Tax Increment Financing is no place for short-term thinking

This week, Keene Winters of the Center Right Coalition of Wausau had a column in the Wausau Daily Herald in which he makes some points about Tax Increment Financing districts to arrive at what is probably an erroneous conclusion about a specific TIF expenditure in central Wausau. (I say “probably” because I can’t see decades into the future, so I can’t make a pronouncement about the outcome or wisdom of this decision.)  I’m not going to reprint his entire column, but here are some salient excerpts.

* * *

“In July, the Wausau Daily Herald ran two stories on how the city of Wausau used the TIF process to purchase 16 acres of riverfront land for $2.6 million with no immediate plans for development. The newspaper also reported that taking the property out of private hands eliminated some $55,000 in annual property tax revenue and that it would probably be a decade before development occurred.

“Huh? Where is the cash flow on this project? It’s minus $55K per year plus the cost of debt service with no concrete strategy to turn that around!

“Worse yet, the city has embarked on this massive brainstorming process where committees, council members, city bureaucrats and even architecture students from Milwaukee sit around and think about ways to spend some developer’s money. Would you like to be the developer that ventures his or her capital on a project with so many expectations?

The column concludes:

“TIF district management isn’t that tough. Have a developer with a plan to start. Keep the city’s requirements for the project simple, and have a solid strategy for the municipal cash flow. Then, the project can get done and be a win-win for everyone.”

* * *

First, let me say that it would fairly easy to debate on either side on this issue. But the Center Right Coalition, for which Winters is the local chapter coordinator, is a creation of Grover Norquist, president of Americans for Tax Reform. (If you’ve enjoyed the intransigence in Washington on the part of Republicans who signed “no tax increase” pledges and refuse to consider a balanced approach to deal with U.S. budget challenges, you can thank Grover Norquist.) Winters has been a Republican Party leader in several counties around Wisconsin, too. So since he has already chosen a dog in this fight, I’ll just choose the opposing viewpoint in the interests of being ‘fair and balanced.’

(In the interests of full disclosure, let me also say that I chaired the Wausau’s Finance, Economic Development and TIF district joint review boards  for a good share of the last decade, so I have more than a passing interest in this stuff.)

Municipalities in Wisconsin have few tools in the area of economic development, but tax increment financing is one that is extremely useful. While it would be great if there was always a developer standing in the wings on the front end and we could run the equations to cash flow a TIF district from Day 1, it often isn’t that simple. Moreover, even an overwhelmingly positive cash flow on a particular project may often provide little protection from criticism and the reason is simple: most people don’t understand tax increment financing. It is a case of the immediate vs. the ultimate.

Let me give you some examples. First, take a look at the Wausau West Industrial Park. It involved the acquisition of many hundreds of acres of land and the installation of millions of dollars worth of improvements using multiple TIF districts over several decades. Much of this work and expense was undertaken without any specific guarantee of development as these investments were being made, but with an understanding of what might be anticipated, in terms of additional property tax base and employment opportunities. By creating a positive environment for development with a multitude of individual actions over many years, it became achievable. I’ve yet to hear people say that setting up the industrial park was a bad move overall, although there has been debate over individual projects.

Now let’s take a look at TIF District 3, which is where the 16 acres Winters talks about in his column is located. In 2000, the City of Wausau expanded the district to include that particular property. The expansion also included a significant amount of property on the west side of the Wisconsin River, south of Bridge Street. This enabled the city to accommodate the Pic ‘n Save development, in which a substantial piece of blighted property with difficult soil conditions became used, useful and attractive.

With the Pic ‘n Save project, the city invested around $750,000 under the condition that at least $6 million in new tax base would be developed (a figure that has since been far exceeded.) While it might seem like a no-brainer that met all of the conditions Winters says he would like to see, it was tremendously controversial at the time the project was being undertaken.

TIF districts mitigate risk on the part of developers and when they are properly employed, taxpayers receive a return on the investments made, which comes in the form of new tax base, as well as job creation and a more attractive community. It is impossible to tell right now what might become of the 16 acres that the city recently acquired in TIF District 3. What is clear is that it creates a lot of new options for development and the city is a highly motivated owner. The city’s purchase also finally clears the way for an important segment of the River Edge Trail, which was not forthcoming under the prior ownership.

The city is now free, for example, to subdivide the property and make it available to developers who can advance plans that are in harmony with what the community sees as advantageous in its overall development. This inherently brings more potential players into the game than might otherwise have been the case, together with the ability manage the overall development area in concert with the city’s goals. In order to do that effectively, it’s important have some idea of what the community might want.

This summer, the city – as one element of diligently managing a substantial asset that it has now acquired — solicited input from diverse parties. It made use of resources provided by the University of Wisconsin – Milwaukee’s school of architecture and urban planning to facilitate the process and prepare some ideas and visions from the property’s owners — people who live, work and do business in the City of Wausau. The role of UWM’s Community Design Solutions division in this effort is to create a vision for the land and to prepare a master plan with renderings of use concepts for the space. It doesn’t rule out good ideas that might emerge in the future, but it organizes public input so that it can serve as a helpful guide in setting a tone and theme for future development.

That seems like a reasonable thing to do and a cost-effective way to do it. But making use of cutting edge thinking and giving the new owners an avenue of proactive participation in the destiny of their community is something that Winters dismisses as ‘people sitting around and thinking about ways to spend some developer’s money.’

The City of Wausau has successfully effected hundreds of millions of dollars worth of redevelopment over the past dozen years, including tens of millions in the exact corridor that Winters is talking about. The overwhelming majority of that money was private investment. Much of that would not have been accomplished if the city had adhered to short-sighted thinking that insisted on immediate returns from easy recipes that involve no patience or vision.

JR

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5 Responses to “Tax Increment Financing is no place for short-term thinking”

  1. I don’t know anything about Wausau TIF, but I like your point about long-term thinking for TIF. We’re trying to rectify a poor proposal here in Madison that would have kept loads of property off the tax rolls for another 8-10 years, with most of the benefit accruing to the developer alone. Tax incremental financing must be used wisely, for the benefit of the city as well as the developers.

  2. That wouldn’t be the Edgewater proposal, by chance? I’ve been following that one a bit and had some exchange with a reporter covering it for the Cap Times a number of months back. It brings up an important point about the need to seek the optimum proportionality between public and private investment in a project, (and where you stand on “optimum” is impacted greatly by where you sit.) The developer will naturally want to try to maximize the return by seeking the greatest public contribution possible. The municipality must represent the interests of its taxpayers by trying to get by with the lowest possible investment needed to effect the improvement, thereby keeping the payback period as short as possible. It is important that the “but for” aspect of TIF be strictly adhered to; that is, that the project would not have occurred in substantially the same manner at the same time without the level of TIF participation involved.

  3. I remember the last round of Wausau aldermanic elections, there was a political unknown darkhorse running with a lot of interesting ideas but very little practical experience. One of things that I spent a great deal of time discussing with her was how TIF’s work.. and which ones are likely to be successful and which ones have a higher chance of not being able to balance in the end.

    She really didn’t like the project-specfic TIF expendatures and was a much bigger fan of when TIF’s were used to lay the groundwork to encourage private development.

    However, those project specific expendatures have a much higher probability of working out. Basically, because you are working with more “knowns.” How much money will be expended? How much incriment will be created? With those pieces of information, it is easy to determine when the expendature will “Break Even” and after that contribute to a positive cash flow in the TIF account.

    With the larger TIF’s when you don’t have a developer or project lined up and ready to go… it is a lot of hoping. You are making a gamble on “if you build it they will come.” Alot here depends on what the Community Development Dept had simmering in the background.

    Its a gamble. But worst case scenario, even if the TIF didn’t draw the development during the life of the TIF to pay for the improvements, you were at least able to address blight within that TIF district and create an environment for future for development that would not have otherwise been.

    Jim, kudos for mentioning that “but for” aspect. It does not make sense to create TIF expendatures if the development would proceed whether there was TIF participation or not.

  4. ブルガリ 時計 値段

  5. I’m going to presume the above comment is being offered in good faith. 🙂

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