Critics contend TIFs are handed out like party favors. Tax increment financing is a favored instrument of development for many communities. But at the core lies the questions we’ll explore tonight:
What do TIFs and other economic development tools cost? Is the return on the investment worth the cost? And how do citizens keep score?
Alan Kemp is Executive Director of the Iowa League of Cities. Peter Fisher is Research Director, Iowa Policy Project.
Yeager: Critics contend TIFs are handed out like party favors. Tax increment financing is a favored instrument of development for many communities. But at the core lies the question we'll explore tonight. What do TIFs and other economic development tools cost? Is the return on the investment worth that cost? And how to citizens keep score? Alan Kemp is Executive Director of the Iowa League of Cities. Peter Fisher is Research Director of the Iowa Policy Project. Gentlemen, thank you for coming in tonight. Alan, you saw that piece right there and you saw a couple of the ways that the malls are safe. What is the best way to save a mall whether it's in Iowa or anywhere else?
Kemp: Well, you're really looking at finding the most efficient way of doing it and that's going to give you a return. The real benefit of saving a mall is that you're not only taking on an economic development issue and you're looking at increasing your tax base, you're also potentially increasing another tax base and that is your sales tax because more and more communities and schools rely on local option sales tax as well as the state of Iowa. And so the development of a mall can really not only bring up your property values, provide jobs, provide an amenity for people to visit and therefore have spin-offs for development but you can also look at this as a benefit for local option sales tax.
Yeager: And should that offset it? Do you think the two will offset with the sales tax there?
Kemp: You would hope so. By its nature economic development is sort of a risky business whether you're a developer or whether you're a city and cities do whatever they can to ensure to the best of their ability that they're going to get a return on investment. And so you try to take the actions necessary and you rely upon your bond council who help you with these tax and financing areas and also your financial advisors to make sure that this is going to cost out well and the city is protected.
Yeager: Peter, your thoughts on this argument? Do they seem like good deals? Or do they come across as good deals for everybody?
Fisher: Well, I think you have to be really careful. If you think about why a mall gets empty in the first place it's because the private market has moved onto another location typically. There is this succession of malls, the older ones replaced by newer and bigger ones farther out on the periphery and that creates a lot more retail space which is why the Sycamore Mall is in trouble, why the downtown mall in Iowa City was in trouble. So, if the city is going to do something I think they have to ask what the market forces would do by themselves and why there is a role for this city or what the role for the city properly is in this kind of a situation because if there is an excess of retail space which is the problem then why is it in the city's interest to subsidize retail that the market isn't ready for. And the problem is you can end up creating an excess of retail or any kind of space when you subsidize something that the market isn't prepared to support.
Yeager: So you're saying that natural business selection would take over or should take over in some of these cases and it's more of a corporate welfare type prop up for some of these regions that have malls that have faded?
Fisher: I think in many cases the market would take care of it in one way or another and what we saw in Iowa City was there wasn't sufficient market for two floors of retail so we had to return to kind of the old form of the city, ground floor or street level retail and second floor office and commercial uses.
Yeager: You deal with a lot of cities across the state. Does this scare cities when they hear things like this?
Kemp: I don't know if it scares them but a key role that has emerged over the last 30 or 40 years is the role that cities play in economic development. Historically it's been public safety, you know, make sure you've got police, make sure you've got fire and make sure you've got safe streets. But increasingly economic development is an enormous role that cities play. And so they have become quite sophisticated at this and it's true in a sense you would hope the market would take care of this on its own. The trouble is most city officials because they understand that they are competing they don't want to take that chance. They want to make sure that they have taken what they think are the best options to ensure their community is used in a competitive position.
Yeager: Because the city is just like a business, they're in negotiation, they're trying to look out for their best interests. How does a city stand up and say no, go somewhere else? How does a city let that company go down the street?
Kemp: They can and they often times do. they will look at a proposal and decide is it going to cost out? No. We stand to lose our shirt. We're only going to do this if we feel that there is a tangible benefit and whether that benefit is directly to the city or whether it's to the community at large where it provides a stronger amenity or has some sort of a spin-off effect. But they do this all the time and often times this takes care of itself because the public becomes involved. If you look at sort of the issue that the city of Ames had when there was a new mall proposed a group emerged that really questioned it and they sort of directed where this was going and questioned it and it slowed it down and it possibly stopped it.
Yeager: You talk about citizens but I think TIFs don't have to be approved by voters. Is that almost a little -- there was an article in The Economist that we were reading to get ready for this talking about that's one of the more dangerous parts of this is voters can't select or can't say or sign off on a TIF agreement. That's something that doesn't go in front of the voters. How do you answer a question like that?
Kemp: Well, cities take decisions all the time that don't go before the voters. That's what the nature of the system is and that is that we're a republic, we elect representatives to make our decisions and our contact then is with that elected official to say hey, I agree with this or I disagree with it. And all these TIF projects there is always a measure of a public hearing that has to be publicized and people have the opportunity to come in and often times they do and, in fact, often times competitors come in and raise the issue.
Yeager: Why are you giving them such a good deal?
Yeager: Peter, your thoughts on what voters should or rights they have when it comes to voting or discussing a TIF.
Fisher: I think that is an issue and if you look at broadly what is really important to Iowa's long-term economic health infrastructure, the traditional city functions that you've talked about, our education system, a lot of which is the responsibility of local government. These are really the foundations of growth. And it seems to me odd that we have a system where if you want to build a school which is one of the most essential pieces of infrastructure we have paid for out of property taxes you have to have not just voter approval but a super majority. But a city can build a hotel with regular bonding and that would require at least majority approval if it were a general obligation bond. But as soon as it becomes a TIF project that voting requirement disappears. It's automatically exempt from a voter referendum and that doesn't make sense. We have to get 60% for a school and this council can build a hotel just by a majority vote of the council.
Yeager: You're nodding here, in agreement?
Kemp: Well, that's a good point and the pushback that you'd get, of course, from local officials, the city council member or a school board member is well maybe we shouldn't have the referendum's also. And that is going to be a perennial debate. We try to find this balance within the system that we think is right for citizen participation and the balance sometimes shifts. I think the reason TIF has worked as well as it has is it's been successful and that seems to be the issue. It's often times a perennial fight in the legislature because people are questioning it. How does this work? Should it work this way? And yet at the end of the day it seems it's always the answer to the extent that it is successful, that you do see and we very rarely have projects that go awry.
Yeager: Let's go opposite of awry but good TIF projects. Peter, are there any through your studies follow that appear to be good TIF projects that it's a fair use of public money to put this project together?
Fisher: Well, I'd like to go back to the original purpose of TIF and I think if you follow the logic of that you see why they created this tool and it was for situations where there was some blight, some real decline in property values. And the market left to its own devices isn't solving that problem. There needs to be something, some catalyst, the city has to intervene. It's the city's job, not the county's or the school district's job to do that. So, what this law said was okay, you're going to step in and invest some money in this neighborhood and turn it around and that is going to be down to the benefit of county and school district governments eventually. So, we're going to let you capture various taxes until you are repaid for investment because you're undertaking the risk. So, when you think about it it's a pretty extraordinary thing for the state law to do is to allow a city to say to the county and school district, you know that new building, well we're going to take your taxes as well as ours off of that for a while. And so I think you have to have an extraordinary situation for that really to be justified and certainly there are plenty of examples of situations where there was blight ...
Yeager: Justified in the original intent of the law, not how the law has expanded. Alan, what are your thoughts and what are some of the best uses of a TIF?
Kemp: Well, he's right, the original use of TIF was to address slum and blight and then at some point in time they decided to expand it into the area specifically of economic development. And, again, I think it's because there was an acknowledgement that number one, the tool worked and then the second thing that they acknowledged was that's the way the system works. If you're a local government the only way you have to ensure a general purpose revenue stream is to ensure your property tax base stays up. And so that is what TIF was designed to do is it's a tool, if you will, that sort of steps in, primes it and ensures that property values continue to grow.
Yeager: And you say prime, there's a couple of uses of that. Prime the pump, if you can get part of it here started there's going to be other business that comes around it?
Kemp: Absolutely. Probably the most recent success has been out in West Des Moines with the Jordan Creek Mall. That included a TIF area that really went for the traditional purposes and that was to put in roads, streets and sewers. And that has just had remarkable success for the city of West Des Moines. You literally drive out there and something new emerges every day. And that has really helped their property tax base and the broader you make that base the more healthy your city is for not only the city but also the school district and the county.
Fisher: I think it's important to distinguish between the success of the project and the success of TIF and it's difficult to know when TIF is necessary and when it isn't but I think if you look at the Coral Ridge Mall as an example which is one I'm more familiar with, that mall was there because of the location. It's near the intersection of two Interstates and we all know the mantra about where is retail located. It's location, location, location. And the TIF didn't matter. It's a small piece of their investment. That's where the mall had to be and it's kind of icing on the cake. So, the project was a success but I would argue that in many cases particularly in retail that are local market driven they're not really footloose. They need to be where the market is. The TIF was an expenditure of public funds, it wasn't necessary to get the project.
Yeager: Do we have too many TIF projects especially for retail in cities across the state?
Fisher: Well, I certainly think we have too much TIF when we have cities who over half of the valuation is under an increment, we have cities where the entire city is a TIF district. I think it needs to be reigned down. The intent was to redevelop blighted areas and it's so loose now ...
Yeager: That would say a whole town is a blighted area. We're under a minute now so your thought on that. Do we have too many TIFs?
Kemp: I don't think it's a question of too many. You're always going to have, with any type of a law some of the marginal uses in which someone made the decision to put the entire city in the TIF, they probably didn't do that as a grab, they probably did it because it was convenient and the thought was we don't know where we're going to do it and they didn't think about it. And so that's sort of what happens with this. Overwhelmingly most cities have really stayed true to what they thought the purpose was for or at least their interpretation and it really remains the only economic development tools that cities really have that they can direct that they don't have to go either to the state to get or somewhere else or the acquisition of land which has costs and which has process. It's really the one tool and so to be honest, city officials have really, really taken advantage of that tool to what they thought was the benefit of their communities.