrow more money to repair streets in the same meeting Council approved the TIF grant for this garage.I have to ask, Is TIF money reserved to subsidize our corporations?”

In a 2013 Brown University study published in Socio-Economic Review, “Tax Increment Financing, Economic Development Professionals and the Financialization of Urban Politics,” The author, Josh Pacewicz, lays out the history of TIF — originally a funding method of last resort for “blighted” neighborhoods — and looks at how it has evolved.

  • Because developers’ reputations depend on successful outcomes, “they become invested in these solutions, which are frequently expensive.”
  • Politicians in the two cities used for the study expressed concern that TIF was “corporate welfare,” that it produces unsustainable debt, and that repaying it diverted crucial resources. “Despite such reservations, however, city council always unanimously approved TIF packages during my fieldwork,” the researcher states.
  • Frequently, “politicians and other urban leaders who hire development professionals do not understand TIF’s mechanics and are unable to directly evaluate the technical virtuosity of development professionals.”
  • “The special status of development professionals in urban politics has co-evolved with a set of professional incentives that do not align with the city’s long-term fiscal outlook,” the author concludes. “First, they have an incentive to fund large development initiatives, which can allow them to move to a more prestigious position in another city before the long-term fiscal consequences materialize. Second, they have come to identify their professional identity with the capacity to creatively solve any problem, and this gives them an incentive to create ever-more elaborate, and generous, financing schemes with TIF.” –

See more at: http://journalistsresource.org/studies/government/municipal/tax-increment-financing-economic-development-urban-politics#sthash.fRzDCeT2.dpuf

Advertisements

13 thoughts on “Is TIF District Money Reserved to Subsidize Corporations?

  1. Bill Collins

    Excellent post, Kathy.

    As you report here, these large-scale development projects located in the TIF districts – especially the projects where constructing of the parking garages become, in effect, taxpayers’ funding of the foundations of the buildings themselves — diverts a tremendous amount of taxpayer money to subsidize real-estate developers.

    SUBSIDIES DON’T BOTHER ME, BUT THE QUESTION: ARE WE SUBSIDIZING THE RIGHT THINGS THAT WILL GENERATE LONG-TERM GROWTH TO HELP POOR PEOPLE AND WORKING PEOPLE?
    That’s what bothers me. Maybe I’m missing something, but it appears to me that the projects that are usually subsidized through these municipal TIF projects tend to have the effect of subsidizing these groups:
    * retailers
    * restaurants
    * bankers
    * real-estate developers, and
    * other service-sector employers

    So, it seems to me that the question is: Does the City of Cincinnati really want to subsidize these sectors of the economy, to the exclusion of other sectors such as manufacturing, transportation, telecommunications in the private sector and education in the public sector?

    This is similar to the question that we should ask of the federal government:
    Rather than operate single-payer health-care system like the one in Canada (which I would argue is better and cheaper), do we *really* want an Obamacare-style health-care system that involves such massive, expensive taxpayer subsidies of the health-insurance sector?

    In summary:
    looking at local and federal government spending, collectively should these levels of government (that are financed with our taxes) be subsidizing bankers, real-estate developers, restaurants, retailers and the for-profit health-insurance sectors to the exclusion of other sectors of our economy? Is that good policy?

    Reply
    1. executivedreamer Post author

      That’s what started this whole blog, Bill. All I wanted to do was talk to my fellow citizens about what it is that we want to subsidize. The strategic use of well-thought-out subsidies can work wonders. But I didn’t agree with a lot of the projects where these had been used and I didn’t know if I was crazy – or there was anybody else like me who had other values and ideas about what kind of a city we want to end up with.

      Reply
  2. Mike Brown

    Kathy, I support your quest for open, transparent decision-making in development and financing decisions affecting the public. Also, good public policy, as Bill advocates. I think these are the right questions. I am not an expert in TIF financing, however, I will wade into the question of whether a TIF, in and of itself, is inherently an inappropriate tool for public development.

    Who are the losers under a TIF? Tax revenues from the incremental tax value of the TIF project/district go to service the debt rather than to the tax districts until the debt is paid off (maybe 20 years). Thereafter, tax revenues from the incremental tax value goes to the tax districts. TIF promoters make a “but for” argument. That is, but for the TIF, the project would not have been built, and the public would have been worse off. No doubt the answer depends on the circumstances.

    Who are the winners under a TIF? If developers of a $100 million project receive $10 million in TIF financing, then the developers need only finance $90 million. Given rough assumptions about borrowing costs and term, the $10 million TIF may create $1 million in annual debt service savings for the project. In a developer’s perfect world of full occupancy and fair market value rents, annual revenues would cover operating and debt service expenses and covenant requirements on the debt (coverage, reserves, etc). Revenues would also provide the target margin of profit, presumably with the full knowledge and support of the public body that authorized the TIF.

    Were rents subsidized? Did the developer make excess profits? I don’t know. I suspect there is no a priori analysis to support a definitive conclusion about these questions. The costs, expenses, revenues, and other financial variables are merely too hard to estimate with precision. Is there room for abuse? Certainly.

    So, IMO, it is true that TIFs can be used as a form of corporate welfare; they can be used to fund unsustainable projects; and they can divert crucial resources away from important public projects. However, these problems are not inherent to the TIF. Rather these problems represent misuse of a public finance tool.

    Reply
    1. executivedreamer Post author

      I agree with you, Mike. Know what would make me really happy? Open, honest public conversations about the specific use of these tools. Let’s take a little more time to approve 30 year+ deals. Let citizens participate in the decision-making process in public hearings. Let’s take a good, hard look at the assumptions being made in the economic impact studies. (the one for the Anthem project is a whopping 6 pages, chock-full of pictures and very questionable numbers.) — Critical scrutiny is not a bad thing. I speak from personal experience as my husband has questioned every decision I’ve ever made – and daggone it – turns out we make better decisions together than we ever would without all those annoying questions.

      Reply
  3. Marc Raab

    While the dunnhumby building was subsidized at 50%, an interesting provision could make that number sail even higher. Their lease allows them to “purchase” the top 3 floors of the parking garage to convert into offices. And I think we all know what will happen here- 84.51 will commit to adding, say 500 jobs, and in return get to purchase the top 3 floors for $1.

    It’s corporate welfare at its most obvious, and city leadership with no backbone will jump at the chance to make this deal. Nevermind that the city has all the leverage here.

    Clearly this system is broken. Which is not surprising, since John Cranley spearheaded TIF districts back in 2003. So while Bill poses some great questions, my simplified version is this- “what can we do to fix/change this broken system of corporate welfare?”

    Reply
  4. executivedreamer Post author

    Oddly enough, I don’t think this problem is that hard to solve. After all, it’s not poverty. — Step 1: Stop the use of Emergency Ordinances on all TIF related projects. Step 2: Council needs to pass a motion that requires a Community Building Agreement be negotiated by a broad range of stakeholders BEFORE they vote on TIF grants and projects. Stakeholders should include labor, the art community, faith-based organizations, housing advocates, schools,and the community council (of course). We need to negotiate for more in return for what we are giving away.

    Reply
    1. Marc Raab

      I agree 100%. As for stopping the use of Emergency Ordinance TIF projects, It doesn’t seem council would be in favor of stopping this, as these are usually unanimously approved. A citizen referendum? Do you think it’s possible to find 6,000 or so people who care about this to sign a petition to get it on a ballot? For those who only casually follow city politics, this might be a bit over their head. BUT…..if it was on a ballot, I bet stopping this abuse would pass at the polls. I just don’t see an argument that can be made for keeping the public from voicing their concerns about the millions the city gives away. It deserves due process.

      Reply
  5. executivedreamer Post author

    Could we do that? A Citizen Referendum. I think that would be really neat. Why not? It must be political suicide for Council to vote against one of these deals in anything other than the most superficial way (sometimes one of them will vote against one in Budget & Finance – but never enough votes to ever seriously threaten one)

    Reply
  6. Pingback: Stop giving the city away. | BUILD 513.com

  7. executivedreamer Post author

    You know I’m in Italy, right? — But I love this idea. I just hope you are more knowledgeable than I am about the process. What’s the deadline for the November ballot? Do I need an attorney to put together the language? (I do have a marvelous source who would probably at least help answer these basic questions and give his sense of legal/political reality.) Internet is a great organizing tool – so this is possible even with me out of the country.

    Reply
    1. Marc Raab

      Yes I know…rub it in, why don’t ya? 🙂 My experience in this is limited to gathering signatures to keep the Streetcar (I know that topics off limits) and luckily that never went on the ballot, and our council members stepped up to keep it. If I recall, the deadline is early august, so the fall ballot would be unlikely anyways. I just got super hyped at the idea. And am still super hyped. But this falls election could be a messy one anyways, with two possible park levies likely to drown out any other issues. My main concern is the issue could be uninteresting or over the heads of the average city resident. Education on the issue will be key, as once people find out how the city abuses its emergency clause, they would hopefully want to take a stand.

      Reply
  8. Chris

    Very interesting post. I’m learning more about TIFs as a newer member of Oakley Community Council. They seem to be used, in my neighborhood, mainly to support corporations to reduce their investment. And the need for TIF financing and benefits to the community are not clear. TIF financing is quickly approved with little to no debate. Concerned residents need to hold their local and city council more accountable to think through the impacts of their decisions.

    Reply

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s