Economic Development: Indiana’s Wobbly TIF Law
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Editors: The author earned his bachelors in economics at the Wharton School and a masters in regional science, both from the University of Pennsylvania. Prior to his move to Indiana, he was principal and founder of regional analytic sciences in Seattle, Washington. Heller’s specialty in public finance, land economics and transportation was developed in an array of positions with the Washington State Department of Transportation, Washington State Ferries, Washington State Senate, Parsons-Brinckerhoff (an international transportation consultancy) and Snohomish-King County Master Builders Association. In addition to helping author a successful “no-new-taxes” biennial state budget for Senate Republicans in the late 1980’s, his professional and volunteer work has encompassed analyzing a $2.6-billion light-rail project, devising cross-lake bridge alternatives for environmental review, critiquing impact fees authorized under state-mandated local growth management plans and proposing organic methods to finance capital facilities including local school construction. He is actively engaged in municipal issues in his hometown, Columbus, in Bartholomew County. Contact him at regional.analytic@gmail.com.
by TOM HELLER
Tax increment financing (TIF) is a popular but increasingly controversial tool designed initially for redevelopment of blighted areas. With historical roots tracing to federal urban-renewal programs of the Depression Era, TIF more recently has morphed into a way of attracting investiment for local commercial and industrial development.
It enjoys one feature, however, that sets it apart from other state and local “economic-development” tools such as property-tax abatements, tax-credit incentives and outright grants. That is a TIF district’s ability to capture or “pool” property-tax collections that otherwise would flow to local government bodies (cities, schools, county, libraries, etc.).
Through this pooling, TIF districts can represent an affirmative and voluntary choice by all the local taxing bodies to concentrate a stream of captured property-tax revenues derived from within a defined territory for a single purpose. — to finance local public improvements to lure follow-on private investment to produce desired outcomes for the local economy, most especially additional job opportunities and wage growth for local residents.
History and Initial Purpose
Economic development was not always the aim of Indiana’s Redevelopment Act (1972) which forms the basis for TIF and its money-pooling mechanism. The Redevelopment Act was replete with the terms “blight” and “blighted” and as such was aimed at rehabilitating decaying and dilapidated inner-city neighborhoods. In this same era, other states adopted similar redevelopment programs to address decline in their cities.
By 1987, states were rapidly turning their attention to economic development. An array of programs, and incentives were authorized, now centralized under the Indiana Economic Development Corporation (IEDC). The Legislature permitted the creation of Economic Development Areas (EDA), Economic Revitalization Areas (ERA) and empowered cities to offer tax incentives to private developers. While these incentives mostly took the form of property-tax abatements, one redevelopment power added in the 1980’s — permitting bonds to be financed from TIF revenues – opened a new pathway for direct involvement by local government in economic development.
With time, that pathway was streamlined. In 2005, a wholesale change to the qualification for starting a TIF was changed: the previous standard of declaring an area as “blighted” was removed, replaced by the simple hurdle of “needing redevelopment”. (A Mack truck could fit through this opening, some critics argued unsuccessfully). And the very next year, the Legislature adopted language to ensure that TIFs always had enough money to meet their bonded debt service, “perfecting” the security of bonds sold against TIF proceeds.
TIFs are sold as a tool to help an area’s economic development. That belief or assertion, however, is subject to question. A report by RAND on California’s tax increment financing program found that only about half of TIF-district revenues could be traced to growth actually spurred by TIF-financed improvements. Last year, the California Legislature closed all the TIFs in the state even though they had been collecting $5.7 billion annually and had issued nearly $13 billion of bonds.
Controversy over the workings, uses and effects of TIF has only grown as taxpayers became aware of them. A watchdog group in Chicago reports that 163 TIFs drain $455 million annually from that city’s coffers. TIFs have now spread over a third of the city and approximately a third of property taxes collected in a TIF district are diverted from city services — a robust harvest, even by Chicago standards.
Analysis and Application
All of that considered, Indiana’s TIF laws, and their interaction with property-tax laws, are predictably complex. The accounting and math governing TIF districts is so opaque as to defy audit. This may intentionally advantage those who stand to benefit, as TIFs have bred a well-heeled cottage industry composed of law firms, CPA firms, land developers, industrial and commercial property brokers and consultants, economic development officials and experts, architects and engineering design firms and building contractors. Complexity helps to provide this backslapping crew cover from public view.
This report begins to untangle the complexity, illustrating how the financial machinery of TIF really works in Indiana. Its conclusions contrast starkly with the unalloyed claims of success advanced by the TIF industry, its champions and cadre of defenders.
TIFs in Indiana expect to collect $580 million dollars this year. Over five years through 2010, they issued $430 million in bonds, placing us 7th highest in the nation in per-capita TIF bonds sold, markedly ahead of Illinois, Ohio and Michigan.
The statutorily-permitted uses of TIF money retains a flavor of the urban-renewal language of the 1972 Redevelopment Act, i.e., “acquire property,” “clear property,” “inspect property,” “repair and maintain structure,” “remodel, rebuild, enlarge structures,” ”hold, use, sell . . . or otherwise dispose of property acquired,” “grant interests for public ways, levee, sewerage, parks . . . and other public purposes,” and “contract for the construction of local public improvements.”
But the focus of TIFs — and the local redevelopment bodies that control them — has moved beyond urban renewal or redevelopment and is now focused on development, including for exurban “greenfield” sites on former farmland. So, too, has the central term “local public improvements” become clouded — even exploited. It now encompasses things like parking garages -frequently paired with new mixed-use commercial and residential development projects- and new big-box or national-chain retailers and restaurants.
What makes TIF projects so unique among economic-development tools is the revenue stream captured for their purposes. This revenue stream supposedly represents the yield of follow-on development after a TIF completes its “local public improvement.” In a sense, then, TIF is designed to be a development bank financing public improvements that support urban renewal or economic development — an “infrastructure bank” unlike any other economic-development tool.
As cities have taken on more aggressive economic and urban-development stances, their local redevelopment commissions have been increasingly tempted by TIF’s “cottage industry” to stray from their intended role of simply constructing local public improvements and instead these commissions have begun to take on the role as a bank – a credit-granting entity crafting agreements that deploy TIF revenues to help private property developers finance high-profile commercial investments.
This new role has been assisted by some curious math enabling TIFs to actually harvest more money than they earn, working not only to bulge the coffers of local redevelopment commissions with surplus money – but also sending false signals of success to local redevelopment bodies. Beyond this “scope creep”, the TIF mechanism has gone awry in another, perhaps more fundamental way.
A central promise underlying TIF is the assurance that the tax base of all local taxing districts (schools, etc) will not suffer a decline under the math governing TIF. (TIF is supposed to “freeze” the tax districts, preventing a loss of future tax revenue to schools, cities, counties and libraries).
That promise is no longer fulfilled in Indiana. TIFs across the state have been eroding the tax bases of local taxing districts. (For a full explanation of the Base AV or Assessed Valuation, see box on next page). Indeed, eroding the supposedly frozen tax base appears to be the dark, hidden secret of TIF in Indiana communities, generating false signals of success hyped by the TIF industry.
For example, in seven short years since the TIFs were started up in 2005, the Base AV of TIFs in my city, Columbus, in Bartholomew County, has eroded by 43 percent or $124 million. This tax base erosion exceeds all the new private commercial and industrial investment within the TIF districts since they were created. And it represents about 30 percent of the declared value all new commercial and industrial building permits issued in the entire county.
Why would this happen? Follow the money. By TIF’s curious math, the erosion flows through to the Increment AV and generates more TIF revenue for the local redevelopment commission. By this curious math, erosion of Base AV — not growth — accounts for most of the revenues harvested by the Columbus local redevelopment commission. Our TIFs now generate over $6 million annually, up 20 percent in just this last year. But this is a false signal of success because it is mostly “unearned revenue”. This and the aforementioned scope creep curiously enriching TIF math go hand-in-hand, producing a fast-growing pool of money for the assorted elements of the TIF industry to “mine” under the banner of economic development, which has attained a status right up there with mom, apple pie and the American flag.
In this same period, the total assessed value property in Columbus’ TIF districts has risen only $14 million — about one-eighth as much as the value of new county building permits issued for investment within them. How can seven years and $107 million in new taxable private investment result in only a $14-million increase in taxable assessed value within our TIFs? This suggests that the county assessor granted $93 million in adjustments (write-downs) of property values inside the TIF district. That’s upwards of a 33 percent write-down — on previously developed parcels, we presume. Requests submitted to the county auditor for explanation have gone unanswered.
Besides enriching TIF revenues through that curious math, there’s one last consequence of TIF base erosion. It works to “export” (or transmit) higher property-tax rates to properties located outside TIF districts (see box below). Thanks to the “maximum levy” law enacted in 2002, which effectively “de-coupled” (or insulated) every taxing district’s total property-tax levy from declines in AV, the erosion of TIF Base AV we’ve seen in Columbus means higher property-tax levy rates were passed along to cities, counties, school and library districts. Thus, the math of TIF districts has real-world consequences that come at the expense of all taxpayers. (Adding insult to injury, the curious math of TIF translates these higher levy rates into an added TIF revenue “kicker” for local redevelopment coffers, another false signal of success.)
The Secret Sauce
This policy review reveals unexpected but politically critical features behind the math and mechanics of TIF in Indiana.
First, the erosion of Base AV greatly boosts TIF revenues under the curious math of TIF in Indiana. Second, the erosion translates immediately into higher property-tax rates on property county-wide; whether it lies inside or outside the TIF is of no consequence. Third, base erosion offsets genuine new investment in a TIF district, hiding significant assessment write-downs on existing properties within the TIF. Thus, while new money (AV) is deposited in the TIF “bank,” old money (AV) can be withdrawn. This appears to be the secret sauce in the recipes of the TIFs , which, straying beyond their initial intentions, have morphed into bank-like, politically-controlled mechanisms advised by an industry of law firms and a marauding army of economic development preachers and crusaders.
There’s ample evidence that erosion has been occurring all across the state. Figures obtained from the Department of Local Government Finance (DLGF), the state agency where county auditors file annual TIF neutralization worksheets, display a ‘Niagara Falls’ of TIF Base AV neutralization factors. (See Chart 1.)
Fully half of Indiana’s TIFs have gone ‘over the brink’ — and half of those have ‘zeroed-out’ (fully eroded) their TIF base, transferring it to the TIF ‘bank’ instead.
Indeed, the exploration into my community’s TIFs leads me to conclude that TIFs can be manipulated to function like a shell-game where, generally speaking, assessments on the property of selected individuals are lowered while “newly arrived” property (i.e. new commercial or industrial investment) is added to the tax roles. This produces two unanticipated outcomes: vast new unearned TIF revenue to the local redevelopment body and higher property-tax rates (and annual property-tax bills) on all property in the county, whether or not it is located inside the TIF district. By the curious math of Indiana’s TIFs, the lowered assessments on selected properties (“contested assessments”) enables significant unearned TIF revenue.
Other worrisome features of TIFs in Indiana should also be mentioned. The accounting for TIFs elude the discipline of double-entry bookkeeping and the integrity of a General Ledger. TIF assets (namely the increment tax base) are ‘accounted for’ via an annual spreadsheet exercise resembling an IRS 1040 tax filing. The lack of accounting integrity leads both to very limited forward visibility of TIF revenues (impairing effective programming of TIF dollars) but also presents an invitation to behind-the-scene manipulation, such as the granting of significant assessment write-downs on selected properties.
When a TIF is created, a “statement of impact” is produced for all affected local taxing districts. These impact statements are inadequate, incomplete and thoroughly uninformative. They offer only impact projections that are short-range (as little as 2 years) and unrealistic (assume no AV growth). Indeed, if these projections were accurate, they would provide insufficient reason to establish a TIF in the first place!
The complexities -legal and accounting- of TIFs translate into high administrative costs, high borrowing rates (e.g., 9 percent on a 15-year issue) and high issuance costs for bond issues (e.g., $184,500 on a $1.65 million issue). Another example of high administrative costs was Crowe-Horwath’s $43,100 bill to the Columbus Redevelopment Commission for a “parcel-level TIF analysis” in September 2010, purportedly to ensure proper calculation of the TIF districts’ incremental assessed value.
An unelected body of appointees controls the money in the TIF account. While they’re largely unaware of where their money comes from, they nonetheless enjoy the false signal of annual revenue growing faster than new investment within the TIF. The surplus money bestowed upon them by TIF’s curious math enables them to entertain –even court- private firms peddling new development ideas. Among these ideas is creating “private TIFs” –areas carved out of larger TIF districts and whose developers harvest their own increased property taxes. Such is one additional, special case of Indiana’s curious TIF law.
“Contested assessments” (line 9a on DLGF’s annual TIF neutralization worksheet) appear to offer a convenient and reasonably easy-to-hide means to erode (“capture”) the TIF’s base and ‘flow’ it instead into the TIF increment (and thus into the redevelopment body’s bank account.) Contested assessments account for about $93 million or three-quarters of the total TIF base erosion in Columbus. (More curiously, these contested assessments came principally in two very big batches, $51 million in 2010 and another $32 million in 2012. 2011 brought another $7 million.)
TIF-supported projects — and the activities of local redevelopment bodies — are now stretching the envelope, venturing into areas that lack specific statutory authority. This is most visible today in proposals that seek TIF assistance for commercial development ventures.
Conclusion
Although the 2013 legislature, via HB 1116, directed DLGF to take measures to stop further erosion in TIF base AV, the substantial erosion — and the large amount of unearned TIF revenue TIF erosion has already produced — was not addressed. That was swept under the rug. The legislature’s action amounted to little more than sticking a finger in the levee after the pasture and fields have flooded. In essence, the directive to DLGF was simply go forth and sin no more. And do it quietly.
The amount of damage already inflicted by TIF base erosion calls for more. At minimum, we are owed an estimate of the extent to which this erosion has stealthily raised property taxes onto property owners outside of TIF boundaries, properties whose owners have not benefited in any manner from Indiana’s explosion in TIFs.
If Columbus’ experience can be considered a guide for what has happened with TIFs across the state, this is a large amount. Eroded TIF base may represent as much as three-quarters of all TIF revenue collected statewide – and in each and every instance where this erosion has occurred, higher property tax rates on non-TIF parcels has resulted.
Columbus’ experience also confirms findings of studies like those in California which were unable to discern any correlation between a community’s formation of a TIF and subsequent levels of investment in a community.
Measured by the number and value of building permits issued since 2000, the scale and pace of business investment in Bartholomew County has witnessed no clear uptick following Columbus’ formation of two TIF districts in late 2004. Indeed, business investment in the community remains stuck at — or even below -pre-TIF levels. (See Charts 1 and 2.)
The bump in the number of permits reflects recovery activity following the devastation of a 500-year flood in June 2008 and the bump in the value of building permits issued in 2011 owes mostly to large (~$90 million) non-TIF public projects (high school renovations), investments that produce no new incremental taxes.
In summary, TIFs have become a playfield, a sand box, an exclusive “bank” designed and built by a cottage industry and playing upon public fears that our communities aren’t doing enough to create jobs and attract investment. Like honey attracts bears, TIFs attract lots of attention from people who seek advantage from the pool of money that TIFs accumulate thanks to their curious math.
Given this scent of free-flowing money, is it any wonder that TIFs and the army of lawyers and economic-development crusaders who make a living harvesting it have run roughshod over our communities, consuming disproportionate time, attention and resources of our local civil governments whose first responsibilities lie elsewhere?
Writings and Analyis
Erin Blasko. “TIF spending Raises Issue of Accountability: Appointed Commissions Don’t Answer to Taxpayers.” One in a series of articles. South Bend Tribune, May 2011.
Richard Briffault. “The Most Popular Tool: Tax Increment Financing and the Political Economy of Local Government.” University of Chicago Law Review, Vol 77, 2010.
Michael Dardia. “Subsidizing Redevelopment in California.” Public Policy Institute of California, January 1998.
Greg Hinz. “Will Politics Kill Chicago’s TIF Golden Goose?” Crain’s Chicago Business, January 2011.
Randall Holcomb. “Crony Capitalism: By-Product of Big Government.” Mercatus Center, George Mason University, Oct. 24, 2012.
George Lefcoe. “After Kelo, Curbing Opportunistic TIF — Driven Economic Development: Forgoing Ineffectual Blight Tests; Empowering Property Owners and School Districts.” Working Paper Series, No. 75. University of Southern California Law School Law and Economics, 2008.
Micah Maidenberg. “Miffed over TIF: Village Sues CenterPoint over Subsidy Deal.” Chicago Real Estate Daily, Feb. 7, 2013.
Daniel McGraw. “Tax Increment Financing: A Bad Bargain for Taxpayers.” Reason Magazine, January 2006.
Randal O’Toole. “Crony Capitalism and Social Engineering: The Case Against Tax increment Financing.” CATO Policy Analysis No. 676, May 2011.
David Varner. “Retool Indiana’s TIF Statute for the Benefit of All.” South Bend Tribune, Dec. 28, 2012.
Kevin Williamson. “The Other National Debt.” National Review, June 21, 2010.
Additional Resources
Indiana Redevelopment Act (IC 6-7-14 et seq.)
Department of Local Government “County Auditor’s Certificate of Adjustment to the Base Assessed Valuation of TIF Districts” (the “TIF Worksheet”); filed annually 2010 filings for two Columbus TIF areas. http://bit.ly/12SPNEF
Ibid. Compilation of TIF worksheet filings for 2013. http://bit.ly/12sd85e
Melina Kennedy. Baker & Daniels, LLP. “Tax Increment Financing in Indiana” (undated). http://www.cdfa.net/cdfa/cdfaweb.nsf/ordredirect.html?open&id=TIFindianabd.html
California Legislative Analyst’s Office (LAO). “The 2011-12 Budget: Should California End Redevelopment Agencies?” February 2011.
TIF Illumination Project of the Civic Lab (civiclab.us). “Have You Seen Your $255 Million?” information brochure, TIFs created in Chicago’s 27th ward, Chicago, May 2013. http://bit.ly/14URcjs
A Report to the People of California. “Redevelopment: The Unknown Government — What It Is. What Can Be Done.” Municipal Officials for Redevelopment Reform, September 2002.
WAMU and National Public Radio. “Deals for Developers, Cash for Campaigns.” Washington, D.C., May 2013.
Thomas Heller. “Profile of TIF Base AV Neutralization Factors.” Compiled from data from Indiana Department of Local Government Finance, 2013.
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