NTF Issue Paper: legwatch153.doc. 8-17.
NEBRASKA TAXPAYERS FOR FREEDOM ISSUE PAPER:
TAX INCREMENT FINANCING OUT OF CONTROL.
BACKGROUND. After federal funding for economic redevelopment decreased, localities sought other tools for economic development and urban renewal. Nebraska voters approved tax increment financing (TIFs) in Nov. 1978, and the Legislature passed enabling legislation in 1979. The original intent of TIFs meant to finance public costs connected to a private development project, e.g., a commercial building might require associated infrastructure like sidewalks, sewers, etc. Eventual property tax increases stemming from a development in a blighted or deteriorating area would repay the public investment required. This mechanism offers a way to encourage private investment in declining areas by permitting local governments to use all property tax revenues there to repay the public investment needed to attract developers. 45 states now utilize TIFs. Substandard areas have deteriorated, obsolete buildings, overcrowding, conditions that endanger life or property by fire or other causes, have a combination of factors that invite transmission of disease, infant mortality, juvenile delinquency, and crime, and appear detrimental to public health, safety, and welfare. Blighted areas defined as including a large number of rickety structures, inadequate streets, unsanitary or unsafe conditions, a tax assessment delinquency exceeding the land value, and defective titles. After designation of a site as blighted, local government initiates a redevelopment plan. Projects include residential, commercial, industrial, or mixed use. TIFs can cover land purchases, demolishing of old buildings, public improvements, infrastructure, and utilities. Each evaluation must include a cost-benefit analysis. That analysis must include statutorily specified tax effects and public service costs. Following approval, a local government authorizes bonds issued to begin public improvements in the area. TIF bonds fall exempt from state and federal income taxes. A developer begins construction under an approved plan, bonds paid off by the increase in property taxes stemming from development. A locality seeks a recommendation from a local planning commission or board about designating an area substandard and blighted. Such declaration fits, if buildings detrimental to public health and safety or meets one of the following categories: 1) area unemployment is at least 120% of the state or national average; 2) the average age of the residential or commercial buildings is at least 40 years old; 3) over half the property is unimproved land within the city for 40 years and has remained unimproved during this time; 4) the per capita income of the area is lower than the average income of the city or village; or 5) the area has shown either stable or declining population based on the last 2 decentennial censuses (Revised Statutes of Nebraska, Sec. 18-2103). Vacant or blighted areas provide minimal property tax revenue. Redevelopment increases value, often significantly, together with property tax revenues. A planning commission has 30 days to respond to a request. Then, local government must hold a public hearing before declaring an area substandard and blighted. Notice of this public meeting goes to all registered neighborhood associations whose area of representation locates at least partly within a 1-mile radius of the area and to the leader of each county, school district, community college, educational service unit, and NRD district in which the property subject to such plan situates (Revised Statutes of Nebraska, Sec. 18-2115). A developer then may prepare a redevelopment plan for the project area. A locality must consider if the proposed land uses and buildings in the redevelopment plan conform to its community planning. After the hearing, a locality may approve a plan, if it conforms to the general plan for that locality, must determine that the project would not appear economically feasible without use of a TIF, and consider the costs and benefits of the project, the community economy, and the demand for public and private services undergone analysis by the governing body and found in the best interests of the community in that area. The redevelopment site transfers to the developer at fair market value, and the construction project begins as approved by the plan. Property tax increases stemming from the redeveloped site apply to the TIF bonds until repaid, or for 15 years, after which the taxes revert to local government taxing authority. The developer can borrow against the future, incremental property value of a project for up to 15 years to help fund part of the project cost. In some cases, a lender may finance a TIF with a loan, so the funds eventually would repay the TIF loan. The property owner uses a portion of property taxes to make improvements, money that would have otherwise gone into the locality General Fund.
LAX OVERSIGHT. Conservative State Auditor Charlie Janssen released an audit of TIFs in January, 2017, revealing minimal monitoring and oversight. Localities are using TIFs very differently across our state. Janssen began his audit after hearing increasing complaints from state senators and taxpayers. He audited 22 of 700+ TIFs. A farmer coop project in McCool Junction used TIF to fund general town improvements, like parks, which did not increase property values in that area, which included almost the entire town. North Platte started a revolving loan program, using TIF revenues for non-TIF projects. 14 projects did not maintain adequate documentation for redevelopment expenses. 13 failed to provide requested information. 6 projects failed to meet requirements for designating blight. The Auditor found that a number of municipalities violated the Community Development Law that authorizes TIF. He recommended that localities develop controls to ensure sufficient documentation of project expenses, accurate distribution and collection of funds, and compliance with notice requirements. He also recommended that the Unicameral evaluate use of TIF funds, state what costs are eligible for reimbursements, and closely define substandard and blighted property. His suggestions include creating a state oversight committee to monitor the compliance of projects with the law to protect taxpayers.
TAXPAYER CHAMPION. Conservative State Sen. Mike Groene (North Platte) is a champion for reforming TIF. He supports its use for actual blighted neighborhoods but decries its misuse, its transformation into blanketed urban renewal. There now exists no complaint mechanism. The only means now to stop a TIF is to file a lawsuit. Groene decries the lowered tax base and out of control TIF utilization. If all Grand Island projects built with the help of TIF developers had built without TIF, the Grand Island Public Schools would have collected more than $409,475 in additional property taxes one year. These additional taxes would have helped pay for the school district daily operating expenses and help retire the debt from several bond issues school district voters approved over the years to build and expand schools to match growing enrollment. Those taxes also would have added to the district building fund, to pay for smaller construction projects and its qualified capital purpose undertaking fund, used to pay for very specific projects such as improving handicap accessibility or removing hazardous materials from buildings. If all 12 residential projects were finished and fully on the tax rolls, the school district would collect about $128,371 in additional property taxes. A project in southeast Grand Island being constructed will eventually create 288 apartment units. If that project could have begun without the use of TIF, it could potentially generate another $239,655 in revenue for the Grand Island Public Schools.
POSITIVE EFFECTS. TIFs are useful to finance public infrastructure like streets, sewers, and sidewalks. They can rehab decrepit buildings and improve blighted and substandard conditions. TIFs encourage new commercial investment and create industrial, commercial, and office jobs. They provide affordable housing and fill in older neighborhoods. They preserve and revitalize historic buildings. The locality receives the long-term benefit of the increased valuation of the property after the bond retires and encourages redevelopment by minimizing risks to the redevelopment that may not otherwise occur unless availability of TIF. The tax base eventually will increase, along with new commercial, industrial, or residential development. Omaha has used TIFs for over 30 yrs. to improve the riverfront, downtown, midtown, the AkSarBen area, and stockyards district in South Omaha.
NEGATIVE CONSEQUENCES. Remaining taxpayers must fill the gap created by TIFs by paying higher taxes on their property. Money taken from schools and other core urban services goes to politically-connected developers. Then the state must increase school aid to substitute for lost revenues. TIF required NE to increase state aid to schools by $22 million annually. In 2014, TIF diverted about $61 million in local property taxes from schools. TIF in 2016 drained $70 million from local governments. A total of $2.9 billion in property taxes lost that year. TIF projects in Douglas County cost $35 million, $6 million in Lancaster County. In 2012, outstate counties lost about $8 million in potential tax revenues, community colleges about $2 million, and NRDs $900,000. While businesses in TIF-created areas do not pay for years for public safety services, taxpayers in the rest of the locality must pay higher taxes or receive fewer services. Taxpayers residing outside a TIF district lose when developers gravitate to a TIF district and pay more taxes or receive fewer services. TIF favors one category of developers and property owners over others and engenders corruption, when local leaders give developers TIFs and then receive campaign contributions in elections. Businesses quickly learned how to play one locality against another over TIF. Unscrupulous politicians and real estate speculators hijacked TIF, turning it into unauthorized use for selfish redevelopment projects. An apartment complex in Lincoln used TIF to pay for parking renovations, a clear violation. This city persuaded a brewing company to accept TIF financing even though not requested. Lincoln also wrongly designated remaining TIF funds from projects to use for others. 8% of the valuation of property to fund OPS is off the tax rolls. When developers capture the additional revenue for 15 years to pay for the costs of residential projects, the result is more students enrolling in the school system. The number of TIF projects in NE has skyrocketed, from 149 in 1996 to 636 in 2012, with 3.5% of city land in TIF districts (NE Dept. of Revenue Property Assessment Division). The usage has morphed from its original purpose of renewing blighted areas to a vast economic development tool, which the Legislature never envisioned. A 2009 study of 37 TIF districts in Omaha pointed to 30 that could have developed without TIF. NE law states TIF use only if a project could not occur without TIF. Liberal Sen. Justin Wayne wants to extend the TIF property tax abeyance time from 15 to 20 years. A 2003 study by The Heartland Institute and 3 other organizations examining 5 Chicago-area TIF districts found tax increment financing does not tend to produce a net increase in economic activity. It favors large businesses over small businesses, often excludes local businesses and residents from the planning process, and operates in a manner that contradicts conventional definitions of justice and fairness.
REFORM SUPPORTERS. Besides NTF, reform legislation wins support from the NE Association of County Officials, NE Association of School Boards, NE Council of School Administrators, and NE Rural Schools Association.
REFORM OPPONENT. The League of NE Municipalities opposes reform legislation, because cities now use TIF with wild abandon.
FREMONT EXAMPLE. The proposed Costco chicken plant planned for Fremont provides a prime example of TIF run amok. Angry citizens filed a lawsuit over the alleged illegal blighted designation for 421 acres upon which Costco wants to build its poultry facility. The city council wishes to designate a blighted cornfield in order to attract a big investment. Costco seeks $13.5 million TIF over 15 years, made possible by “blighting” over 400 acres of cropland on which the plant will locate. Additionally, the company will receive millions in other subsidies from the city, county, and state. The agreement reveals that Costco will apply for $1 million in incentives under a local economic development plan, another $2 million in economic development incentives from Fremont, and receive a discount on electricity for 5 years. Costco also will apply for tax incentives offered by the state under the Advantage Act. Taxpayers will subsidize many of the 1,000 Costco employee kids schooled and other city services for 15 years. During this time, those with allergies would smell the stench from the chicken barns, hatchery, and feed mill, while schools suffer the burden of many English as a 2nd Language pupils and water supplies become fouled. United Communities in Fremont aggressively is fighting the Costco plant location there.
NTF RECOMMENDATIONS. TIF law does not specify degree of blight, so localities broadly interpret this word to meet designations. Legislators must closely define “blight” and demand better record-keeping and transparency to taxpayers. Restrict the law narrowly, so that localities cannot utilize it for questionable purposes and abuse. Governments should supply detailed, continual information about the finances and performance of TIF projects via the Internet. Allow the state auditor to audit TIF projects, enact a public hearing notice requirement, and require publication of cost/benefit analyses. Use TIF only for redevelopment of existing buildings or inner city lots but not empty fields on town fringes converted to residential subdivisions or commercial/industrial uses. Subsidizing farm field development contributes to sprawl and undermines downtowns and urban neighborhoods, exacerbating the problem TIF intended to address. Limit TIF to actual distressed areas with a high poverty rate and/or high unemployment rate. Tax revenue diverted to a project used only to demolish an existing building on the site or to clear and grade the land, as in Missouri. TIFs should not become a tool to attract developers. TIF agreements should include measurable benchmarks for success, and regular performance reviews should measure progress towards those benchmarks. Localities should retain the ability to demand return of some or all of the money used to subsidize private investors, if development promises not fulfilled. If a municipality does not comply with the reporting requirements, prohibit it from adopting a new TIF plan for 5 years. TIF projects must expand the tax base and/or limit the percent of the city or the tax base tagged by TIFs. Safeguard against cities poaching development from adjacent cities.
TAKE ACTION NOW. Lobby your city council member to withdraw your city from the League of NE Municipalities, which continually lobbies against taxpayers in the Unicameral. Contact your state senator to introduce or co-sponsor a bill in the 2018 session to reform and narrowly restrict the use of TIFs to relieve NE taxpayers of the heavier property tax burdens that TIFs impose. Email netaxpayers@gmail.com for state senator contact information.
Research, documentation, and analysis for this issue paper done by Nebraska Taxpayers for Freedom. This material copyrighted by Nebraska Taxpayers for Freedom, with express prior permission granted for its use by other groups in the NE Conservative Coalition Network. 8-17 C.