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Original article URL: http://bridgemi.com/2012/08/taxpayers-on-hook-for-captures-gone-wrong/

Public sector

Taxpayers on hook for ‘captures’ gone wrong

They collect taxes. They borrow money. They pay interest on their loans. They spend money on public improvements to entice businesses to locate in specific areas.

And they may have the most bureaucratic of names ever coined: tax increment financing authorities.

In Michigan’s capital city, a TIFA allowed the city to bulldoze porn shops, build a convention center, erect a handsome ballpark for the Lansing Lugnuts and refurbish a dowdy downtown. Just this month, a TIFA in Grand Rapids issued a $100,000 grant for a study on how to restore the rapids in the Grand River that gave Michigan’s second-largest city its name.

There are hundreds of such units across Michigan, many with their own local tales of success. They are operated largely out of public’s attention, but wield the taxpayers’ backing to cover their financial calls.

And, thanks in no small part to Michigan’s property value fall of the last decade, TIFAs are running into financial trouble, and casting an eye toward taxpayers for help.

In Lansing, the city’s already stretched general fund might have to make a bond payment of as much as $2 million in the fiscal year starting July 1, 2013, because Lansing’s TIFA is short of cash.

An audit of Lansing’s TIFA for the fiscal year ending June 30, 2011 showed a deficit (assets minus liabilities) of $34.3 million, including long-term debt of $25.3 million.

A Bridge review of a handful of those local audits from 2011 found that downtown development authorities and other types of tax increment financing authorities in Battle Creek, Detroit, Lansing and Pontiac were carrying a combined $178.6 million in long-term debt.

That debt requires annual bond payments over the next 20 to 30 years, payments that are guaranteed by the full

How tax increment
financing works

Tax increment finance districts capture tax revenues from the increased value, or “increment,” created by new development.

Using a downtown development authority in a community that assesses 36 mills as an example:

Base year taxable value before new development occurs: $3 million

Taxable value of property after new development occurs: $5 million

“Captured” tax value: $2 million

Multiple $2 million by 36 mill tax rate: $72,000 in tax increment revenue.

Those funds are available to be used for needed public improvements, such as streets and sewers, to support the new development. Funds also are used for the administration of the downtown development authority.

Source: Michigan Department of Treasury

faith and credit of local units of government that already are struggling to provide basic services to residents.

Several specialists in local government finance say taxpayers could be on the hook for hundreds of millions of dollars in bond payments that local tax increment financing authorities are struggling to pay.

But no one knows for sure because state officials don’t analyze the audit reports that the approximately 1,300 local tax increment financing authorities file annually with the Treasury Department.

Treasury Department audit reports (2011) on local government units

“The data is not aggregated. Nobody really tracks it,” said Eric Scorsone, a former senior economist at the state Senate Fiscal Agency. “It’s completely unclear at this point how effective these things are.”

Property values go up, go down

Tax increment financing has been used for decades by local governments to promote downtown development, rehabilitate blighted neighborhoods, attract high-tech companies and pursue other projects.

“There’s been a remarkable amount of downtown development because of our tax increment finance authority,” said Robert Trezise, president of the Lansing Economic Area Partnership and the former head of the Lansing Economic Development Corp.

“Lansing is not unique (with its financial challenge),” Trezise said. “This is literally a result of the worldwide economic collapse. The value of our commercial property fell 33 percent in 2011. You can’t recover from that.”

“I’m all for finding new ways to spur investment in our central cities – especially as a downtown Lansing resident,” countered Lansingite Graham Davis. “However, I’m concerned about how the city’s TIF district shortfall will play out. We need to find new ways to encourage growth in downtowns like Lansing that don’t decimate the city’s budget long-term. I’d rather pay slightly more in taxes and have the city continue to aggressively pursue brownfield redevelopment efforts than see the city’s progress stymied for decades while we pay off the TIF.”

Between 2007 and 2011, Michigan property values dropped $180 billion, when adjusted for inflation, a Bridge analysis found. The city of Lansing dropped from $5.75 billion in 2007 to $4.23 billion in 2011, a nearly 27 percent fall.

Trouble for number of cities

Battle Creek’s downtown development authority, which uses TIFA financing, had a deficit of $40.2 million, including long-term debt of $43.4 million, according to an audit of its operations for the fiscal year ending June 30, 2011.

Types of tax increment
financing in Michigan

Downtown Development Authority

Purpose: Authorized by Public Act 197 of 1975. Allows local authorities to collect and levy taxes, issue bonds and spend tax dollars within the boundaries of downtown to support new development.

Tax Increment Finance Authority, Public Act 450 of 1980

Purpose: Prevent urban deterioration and encourage economic development and activity. No new TIFAs were allowed after 1987 and geographic boundaries could not be expanded after that year.

Local Development Financing Act, Public Act 281 of 1986

Purpose: Prevent “conditions of unemployment” and promote economic growth. Properties eligible to be included in LDFA districts must be engaged in manufacturing,  agricultural processing or high-technology activity. Business incubators also are eligible for inclusion.

Brownfield Redevelopment Finance Act, Public Act 381 of 1996

Purpose: Promote the redevelopment of  “tax-reverted, blighted or functionally obsolete property.”

Historic Neighborhood TIFA Act, Public Act 350 of 2004

Purpose: Use tax increment financing to fund improvements in historic neighborhoods, including streets, pedestrian malls and other public improvements.

Corridor Improvement Authority Act, Public Act 280 of 2005

Purpose: Prevent deterioration and redevelop run-down property in business districts. Encourage historic preservation.

Neighborhood Improvement Authority Act, Public Act 61 of 2007

Purpose: Prevent property deterioration in neighborhoods and improve property. Promote residential and economic growth.

Water Resource Improvement TIFA Act, Public Act 94 of 2008

Purpose: Improve water quality on inland lakes by using TIFA funds to fight invasive species and working to halt pollution from failing sewer systems and storm sewer runoff.

Source: Michigan Department of Treasury

Detroit’s Local Development Finance Authority, which helped finance construction of Chrysler’s Jefferson North assembly plant and other projects, had a deficit of $30.4 million last year and long-term debt obligations of $58 million.

Pontiac’s TIFA had a deficit of $48 million and long-term debt obligations of $51.3 million.

Not all are struggling. Grand Rapids’ TIFA, which captures taxes to aid development in several parts of the city, ended its 2011 fiscal year with a fund balance of $1.4 million and long-term debt of $820,000.

TIFAs in Battle Creek, Detroit, Lansing and Pontiac, while reporting large accumulated deficits, brought in enough tax revenues to pay for operations last year, according to their audited statements.

Battle Creek finance director Linda Morrison said the city’s downtown development authority should bring in enough future revenue to make its bond payments without a subsidy from the city’s general fund.

“We do not expect anything like that to happen,” she said.

There are some 1,300 TIFAs in Michigan that are expected to capture $280 million in local property tax revenues this year, according to the state Treasury Department.

That’s up from about $150 million in 2006, an 86 percent increase. (Adjusted for inflation to 2012 figures, the increase is about 65 percent.)

But beyond those figures, state officials say they have little information about the financial condition of TIFAs or the debt they’re carrying. Treasury does not compile or analyze the data on a statewide basis, according to spokesman Terry Stanton.

While the purpose of TIFAs is to attract new investment and create jobs, no statewide data exists either on how much economic development has been created by these “tax capture” tools.

“Tax capture was created as an economic development tool that was intended to create jobs, by statute. However, there is no audited data to verify that this is actually an effective job creation tool,” said Michigan Library Association President Gretchen Couraud, who has extensively researched TIFAs.

Tax capture, by various names

There are eight different types of tax capture authorities allowed by state statute for downtown development, neighborhood improvement, brownfield redevelopment and other uses.

The first of these was the Downtown Development Authority Act in 1975. In a briefing paper last year, the Michigan Library Association said TIFAs had proliferated throughout the state with little oversight beyond the unelected local boards that administer them.

“They have been liberally expanded many times over from their original purpose,” Scorsone said. “At same time, it raises lots of questions. Is this the economic development policy we need and want, and is this way to go?”

TIFAs are experiencing financial problems for the same reason that the local governments that created them are struggling: a steep decline in property values over the past five years.

The value of the “increment” — the additional tax base created by new development — has plunged across the state, experts say. TIFAs use that revenue to pay for public improvements related to new development and to fund their own operations.

“When you go through this unprecedented period we’ve gone through, the increment is gone,” said Eric Lupher, director of local affairs at the nonpartisan Citizens Research Council of Michigan. “There is no money to do the things TIFAs are supposed to do.”

TIFAs could take another hit if the state eliminates the personal property tax without replacing the revenue collected by local units of government. Personal property taxes also are subject to tax capture.

In some cases, TIFAs are capturing portions of voter-approved millages for public services such as libraries, and police and fire protection, and using the revenue on economic development work.

Steve Wade, president of the Litchfield District Library Board in Hillsdale County, said he has mixed feelings about that practice.

Voters in the city of about 1,300 residents approved a 1-mill levy to support the library in 1997. But nearly $28,000 in tax revenue — an amount equal to 47 percent of the library’s $60,000 annual budget — was captured last year by a TIFA created to aid in the development of an industrial park in the city.

“Would the library be able to better serve the community if we had the entire amount? Sure,” Wade said.

But the industrial park has brought new residents to town and expanded the tax base, he said, increasing the amount of revenue generated by the library’s dedicated millage.

And the local TIFA has offered to help Litchfield pay for a new library, which is now housed in a rented building that has a leaky roof.

“As a library board president, I can see the potential for problems,” Wade said. “The TIFA board is appointed by the city council and it’s one step removed from direct representation. But ours has been quite successful.”

Scorsone said he’s concerned about appointed boards spending publicly voted tax dollars.

“TIFAs are a second or third wave away from elected officials,” he said. “It raises questions about accountability and the democratic process.”

Rick Haglund has had a distinguished career covering Michigan business, economics and government at newspapers throughout the state. Most recently, at Booth Newspapers he wrote a statewide business column and was one of only three such columnists in Michigan. He also covered the auto industry and Michigan’s economy extensively.

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