TIFs: Mr. Daniels, Meet Mr. Brown

April 20, 2011

Well, he’s back. Jerry Brown, after a stint as mayor of the City of Oakland, is once again governor of California. This time, however, the ultra-liberal governor has something to teach Indiana.

For this is a different Jerry Brown; now he’s attempting to cut $1.7 billion from the state budget to correct a deficit that threatens to crush his state. How does one “trim” more than a billion dollars from a budget that was supposedly crafted by the more-conservative Arnold Schwarzenegger? Will Governor Brown try to cut back on police and fire protection? Will he reduce teachers’ salaries or pension benefits? Will he try to stem the inflow of illegal (and expensive) immigrants?

He may eventually attempt to implement all of those policies, but he has begun in a different arena — one that Hoosiers and Gov. Mitch Daniels should examine carefully. Indiana, please know, is not so unlike California in the policies and budgets it implemented in past decades.

The focus of Jerry Brown’s budget cutting has been the 749 redevelopment agencies in California. These agencies were formed to fight urban blight. They were allowed to use the force of government in the form of rights of eminent domain to clear properties by floating bonds to pay for their activities. Increases in taxes, called “tax-incremental financing” or TIF, were allowed to be implemented by the redevelopment authorities with the idea that future increases in the value of the tax base would pay for any improvements of the redevelopment authorities.

These redevelopment authorities, however, did not always (and perhaps only rarely) make reasonable choices in what to develop and what to fund. Often, the tax base does not increase in value and taxpayers are simply left with larger and larger tax bills and areas of urban blight that were little better off than before the large sums were spent.

The real issue is whether there ought to be a publicly funded redevelopment commission, or whether these issues should be handled by the private sector.

South Bend’s Redevelopment Commission, one of several such government commissions in Indiana, describes its mission this way: “The Redevelopment Commission was established to address conditions associated with blight and the under-utilization of land and/or barriers to development.” So has South Bend’s commission done a cost-effective job of removing that “blight”?

Consider the College Football Hall of Fame that was financed by the commission two decades ago. The minutes of the South Bend Redevelopment Commission show how public spending on the Hall of Fame was extended throughout the 1990s. More than $19 million of spending was agreed to at one meeting alone on June 28, 1994. Tax-incremental funding here enables these local redevelopment authorities to collect the property-tax revenue attributable to increased assessed value resulting from new investments in the TIF district.

Was the TIF project undertaken by the South Bend Redevelopment Commission so successful that South Bend residents were able to pay for the project through projected increases in the value of the property-tax base?

Far from it. While the commission obligated residents to higher property taxes to pay for the Hall of Fame, the hall itself never broke even. It was a disappointment in terms of attendance by paying visitors, once forecast by the commission to be both plentiful and loyal.

In late 2009, the College Football Foundation judged the South Bend enterprise a failure and decided to move its facility to Atlanta. As a result, South Bend residents were left with a single-purpose building without a tenant. And instead of the previously “blighted” area (according to the commission) in downtown South Bend, the city now has an expensive but vacant building on its hands. Taxpayers have been impoverished by building it, and alternative uses for these funds have gone unmet.

In short, the city is worse off than if it had done nothing at all.

It has been made clear that “blight” is a concept easily abused by quasi-government officials and redevelopment agencies. Agencies such as the South Bend Redevelopment Commission are able to essentially raise property taxes without a vote and spend the proceeds on anything they deem blighted.

Again, Governor Brown in California has learned that lesson, recognizing that “the more aggressive cities have become in using this tool, the more they divert tax dollars from traditional public services like schools, fire-fighting and police services.” Government cannot do everything; it must concentrate on those things that are the necessary and traditional public services. Financing halls of fame, golf courses and convention centers with public property-tax payments is nothing more than an end-run around the taxpayer.

It may be time to reign in TIFs here and begin the dismantling process.

Barry Keating, Ph.D., an adjunct scholar of the Indiana Policy Review Foundation, is the Jesse H. Jones Professor of Finance at the University of Notre Dame. He has written or co-authored 15 books, including a best-selling textbook used in colleges and universities (McGraw-Hill), and a microeconomics book for public managers (Blackwell).


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