Why tax increment financing works, and why it's causing worry

TIF addiction

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The city of Altoona pays $56 million to build a Bass Pro Shop superstore. It also freezes the property valuation of the store site and diverts taxes from the valuation increase to pay off project bonds over three decades.

A city erecting a retail store to attract a company that will sell fishing tackle and waders? And paying $56 million?

A complex and poorly understood public finance mechanism that makes such projects possible has come under renewed fire, sparking legislative reforms that still don't satisfy critics.

The Altoona project was a modern example of tax increment financing or TIF. Enacted in Iowa in 1969 to help communities redevelop blighted areas, it's morphed over the years through subsequent expansions of the law's uses into a miracle cure for Iowa's financially strapped cities.

In general, it works like this: Cities designate a targeted development site as an urban renewal area and a TIF district. The tax valuation of the site — which is the basis for the property taxes the owners pay — is frozen at the pre-development value.

New tax money collected based on the improvements go into a fund used to pay off project bonds.

Altoona's Bass Pro Shop opened on August 27, 2009, near the busy intersection of Interstate-80 and the Highway 65 Bypass.

It's brought jobs and thousands of visitors to Altoona. But it also causes higher property taxes in places such as  Runnells.

The town of 352, about 18 miles away, happens to be in the same school district. Because property valuations on the prime development ground in Altoona are frozen, the school district must lean more heavily on property owners in places such as Runnells to meet its rising budget.

Altoona's Bass Pro Shop was already water under the bridge when Iowa legislators got up in arms about TIF last session.

Coralville became the epicenter of a TIF reform debate when the city decided last year to use at least $9.5 million worth of TIF revenues for construction of a new Von Maur department store, and several million more to build a microbrewery as anchor attractions in its Iowa River Landing development.

The Von Maur store will replace a store closing in neighboring Iowa City.

Coralville was blamed for using TIF to finance an act of "economic piracy" — a phrase that's gained some popularity as part of the TIF discussion — although city leaders and Von Maur officials said the store was going to move from its Iowa City location anyway.

Much of the TIF revenue to pay for the project, ironically, will come from nearby Coral Ridge Mall in Coralville — which also wanted Von Maur. Income generated from the Mall-Iowa River Landing TIF area will drop from about $12.8 million per year to about $2.8 million in 2019, when the mall portion of the TIF expires.

As state legislators began looking into TIFs, Coralville's use of the mechanism to pay for its Iowa River Landing development became only one piece of what they saw as a disturbing picture.

At least seven rural counties had begun designating wind farms as tax increment financing districts to pay for projects such as road improvements, according to a report from the Iowa Fiscal Partnership.

The small Mississippi River town of Le Claire has more than half of its property valuation in TIF, the report said. It has used TIF to pay for a new library, city hall, fire station and infrastructure for an upscale housing development.

A TIF district has two categories of property valuation:

  1. One is the "frozen" value of property as it existed when the TIF started.
  2. The other is the amount of increase in valuation since the TIF district was approved, known as the increment.

Revenues from the frozen category continue to flow to all taxing bodies that include the land, but revenues from the increment go only to support the project.

In Linn County, $484.4 million in assessed property valuation is excluded from the normal distribution of tax proceeds because it is in TIF increment, according to the Linn County Auditor's Office. That is 5.03 percent of the total assessed valuation.

Johnson County has $739 million in assessed property valuation in TIF increment, 11.06 percent of the county total valuation.

"IT'S COMPLICATED"

A growing string of reports by academic experts and policy groups have pointed with concern to the escalation of TIF use and resulting shift in tax burden. Critics say local elected officials can use TIF to circumvent the need for elected leaders to obtain a public vote when taking on large amounts of debt.

Local governments have extended the life span of TIF districts beyond the need to pay back projects, according to a report by the Iowa Fiscal Partnership, diverting the revenue streams to other projects not originally envisioned.

As an economic development tool, TIF has become powerfully addictive. That's partly because the rationale for using TIF has changed, according to testimony by Iowa State University economist Dave Swenson to the Iowa House Ways and Means Committee.

Swenson said the original rationale for diverting other government's revenues to TIF districts was "market failure" in blighted areas. If it were not for a creation of a TIF district to stimulate investment in the area, the tax base would have continued to decline for all taxing bodies.

In the 1980s, the competition among Iowa communities for jobs escalated due to the struggling economy, Swenson said. Cities embraced TIFs as a way to entice ethanol plants and other projects, and TIF tended to become an entitlement, which businesses expected from their host community.

Today, TIF districts harvest almost $300 million in property tax revenue per year in Iowa.

"I don't think the average ordinary citizen understands it because it's complicated," said State Sen. Joe Bolkcom, D-Iowa City.

"I think sometimes even the people that are using it and even the elected officials don't understand it. And I think members of the general assembly who aren't like ordinary citizens don't always understand."

What's to understand?

"The little secret of TIF is that it spreads the tax burden for paying for projects in municipalities to taxpayers who aren't living in those municipalities," Bolkcom said.

Bolckom is chairman of the Senate Ways and Means Committee, which considered TIF reform in the last session. The discussions eventually led to fairly narrow law that:

  • Requires web-based public disclosure of each community's TIF use
  • Limits use of TIF incentives to entice a business to move from another Iowa community
  • Requires  the Legislative Services Agency to issue an annual report to the General Assembly and governor that summarizes and analyzes the data provided by local entities.

City officials and economic development agencies gave Iowa legislators an earful about how significant TIF is to their efforts.

"TIF is important because of its flexibility as a tool and the fact that it is a program that is administered at the local level," said Brent Willett, executive director of the North Iowa Corridor economic development organization and vice president of the Professional Developers of Iowa.

City councils or county boards with a project in mind don't have to apply for state grants with relatively restrictive requirements and wait for answers, Willett explained. TIF funds also can be used as local match for state grants.

Willett noted TIF funding can be especially critical for smaller communities such as Mason City, which would otherwise have had difficulty coming up with local match for projects such as a recent $12.5 million expansion of its Cargill Kitchen Solutions plant recently that will add 20 jobs.

In many cases, Willett said, TIF helps a community plug a gap in funding for a project. He said typical TIF projects are mundane things such as sewer and water lines to bring in a new industry, not flashy swimming pools or superstores.

TALE OF TWO CITIES

Economic development activity in two Corridor communities has become synonymous with TIF, but in different ways. Hiawatha has used TIF in a more traditional manner to attract new and relocating factories and office complexes, ranging from software businesses to print shops.

Coralville, on the other hand, has exemplified the trend toward extending TIF benefits to retail projects and civic improvements, normally viewed to have considerably less economic impact than factories.

A TIF incentive awarded to Hiawatha-based World Class Industries back in 1994 paid big dividends for the company when the 1993 flood forced the company out of a leased warehouse building , according to World Class board Chairman Pat Cobb.

World Class Industries is a contract manufacturer that assembles components for companies such as John Deere. It consolidated from three leased buildings in Cedar Rapids and Hiawatha into one company-owned building in Hiawatha.

"It gave us back 50 percent of the taxes we would pay on the building we constructed for the first eight and one-half years," Cobb said.

It amounted to $75,000, which the company used as part of its 10 percent equity requirement to obtain a Small Business Administration loan. Without the $75,000 upfront payment, Cobb said the company wouldn't have been able to obtain the loan.

Since that time, the company has grown from 6 employees to 85, sales have multiplied and the company has opened several new locations near its manufacturing clients.

Cobb says he believes Hiawatha was able to do the TIF deal without taking on much risk because the TIF funds were going into a building. If the company failed and couldn't pay property taxes, Cobb said, the city could have recovered the building for non-payment of taxes.

Hiawatha Mayor Tom Theis doesn't profess deep knowledge of TIF's inner workings, but he says it's worked well for the city.

"We've used TIF wisely, we've been told by our financial people," Theis said. "We don't use it for retail or residential as other cities have tried to.

"Every single TIF is given on its own merits. There's no 'gimme' in Hiawatha."

Hiawatha has its TIF policy available on its website. It specifically excludes certain uses, such as residential developments and retail establishments.

It states the minimum amount of tax base created must be $500,000.

Meanwhile, the city of Cedar Rapids has used TIF sparingly for industrial and large commercial projects. City Manager Jeff Pomeranz said he's unaware of any specific TIF policy in Cedar Rapids —  TIF's great value to cities, he added, is its flexibility, and having a policy that narrows its use would defeat that benefit.

In Iowa City, a rare instance of public involvement to thwart a TIF project last month ended unsuccessfully for its backers.

Taxpayers petitioned the city of Iowa City to force a vote on the issuance of general obligation bonds in connection with a TIF-financed 14-story multi-use building planned by developer Marc Moen at 114 S. Dubuque St. They said essentially that the public money's shouldn't be required to help a wealthy developer build a project.

The city council was able to get around the vote by using revenue bonds, which weren't subject to the vote requirement. Council member Susan Mims explained her take on the decision, saying she didn't think economic development could be done by a public-vote process.

Iowa Gov. Terry Branstad has generally kept out of the TIF debate, while acknowledging he has some concerns about how TIF is used.

One Realtor, Doug Laird of Skogman Commercial in Cedar Rapids, said the big picture is that TIF is needed because Iowa's commercial property taxes are high in comparison to other states. Rebating a portion of them on new construction projects is a way to defuse that issue.

It's clear the argument will continue.

"There more work ahead," State Sen. Bolckom said. "That work's going to be driven by whatever data's collected on that new (Legislative Services Agency public disclosure web) site."

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