A Closer Look at TIF

Council held a work session last night on Tax Increment Financing (TIF) as we continue to consider the One University Place project. We had two speakers talk with us, and it was a very informative and illuminating meeting.

The first presenter was Dr. Peter Fisher, Research Director of the Iowa Policy Project. Peter is national expert on public finance and is a frequently cited commentator on what is viewed as the abuse of TIF projects.

I spent a good deal of time speaking with Dr. Fisher in 2010 when in my first term on city council and the idea of TIF was proposed for One University Place. I find him to be very approachable and gracious with his time and expertise. Last night he had a PowerPoint presentation that he shared with the council and public who attended the meeting.
The slideshow can be downloaded from the U-H Municipal website:  TIF Presentation

The portion I found most helpful were the last two slides he shared. The first slide was guidelines for Responsible TIF Use:

These guidelines generally correspond with what I've said I would support in a TIF: a project based, rebate TIF with a definite time/cost ending. The only area above that I haven't supported is the last one in that I have mentioned TIF as a means to pay for the Community Center which would be a tax exempt facility. I will now need to consider bonding for a center in light of Dr. Fisher's suggestions.

The last slide was Questions to Ask:

These are the questions we should apply to One University Place, some I can answer now, others not yet:

Question One: YES ( we are only considering a rebate TIF, for the project site only)
Question Two: YES (I view the commercial space as a public benefit. The developer has said they could build a residential only project without TIF. I believe the public benefit of commercial space justifies a TIF)
Question Three: Not Yet (I'll talk about this down below)
Question Four: To ensure public benefit (This can be explained in my answer to question 2 as well as my firm belief that this property, which currently generates zero taxes, should be on the city rolls. If this development does not take place there is a high probability that it could be purchased by the University of Iowa, which would effectively remove any possibility of it generating taxes)

The second speaker was Tom Jackson of the National Development Council. City Council has hired Tom evaluate the One University Place project and recommend whether or not a TIF would be necessary. Tom has also performed this duty for the City of Iowa City as they consider re-development projects. Tom's work will heavily influence how I judge the answer to question 3 above.

Tom said he will have a full written report delivered to the City prior to our May 27th Public Hearing on the One University Place Planned Unit Development (PUD). He did have some preliminary remarks last night. Here are what I considered major points of what he said last night:

• While Tom didn't say outright that the project deserves a TIF, he did talk in general terms about amounts and time limits, so I am assuming he has deemed the project as viable and worthy of TIF
• Financing model is predicting an 8% return on the project 
• Local bank financing would be approximately 5% which would be paid first
• Private equity firms are not interested in projects generating under 15% return
• A TIF time limit of 12 years is the rough projection
• The payment would be a flat amount per year, so that after the first several years of payment, any excess amount generated from site would flow through normal channels to all other entities: county, city, school district
• A gap amount of $4 million is the rough projection

As I said at the beginning of this post, I found last night to be extremely helpful and what I learned will certainly influence and clarify my judgement regarding this project.

TIF Talk

City council will continue discussing Tax Increment Financing (TIF) at a work session on Tuesday April 28th. We held an informational session on TIF last month. Here is a link to the official minutes of the meeting as posted at the City of University Heights website:

http://university-heights.org/council/15/minutes/150323minutes.pdf

I recommend reading these. I also took notes at the meeting, here is what I recorded:

1. Explain difference doing TIF funding as opposed to doing a municipal bond to provide funding for a development.

Difference between fronting cash or a TIF rebate arrangement. When city has to front, they have to borrow, and puts city’s credit at risk. TIF rebate requires developer to front cash, and then offers future economic benefits, keeps risk on private side. Iowa law allows cities to define “necessary.” That includes infrastructure low-moderate housing.

2. What are the different types of TIF funding- Bond, tax rebate, tax abatement, et.al

Basic tenet: tool to repay obligations to a city or county of urban renewal projects. Has to have a public obligation. 1. Traditional banking (borrowing or a bond) general obligation can be paid by debt obligation levy. 2. Internal borrowing must have your own funds. 3. Negotiated TIF contracts or rebate agreements. 4. Statutory obligation for low income if you TIF market rate projects. One more tool “tax abatement” not a TIF. Keeps new valuations from going on the property tax roll.

3. What is a TIF district and who decides the location of the TIF district?

Location is defined by City Council and BOS have authority to establish urban renewal areas. TIF district is designated by ordinance.

4. Our town has a bonding capacity of about $5.3 million. How is our bonding capacity affected by the different types of TIF funding or a municipal bond?

Law sets debt limit. Interest is not legal debt. Utility borrowing, special assessments not considered debt. GO and TIF are debt. Annual Appropriations make it such that city’s payment liabilities are dependent on city council decisions and action. You can put specific concrete benchmarks to incentivize developers.

5. If TIF funding or a municipal bond is chosen as a gap funding mechanism, who determines how the repayment is used and where it goes. E.g. Johnson County, School District, University Heights.

All decisions are made by city council. Can’t control whether or not revenue comes in and the pace. Minimum assessment agreement establishes a floor of valuation with assessor. Makes TIF revenue stream more predictable.

6. How is University Heights' bonding capacity affected as new buildings are added to the tax rolls and a portion of the TIF or bond is repaid?

As buildings are added debt limits goes up 5% of assessed valuation of new construction. Have to wait for assessment to catch up. 18 month lag. Bond rating of city won’t be an issue.

7. Are there any employment requirements for any TIF funding or bonding?

Required? No but cities could say that if jobs are created in commercial projects the TIF could be higher. 

8. What are the circumstances in which TIF could go totally wrong and result in "bankrupting the city" that we hear from some individuals?

TIF negotiated contract shouldn’t ever hurt a city, since it isn’t the public credit put at risk. However fronting cash is risky but with debt limits and savvy lenders it shouldn’t be an issue either.

9. When does Affordable Housing come into effect for TIF projects?

Lower and moderate income set aside if used for public infrastructure related to new market rate housing then must have additional funding for low/moderate income. Amount is county specific due to rates. In negotiated contract that developer gets percentage after LMI (low moderate income) is first required. TIF for commercial does not require set aside.

What triggers that obligation (TIF used in residential project or for residential purposes, I believe);

How much funding is involved (how is the obligation computed); and

How is the obligation paid – over time, as TIF is rebated, etc.

Questions from audience

When should city not use TIF?

Each community has to make that decision about what is appropriate use and when.

Any implications for public space not subject to taxation?

2012 leg says analysis has to be done to find feasibility. Keeps discretion at local level.

In determining increment on tax exempt property how is increment measured?

County assessor starts from zero when counting in similar projects but must involve assessor to know for sure.

Coralville’s Bond Rating drops 6 levels in 2 years What about U-H? What about local banks not wanting to loan to us?  

Doesn’t work for a rating agency and has a hard time considering how we might need a bond rating agency. Are you making a good policy decision and a good fiscal decision?  Banks generally will enter with municipalities. 

20 year TIF collection limit under current law. For market rate housing TIF limit is 11 years.